10-K 1 v337518_10k.htm ANNUAL REPORT

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2012

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE OF 1934

 

For the Transition Period From           to

 

Commission File No. 33-20432

 

KIWIBOX.COM, INC.

(formerly known as Magnitude Information Systems, Inc.)

Exact Name of Registrant as Specified in its Charter

 

  DELAWARE 75-2228828  
  State or Other Jurisdiction of IRS Employer  
  Incorporation or Organization Identification Number  

 

  330 W. 38th Street, #1602, New York,  New York 10018  
  Address of Principal Executive Offices    Zip Code  

 

(212) 239-8210

Registrants Telephone Number, Including Area Code

 

Securities Registered Pursuant to Section 12(b) of the Act:

NONE

 

  Title of Each Class   Name of Each Exchange on Which Registered  
  NONE   NONE  

 

Securities Registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, par value $0.0001

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

The Registrant’s revenues for the fiscal year ended December 31, 2012 were $1,469,705.

 

Common stock, par value $.0001 per share (“Common Stock”), was the only class of voting stock of the Registrant outstanding on March 29, 2013 Based on the closing price of the Common Stock on the OTC Electronic Bulletin Board as reported on March 25, 2012 the aggregate market value of the shares of the Common Stock held by persons other than officers, directors and persons known to the Registrant to be the beneficial owners (as the term is defined under the rules of the Securities and Exchange Commission) of more than five percent of the Common Stock on March 29, 2013, was approximately $6,793,930. By the foregoing statements, the Registrant does not intend to imply that any of the officers, directors, or beneficial owners are affiliates of the registrant or that the aggregate market value, as computed pursuant to rules of the Securities and Exchange Commission, is in any way indicative of the amount which could be obtained for such shares of Common Stock.

 

As of March 29, 2013 679,393,060 shares of Common Stock, $.0001 par value, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: SEE EXHIBIT INDEX

 

 
 

 

KIWIBOX.COM, INC.

 

CONTENTS

 

    Page
PART I.    
     
Item  1. Business 3
Item 1A. Risk Factors 6
Item  2. Properties 9
Item  3. Legal Proceedings 9
Item  4. Submission of Matters to a Vote of Security Holders 9
     
PART II.    
     
Item  5. Market for Registrant's Common Equity and Related Shareholder Matters 10
Item 6. Selected Financial Data 11
Item  7. Management’s' Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risks 14
Item 8. Financial Statements 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
Item 9A. Control and Procedures 14
Item 9B. Other Information 15
     
PART III.    
     
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 24
Item 14. Principal Accountant Fees and Services 25
     
PART IV.    
     
Item 15. Exhibits 26
     
  Signatures 27
     
  Exhibit Index 28

 

2
 

 

PART I

ITEM 1:BUSINESS

 

Section 1.1       The Company

Kiwibox.Com, Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31, 2009, the Company changed its name to Kiwibox.Com, Inc.

 

On August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.

 

The Company, its subsidiary Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc. being a wholly owned subsidiary. The 1% of Magnitude, Inc. not owned by the Company constituted a minority interest which was valued at $0. On December 31, 2009, the two subsidiaries Magnitude, Inc. and Kiwibox Media, Inc. merged into the Company.

 

On September 30, 2011, Kiwibox.com acquired the German based social network Kwick! (see Note 21 of the Financial Statements).

 

The Company is currently subject to the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934. The Company has the authority to issue an aggregate of One Billion Four Hundred Million (1,400,000,000) Common Shares, par value $.0001, following an increase from 700,000,000 shares, authorized by the Company on January 29, 2009, and Three Million (3,000,000) Preferred Shares, par value $.001, of which at December 31, 2011, Two Thousand Five Hundred (2,500) were designated as Cumulative Preferred Shares, par value $.001; Three Hundred Thousand (300,000) were designated as Series A Senior Convertible Preferred Stock, par value $0.001; Three Hundred Fifty Thousand (350,000) were designated as Series B Senior Convertible Preferred Stock, par value $0.001; One Hundred Twenty Thousand (120,000) were designated as Series C Senior Convertible Preferred Stock, par value $0.001; Five Hundred Thousand (500,000) were designated as Series D Senior Convertible Preferred Stock, par value $0.001; Five Hundred Thousand (500,000) were designated as Series E Senior Convertible Preferred Stock, par value $0.001, and Forty-Three Thousand Six Hundred Ten (43,610) were designated Series G Senior Convertible Preferred Stock

 

As of December 31, 2012, there were outstanding 679,393,060 Common Shares, 1 Cumulative Preferred Share, and 85,890 Convertible Preferred Shares.

 

3
 

 

Description of Business

 

Overview

 

On December 31, 2009 Magnitude Information Systems, Inc. changed its name to Kiwibox.Com, Inc.

 

We own and operate “Kiwibox.com”, a social networking website. Initially launched in 1999, Kiwibox.com is an online social networking community.. Kiwibox has a regional-based advertising-system that allows target-group-optimized ads for advertisers and sponsors.

 

Kiwibox Operations

 

The company successfully acquired the German social network Kwick! in the third quarter 2011. This acquisition added more than 1 million members with over 2 billion page impressions a month to the Kiwibox network. This community has been online since 1999 and has flirting, blogging and real time event features. Kiwibox was one of the first social networks integrated for social mobile advertising in its mobile-apps, to account for the movement to mobile applications from fixed site usage. Based on the increasing mobile usage Kiwibox is “focusing on mobile development in 2013.

 

We are continuing to optimize this website and develop mobile applications to keep these users engaged across multiple platforms. We are presently increasing the number of events sponsored in Germany as a way to bind our German members to our website.

 

The Company has successfully integrated the Pixunity picture-sharing platform to the US market and will continue to add enhanced features throughout the year. At the same time we continue to increase our market presence. Our promotional teams, both inside and outside of New York City, continue to develop  partnerships with event organizers and businesses along the East Coast of the United States and plan further expansion of these types of market alliances throughout 2013.

 

 

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.

 

Our monthly operating expenses, not including stock-based compensation, are at a level of approximately $119,000. (see sections “Loans and Notes Payable”).

 

Overall, we have equipped the entire website with the newest state-of-the-art advertising features which enable sponsors to self-direct their message to specific target audiences based on gender, age, geographic region, education, and interests. That also included a Search-Engine optimization with privacy options which improves search results.  We focused our development resources to construct a scaleable and highly redundant platform that can accommodate future growth. Our platform and software were updated in the second quarter to the new Internet Protocol IPv6 to verify being reachable also in the near future. During 2012, Kiwibox and Kwick! coordinated their software developments, versions and technology on parallel tracks to optimize future developments. These technology improvements will permit us to more easily integrate new applications and networks as they are acquired in the future.

 

One of the most important features of a social network website is the Search and “be found” function. Here we completely upgraded our member search function to facilitate friends’ searches and establish community networks of users on a global basis.

 

Potential Revenue Streams and Marketing Strategy

 

Currently we generate the majority of our revenue from advertising/sponsorships. We are currently in the midst of cementing partnerships with various event marketers in our core user area. We anticipate revenue growth from increased membership activity on our revitalized website as we continue to implement new marketing strategies. Our software and networking technologies we incorporated during 2012 now permit our mobile devices to accept and receive direct advertising, a vital mobile usage component that we expect to drive new advertising revenues during 2013.

 

With the integration of target-group optimized advertising, we seek to accommodate potential advertisers, recognizing and responding to the importance of a contact-price in relation to the internet target “cloud”. Our social media 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.

 

4
 

 

“Community” means social network – and thrives on membership networking. Our new website is based on the latest web technology which makes it easier for users to stay connected and to interact with each other. Most importantly, our website features permit our community members to stay informed in “real” time about events and parties in areas we are targeting through our promotional teams.

 

Safety

 

Kiwibox.com has developed an effective monitoring model which assists in maintaining a safe site for our membership 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. Kiwibox.com has also 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. Our Kwick! subsidiary uses a team of online volunteers to monitor the site and assist users to optimize their time spent on the site.

 

Competition

 

Our primary competitors are other youth targeted online social networks, including Facebook.com, Twitter. Facebook and Twitter are widely considered the industry leaders, however, recently statistics and strategic announcements from both companies has indicated a shift in the target audience from teens and college students to a much broader and more adult demographic, because of their international focus. We plan to distinguish ourselves by targeting the US-market and by combining the social-network advantages with user generated content – from users to users, while stressing the community feeling. As these other social networks have made changes to their websites we have been able to capitalize on the disenfranchised users and bring them into our online community.

 

Intellectual Property

 

We currently own trademarks on Kwick! (European) , Kwick!anddirty (Germany), deinefreundeunddu (Germany) and Kwick! (Switzerland). However, the Kiwibox.com web and mobile software and other related intellectual property rights are important assets. We hold the Internet domain names Kiwibox.com, Kiwibox.net, Kiwibox.org, Kwick!.de as well as other country-code top level domains (e.g. kiwibox.cn) and feature-based domains like 4kiwi.com.

 

Governmental Regulations

 

Our Kiwibox website operations are subject to state, federal and international laws, rules and regulations that cover on-line business, privacy policies, consumer protection and product marketing. The Kiwibox website business is subject to state, federal and international laws, rules and regulations applicable to online commerce, including user privacy policies, product pricing policies, website content and general consumer protection laws.  Various laws, rules and regulations have been adopted, and probably will be adopted in the future, that apply to the Internet, including available online content, privacy concerns, online marketing, “spam” and unsolicited commercial email, taxation issues, and regulations that effect and monitor the quality of products and services.

 

5
 

 

A portion of these laws, rules and regulations that concern the Internet and its uses have been only recently adopted. Courts and administrative agencies have not yet fully interpreted these legal requirements as to their application and scope. Accordingly, our Kiwibox website business is subject to the uncertainties of future interpretations and application of these legal requirements. The application and interpretation of these legal requirements or the passage of new and/or revised laws, rules and regulations could reduce the demand for Kiwibox website services, increase its operational costs, and expose it to potential liability. Any such events could have a material adverse effect upon our Kiwibox website business and financial condition. Our failure, or that of our business partners, to accurately predict and anticipate the interpretation or application of these laws, rules and regulations, whether now in force or adopted in the future, could have a detrimental impact on our operations, create negative publicity for us and expose us to potential liability.

 

State and federal agencies are applying consumer protection laws to regulate the on-line use, collection and dissemination of personal information and website content. These laws require us to implement programs to notify our website users of our privacy and security programs. Consumer protection laws will require us to obtain the consent of our website users if we want to collect and use certain portions of their personal information. We are currently voluntarily working in partnership with the New York State Attorney General’s office and have incorporated hash value technology into our website.

 

The Federal Trade Commission (“FTC”) is the lead federal agency monitoring Internet websites and their content. State attorneys general have become active monitors of the Internet at the local State level. These governmental bodies may investigate or bring enforcement actions against website operators they deem in violation of applicable consumer protection laws. We believe that our Kiwibox website’s collection and dissemination of information programs, including our privacy policies, do and will continue to comply with existing laws. However, a decision by a federal or state agency that any of our Kiwibox website’s business practices do not meet applicable legal standards could result in liability and have a material adverse effect on our business and financial condition.

 

Employees

 

Currently, we have 13 full-time employees are employed by our German subsidiary, Kwick!.

 

ITEM 1.A:Risks Related to Our Business

 

Early Stage Company; Generation of Revenues

 

Kiwibox.Com, Inc. (“Kiwibox” or “the Company”) can be considered an early stage company and investors cannot reasonably assume that we will ever be profitable. As an early stage company, we are likely to continue to have financial difficulties for the foreseeable future. Our recent acquisition of Kwick! has added a reliable stream of revenues to our operations but the profit generated by Kwick! is currently not sufficient to fund Kiwibox.com. We may successfully re-develop our website operations and generate additional revenues but still be unable to achieve profitability. Kiwibox had devoted substantial funds to develop its website, but investors should be aware that there can be no assurance that Kiwibox will ever achieve revenues that exceed its operational costs. We may not obtain the funding necessary to provide Kiwibox with the working capital necessary to continue to develop and market its website. Moreover, the Kiwibox.com website may not receive sufficient internet traffic to increase revenues or achieve profitability.

 

Doubt Raised About our Ability to Continue as a Going Concern.

 

Our financial statements have been presented on the basis that we will remain a going concern and that our assets will increase and that we will satisfy our liabilities in the normal course of our business. Kiwibox has had minimal revenues and/or has incurred operating losses during the fiscal years ended December 31, 2009, 2010, 2011 and 2012. Our independent auditors have concluded that these factors create an uncertainty about our ability to continue as a going concern. Our ability to continue as a going concern is dependent, among other factors, on our continued success in raising capital.   

 

6
 

 

Need for Additional Capital; Short-Term Viability of Company

 

Our operations require immediate investment of equity capital or loans to continue to operate. If we can not secure funds in the short-term, we will be required to close our entire business operations and our website. Assuming we can receive a current investment or loans to fund our immediate operational needs, our Kiwibox website business’s future capital requirements will depend on many factors, including the degree to which teenagers use the kiwibox.com Website and the degree to which Kiwibox is able to generate revenues from users of its site. We expect to require additional financing before we achieve a profitable level of operations, however, there is no assurance that such funding will be available on acceptable terms, or at all.  If we elect to sell equity to raise additional funds, there is no assurance that additional equity can be sold on terms favorable to the Company and to its existing shareholders, with the result that existing shareholders may incur substantial dilution. Without the necessary funding, we may be required to delay, reduce or terminate some or all of our Kiwibox website business or our efforts to obtain additional funding.

 

No Formal Feasibility and Market Research Plan

 

We have collected data and statistics concerning the potential market for the Kiwibox.com website and the costs of marketing our services. We have relied principally on the judgment and conclusions of our management, based on their respective knowledge and experiences. We have not performed any formal marketing study that confirms any absolute demand for the services we are providing on our Kiwibox.com website.

 

Unpredictability of Future Revenues; Potential Downturns in Operating Results

 

Due to Kiwibox’s minimal revenues since inception and the uncertainty of revenues that may be generated through potential partners and alliances, we are currently unable to forecast our future revenues with accuracy.  Our current and future operational costs are based primarily on our marketing and website development plans and our estimates of future revenues. Our potential advertising and joint marketing sales results are difficult to forecast at this stage.  It will be difficult for us to realign our operational expenses should future revenue forecasts not materialize which would require that we curtail or cease certain aspects of our operations. Accordingly, if our future revenues are insufficient to fund our planned operations, such a shortfall could have an immediate adverse effect on our business, prospects, financial condition and results of operations.

 

We may experience cyclical downturns in our future operating results due to various factors, many of which are beyond our control. Some of the factors that could impact our operating results include: (a) our ability to attract and retain new members to our Kiwibox.com website; (b) new developments by our competitor websites; (c) advertising and product price competition; (d) our ability to develop enhancements to our website, upgrade its internet functionality and services; (e) our ability to attract and retain necessary personnel; (f) difficulties with our software or hardware equipment, including any interruptions in the development and maintenance of our internet equipment and related infrastructure systems related to our Kiwibox.com website; (g) the future impact of governmental rules, regulations and laws, and; (h) general economic conditions.

 

Website and Service Development Risks

 

The continuing development of our Kiwibox.com website is a highly complex technical process. We are continuing the process of designing and implementing a wide array of feature and contents enhancements in order to remain competitive in our teen marketplace. If we are unable to develop and introduce new services or enhancements to our website in a timely manner in response to changing market conditions or customer requirements, our business, prospects, operating results and financial condition could be materially adversely affected.  

 

7
 

 

Limited Senior Management Team; Potential Problems with Expanding Personnel

 

We have a limited number of senior management personnel, planning, developing and managing our website business. We have expanded our website operations to accommodate potential growth in our membership and marketplace. We could experience significant pressure on our financial resources and management personnel as a result of the current expansion. In order to manage this expansion, we may be required to adopt new operating procedures, develop new advertising and marketing plans, financial controls and procedures and policies to supervise a growing employee population. We will also be required to attract, retain and properly administer the expansion of our employee population. Investors should be aware that we may not be able to adequately manage all of these new developments in our expansion, in which case our operations, business prospects, operating results and financial condition could be materially adversely affected.

 

Competition

 

Our website business in the young adult and teen marketplace is highly competitive. We can give no assurances that our website business will effectively compete with the more established teen websites currently operating in this marketplace.

 

Many of our competitors have significantly greater financial resources, established brand names and significantly larger membership and customer bases and we expect our competition to only intensify.

 

Dependence on Management

 

The Kiwibox.com website’s success will be substantially dependent on the continued services and on the performance of our current senior management. We will also be dependent upon our ability to retain and provide incentives for our management team. The loss of services of any one or more of our senior management team could have a material adverse affect on our operating results, business prospects and financial condition.

 

Our success will be dependent, in large part, on the services of our principal officers and employees.  The loss of any of these individuals could have a material adverse effect on our business or results of operations.  We do not maintain “key-man” life insurance policies on the lives of our officers to compensate us in the event of their deaths.

 

Except for issues that require shareholder approval, investors should be aware that they will have no vote on our operations, business developments or any management issues, including expansion, website enhancements or personnel decisions. You should not invest in our company unless you understand that all business and operational decisions are made by our management.

 

Creation of Brand Awareness

 

It will be crucial to the economic success of our Kiwibox.com website that we promote and establish brand awareness. A successful brand awareness campaign will tend to decrease our marketing expenses over time. If we are not able to adequately establish our brand in our marketplace, our operating results, market growth and financial condition could be materially adversely affected.

 

Potential for Defects in our Products and Services

 

Our Kiwibox.com website, its functionality, product offerings and services may contain defects or problems yet undetected. Such defects or problems could delay the launch of our new Kiwibox.com website, generate negative public comment and inhibit marketplace acceptance, any one or more of which could have a material adverse affect on our operating results and financial condition.

 

Penny Stock Regulation

 

Our common shares are subject to the “penny stock rules” that require broker-dealers who sell our shares to make specific disclosures before selling to certain persons. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risk associated therewith as well as the written consent of the purchaser of such security prior to engaging in a penny stock transaction. These penny stock restrictions will continue to apply as long as the Company’s common stock continues to trade at market prices below $5.00. Investors should be aware that the regulations on penny stocks may significantly restrict the ability of any purchaser of our common shares to sell his or her Company common shares in the market.

 

8
 

 

Absence of Dividends

 

We have not paid any dividends on our common stock and we are not likely to do so in the foreseeable future. We presently intend to retain earnings for use in growing our business. We may pay for some of our future expansion through debt financing, in which case lenders traditionally prohibit the payment of any such dividends. We also are prohibited from paying dividends on our common stock before we have paid all dividends accrued on our preferred stock, which accruals amounted to $633,129 at December 31, 2012. Investors should be aware, therefore, that the Company intends to re-invest any earnings back into our business for the foreseeable future and that they should have no expectations of receiving any dividends on the common shares they may purchase.

 

ITEM 2:Description of Properties

 

We maintain offices for our Kiwibox operations at 330 W. 38th Street, New York, New York 10018, for approximately 733 square feet. The lease expired at the end of 2012 and was subsequently extended until December 2013 under the same terms. Currently there is no written lease only a verbal commitment. We pay minimum monthly rentals of $2,200 plus tenants’ share of utility/cam/property tax charges which average approximately $623 per month. Kwick! maintains an office at Werkstrasse 24, 71384 Weinstadt Germany, comprised of approximately 4,000 square feet for which we pay monthly charges of 3,620 Euros pursuant to a lease with a 90 day opt out clause.

 

ITEM 3:LEGAL PROCEEDINGS

 

At the time of this report, the Company is not a party to any material legal proceedings.

 

ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of the security holders during the 2012 fiscal period.

 

9
 

 

PART II

 

ITEM 5:MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

(a) Market Information

 

The Company’s common stock currently trades on the Electronic Bulletin Board of the OTC market, under the symbol KIWB. The following table sets forth, for the calendar quarters indicated, and for the last three years, the high and low sales prices for the Company’s common stock.

 

   OTC-BB 
   Low/Bid   High/Ask 
2010          
First Quarter  $0.01   $0.02 
Second Quarter   0.01    0.02 
Third Quarter   0.01    0.01 
Fourth Quarter   0.01    0.02 
2011          
First Quarter  $0.01   $0.02 
Second Quarter   0.02    0.06 
Third Quarter   0.04    0.06 
Fourth Quarter   0.02    0.06 
2012          
First Quarter  $0.03   $0.05 
Second Quarter   0.02    0.04 
Third Quarter   0.01    0.02 
Fourth Quarter   0.01    0.02 

 

(b) Shareholders

 

As of March 25, 2013, there were approximately 356 shareholders of record for the Company’s Common Stock. The number of record holders does not include shareholders whose securities are held in street names.

 

(c) Dividends

 

The Company has not declared or paid, nor has it any present intention to pay, cash dividends on its Common stock. The Company is obliged to pay cash dividends on its outstanding convertible preferred stock and, under certain circumstances, on its outstanding cumulative preferred stock. See "DESCRIPTION OF CAPITAL STOCK" - "The Series A Stock", "The Series B Stock", "The Series C Stock", "The Series D Stock", the “Series E Stock”, and "The Series G Stock", below.

 

Recent Issues of Unregistered Securities

 

On December 22, 2012, the Board of Directors authorized the issue of restricted common shares to its two Directors and Chief Financial Officer for 250,000 shares each, and to its accountant and an officer of Kwick! for 150,000 shares each. These restricted common shares were issued to these recepients pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof.

 

10
 

 

ITEM 6:Selected Financial Data

 

Except for historical information, the Company's reports to the Securities and Exchange Commission on Form 10-K and Form 10-Q and periodic press releases, as well as other public documents and statements, contain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the statements. These risks and uncertainties include general economic and business conditions, development and market acceptance of the Company’s products, current dependence on the willingness of investors to continue to fund operations of the Company and other risks and uncertainties identified in the Company's reports to the Securities and Exchange Commission, periodic press releases, or other public documents or statements.

 

Readers are cautioned not to place undue reliance on forward-looking statements. The Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

 

The selected financial information presented below under the captions "Statement of Operations" and "Balance Sheet" for the years ended December 31, 2008 through 2012 is derived from the financial statements of the Company and should be read in conjunction with the financial statements and notes thereto.

 

The financial data are those of Kiwibox.Com, Inc. (f/k/a Magnitude Information Systems, Inc.) including the operations of Magnitude, Inc. and, starting with August 16, 2007, the date of acquisition, the operations of KiwiBox Media, Inc through December 31, 2009, the date these entities were merged into Kiwibox.Com, Inc. All inter-company accounts and transactions have been eliminated in consolidation through December 31, 2009.

 

Balance Sheet

 

   December 31, 
   2012   2011   2010   2009   2008 
                     
Total assets  $6,877,123   $8,243,931   $166,436   $141,415   $130,672 
Current liabilities   25,910,042    16,326,319    6,181,044    2,311,386    5,179,293 
Long-term debt   -    -    -    -    - 
Working capital   (25,475,653)   (15,505,560)   (6,145,931)   (2,226,345)   (5,148,331)
                          
Stockholders’ equity (impairment)  $(19,032,919)  $(8,211,778)  $(6,014,608)   (2,169,971)   (5,048,621)

 

Statement of Operations

 

   For the Year Ended December 31, 
   2012   2011   2010   2009   2008 
Total revenues  $1,469,705   $599,615   $2,039   $50,450   $59,421 
Operating loss   (1,671,156)   (1,500,610)   (1,181,626)   (1,609,956)   (6,206,870)
Net loss   (14,010,332)   (5,900,537)   (3,972,372)   (2,440,465)   (5,493,764)
Net loss after dividends on preferred shares   (14,061,595)   (5,951,800)   (4,023,635)   (2,491,728)   (5,545,096)
Net loss per common share  $(0.022)  $(0.011)  $(0.008)  $(0.006)  $(0.015)
Number of shares used in computing per share data   650,715,901    522,090,046    494,315,316    447,090,174    373,156,459 

 

11
 

 

ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CAUTIONARY STATEMENT PURSUANT TO "SAFE HARBOR" PROVISIONS OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934

 

The information in this annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their businesses so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than those statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements of Kiwibox.Com, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Description of Business

 

Based on its market surveys, the Company’s business plan focused on increasing its regional membership during 2012. These efforts in the New York City membership market have resulted in an increased membership growth during 2012. The Company intends to continue its marketing efforts in this region through a series of street promotion and event organizing in 2012. The Company has developed a number of partnerships with event organizers and businesses along the east coast of the United States and plans further expansion of these types of market alliances.

 

In continuing its efforts to exploit other available revenue sources in addition to its current efforts focused on organic membership growth, the Company acquired the German social network Kwick! on September 30, 2011. Management believes that this acquisition will significantly enhance the Company’s competitive market position during 2013.

 

The Company attaches great importance to its technology developments and continues to follow the top social network market leaders with technology upgrades, providing its users with an alternative social networking opportunity.

 

The operating expenses, not including stock-based compensation, remained at a level of approximately $119,000 per month. We are currently receiving funding at these levels from existing investors (see sections “Loans and Notes Payable”).

 

12
 

 

Results of Operations for the Twelve Months Ended December 31, 2012 Compared to the Twelve Months Ended December 31, 2011

 

The Companies acquisition of its subsidiary Kwick! has significantly increased revenue. Our website presence is not yet supported by a volume of active members-users that would provide a basis for significant growth in advertising revenues. For the year ended December 31, 2012, total revenues amounted to $1,469,705 compared to $599,615 in 2011. Revenues were derived almost entirely from the Kwick! operations, which were acquired on September 30, 2011.

 

Gross Profit (Loss) amounted to $177,534 after considering $1,292,171 costs of goods sold. After deducting selling, research, and general and administrative expenses of $1,848,690 compared to the $1,606,116 recorded in 2011, the Company realized an operating loss of $1,671,156 compared to an operating loss of $1,500,610 in 2011. For the year 2013 management expects a reduction in operating expenses which, coupled with an expected increase in revenues, will start a process of putting the company on a path towards eventually eliminating the erosion of shareholder value.

 

The major item included in non-operating income and expenses was a charge of $7,663,872 accounting for the intrinsic value of the beneficial conversion feature associated with convertible debt. We also incurred a charge of $2,895,203 in connection with changes in the valuation of derivative liabilities. In 2011, the major item included in non-operating income and expenses was a charge of $3,659,670 accounting for the intrinsic value of the beneficial conversion feature associated with convertible debt and a charge of $476,281 in connection with changes in the valuation of derivative liabilities In 2011, The year concluded with a net loss of $14,010,332. After accounting for dividends accrued on outstanding preferred stock which totaled $51,263 the net loss applicable to common shareholders was $14,061,595 or $0.022 per share, compared to a loss of $5,951,800 or $0.011 per share for the previous year.

 

Liquidity and Capital Resources

 

We have financed our business with new debt and equity capital since our cash flow is insufficient to provide the working capital necessary to fund our parent operations. In addition, we received $1,055,000 from short-term loans. We have an urgent need for working capital to fund our operations. If we are unable to immediately receive new equity investments or obtain loans, we will not be able to fund our operations and we will be required to close our business.

 

Our deficit in working capital amounted to $25,475,653 at December 31, 2012, as compared to $15,505,560 at December 31, 2011. Stockholders’ equity showed an impairment of $19,032,919 at the end of the year, compared to an impairment of $8,211,778 at the beginning of the year. The cash flow from operations totaled $(969,318) and was brought about primarily due to operating losses. We have no bank debt and our indebtedness at December 31, 2012, except for an overdraft line of credit of $176,103 with Kwick! Our other indebtedness, excluding the other current liabilities described below, consisted of certain notes and loans aggregating $9,328,895, derivative conversion liabilities of $13,797,679 and advances from related parties of $30,710. The position “Obligations to be settled in stock” of $270,658 includes $134,658 for common shares and options accrued for certain officers and directors pursuant to their respective employment and remuneration agreements, and $136,000 for stock and warrants due under consulting agreements. Current liabilities also include $633,129 accrued unpaid dividends on outstanding preferred stock. Such dividends will be paid only if and when capital surplus and cash-flow from operations are sufficient to cover the outstanding amounts without thereby unduly impacting the Company’s ability to continue operating and growing its business.

 

Our current cash reserves and net cash flow from operations expected during the near future will be insufficient to fund our operations and website development and marketing plan over the next twelve months. We expect to fund these requirements with further investments in form of debt or equity capital and are in discussions with potential investors. There can be no assurance, however, that we will be able to identify financing sources, or if we do, whether the terms of such financing will be acceptable or commercially reasonable.

 

13
 

 

Absent the receipt of immediate equity investment or loans, we will be compelled to close our business operations. Absent the receipt of sufficient funds, our website development, results of operations and financial condition could be subject to material adverse consequences. There can be no assurance that we will find alternative funding for the working capital required to finance on-going operations.

 

ITEM 7 A:Quantitative and Qualitative Disclosures about Market Risk

 

The Company is subject to certain market risks, for changes in financial market conditions. The Company does not undertake any special actions to limit those exposures. We do not have a significant interest rate risk because the interest on all our debt obligations is based on fixed rates in accordance with the terms of such indebtedness.

 

ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Company's Financial Statements and Notes to Financial Statements are attached hereto as Exhibit A and incorporated herein by reference.

 

ITEM 9:CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been no changes in or disagreements with the Registrant’s independent auditors during the last two years.

 

ITEM 9A:MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Item 9A(T).   Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of the Company’s Annual Report on Form 10-K, an evaluation was carried out by our management, with participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of December 31, 2012.  Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed and submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to  management, included the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

During our evaluation of disclosure controls and procedures as of December 31, 2012, conducted as part of the Company’s annual audit and preparation of our annual financial statements, several deficiencies were identified which viewed in the aggregate, represent a material weakness.  As a result of this material weakness, described more fully below, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, the Company’s disclosure controls and procedures were ineffective.

 

 The Company instituted and is continuing to implement corrective actions with respect to the deficiencies in our disclosure controls and procedures.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

 Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

14
 

 

 Management has conducted, with the participation of the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012.  Management’s assessment of internal control over financial reporting was conducted using the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments.

 

 A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  Based on management’s assessment over financial reporting, management believes as of December 31, 2012, 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, primarily due to a lack of resources.

 

2. The Company had only a part time chief financial officer performing all accounting related duties on site, presenting the risk that the reporting of these non routine and complex transactions during the preparation of our future financial statements and disclosures may not be accomplished in a timely manner. In September of 2012 the Company hired an additional comptroller to review and assist the Chief Financial Officer.

 

Company management believes that notwithstanding the above identified deficiencies that constitute our material weakness, that the consolidated financial statements fairly present, in all material respects, the Company’s consolidated balance sheets as of December 31, 2012 and 2011 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2012 and 2011, in conformity with generally accepted accounting principles.

 

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.

 

 Remediation of Material Weaknesses in Internal Control over Financial Reporting

 

 The Company commenced efforts to address the material weakness in its internal control over financial reporting and its control environment through the following actions:

 

-  We will continue to seek qualified fulltime or part-time employees and third party consultants to supplement our financial personnel when and if additional resources become available;

 

-  We will continue to institute a more stringent approval process for financial transactions, and

 

-  We will continue to perform additional procedures and analysis for significant transactions as a mitigating control in the control environment due to segregation of duties issues.

 

 Changes in Internal Control over Financial Reporting

 

 Other than described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal year ended December 31, 2012, that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

ITEM 9B: OTHER INFORMATION

 

None.

 

15
 

 

PART III

 

ITEM 10:DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

 

The names of all directors and executive officers of the Company are as follows:

 

Name   Positions   Term Served (Expires)
         
 Andre Scholz   Director   May 13, 2009 to present
    President, Chief Executive Officer   August 1, 2010 to present
    Chief Technology Officer   May 13, 2009 to present
         
Joseph J. Tomasek   Director   Feb. 11, 1999 to present
         
Craig S. Cody   Chief Financial Officer   May 1, 2010 to present
         
Joerg Otzen   Director   July 14, 2008 to October 5, 2011*
         
Rudolf Hauke   Director  
    President, Chief Executive Officer   July 14, 2008 to August 1, 2010*
         

 

  Director   Dec. 2, 2005 to May 1, 2010*
Joerg H. Klaube   Sr. Vice President, Secretary,   July 31, 1997 to May 1, 2010*
   Chief Financial Officer    
         

 

* Mr. Otzen resigned as a director on October 5, 2011 Mr. Hauke resigned as an officer and Director on August 1, 2010. Mr. Klaube resigned as a director and Chief Financial officer on May 1, 2010. All Directors of the Company hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at meetings of the Company's directors and hold office until they resign or are removed from office.

 

Andre Scholz, Age 35 – Director, Chief Technology Officer. Andre Scholz has more than 15 years business experience in Internet, telecommunication technology and IT security. He holds an advanced degree from the University of Stuttgart and Konstanz in electronic engineering. Mr. Scholz is a consultant and well known technical expert for numerous social networks, communities and high-traffic sites, active around the world. He brings a wealth of social network and internet knowledge to Kiwibox. Mr. Scholz was co-founder of various internet exchange points and manages them until now. Since 1996 he is Managing Director of a carrier and Internet Service Provider in Stuttgart, Germany and since 2002 he is CEO of the Interscholz company group, Leonberg, Germany, which places private investments in and is managing and operating various companies.

 

16
 

 

Craig S. Cody, Age 50 – Chief Financial Officer. Effective as of May 4, 2010, Registrant promoted Craig S. Cody to serve as its Chief Financial Officer. Mr. Cody, a licensed Certified Public Accountant, had previously served as the Comptroller for the Registrant. In addition to managing an independent accounting and financial services business in New York for a diverse group of clients, he brings extensive management experience derived in the public sector. Mr. Cody holds a B.S. Degree in Accounting from the State University of New York.

 

Joseph J. Tomasek, Age 66 - Director. Mr. Tomasek was appointed a director in February 2000. Mr. Tomasek also serves as our General Counsel and coordinates our legal affairs in such role. In addition to serving in these Company positions, Mr. Tomasek represents U.S. and international clients in corporate and securities law matters. Mr. Tomasek received his Juris Doctor and Bachelor of Arts Degrees from Seton Hall University and a Certificate d'Etudes in European Studies from the University of Strasbourg, France. Mr. Tomasek is a member of the Bars of the States of New Jersey,and New York.

Family Relationships

 

There are no family relationships between any of the directors or executive officers.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

The Company knows of no person, who at any time during the period from the date at which it filed its annual report on Form 10-K for the year ended December 31, 2012 to the present, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company (a "Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a), except for the annual statements of beneficial ownership of securities on Form 5 for the officers and directors of the Company which were filed late.

 

17
 

 

 

ITEM 11:          EXECUTIVE COMPENSATION

 

2012 SUMMARY COMPENSATION TABLE

 

The following table sets forth certain compensation information for: (i) the person who served as the Chief Executive Officer of the Company during the year ended December 31, 2012, regardless of the compensation level, and (ii) each of our other executive officers, serving as an executive officer at any time during 2010, as well as the most highly compensated employees who did not serve as executive officers during 2010. Compensation information is shown for the fiscal years ended December 31, 2012, 2011 and 2010:

 

                              (1) 

Name and

Principal Position

(a)

 

Year

(b)

 

Salary

($)

(c)

  

Bonus

($)

(d)

  

Stock

Awards

($)

(e)

  

Option

Awards

($)

(f)

  

Non-
Equity

Incentive
Plan

Compensation

($)

(g)

  

Non-

Qualified

Deferred

Compensation
Earnings

($)

(h)

  

All

Other

Compensation

($)

(i)

  

Total

($)

 
Andre Scholz  2012   200,000    2,500    30,600    -    -    -    -    233,100 
Chief Executive  2011   200,000    -    28,950    -    -    -    -    228,950 
Officer, President,  2010   230,000    -    24,000    -    -    -         254,000 
Director                                           
Joseph J. Tomasek,  2012   -    2,500    -    11,880    -    -    60,000    74,380 
Esq., Director and  2011   -    -    -    11,880    -    -    60,000    71,880 
General Legal Counsel  2010   -    -    -    11,880    -    -    65,000    76,880 
Joerg Otzen  2012   -    -    -    -    -    -    -    - 
Director  2011   -    -    -    -    -    -           
   2010   -    -    -    -    -    -    5,000    5,000 
Craig S Cody  2012   91,000    2,500    -    -    -    -    5,000    98,500 
Chief Financial Officer  2011   91,000    -    -    -    -    -    3,500    94,500 
   2010   59,750    -    -    -    -    -    27,462    87,212 
Rudolf Hauke  2012   -    -    -    -    -    -    -    - 
Chief Executive  2011        -    -         -    -    -    - 
Officer, President,  2010        -         13,867    -              13,867 
Director                                           
Joerg H. Klaube  2012   -    -    -    -    -    -    -    - 
Chief Financial  2011        -    -    -    -    -    -    - 
Officer, Director  2010   30,763    -    -    -    -    -    -    30,763 
                                            
All executive officers  2012   291,000    7,500    30,600    11,880    -    -    65,000    405,980 
and named significant  2011   291,000    -    28,950    11,880    -    -    63,500    395,330 
employees and  2010   320,513    -    24,000    25,747    -    -    97,462    467,722 
directors as a group                                           

 

18
 

 

Andre Scholz 2009-2012: Andre Scholz joined the Company in May 2009, as our Chief Technology Officer and as a director. On August 1, 2010 Mr. Scholz took over as President and Chief Executive Officer. During 2012, we paid Mr. Scholz $200,000 as salary. He also has accrued 1,200,000 common shares earning 100,000 common shares every month. These shares were accrued for and valued at $30,600. During 2011, we paid Mr. Scholz $200,000 as salary. He also has accrued 1,200,000 common shares earning 100,000 common shares every month. These shares were accrued for and valued at $28,950. During the first quarter of 2010, the company issued the 500,000 shares for the signing bonus and 950,000 shares towards the accrued monthly allowance. In the third quarter the company issued an additional 500,000 shares towards the accrued monthly allowance. During 2010, we paid Mr. Scholz $230,000 as salary and $20,000 in consulting fees prior to his entry into the Company. . During 2009, we paid Mr. Scholz $140,000 as salary and $20,000 in consulting fees prior to his entry into the Company. He also has accrued 500,000 common shares as a signing bonus and is earning 100,000 common shares every month, beginning with May 15, 2009. All but 500,000 of these shares have been issued through December 31, 2012.

 

Rudolf Hauke 2010-2008: Rudolf Hauke resigned effective August 1, 2010. He had joined the Company in July 2008 as a consultant, acting in the capacity of President and Chief Executive Officer, and as a director. In 2010, Mr. Hauke has earned 700,000 non-qualified 4-year stock options, exercisable at $0.10 per common share, valued at $13,867 pursuant to the Black-Scholes valuation formula. During 2009 we paid him $36,000 in salary and $27,000 remuneration for services performed, and $21,000 in flat-fee expense allowances. In addition, Mr. Hauke earned 1,200,000 non-qualified 4-year stock options, exercisable at $0.10 per common share, valued at $23,790 pursuant to the Black-Scholes valuation formula. During 2008 we paid him $48,000 in salary and $52,000 as travel and living expense allowances. In addition, Mr. Hauke earned 1,000,000 non-qualified stock options, 500,000 of which are 2-year options, exercisable at $.05 per common share, and 500,000 of which are 4-year options, exercisable at $.10 per common share, such options valued at $19,200 pursuant to the Black-Scholes valuation formula.

 

Joseph J. Tomasek 2012-2009: During fiscal years 2012, 2011, 2010 and 2009, the Company incurred or paid $60,000, $60,000, $65,000 and $ 185,000, respectively, to Mr. Tomasek for legal services rendered to the Company. In 2012 Mr. Tomasek earned options for 1,200,000 restrictrd shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. In 2011 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. In 2010 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880 pursuant to the Black-Scholes valuation formula. In addition, Mr. Tomasek was granted 500,000 stock warrants, valued at $5,000 pursuant to the Black-Scholes valuation formula. In 2009 Mr. Tomasek earned options for 900,000 restricted shares, valued at $8,910 pursuant to the Black-Scholes valuation formula. These options are earned at the rate of 100,000 options per month, beginning with April 2009.

 

Joerg Otzen 2011-2009: During 2010 Mr. Otzen earned 500,000 stock warrants, valued at $5,000 pursuant to the Black-Scholes valuation formula.

 

Craig S Cody 2012- 2010: During the year 2012, Mr. Cody earned $96,000. During the year 2011, Mr. Cody earned $94,500. During the year 2010, Mr. Cody earned $82,212 and 500,000 stock warrants, valued at $5,000 pursuant to the Black-Scholes valuation formula. In 2009, Mr. Cody earned $18,450.

 

Andre Scholz – 2012-2009. The terms of his consulting /employment agreement are included in our filing on Form 8-K of May 22, 2009 which is incorporated herein by reference to that filing. On January 1, 2013 the terms of his consulting agreement were extended through December 31, 2013 with no changes to the terms.

 

Stock Options:

 

No stock options were granted during 2009, 2010 or 2011 pursuant to the Company’s 1997 Stock Option Plan and 2000 Stock Incentive Plan, to any executive officers, directors, employees or to any beneficial owners of more than 10 percent of any class of equity securities of the Company. In addition, there were no stock options or warrants exercised by any officer, director, employee or any beneficial owners of more than 10 percent of any class of equity securities of the Company during 2010, 2011 or 2012.

 

19
 

 

1997 Stock Option Plan:

 

The Company’s 1997 Stock Option Plan, as filed with Information Statement pursuant to Section 14(c) with the Commission on July 1, 1997, and with Registration Statement on Form S-8 with the Commission on September 8, 1997, is hereby incorporated by reference.

 

2000 Stock Incentive Plan:

 

The Company’s 2000 Stock Incentive Plan, as filed with the Commission as an exhibit to the quarterly report on Form 10-QSB for the period ended March 31, 2000, is hereby incorporated by reference.

 

Options Granted Outside of Stock Option Plans:

 

During 2012, one director who also serves as the Company’s general counsel earned 1,200,000 five-year stock options, exercisable at $0.05 per common share.

 

During 2010, Rudolf Hauke, the former Chief Executive Officer earned 700,000 four-year stock options, exercisable at $0.10 per common share, pursuant to his employment agreement. Also during 2010, one director who also serves as the Company’s general counsel earned 1,200,000 five-year stock options, exercisable at $0.05 per common share.

 

Outstanding Equity Awards at Fiscal Year-End Table

 

The following table provides certain information regarding unexercised options to purchase common stock, stock options that have not vested, and equity-incentive plan awards outstanding at December 31, 2012, for each of the persons covered under our Summary Compensation Table.

 

20
 

 

Name and

Principal

Position

 

Number of

Securities

Underlying

Unexercised

Options

Exercisable

  

Number of

Securities

Underlying

Unexercised

Options

Unexercisable

  

Equity

Incentive

Plan

Awards

No. of

Underlying

Unexercised

Unearned

Options

  

Option

Exercise

Price

  

Option

Expiration

Date

 

No. of

Shares or

Units of

Stock that

have not

vested

  

Market

Value of

Shares or

Units of

Stock that

have not

vested

  

Equity

Incentive

Awards,

Shares,

Units

Or other

Rights that

have not

vested

  

Equity

Incentive

Plan

Awards:

Market or

Payout

value of

Unearned

Shares, Units

or other

rights that

have not

vested

 

Rudolf Hauke,

CEO and

President

   1,600,000    -    -   $0.10  

1/14/13
to

4/14/14

   -    -    -    - 
                                            
Joseph J.   1,000,000    -    -   $0.025   6/26/13   -    -    -    - 
Tomasek,   4,500,000    -    -   $0.05   3/31/13 to                    
Director and General                      9/30/16                    
Legal                                           
Counsel                                           
                                            
         -    -            -    -    -    - 
         -    -            -    -    -    - 

 

Option Exercises and Stock Vested Table: None

 

Pension Benefits Table: None

 

Nonqualified Deferred Compensation Table: None

 

Pre-requisites Table: None

 

Compensation of Directors:

 

We did not pay any compensation to any of our directors for services rendered as directors during fiscal years 2012, 2011 and 2010

 

During 2010, we granted 2 directors 500,000 warrants each exercisable at $0.025 for 5 years in recognition of the services provided as directors of the company.

 

During 2012, 2011 and 2010, one outside director of the Company who also serves as the Company’s general and securities counsel, incurred or was paid an aggregate of $60,000, $60,000, and $65,000 respectively, for legal services.

 

CORPORATE GOVERNANCE AND CODE OF ETHICS

 

The Company has always been committed to good corporate governance. In furtherance of this commitment, during 2002 the Board of Directors expanded the duties of the Company’s Audit Committee by increasing the Committee's duties specifically to include responsibility and oversight of corporate governance matters and adherence to the Company’s Code of Ethics. A copy of the Corporate Code of Ethics and Conduct had been included as an exhibit to the Company’s report on Form 10-KSB for the year ended December 31, 2002.

  

21
 

  

Board Committees

 

AUDIT COMMITTEE

 

The Company has appointed an Audit Committee in accordance with the provisions of the Sarbanes-Oxley Act of 2002. The Audit Committee is currently comprised of the entire board of directors.

 

COMPENSATION AND NOMINATING COMMITTEES

 

Our board of directors intends to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by the national securities exchanges. Therefore, we intend that a majority of our directors will eventually be independent directors. Additionally, our board of directors is expected to appoint a nominating committee and a compensation committee, and to adopt charters relative to each such committee. Until further determination by the Board, the full Board of Directors will undertake the duties of the compensation committee and nominating committee.

 

ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information known to us with respect to the beneficial ownership of Common Stock held of record as of December 31, 2012, by (1) all persons who are owners of 5% or more of our Common Stock, (2) each of our named executive officers (see “Summary Compensation Table”), (3) each director, and (4) all of our executive officers and directors as a group. Each of the stockholders can be reached at our principal executive offices located at 330 West 38th Street, Suite 1602, New York, New York 10018.

 

Title of Class*  Name and Address of
Beneficial Owner
  Amount and Nature of
Beneficial Ownership(1)  
   Percent
of Class  
 
Directors and Executive Officers:             
             
Common Stock  Andre Scholz   6,800,000(2)   1.01%
   Pres./CEO/Director          
              
   Joseph Tomasek   8,480,500(3)   1.29%
   Director          
              
   Craig Cody   750,000(5)   0.10%
   Chief Financial Officer          
              
All Directors and Officers as a Group:      13,130,500    2.4%
as a Group (3 persons)             
              
Beneficial owners of more than 5% of Common Stock (exclusive of officers and directors):             
              
Discover Advisory Company      67,871,366(7)   9.99%
c/o Horymor Trust Corp. Ltd.             
50 Shirley Street / P.O.Box N-341,             
Nassau             
              
Cambridge Services Inc.      67,871,366(8)   9.99%
c/o TSZ Treuhandgesellschaft              
Sauter & Co.             
Suedstr. 11, CH-8034 Zurich, Switzerland             
              
Markus Winkler
330 West 38 St
New York, NY 10018
      67,871,366(9)   9.99%

 

 * The Company also has issued and outstanding as of December 31, 2012, 85,890 shares of its Senior Convertible Preferred Stock, with concentrations in excess of 10% for one or more of the holders of such stock, however, none of such shares bear any voting rights.

 

 

 

(1)For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock which such person has the right to acquire within 60 days of March 1, 2013. For purposes of computing the percentage of outstanding shares of Common Stock held by each person or group of persons named above, any shares of Common Stock which such person has the right to acquire within such date, whether by exercise of stock options or warrants or conversions of other securities, are deemed to be outstanding and to be beneficially owned by the person holding such option, warrant or convertible security for purposes of computing such person’s percentage ownership but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnote to this table and pursuant to applicable community property laws, the Company believes based on information supplied by such persons, that the persons named in this table have sole voting and investment power with respect to all shares of Common Stock which they beneficially own.
(2) Consists of 5,750,000 shares 800,000 shares accrued but not yet issued along with 250,000 shares issued in February 2013
(3) Includes 3,400,000 stock options and 500,000 warrants.
(4) Includes 500,000 warrants.
(5) Includes 500,000 warrants and 250,000 shares.
(6) Includes 2,800,000 shares accrued but not yet issued, and 3,500,000 warrants owned by Ulrich Schuerch who has investment and voting control of Tell Capital AG, 22,500,000 5-year warrants, exercisable at $0.07 per share, and 12,700,000 4-year warrants, exercisable at $0.05 per share.

 

22
 

 

(7) Includes 54,853,154 shares issuable upon conversion of convertible debt. Karen Buehler has investment and voting control of Discover Advisory Company.
(8) Includes 21,852,490 shares issuable upon conversion of convertible debt. Victor Sauter has investment control of Cambridge Services Inc.
(9) Includes 47,871,367 shares issuable upon conversion of convertible debt of Kreuzfeld, LTd and VGZ-Vermoegenssverwaltungsgesellschaft both of which Markus Winkler has investment and voting control. sult

 

All Directors of the Company hold office until the next annual meeting of the shareholders and until successors have been elected and qualified. Executive Officers of the Company are appointed by the Board of Directors at meetings of the Company 's Directors and hold office until they resign or are removed from office.

 

Family Relationships

 

There are no family relationships between any of the directors or executive officers.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

The Company knows of no person, who at any time during the period from the date at which it filed its annual report on Form 10-K for the year ended December 31, 2008 to the present, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company (a "Reporting Person"), that failed to file on a timely basis any reports required to be furnished pursuant to Section 16(a).

 

23
 

 

ITEM 13:            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

During the year ended December 31, 2012 and 2011 one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $60,000 and $60,000, respectively, for each period for legal services. The director also received 100,000 common stock options per month during the year ended December 31, 2012, valued at $11,880, and a stock grant of 250,000 common shares, valued at $2,500. The director also received 100,000 common stock options per month during the year ended December 30, 2011, valued at $11,880. The balance due to this director at December 31, 2012 and 2011 was $0 and $5,000, respectively.

 

For the year ended December 31, 2012 and 2011 we incurred an aggregate $437,952 and $444,390, respectively, to companies controlled by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server farm installations and IT equipment purchases, and paid $7,585 in 2011, for promotional materials. The officer also earned 100,000 common shares per month during the year ended December 31, 2012 under a consulting agreement, valued at $30,600, and a stock grant of 250,000 common shares, valued at $2,500. During 2012, the officer received 1,200,000 shares for prior year share obligations. The officer also received $100,000 in November 2012 for prepaid consulting fees towards 2013 under the terms of a consulting agreement.

 

During 2011, one former principal of Kwick! advanced the subsidiary 100,000 Euros, which was repaid during 2012.

 

During 2012 and 2011 the beneficial ownership in the Company’s securities held respectively, by Tell Capital AG of Switzerland and its principal, Ulrich Schuerch on a consolidated basis, was approximately 11.4% and approximately 9.9% 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 2012 and 2010.During the year ended December 31, 2012 Cambridge Services converted $581,269 of debt. Kreuzefeld, Ltd converted $419,100 and VGZ converted $409,200 of debt. During the year ended December 31, 2011, Cambridge Services, Inc. reassigned $503,760 to a third investor Kreuzfeld, Ltd and converted $377,820. During the same periods Discovery Advisory Services converted $1,160,700 and Kreuzfeld, Ltd. converted $492,760.

 

During the year ended December 31, 2012 Cambridge Services Inc.advanced an additional $1,303,913, Discovery Advisory Company advanced an additional $2,436,588, Kreuzefeld, LTD advanced an additional $2,069,479 and VGZ advanced $365,338 During the year ended December 31, 2011, Cambridge Services, Inc. advanced an additional $745,000. At December 31, 2012, $3,221,722 and $1,215,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively. During 2012 To complete the acquisition of Kwick!, Cambridge Services, Inc.,Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively. Additionally, Ulrich Schuerch advanced the Company $100,000 in the year ended December 31, 2011, and holds $340,000 of demand notes issued at a rate of interest of 10%.

 

The Company, through its subsidiary, Kwick, is party to a service agreement with JAUMO GmbH, Germany, a company partially owned by the officers of Kwick. The subsidiary recognized approximately $93,174 in service revenue from this entity in the year ending December 31, 2012. In the year ending December 31, 2011 the subsidiary recognized $57,416 in service revenue.

 

24
 

 

ITEM 14:            PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

AUDIT FEES

 

Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the aggregate amount of $64,860 and $41,262 for professional services rendered for their audit of our annual financial statements and their reviews of the financial statements included in our Forms 10-K and 10-Q for the years ended December 31, 2012, and December 31, 2011, respectively.

 

AUDIT-RELATED FEES

 

Rosenberg did not bill us for, nor perform professional services rendered for assurance and related services that were reasonably related to the performance of audit or review of the Company's financial statements for the fiscal years ended December 31, 2012, and December 31, 2011.

 

TAX FEES

 

Rosenberg billed us in the aggregate amount of $0, and $0 for professional services rendered for tax related services for the fiscal years ended December 31, 2012 and December 31, 2011, respectively.

 

ALL OTHER FEES

 

The aggregate fees billed by Rosenberg for services rendered to the Company during the last two fiscal years, other than as reported above, were $0 and $0, respectively.

 

TRANSFER AGENT

 

The transfer agent for the Company is Securities Transfer Corporation, located at 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.

 

ANNUAL REPORT

 

The Company intends to continue its practice of furnishing annual reports to its shareholders containing financial statements audited by independent certified public accountants.

 

25
 

 

PART IV

 

ITEM 15:            EXHIBITS AND REPORTS ON FORM 8-K

 

(a)Exhibits

 

The Exhibits that are filed with this report or that are incorporated by reference are set forth in the Exhibit Index attached hereto.

 

(b)Reports on Form 8-K

 

During the fourth quarter in 2012, the Company filed the following reports on Form 8-K:

 

On October 25, 2012, the Company filed a current report on Form 8-K, announcing Kiwibox.com was launching a mobile site registration capability..

 

On December 17, 2013, the Company filed a current report on Form 8-K, announcing Kiwibox.com has released a new IOS and Android updates.

 

26
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

KIWIBOX.COM, INC.    
       
By:   /s/ Andre Scholz   Date: April 10, 2013
  Andre Scholz    
  President and Chief Executive Officer    
  (Principal Executive Officer),    
  Director    
       
By: /s/ Craig Cody   Date: April 10, 2013
  Craig S. Cody    
  Secretary, Chief Financial Officer    
  (Principal Financial Officer)    

 

In accordance with the requirements of the Securities Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name   Date
     
//s/ Joseph J. Tomasek   April 10, 2013
Joseph J. Tomasek, Director    
     
/s/ Andre Scholz   April 10, 2013
Andre Scholz, Director    

 

27
 

 

EXHIBIT INDEX

 

(A)   Financial Statements and Notes to Financial Statements
     
(3) (i)   Articles of Incorporation and Amendments thereto, incorporated herein by reference to Exhibits of previous filings with the Commission.
     
(3) (ii)   Bylaws of the Company, incorporated herein by reference to Exhibits of previous filings with the Commission.
     
10.25*   Copy of Agreement and Plan of Reorganization, Dated February 19, 2007, between the Company, Kiwibox Media, Inc. and the Kiwibox Shareholders, and Form of Employment Agreement for the Three Kiwibox Shareholders,
     
10.27*   Amendment No. 3 to Agreement and Plan of Reorganization, dated July 31, 2007 and Effective August 2, 2007.
     
10.28*   Preliminary Employment Agreement with Paul Farris, Dated September 19, 2007
     
10.29*   Amendment No. 4 to Agreement and Plan of Reorganization, dated as of December 3, 2007.
     
10.30*   Amendment No. 5 to Agreement and Plan of Reorganization, dated as of December 31, 2007.
     
10.31*   Standstill Letter Agreement, dated as of January 30, 2008.
     
10.32*   Standstill Letter Agreement, dated as of February 11, 2008.
     
10.33*   Amendment No. 6 to Agreement and Plan of Reorganization, dated as of February 28, 2008.
     
10.34*   Engagement Agreement, Dated June 27, 2008, between Tell Capital AG and the Company.
     
10.35*   Resignation Agreement, Dated August 19, 2008, between Ivan Tumanov and the Company.
     
10.36*   Form of Demand Notes issued by the Company to Lender, Discover Advisory Company.
     
10.36-1*   Form of corrected Demand Notes issued by the Company to Lender, Discover Advisory Company.
     
10.36-2   Form of Registrant’s Master Corporate Promissory Note, dated June 4, 2009, delivered and accepted by Discover Advisory Company, attached as an exhibit to Registrant’s Form 8-K filed with the Commission on June 12, 2009.
     
10.37   Copy of Stock Pledge Agreement, dated June 4, 2009, by and between Registrant and Discover Advisory Company- attached as an exhibit to Registrant’s  Form 8-K filed with the Commission on June  12, 2009.
     
10.38   Copy of Consulting Agreement, dated June 1, 2009, between the Registrant, Kiwibox Media, Inc. and Andre Scholz attached as an exhibit to Registrant’s  Form 8-K filed with the Commission on June  12, 2009.
     
10.39   Form of Registrant’s Securities Purchase Agreement, with Warrant as an Exhibit: attached as an exhibit to Registrant’s Form 8-K filed with the Commission on December 31, 2009.

 

28
 

 

10.40   Certificate of Ownership and Merger of Kiwibox Media, Inc. with and into Magnitude Information Systems, Inc., including Corporate Name Change, dated December 15, 2009 and as filed with the Secretary of State of Delaware on December 17, 2009. attached as an exhibit to Registrant’s  Form 8-K filed with the Commission on December 31, 2009
     
10.41   Form of Class AA Senior Secured Convertible Revolving Promissory Note issued to Discover Advisory Company, Cambridge Services, Inc., VGZ and Kreuzfeld Ltd. On August 1, 2012.
     
31.01A.   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 8, 2013.
     
31.02A.   Certification of Acting Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated April 8, 2013.
     
32.01A.   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated  April 8, 2013.
     
32.02A.   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated  April 8, 2013.

 

*Documents filed as exhibits to Registrant’s current reports, quarterly reports, annual reports and registration statements and amendments thereto with the U.S. Securities and Exchange Commission.

 

OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCE

 

(a)The Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2012, June 30, 2012, and September 30, 2012.

 

(b)All other reports filed by the Company pursuant to Section 13(a) or 15(d) of the Exchange Act since the Company’s fiscal year ended December 31, 2010

 

29
 

 

Kiwibox.Com, Inc.

 

Financial Statements

 

December 31, 2012 and 2011

 

 
 

 

Kiwibox.Com, Inc.

 

Index to the Financial Statements

 

December 31, 2012 and 2011

 

    Page
     
Report of Independent Registered Public Accounting Firm   F-2
     
Financial Statements    
     
Balance Sheets   F-3
     
Statements of Operations   F-4
     
Statements of Stockholders Equity (Impairment)   F-5 - F-6
     
Statements of Cash Flows   F-7 - F-8
     
Notes to the Financial Statements   F-9 - F-37

 

F-1
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Kiwibox.com, Inc.

 

We have audited the accompanying balance sheets of Kiwibox.com, Inc. as of December 31, 2012 and 2011, and the related statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. Kiwibox.com, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kiwibox.com, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company’s revenues are insufficient to finance the business, and the Company is entirely dependent on the continuation of funding from outside investors. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

Rosenberg Rich Baker Berman & Company

 

Somerset, New Jersey

April 10, 2013

 

F-2
 

 

 

 

Kiwibox.Com, Inc. and Subsidiary

Consolidated Balance Sheets

 

   December 31, 2012   December 31, 2011 
Assets          
Current Assets          
Cash and cash equivalents  $56,751   $195,613 
Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively   230,691    383,742 
Due from related parties   15,468    17,582 
Other receivables   2,469    91,443 
Income taxes receivable   -    90,138 
Prepaid expenses and other current assets   129,010    42,241 
Total Current Assets   434,389    820,759 
Property and equipment, net of accumulated depreciation of $621,876 and $605,112   120,556    244,314 
Website development costs, net of accumulated amortization of $284,121 and $187,128   108,539    145,211 
Goodwill   6,169,426    5,937,378 
Deferred tax Asset   -    1,052,454 
Other assets   44,213    43,815 
Total Assets   6,877,123    8,243,931 
           
Liabilities and Stockholders’ Equity (Impairment)          
           
Current Liabilities          
Bank overdraft   176,103    - 
Accounts payable   230,691    228,555 
Accrued expenses   1,442,177    761,191 
Due to related parties   30,710    187,264 
Obligations to be settled in stock   270,658    249,275 
Dividends payable   633,129    581,865 
Kwick! acquisition indebtedness   -    5,221,093 
Loans and notes payable - other   100,000    140,000 
Loans and notes payable – related parties   340,000    340,000 
Convertible notes payable-related parties   8,773,699    4,007,950 
Convertible notes payable – other, net of discount   81,667    - 
Current maturities of long-term debt   33,529    33,529 
Liability for derivative conversion feature –related parties   13,797,679    4,704,987 
Total Current Liabilities   25,910,042    16,326,319 
           
Stockholders’ Equity (Impairment)          
Preferred Stock, $0.001 par value, non-voting, 3,000,000 shares authorized; 85,890  shares issued and outstanding   86    86 
Common Stock, $0.0001 par value, 1,400,000,000 shares authorized;          
issued and outstanding 679,393,060 and 586,168,060 shares respectively   67,937    58,618 
Additional paid-in capital   52,658,185    49,700,653 
Accumulated deficit   (71,649,780)   (57,588,185)
Accumulated other comprehensive loss   (109,347)   (382,950)
Total Stockholders’ Equity (Impairment)   (19,032,919)   (8,211,778)
Total Liabilities and Equity (Impairment)  $6,877,123   $8,243,931 

 

The accompanying notes are an integral part of the financial statements.

 

F-3
 

 

Kiwibox.Com, Inc. and Subsidiary

Consolidated Statements of Operations

 

   Year Ended December 31, 
   2012   2011 
Net Sales          
Advertising  $1,363,508   $515,775 
Other   106,197    83,840 
Total Net Sales   1,469,705    599,615 
Cost of Goods Sold          
Website hosting expenses   1,292,171    497,110 
Total Cost of Goods Sold   1,292,171    497,110 
           
Gross Profit (Loss)   177,534    102,505 
           
Selling expenses   389,209    401,434 
Stock-based compensation (see below)   9,300    29,298 
General and administrative expenses   1,450,181    1,173,383 
           
Loss From Operations   (1,671,156)   (1,500,610)
           
Other Income (Expense)          
Miscellaneous income   50,489    47,553 
Interest expense   (758,540)   (297,456)
Interest expense-derivative conversion features   (7,663,872)   (3,659,670)
Amortization of debt discount   (41,667)     
Foreign Currency Transaction (Loss)/Gain   50,052    (53,086)
Change in fair value – derivative liabilities   (2,895,203)   (476,281)
           
Total Other Income (Expense)   (11,258,741)   (4,438,940)
           
Loss Before Benefit (Provision) for Income Taxes   (12,929,897)   (5,939,550)
Benefit (Provision) for Income Taxes   (1,080,435)   39,013 
           
Net Loss  $(14,010,332)  $(5,900,537)
           
Dividends on Preferred Shares   (51,263)   (51,263)
           
Net Loss Applicable to Common Shareholders, basic and diluted  $(14,061,595)  $(5,951,800)
           
Net Loss Per Common Share, basic and diluted   (0.022)   (0.011)
           
Weighted Average of Common Shares Outstanding   650,715,901    522,090,046 
           
Comprehensive Income (Loss):          
Net Income (Loss)  $(14,010,332)  $(5,900,537)
Foreign currency translation adjustment   273,603    (382,950)
Total Comprehensive Income (Loss)  $(13,736,729)  $(6,283,487)

 

All of the stock-based compensation relates to selling, general and administrative expenses.

 

The accompanying notes are an integral part of the financial statements

 

F-4
 

 

Kiwibox.Com, Inc. and Subsidiary

Statement of Stockholders’ Equity (Deficit)

Year Ended December 31, 2011

 

  

Convertible Preferred

Shares

  

Cumulative Preferred

Shares

   Common Stock   Additional       Accumulated
Other
     
   Shares   Amount   Shares   Amount   Shares   Amount   Paid in
Capital
   Accumulated
Deficit
   Comprehensive
Income (Loss)
   Total Stockholders’
Equity (Deficit)
 
                                         
Balances, January 1, 2011   85,890   $86    1   $-    498,243,060    49,824    445,571,867    (51,636,385)        (6,014,608))
                                                   
Issuance of  stock for services performed   -    -    -    -    725,000    73    28,855    -         28,928 
                                                   
Shares issued upon conversions of debt   -    -    -         86,000,000    8,600    2,022,680              2,031,280 
                                                   
Recognition of capital from conversion of derivative liabilities   -    -    -    -    -    -    2,053,370    -         2,053,369 
                                                   
Partial settlements of obligation to be settled in stock   -    -    -    -    1,200,000    120    23,880    -         24,000 
                                                   
Dividends on conv. preferred stock   -    -    -    -    -    -    -    (51,263)        (51,263)
                                                   
Net loss, year ended December 31, 2011                                      (5,900,537)        (5,900,537)
                                                   
Other comprehensive income:                                                  
                                                   
Foreign currency translation loss   -    -    -    -    -    -    -    -    (382,950)   (382,950)
                                                   
Balances, December 31, 2011   85,890   $86    1   $-    586,168,060   $58,618   $49,700,653   $(57,588,185)  $(382,950    (8,211,778)

 

The accompanying notes are an integral part of the financial statements.

 

F-5
 

 

Kiwibox.Com, Inc. and Subsidiary

Statement of Stockholders’ Equity (Deficit)

Year Ended December 31, 2012

 

                                   Accumulated     
   Convertible Preferred   Cumulative Preferred           Additional       Other     
   Shares   Shares   Common Stock   Paid in   Accumulated   Comprehensive   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Equity (Deficit) 
Balances, January 1, 2012   85,890   $86    1   $-    586,168,060    58,618    49,700,653    (57,588,185)   (382,950)   (8,211,778)
                                                   
Shares issued upon conversions of debt   -    -    -         92,,000,000    9,200    1,400,370              1,409,570 
                                                   
Recognition of capital from conversion of derivative liabilities   -    -    -    -    -    -    1,529,883    -         1,529,883 
                                                   
Partial settlements of obligation to be settled in stock   -    -    -    -    1,225,000    119    27,279    -         27,398 
                                                   
Dividends on conv. preferred stock   -    -    -    -    -    -    -    (51,263)        (51,263)
                                                   
Net loss, year ended December 31, 2012                                      (14,010,332)        (14,010,332)
                                                   
Other comprehensive income:                                                  
                                                   
Foreign currency translation gain   -    -    -    -    -    -    -    -    273,603    273,603 
                                                   
Balances, December 31, 2012   85,890   $86    1   $-    679,393,060   $67,937   $52,658,185   $(71,649,780)  $(109,347)   (19,032,919)

 

The accompanying notes are an integral part of the financial statements.

 

F-6
 

 

Kiwibox.Com, Inc. and Subsidiary

Statements of Cash Flows

 

   Year Ended December 31, 
   2012   2011 
Cash Flows From Operating Activities          
Net Loss  $(14,010,332)  $(5,900,537)
Adjustments to Reconcile Net Loss to Net Cash Used in Operations:          
Depreciation and amortization   305,478    150,093 
Securities issued for services   9,300    28,928 
Intrinsic value of  beneficial conversion feature   7,663,873    3,659,670 
Change in fair value – conversion features   2,895,203    476,281 
Change in deferred taxes   1,052,454    53,593 
(Gain) loss on disposition of assets   -    13,084 
Foreign transaction (gain) loss   (50,052)   53,086 
Decreases (Increases) in Assets          
Accounts receivable   153,051    151,269 
Income taxes receivable   90,138    (168,990)
Other receivables   88,974    28,909 
Prepaid expenses   (86,769)   35,548 
Increases (Decreases) in Liabilities          
Bank overdraft   176,103    - 
 Obligations to be settled in stock   52,980    79,627 
Accounts payable   1,413    46,733 
Accrued expenses   688,868    332,681 
Net Cash Used by Operating Activities   (969,318)   (960,023)
Cash Flows From Investing Activities          
Proceeds from sale of assets   666    49,144 
Cash outlay – website development costs   (65,834)   (41,024)
Cash outlay – other assets   (398)   (9,572)
Cash acquired – business combination   -    339,198 
Purchases of property and equipment   (3,165)   (35,261)
Net Cash Provided (Used) by Investing Activities   (68,731)   302,485 
           
Cash Flows From Financing Activities          
Proceeds from loans payable   1,055,000    845,000 
Net proceeds from (repayments to) related parties   (156,554)   56,517 
Proceeds from issuance of common and preferred stock and warrants   -      
Net Cash Provided by Financing Activities   900,560    901,517 
           
Net Increase (Decrease) in Cash   (137,490)   243,979 
Effect of exchange rates on cash   (1,372)   (48,743)
Cash at beginning of period   195,613    377 
Cash at end of period  $56,751    195,613 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION     
Interest Paid  $16,637   $4,016 
Income Taxes Paid  $-   $124,299 

 

The accompanying notes are an integral part of the financial statements.

 

F-7
 

  

Kiwibox.Com, Inc. and Subsidiary

Statements of Cash Flows

Year Ended December 31, 2012

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:     
      
 The Year Ended December 31, 2012     
      
Settlement of obligations with common stock  $31,597 
      
Acquisition of subsidiary via acquisition indebtedness and affiliate debentures  $5,170,318 
      
Conversion of debt  $1,409,570 
      
Year to date dividend accruals  $51,263 
      
Reduction of derivatives from conversion of debt  $1,516,384 
      
The Year Ended December 31, 2011     
      
Settlement of obligations with common stock  $24,000 
      
Acquisition of subsidiary via acquisition indebtedness and affiliate debentures  $8,567,843 
      
Conversion of debt and related derivative liabilities  $2,031,280 
      
Warrants granted in acquisition of other assets  $  
      
Year to date dividend accruals  $51,263 
      
Reduction of derivatives from conversion of debt  $2,053,372 

 

The accompanying notes are an integral part of the financial statements.

 

F-8
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Organization

 

Kiwibox.Com, Inc. (the “Company”) was incorporated as a Delaware corporation on April 19, 1988 under the name Fortunistics, Inc. On November 18, 1998, the Company changed its name to Magnitude Information Systems, Inc. On December 31, 2009, the Company changed its name to Kiwibox.com, Inc.

 

On August 16, 2007 the Company acquired all outstanding shares of Kiwibox Media, Inc.

 

The Company, Magnitude, Inc. and Kiwibox Media Inc. were separate legal entities until December 31, 2009, with Kiwibox Media, Inc. being a wholly owned subsidiary. On December 31, 2009, the two subsidiaries, Magnitude, Inc. and Kiwibox Media, Inc. merged into the Company.

 

On September 30, 2011, Kiwibox.com acquired the German based social network Kwick!! Community GmbH & Co. KG, a wholly-owned subsidiary.

 

Cash and Cash Equivalents

 

The Company accounts for cash and other highly liquid investments with original maturities of three months or less as cash and cash equivalents.

 

Principles of Consolidation

 

The consolidated financial statements as of and for the year ended December 31, 2012 include the accounts of Kiwibox.com, Inc. and its subsidiary, KWICK! Community GmbH & Co. KG (“Kwick”). The activities of Kwick are included in the financial statements from September 30, 2011 (date of acquisition) through December 31, 2012. Any significant inter-company balances and transactions have been eliminated.

 

Depreciation and Amortization

 

Property and equipment are recorded at cost. Depreciation on equipment, furniture and fixtures and leasehold improvements is computed on the straight-line method over the estimated useful lives of such assets between 3-10 years, or lease term for leasehold improvements, if for a shorter period. Maintenance and repairs are charged to operations as incurred. 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.

 

Foreign Currency Translation

 

Assets and liabilities of foreign operations are translated into U.S. dollars at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the weighted average exchange rates prevailing during each period presented. Gains and losses resulting from foreign currency transactions are included in the results of operations. Gains and losses resulting from translation of financial statements of our foreign subsidiary operating in a non-hyperinflationary economy are recorded as a component of accumulated other comprehensive loss until either sale or upon complete or substantially complete liquidation by the Company of its investment in the foreign entity. Accumulated gain or (loss) on foreign currency translation adjustment was $(109,347) at December 31, 2012.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. Advertising expense was $82,573 and $92,049 for the years ended December 31, 2012 and 2011, respectively.

 

F-9
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Evaluation of Long Lived Assets

 

Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated undiscounted future net cash flows of the related long-lived asset.

 

Fair Value Measurements

 

The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures, which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company accounted for certain convertible debentures modified in the years ended December 31, 2012 and 2011 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 12).

 

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.

 

F-10
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Capitalization of Software /Website Development Costs (continued)

 

Fees incurred for web site hosting, which involve the payment of a specified, periodic fee to an Internet service provider in return for hosting the web site on its server(s) connected to the Internet, are expensed over the period of benefit, and included in cost of sales in the accompanying financial statements.

 

A total of $60,321 and $57,622 was capitalized for web-site development work during the years ended December 31, 2012 and 2011, respectively. During 2010, software costs of $11,880 were determined to be impaired and were written off during the year then ended.

 

Goodwill Impairment

 

The Company has adopted the provisions of Accounting Standards Update (ASU) 2011-08, which amended the guidance on testing for goodwill impairment, and allows an entity to elect to qualitatively assess whether it is necessary to perform the current two-step goodwill impairment test. If the qualitative assessment determines that it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step test is unnecessary. If the entity elects to bypass the qualitative assessment for any reporting unit and proceed directly to Step One of the test and validate the conclusion by measuring fair value, it can resume performing the qualitative assessment in any subsequent period. The Company performed qualitative assessments during 2012 and determined that there was no indication of impairment based on the assessments.

 

In accordance with the provisions of ASC 350-20, Intangibles – Goodwill, the Company tests the Goodwill of a reporting unit on at least an annual basis. The Company performed the annual impairment test on its reported Goodwill during the third quarter of 2012 (see Note 21). The impairment test under ASC 350 is a two step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. If the carrying amount of the reporting unit exceeds the determined fair value, the second step of the goodwill impairment test is necessary in order to measure the amount of impairment loss, if any. The second step of a goodwill impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. In order to determine the amount of impairment (if any), a full purchase price allocation must be performed in the same manner as when a business combination is determined. Once the fair value of the assets in the second step has been determined, the excess of the fair value of a reporting unit over the fair value of its assets and liabilities is the implied fair value of goodwill. After a goodwill impairment loss is recorded, the adjusted carrying amount of goodwill becomes the new accounting basis for subsequent goodwill impairment tests.

 

Income Taxes

 

The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset.

 

F-11
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Net Loss Per Share

 

Net loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 455,186,819 common shares at December 31, 2012, comprised of 127,231,315 shares issuable upon exercise of stock purchase warrants, 8,850,000 shares issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 128,609,269 shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, presently convertible at the option of four holders at a conversion price of 50% of the ten day trailing market price, totals $8,773,699 which would yield in excess of 1,750,000,000 shares if fully exercised, however, the respective notes, all of which were issued to these four investors, carry a stipulation whereby the number of all shares issued pursuant to a conversion, may in the aggregate not exceed a number that would increase the total share holdings beneficially owned by such investor to a level above 9.99%. At the end of the quarter, this clause limits any conversion to the aforementioned number of shares. All of the aforementioned conversions or exercises, as the case may be, are at the option of the holders.

 

Revenue Recognition

 

The Company’s revenue is derived from advertising on the Kiwibox.Com or Kwick! Community websites. Most contracts require the Company to deliver the customer impressions, click-throughs or new customers, or some combination thereof. Accordingly, advertising revenue is estimated and recognized for the period in which customer impressions, click through or new customers are delivered. Licensing or hosting revenue consists of an annual contract with clients to provide web-site hosting and assistance.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

2. GOING CONCERN

 

The ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing. Our revenues during the foreseeable future are insufficient to finance our business and we are entirely dependent on the willingness of existing investors to continue supporting the Company with working capital loans and equity investments, and our ability to find new investors should the financial support from existing investors prove to be insufficient. If we were unable to obtain a steady flow of new debt or equity-based working capital we would be forced to cease operations. In their report for the fiscal year ended December 31, 2012, our auditors have expressed an opinion that, as a result of the losses incurred, there is substantial doubt regarding our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company were unable to continue as a going concern. Management’s plans are to continue seeking equity and debt capital until cash flow from operations cover funding needs.

 

F-12
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash balances in a financial institution which is insured by the Federal Deposit Insurance Corporation up to $250,000. Balances in these accounts may, at times, exceed the federally insured limits. At December 31, 2012, cash balances in bank accounts did not exceed this limit. The Company provides credit in the normal course of business to customers located throughout the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.

 

4. PREPAID EXPENSES

 

Prepaid expenses consist of the following at:  December 31, 2012   December 31, 2011 
Rent  $11,427   $20,512 
Promotional supplies inventory   6,866    10,302 
Business insurance   5,250    9,237 
Consulting   100,000    - 
Other   5,467    2,190 
    129,010    42,241 

 

5. PROPERTY AND EQUIPMENT

 

Property and equipment consist of the following at:  December 31, 2012   December 31, 2011 
Furniture  $14,322   $14,322 
Leasehold Improvements   24,130    24,130 
Computer Equipment   630,842    620,746 
Office Equipment   73,138    190,228 
    742,432    849,426 
Less accumulated depreciation   621,876    605,112 
Total  $120,556   $244,314 

 

Depreciation expense charged to operations was $166,274 and $58,513 for the years ended December 31, 2012 and 2011, respectively. During the year $129,327 of fixed assets with corresponding accumulated depreciation of $129,299 were disposed of for $666 in proceeds.

 

6. INTANGIBLE ASSETS

 

Intangible assets consisted of software for website development costs as follows:

 

   December 31, 2012   December 31, 2011 
Website development costs  $392,660   $332,339 
Less accumulated amortization   284,121    187,128 
Total  $108,539   $145,211 

 

Amortization expense for the years ended December 31, 2012 and 2011 was $96,993 and $91,570, respectively. Additional amortization over the next 5 years is estimated to be as follows:

 

   Amortization expense 
     
December 31,   2013  $63,048 
December 31,   2014   2,172 
December 31,   2015   1,907 
December 31,   2016   1,146 
December 31,   2017   1,085 
Thereafter   1,714 

 

F-13
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

  

7. ACCRUED EXPENSES

 

Accrued expenses consisted of the following at:

 

   December 31, 2012   December 31, 2011 
         
Accrued interest  $1,203,923   $462,020 
Accrued payroll, payroll taxes and commissions   51,944    85,756 
Accrued professional fees   150,598    151,862 
Accrued rent   12,158    15,158 
Miscellaneous accruals   23,554    46,395 
Total  $1,442,177   $761,191 

 

8. OBLIGATIONS TO BE SETTLED IN STOCK

 

Obligations to be settled in stock consisted of the following at

 

   December 31,   December 31, 
   2012   2011 
Obligation for warrants granted for compensation  $100,000   $100,000 
           
900,000 common shares issuable to a consultant who was a director of the company, for services rendered.   36,000    36,000 
           
500,000 (2012) and 500,000 (2011) common shares, and 2,900,000 (2012) and 2,900,000 (2011) stock options issuable to two officers of the Company pursuant to their respective employment Agreements   69,608    70,605 
           
4,500,000 (2012) and 3,300,000 (2011) stock options  issuable to one director who also serves as the  Company’s general counsel   44,550    32,670 
           
1,000,000 warrants granted on the Pixunity.de asset  Purchase   10,000    10,000 
           
1,050,000 shares issuable under stock grants   10,500    - 
           
   $270,658   $249,275 

 

F-14
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

9. LOANS PAYABLE

 

The Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at December 31, 2010 and 2009:

 

On December 4, 1996, The company (Formerly Magnitude, Inc.) repurchased 500,000 shares of its common stock and retired same against issuance of a promissory note maturing twelve months thereafter accruing interest at 5% per annum and due December 4, 1998.  This note is overdue as of September 30, 2005 and no demand for payment has been made.  $75,000 
      
Total  $75,000 

 

10. NOTES PAYABLE

 

   December 31,   December 31, 
   2012   2011 
Balance of non-converted notes outstanding. Attempts to locate the holder of this note, to settle this liability, have been unsuccessful.  $25,000   $25,000 
           
In January 2008 a shareholder loaned the Company $40,000 pursuant to which the Company issued a demand note bearing interest at the rate of 5% per year. In January 2012 this note was recast and contains a conversion feature allowing the holder to convert the outstanding principal balance into restricted common shares and 5-year common stock purchase warrants, exercisable at $.05 per share (the Warrants), at the conversion rate of $.025 per common share and per warrant, any time prior to the maturity date.   40,000    40,000 
           
From September 2008 through December  2012 four shareholders loaned the Company funds under the terms of the convertible notes issued, as modified in March 2009 and July 2010 and April 2011 (see Note 12).   8,773,699    4,347,950 
           
During March 2012,an individual loaned the Company funds under the terms of a convertible promissory note at interest of  5% per year (see Note 12)   50,000      
           
Less: debt discount on above note   (8,333)     
           
In January 2011 and again in February 2011, a shareholder loaned the Company $50,000 under a demand note at 10%. In  2010, this  shareholder loaned the Company $240,000 under a demand note at 10%.   340,000    340,000 
           
Total  $9,220,366   $4,752,950 

 

F-15
 

  

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

11. LONG-TERM DEBT

 

Long-term debt as of December 31, 2012 and 2011 is comprised of the following:

 

Discounted present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation is in default.  $33,529 
Total   33,529 
Less current maturities   33,529 
Long-term debt, net of current maturities  $- 

 

12. DERIVATIVE CONVERSION FEATURES

 

On July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A Notes”), one to Cambridge Services, Inc., in the principal amount of $683,996, consolidating the series of loans (and related accrued interest) made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal amount of $1,160,984, consolidating the series of loans (and related accrued interest) made to the Company since September 19, 2008 and including advances through September 30, 2010. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum, are convertible (including accrued interest) at the option of each lender into Common Stock of the Company at 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event less than $0.001 (the "Conversion Price"). Both promissory notes contain conversion caps, limiting conversions under these notes to a maximum beneficial ownership position of Company common stock to 9.99% for each lender. Each of these notes contains Company covenants, requiring the lenders’ prior written consent in order for the Company to merge, issue any common or preferred stock or any convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors by more than five (5%) during any calendar year. During the year ended December 31, 2012, Cambridge Services, converted $581,269. During the same period Vermoegensverwaltungs-Gesellschaft Zurich LTD (“VGZ”) converted $409,200 and Kreuzfeld, Ltd converted $419,100. During 2012, to settle the obligation for indebtedness from the acquisition of Kwick!, Cambridge Services, Inc., Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively.

 

The Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas (“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”) and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal amount of $1,080,984, now cancelled, which has an outstanding balance due (including accrued interest) of $3,629,836 as of December 31, 2012; (2) to Kreuzfeld, with a maximum credit facility of $5,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 16, 2011, in the original principal amount of $2,000,000, now cancelled, which has an outstanding balance due (including accrued interest) of $3,911,338 as of December 31, 2012; 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 $1,412,142 as of December 31, 2012, and; to VGZ, with a maximum credit facility of $2,000,000 which replaced the

 

F-16
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

12. DERIVATIVE CONVERSION FEATURES (continued)

 

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 $877,963 as of December 31, 2012. 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 Pledgor’s wholly-owned German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership (“KG”), and all of its shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.

 

On February 28, 2012 the Company signed a convertible note with Michael Pisani. This is a 1 year note that is convertible at $0.025 per share in the amount of $50,000. In the event that any portion of any outstanding Company promissory note, preferred share, warrant or stock option held of record by a non-affiliate of the Company is converted, exercised or exchanged for common shares of the Company at a conversion price or conversion rate less than $0.025 per one (1) common share anytime any part of the outstanding principal amount of this note is outstanding, the conversion rate of this note shall automatically be adjusted to such lower conversion rate. The Company evaluated this conversion contingency under the guidance at ASC 815-40-15 and determined that this conversion feature should be bifurcated from the host contract and measures at fair value. The Company valued this conversion feature utilizing a Black-Scholes valuation model and a probability analysis with regard to the reset provision of the conversion price. The Company determined the initial value to be $55,241, with $50,000 recorded as a debt discount and the remainder as interest expense-derivative conversion features. The discount is being amortized over the life of the note. A total of $41,667 in amortization expense was recorded during the twelve months ended December 31, 2012.

 

The Company accounted for the conversion features underlying these convertible debentures modified in the year ended December 31, 2012 in accordance with ASC 815-40, Contract in Entity’s Own Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate conversion features of these debentures under these terms at the relevant commitment dates to be $7,713,872 utilizing a Black-Scholes valuation model, with $50,000 recorded as a debt discount as indicated above. The Company also recognized $1,516,383 in reductions of fair value to capital for conversions during the year. The fair value of the derivative conversion features was determined to be $13,797,679 at December 31, 2012. The change in fair value of the liability for the conversion feature resulted in a cost of $2,895,203 for the year ended December 31, 2012, which is included in Other Income (Expense) in the accompanying financial statements.

 

13. COMMITMENTS AND CONTINGENCIES

 

We maintain offices for our operations at 330 W. 38th Street, New York, New York 10018, for approximately 900 square feet. This lease requires minimum monthly rentals of $2,199 plus tenants’ share of utility/cam/property tax charges which average approximately $400 per month. During the 1st quarter of 2010 the Company successfully negotiated with the landlord to give up a lease of an office located at the same address consisting of approximately 500 square feet. This lease was extended in December 2010 and again in April 30, 2011 through December 31, 2012 with no changes to the monthly rent. The company is currently operating with no formal lease agreement

 

F-17
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

13. COMMITMENTS AND CONTINGENCIES (continued)

 

In May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. The lease was for 12 months at $2,775 per month through May 31, 2011. In May 2011 the lease was extended through August 31, 2011 at the rate of $2,837. In August 2011 the lease was extended through December 31, 2011 at the rate of $2,837 per month. In December 2011 the lease was again extended through May 31, 2012 with no change in the base rent. In May 2012 the lease was extended through December 31, 2012 at a monthly rate of $2,943, this lease was then extended through May 31, 2013 at the same terms.

 

Kwick! has operating leases related to office space in Weinstadt, Germany along with vehicle leases. The office lease is for a term of one year expiring on December 31, 2012 at the rate of $5,858 per month plus utilities. All operating lease contracts over 5 years contain clauses for yearly market rental reviews. Kwick! has a sublease arrangement with Jaumo GmBH a related party (see Note 14). Kwick!’s operating leases relate to leases of land and vehicles with lease terms of between 3 and 5 years. All operating lease contracts over 5 years contain clauses for yearly market rental reviews. The company does not have an option to purchase the leased land at the expiry of the lease periods.

 

Our total rent expenses were $138,821 and $92,049 during the year ended December 31, 2012 and 2011, respectively.

 

During the third quarter of 2010 the Chief Technology Officer took over the position of Chief Executive Officer, and entered into a consulting agreement which provided for remuneration for services and expenses at the rate of $20,000 and 100,000 restricted shares per month, running through July 30, 2011. On October 6, 2010 the terms of the consulting agreement were modified. The new terms called for a reduced monthly consulting fee of $16,667, and for $100,000 to be prepaid on January 1, 2011 covering the period January 1, 2011 through June 30, 2011 During the fourth quarter of 2011 this agreement was extended through December 31, 2012. During the fourth quarter of 2012 this agreement was again extended through December 31, 2013, with the same prepayment provision. There were no changes to the stock compensation portion of any earlier agreement.

 

During the third quarter in 2009 we entered into an engagement agreement with a consultant to assist the Company as the liaison to the Company’s shareholders and investors, to promote the Company and its website to the public markets, and to identify potential strategic partners, acquisition opportunities, and joint venture partners for the Company’s social networking website business. The agreement is deemed to have commenced on January 1, 2009 and extends through December 31, 2011, and calls for compensation to the consultant in the form of 2,000,000 five year warrants for the purchase of common shares, exercisable at $ 0.025 per share with a cashless exercise provision, for every six months period during the term of the agreement, and the payment in cash of unspecified amounts, the latter at the sole discretion of the Company. This agreement was amended during the second quarter of 2011 so that the options earned in 2011 would be exercisable at $0.075 per share. This amendment did not change the value per warrant and total compensation is unchanged. The original agreement furthermore recognizes that the same consultant had previously provided similar services to the Company for which he received a one-time payment in form of 15,000,000 five year warrants, exercisable at $0.0025 per share. The 15,000,000 warrants were exercised

during the three months ended March 31, 2010 pursuant to a cashless exercise into 13,125,000 shares of common stock. This agreement was not extended past December 31, 2011.

 

On March 7, 2011 the Company announced its acquisition of the assets of Pixunity.DE a German photo book community. We purchased the internet domain name, the software codes for capturing, uploading and sharing images and the list of its approximate 15,000 members. The principal reason for this purchase was to acquire the source code and technology for image sharing which could have cost up to $100,000 to develop this technology in house. We are currently integrating the image sharing software into our Kiwibox website and do not intend to market or rely upon the Pixunity brand for our business.

 

F-18
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

13. COMMITMENTS AND CONTINGENCIES (continued)

 

On April 8, 2013 the Company entered into an agreement with one investor to repay two loans totaling $90,000 plus interest over the next six months.

 

14. 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.

 

F-19
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to Financial Statements

 

14. FAIR VALUE (continued)

 

The following table reconciles, for the years ended December 31, 2012 and 2011, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:

 

Conversion Liability at January 1, 2012  $4,704,987 
Value of beneficial conversion features of new debentures   7,713,872 
Change in value of beneficial conversion features during period   2,895,203 
Reductions in fair value due to principal conversions   (1,516,383)
Conversion Liability at December 31,2012   13,797,679 
      
Conversion Liability at January 1, 2011   2,622,408 
Value of beneficial conversion features of new debentures   3,659,669 
Change in value of beneficial conversion features during period   476,281 
Reductions in fair value due to principal conversions   (2,053,371)
Conversion Liability at December 31, 2011  $4,704,987 

 

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.

 

15. PREFERRED STOCK

 

Preferred stock is non-voting, $.001 par value per share with 3,000,000 shares authorized.

 

Cumulative Preferred Stock has 2,500 shares designated of which 1 share is issued and outstanding. The total Cumulative Preferred Stock at December 31, 2006 is $0 with a liquidation price of $100,000. As of December 31, 2012, there was $9,000 of cumulative preferred dividends in arrears representing $9,000 per cumulative preferred share.

 

F-20
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK (continued)

Series A of the Senior Convertible Preferred Stock series which was issued in 2000 has 300,000 shares designated, 22,000 shares issued and outstanding. The total outstanding Series A Senior Convertible Preferred Stock at December 31, 2012 is $22 with a liquidation price of $110,000. The following is a description of the Series A convertible preferred stock:

 

(1)The holders of said shares of Series A Senior Preferred shall be entitled to receive cumulative dividends at the rate of seven percent (7%) per annum during the first annual period after issuance, increasing by increments of one half of one percent for every year thereafter until the rate reaches ten percent (10%) per annum at which time it will remain at 10% payable semi-annually when declared by the Board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series A Senior Preferred. The dividends on the Series A Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series A Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock.

 

(2)The Series A Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series B, C and D Senior Convertible Preferred Stock.

 

(3)In the event of any liquidation, of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series A Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of Five ($5.00) dollars for each share of Series A Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series B and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis.
(4)The Company shall have the right to redeem pro rata any or all of its Series A Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series A Senior Preferred held by such holder plus a "call premium" of 15% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").

 

F-21
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(5)Each share of Series A Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into such number (the "Conversion Ratio") of shares of the Common Stock of the Company as arrived at by dividing the Liquidation Price by one hundred fifty (150) percent of the market price of the Common Stock of the Corporation ("Market Price") on the earlier of the dates such share of Series A Senior Preferred is subscribed for or issued (the "Effective Date").

 

As of December 31, 2012 there were $132,664 Series A Senior Convertible Preferred share dividends accrued and unpaid representing $6.03 per share.

 

Series B of the Senior Convertible Preferred Stock series which was issued in 2000 has 350,000 shares designated, no shares issued and outstanding. The total outstanding Series B Senior Convertible Preferred Stock at December 31, 2012 is $0. The following is a description of the Series B Senior Convertible Stock:

 

(1)The holders of said shares of Series B Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually when declared by the Board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price of each share of the Series B Senior Preferred. The dividends on the Series B Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series B Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock.

 

(2)The Series B Senior Preferred shall, with respect to dividend rights and liquidation rights, rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, C and D Senior Convertible Preferred Stock.

 

(3)In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or providing for payment of the debts and other liabilities of the Company, the holders of the Series B Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) dollars for each share of Series B Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis.

 

F-22
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(4)The Company shall have the right to redeem pro rata any or all of its Series B Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption of the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series B Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").

 

(5)Each share of Series B Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the Company on the basis of ten (10) shares of Common Stock for 1 share of Series B Senior Preferred.

 

As of December 31, 2012 there were no Series B Senior Convertible Preferred share dividends accrued and unpaid.

 

Series C of the Senior Convertible Preferred Stock series which was issued in 2000 has 120,000 shares designated. There were no shares of Series C Senior Convertible Preferred Stock outstanding at December 31, 2012. The following is a description of the Series C Senior Convertible Stock:

 

(1)The holders of said shares of Series C Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable monthly, before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Liquidation Price (as hereinafter defined) of each share of the Series C Senior Preferred. The dividends on the Series C Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series C Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock.

 

(2)The Series C Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, B and D Senior Convertible Preferred Stock.

 

(3)In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series C Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, the amount of nine ($9.00) dollars for each share of Series C Senior Preferred (the "Liquidation Price") held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A and B Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis.

 

F-23
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(4)The Company shall have the right to redeem pro rata any or all of its Sries C Senior Preferred issued and outstanding at any time, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been issued and outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Liquidation Price for each share of Series C Senior Preferred held by such holder plus a "call premium" of 10% of the Liquidation Price together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").

 

(5)Each share of Series C Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the Company on the basis of ten (10) shares of Common Stock for 1 share of Series C Senior Preferred.

 

As of December 31, 2012 there were no Series C Senior Convertible Preferred share dividends accrued and unpaid.

 

Series D of the Senior Convertible Preferred Stock series which was issued in 2000 has 500,000 shares designated, 63,890 shares issued and outstanding. The total outstanding Series D Senior Convertible Preferred Stock at December 31, 2012 is $64 with a liquidation price of $575,010. The following is a description of the Series D Senior Convertible Stock:

 

(1)The holders of said shares of Series D Senior Preferred shall be entitled to receive cumulative dividends thereon at the rate of seven percent (7%) per annum, payable semi-annually when declared by the Board of Directors before any dividend shall be declared, set apart for, or paid upon the Common Stock of the Company. The Dividend Rate shall accrue on the Stated Value (the "Stated Value"), which Stated Value shall be noted on the certificate issued to the holder, of each share of the Series D Senior Preferred. The dividends on the Series D Senior Preferred, payable in cash, shall be cumulative, so that if the Company fails in any fiscal year to pay such dividends on all the issued and outstanding Series D Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for the Cumulative Preferred Stock or the Common Stock.

 

(2)The Series D Senior Preferred shall with respect to dividend rights and liquidation rights rank prior to all classes and series of Common Stock and the Cumulative Preferred Stock, and on a par with the Series A, B and C Senior Convertible Preferred Stock.

 

(3)In the event of any liquidation of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series D Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of each share of Series D Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B and C Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C and D Senior Preferred, the holders of these series shall receive payments on a pro rata basis.
F-24
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(4)The Company shall have the right to redeem pro rata any or all of its Series D Senior Preferred issued and outstanding at anytime, with the Board of Directors of the Company in its sole discretion deciding how many shares to redeem, provided, however, that any such shares called for redemption have been outstanding for a minimum of three (3) years at the time of notice of redemption to the holders of such shares, by paying to the holders thereof the Stated Value for each share of Series D Senior Preferred held by such holder plus a "call premium" of 10% of the Stated Value, together with the amount of any accrued and unpaid dividends as may have accumulated thereon at the time of redemption (the "Redemption Price").

 

(5)Each share of Series D Senior Preferred shall be convertible at any time prior to the Redemption Date, at the holder’s option, into shares of Common Stock of the corporation on the basis of ten (10) shares of Common Stock for 1 share of Series D Senior Preferred.

 

As of December 31, 2012 there were $491,464 Series D Senior Convertible Preferred share dividends accrued and unpaid representing $7.69 per share.

 

Series E of the Senior Convertible Preferred Stock series which was issued in 2005 has 500,000 shares designated, with no shares issued and outstanding.

 

(1)       The holders of said shares of Series E Senior Preferred shall be entitled to receive cumulative dividends at the rate of six percent (6%) per annum, payable at the time said shares are converted into shares of common stock of the Company and when declared by the board of Directors, before any dividend shall be declared, set apart for, or paid upon the Common Stock and any other Preferred Stock of the Company. The Dividend Rate shall accrue on the Stated Value, which Stated Value shall be noted on the certificate issued to the holder of each share of the Series E Senior Preferred. The dividends on the Series E Senior Preferred, payable in cash, shall be cumulative, so that if the company fails in any fiscal year to pay such dividends on all the issued and outstanding Series E Senior Preferred, such deficiency in the dividends shall be fully paid, but without interest, before any dividends shall be paid on or set apart for any other class of Preferred Stock or the Common Stock. The holders of the currently outstanding shares of Series E Senior Convertible Stock have waived their right for dividends, consequently, no dividends have been accrued on this stock.

 

(2)       The Series E Senior Preferred shall with respect to dividend rights rank prior to all classes and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, and D Senior Convertible Preferred Stock and, with respect to liquidation rights rank prior to all classes and series of Common Stock, the Cumulative Preferred Stock, and be on a par with the Series A, B, C and D Senior Convertible Preferred Stock.

 

(3)       In the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series E Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of each share of Series E Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B, C and D Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C, D and E Senior Preferred, the holders of these series shall receive payments on a pro rata basis.

F-25
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(4)       The holders of said shares of Series E Senior Preferred shall not be entitled to any voting rights.

 

(5)       Shares of Series E Senior Preferred which have been issued and reacquired in any manner, including shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled on the books of the Company and shall not be considered outstanding for any purpose.

 

(6)       During such time as there exist unpaid cumulative dividends due on the Series E Senior Preferred, no reclassification of the shares of the Company or capital reorganization of the Company in any manner provided by law shall be valid unless (a) the holders of a majority of all the Series E Senior Preferred approve, and (b) provision is made for the payment of the aggregate unpaid cumulative dividends then in arrears.

 

(7)       Each share of Series E Senior Preferred shall automatically convert, on the date six months after the date of issuance (the “Conversion Date”) which Conversion Date shall be noted on the certificate issued to the holder of each share of the Series E Senior Preferred, into shares of Common Stock of the Company on the basis of one hundred (100) shares of Common Stock for 1 share of Series E Senior Preferred. The holder of any shares of Series E Senior Preferred shall surrender, as soon as practicable on or after the Conversion Date, at the principal office of the Company or at such other office or agency maintained by the Company for that purpose, the certificate or certificates representing the shares of Series E Senior Preferred due for conversion. As promptly as practicable, and in any event within ten business days after surrender of such certificates, the Company shall deliver or cause to be delivered certificates representing the number of validly issued, fully paid and non-assessable shares of Common Stock of the Company to which such holder of Series E Senior Preferred so converted shall be entitled. Such conversion shall be deemed to have been made at the close of business on the Conversion Date, so that the rights of the holders of the Series E Senior Preferred shall thereafter cease except for the right to receive Common Stock of the Company in accordance herewith, and such converting holder of Series E Senior Preferred shall be treated for all purposes as having become the record holder of such Common Stock of the Company at such time.

 

(8)       In the event that, prior to the conversion of the Series E Senior Preferred Stock by the holder thereof into Common Stock of the company, there shall occur any change in the outstanding shares of Common Stock of the Company by reason of the declaration of stock dividends, or through a re-capitalization resulting from stock splits or combinations, without the receipt by the Company of fair consideration therefore in the form of cash, services or property, the conversion ratio of the Series E Senior Preferred Stock into Common Stock of the Company shall be adjusted such that any holder of Series E Senior Preferred Stock converting such stock into Common Stock subsequent to such change in the outstanding shares of Common Stock of the Company be entitled to receive, upon such conversion, a number of shares of Common Stock of the Company representing the same percentage of common shares outstanding as presented by the shares that he would have received had he converted his Series E Senior Preferred Stock to Common Stock prior to such change in the outstanding shares of Common Stock of the Company.

 

As of December 31, 2012 there were no Series E Senior Convertible Preferred share dividends accrued.

 

F-26
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

Series G of the Senior Convertible Preferred Stock series which was issued in 2007 has 43,610 shares designated. All such shares were issued and outstanding at December 31, 2008. In February 2009, these shares automatically converted into 17,857,142 common shares, leaving no Series G preferred shares outstanding at December 31, 2012.

 

(1)       The holders of said shares of Series G Senior Convertible Preferred shall not be entitled to receive dividends.

 

(2)       The Series G Senior Preferred shall with respect to dividend rights rank junior to all classes and series of Common Stock, Cumulative Preferred Stock, and the Series A, B, C, D, E and F Senior Convertible Preferred Stock and, with respect to liquidation rights rank prior to all classes and series of Common Stock, the Cumulative Preferred Stock, and be on a par with the Series A, B, C, D, E and F Senior Convertible Preferred Stock.

 

(3)       In the event of any liquidation, dissolution, or winding up of the affairs of the Company, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Company, the holders of the Series E Senior Preferred shall be entitled to receive, out of the remaining net assets of the Company, an amount equal to the Stated Value of $11.46526 for each share of Series G Senior Preferred held of record by such holder, payable in cash or in shares of stock, securities or other consideration, the value of which stock, securities or other consideration shall be fixed by the Board of Directors, plus the amount of all dividends in arrears on each such share up to the date fixed for distribution, provided, however, that such remaining net assets are sufficient to cover all the before mentioned payments and also like payments to holders of Series A, B, C, D, E and F Senior Preferred, before any distribution shall be made to the holders of Common Stock or Cumulative Preferred Stock of the Company. In case such remaining net assets are insufficient to cover all such payments to holders of Series A, B, C, D, E and F Senior Preferred, the holders of these series shall receive payments on a pro rata basis.

 

(4)       The holders of said shares of Series G Senior Preferred shall not be entitled to any voting rights.

 

(5)       Shares of Series G Senior Preferred which have been issued and reacquired in any manner, including shares purchased or converted into Common Stock exchanged or redeemed, shall be canceled on the books of the Company and shall not be considered outstanding for any purpose.

 

(6)       No cumulative dividends shall be payable on Series G Senior Preferred.

 

(7)       Upon the second anniversary of the Agreement and Plan of Reorganization, dated February 19, 2007, all the issued and outstanding shares of Series G Senior Preferred automatically converted into shares of common stock based on the “Market Price”, which was determined by dividing the conversion value of $500,000 by the average sales price of a common share for the twenty successive trading days preceding the second anniversary date of the agreement, subject to a minimum of 10 million common shares. The outstanding 43,610 preferred shares converted into 17,857,142 common shares on February 19, 2009: based the average sales price for our common shares during the twenty trading days period immediately preceding February 19, 2009, of $.028. Stock certificates for the new common shares were issued upon surrender of the original preferred stock certificates.

F-27
 

 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

15. PREFERRED STOCK - (Continued)

 

(8)       In the event that, prior to the conversion of the Series G Senior Preferred Stock by the holder thereof into Common Stock of the company, there shall occur any change in the outstanding shares of Common Stock of the Company by reason of the declaration of stock dividends, or through a re-capitalization resulting from stock splits or combinations, without the receipt by the Company of fair consideration therefore in the form of cash, services or property, the conversion ratio of the Series G Senior Preferred Stock into Common Stock of the Company shall be adjusted such that any holder of Series G Senior Preferred Stock converting such stock into Common Stock subsequent to such change in the outstanding shares of Common Stock of the Company be entitled to receive, upon such conversion, a number of shares of Common Stock of the Company representing the same percentage of common shares outstanding as presented by the shares that he would have received had he converted his Series G Senior Preferred Stock to Common Stock prior to such change in the outstanding shares of Common Stock of the Company.

 

16. INCOME TAXES

 

The income tax provision (benefit) is comprised of the following:

   Year Ended December 31, 
   2012   2011 
State current provision (benefit)  $650   $1,125 
Foreign (German) deferred provision (benefit)   1,079,785    (40,138)
   $1,080,435   $(39,013)

 

The Company’s total deferred tax asset and valuation allowance are as follows:

 

   December 31, 
   2012   2011 
Total deferred tax asset, noncurrent  $15,300,000   $13,852,454 
Less valuation allowance   (15,300,000    (12,800,000)
Net deferred tax asset, noncurrent  $0   $1,052,454 

 

The differences between income tax benefits in the financial statements and the tax benefit computed at the combined state and U.S. Federal statutory rate of 40% are as follows:

 

   Year Ended December 31, 
   2012   2011 
Tax benefit   40%   40%
Valuation allowance   (40)%   (40)%
Effective tax rate   -    - 

 

At December 31, 2012, the Company has available approximately $36,500,000 of net operating losses to carry-forward and which may be used to reduce future federal taxable income and expire between December 31, 2012 and 2032.

 

At December 31, 2012, the Company has available approximately $15,487,000 of net operating losses to carry-forward and which may be used to reduce future state taxable income which expire between December 31, 2011 and 2019.

 

The net deferred tax benefit at December 31, 2011 relates to a tax asset created from the excess purchase price in the acquisition of the German subsidiary under tax rules of the foreign government. It derives from the future deductibility of the amortization of this asset over 15 years out of future profits. We have fully reserved this deferred tax asset as of December 31, 2012.

 

F-28
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

17. STOCK BASED COMPENSATION

 

During 2012 and 2011 the Company issued the following securities to officers, directors, and non-employees as part of their compensation and, in the case of the former principals of Kiwibox Media Inc., pursuant to the Kiwibox acquisition agreement, as amended.

 

Andre Scholz (president and Chief Executive Officer): During 2012 and 2011 earned 1,200,000 restricted shares (100,000 per month) valued at $30,600 and $28,950, respectively, based on the commitment date fair value of the shares granted. 1,200,000 and 1,200,000 of these shares were issued in 2012 and 2011, respectively.

 

Joseph J. Tomasek (Director): In each of the years ended December 31, 2012 and 2011 Mr. Tomasek earned options for 1,200,000 restricted shares, valued at $11,880. In addition, as additional compensation, Mr. Tomasek was granted 500,000 warrants exercisable at $0.025 during 5 years, with a cashless exercise option, such warrants are valued at $5,000 pursuant to the Black-Scholes valuation formula.

 

Joerg Otzen (former Director): in 2010, Mr. Otzen was granted 500,000 warrants exercisable at $0.025 during 5 years, with a cashless exercise option. Such warrants are valued at $5,000 pursuant to the Black-Scholes valuation formula.

 

Craig S Cody (Chief Financial Officer): In 2010, Mr. Cody was granted 500,000 warrants exercisable at $0.025 during 5 years, with a cashless exercise option, such warrants are valued at $5,000 pursuant to the Black-Scholes valuation formula.

 

In computing the Black Scholes values for the previous three warrant grants above, we used a volatility of 296% and a risk-free interest rate of 1.6%.

 

At December 21, 2012 the board of directors of the company authorized the issuance of 1,050,000 stock grants of restricted common stock to five individuals (employees and consultants) valued at $0.01 per restricted common share, the public market price of the Company’s common shares traded in the over-the-counter market on December 21, 2012. The consultants and the respective stock grants to these individuals were as follows:

 

  Andre Scholz: 250,000 restricted common shares
  Joseph J. Tomasek:   250,000 restricted common shares

 

In 2011, we granted 4,000,000 warrants to a consultant. 2,000,000 exercisable at $0.025 and 2,000,000 exercisable at $.075, during 5 years, with a cashless exercise option, such warrants valued at $40,000 pursuant to the Black-Scholes valuation formula. In computing the Black Scholes values we used a volatility of 273% and a risk-free interest rate of 2.33%.

 

 

F-29
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

18. STOCK OPTION PLANS

 

In April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan (“the 1996 Plan”). The 1996 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for authorization of up to 480,000 shares. Pursuant to the above described stock exchange offer on July 2, 1997, all options under the 1996 Plan were converted into shares of the Company at a rate of 3.4676 shares of Magnitude, Inc. to 1 share of the Company.

 

In September 1997, the Company adopted its 1997 Stock Incentive Plan (“the 1997 Plan”). The 1997 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial plan and subsequent amendments provided for the grant of options for up to 1,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of grant and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock at the time of grant.

 

F-30
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

STOCK OPTION PLANS - (Continued)

 

In May 2000 the Company adopted its 2000 Stock Incentive Plan (“the 2000 Plan”). The 2000 Plan provides that certain options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section 422A of the United States Internal Revenue Code of 1986, while nonqualified options may also be granted under the Plan. The initial Plan provides for the grant of options for up to 5,000,000 shares. The purchase price per share of common stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the common stock on the date of the grant, and the term of the option shall not exceed five years from the date of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a compensation committee established by the Board of Directors.

 

   Qualified and Non-Qualified
Shares Under Option Pursuant
to the 1997 Plan 
 December 31,
 
   2012   2011 
Outstanding, beginning of year   -    - 
Granted during the year   -    - 
Expired during the year   -    - 
Surrendered during the year   -    - 
Outstanding, end of year   -    - 
Eligible, end of year for exercise   -    - 

 

At December 31, 2012 and 2011, no options were outstanding.

At December 31, 2012, there were 1,000,000 shares reserved for future option grants.

 

   Qualified and Non-Qualified
Shares Under Option Pursuant
to the 2000 Plan 
 December 31,
 
   2012   2011 
Outstanding, beginning of year   -    - 
Granted during the year   -    - 
Exercised during the year   -    - 
Surrendered during the year   -    - 
Expired during the year   -    - 
Outstanding, end of year   -    - 
Eligible, end of year for exercise   -    - 

 

At December 31, 2012 and 2011, no options were outstanding.

At December 31, 2012, there were 5,000,000 shares reserved for future option grants.

 

At December 31, 2012 the company has two stock-based employee compensation plans, which are described more fully above. The company accounts for those plans under the recognition and measurement principles of Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, and related Interpretations. The Company has not granted any options under these plans to employees during 2012 or 2011.

 

F-31
 

 

Kiwibox.Com, Inc.

Notes to the Financial Statements

 

STOCK OPTION PLANS - (Continued)

 

The Company also issues options outside of the Stock Incentive Plans which are comprised as follows:

   December 31, 
   2012   2011 
Outstanding, beginning of year   8,650,000    8,450,000 
Granted during the year   1,200,000    1,200,000 
Exercised during the year   -    - 
Surrendered or cancelled during the year   -    (250,000)
Expired during the year   (1,000,000)   (750,000)
Outstanding, end of year (at prices ranging from $0.025 to $0.05)   8,850,000    8,650,000 
           
Eligible for exercise, end of year (at prices ranging from $0.025 to $0.05)   8,850,000    8,650,000 

 

At December 31, 2012 and 2011 the weighted average exercise price and weighted average remaining contractual life were $0.05 and $0.06 per share, and 1 year 3 months and 1 year 1 month, respectively.

 

During 2012, the Company granted 1,200,000 to a director of the Company, exercisable at $0.05 during a four-year period. During 2011, the Company granted 1,200,000 to a director of the Company, exercisable at $0.05 during a four-year period.

 

The weighted average exercise price for options granted during the years ended December 31, 2012 and 2011 were $0.05 and $0.05, respectively. The weighted average exercise price for options expired during the years ended December 31, 2012 and 2011 were $0.09 and $0.10, respectively. The weighted average conversion price for cancelled options in 2011 was $0.025. The weighted average grant date fair value of options granted during the years ended December 31, 2012 and 2011 was $0.04 and $0.04, respectively.

 

19. WARRANTS

 

The Company granted common stock purchase warrants between January 1, 2011 and December 31, 2012 which are comprised as follows:
   December 31, 
   2012   2011 
Outstanding, beginning of year   157,731,315    152,731,315 
Granted during the year   -    5,000,000 
Exercised during the year   -    - 
Surrendered /cancelled during the year   -    - 
Expired during the year   (30,500,000)   - 
Outstanding, end of year (at prices ranging from $.025 to $.075)   127,231,315    157,731,315 
           
Eligible, end of year (at prices ranging from $.025 to $.075)   127,231,315    157,731,315 

 

At December 31, 2012 and 2011, the weighted average exercise price and weighted average remaining contractual life is $0.05 and $0.05 per share and 10 months and 1 year 8 months, respectively.

F-32
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

20. RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2012 and 2011 one outside director of the Company who also serves as the Company’s general and securities counsel, was paid an aggregate $60,000 and $60,000, respectively, for each period for legal services. The director also received 100,000 common stock options per month during the year ended December 31, 2012, valued at $11,880, and a stock grant of 250,000 common shares, valued at $2,500. The director also received 100,000 common stock options per month during the year ended December 30, 2011, valued at $11,880. The balance due to this director at December 31, 2012 and 2011 was $0 and $5,000, respectively.

 

For the year ended December 31, 2012 and 2011 we incurred an aggregate $437,952 and $444,390, respectively, to companies controlled by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server farm installations and IT equipment purchases, and paid $7,585 in 2011, for promotional materials. The officer also earned 100,000 common shares per month during the year ended December 31, 2012 under a consulting agreement, valued at $30,600, and a stock grant of 250,000 common shares, valued at $2,500. During 2012, the officer received 1,200,000 shares for prior year share obligations. The officer also received $100,000 in November 2012 for prepaid consulting fees towards 2013 under the terms of a consulting agreement.

 

During 2012 and 2011, approximately 9.9% of the voting stock of the Company was beneficially held by Discovery Advisory Company, located in the Bahamas, and Cambridge Services Inc., Kreuzfeld, LTD and Vermoegensverwaltungs-Gesellschaft Zurich LTD. (VGZ) of Switzerland. Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, LTD and VGZ are major creditors, having advanced operating capital against issuance by the Company of convertible promissory notes during 2012 and 2010. During the year ended December 31, 2012 Cambridge Services converted $581,269 of debt. Kreuzefeld, Ltd converted $419,100 and VGZ converted $409,200 of debt. During the year ended December 31, 2011, Cambridge Services, Inc. reassigned $503,760 to a third investor Kreuzfeld, Ltd and converted $377,820. During the same periods Discovery Advisory Services converted $1,160,700 and Kreuzfeld, Ltd. converted $492,760.

 

During the year ended December 31, 2012 Cambridge Services Inc.advanced an additional $1,303,913, Discovery Advisory Company advanced an additional $2,436,588, Kreuzefeld, LTD advanced an additional $2,069,479 and VGZ advanced $365,338 During the year ended December 31, 2011, Cambridge Services, Inc. advanced an additional $745,000. At December 31, 2012, $3,221,722 and $1,215,060 of such notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $3,564,959 and $771,958 owed to Kreuzfeld, Ltd. and VGZ, respectively. During 2012 To complete the acquisition of Kwick!, Cambridge Services, Inc.,Discovery Advisory Services, Kreuzfeld, Ltd and VGZ advanced $298,913, $2,436,588, $2,069,479 and $365,388, respectively. Additionally, Ulrich Schuerch advanced the Company $100,000 in the year ended December 31, 2011, and holds $340,000 of demand notes issued at a rate of interest of 10%.

 

During 2011, one former principal of Kwick! advanced the subsidiary 100,000 Euros, which was repaid in 2012.

 

F-33
 

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

The Company, through its subsidiary, Kwick, is party to a service agreement with JAUMO GmbH, Germany, a company partially owned by the officers of Kwick. The subsidiary recognized approximately $93,174 in service revenue from this entity in the year ending December 31, 2012. In the year ending December 31, 2011 the subsidiary recognized $57,416 in service revenue.

 

21. ACQUISITION OF KWICK!

On September 30, 2011 Kiwibox.com acquired 100% of the limited partner’s interests in the social network, KWICK! Community GmbH & Co. KG, a private German Limited Partnership and all of the shares of its General Partner, Kwick! Community Beteiligungs GMBH for 7,100,000 Euros, payable as follows: 2,500,000 euros at the closing on September 30, 2011;on March 14, 2012 payment arrangements were changed to reflect the following: 2,300,000 Euros by April 13, 2012 and a third payment on or before April 26, 2012 of 1,600,000. This converts using the conversion rate in effect on September 30, 2011 to $8,567,843. The original agreement also called for 700,000 Euros, contingent on certain earnings goals (“original bonus payment”).The original payment was amended by mutual consent of both parties and the original bonus payment possibly due Kwick! were eliminated. On May 14, 2012 the amended agreement was changed to reflect a decrease in salaries based on restated employment contracts for the former Kwick owners, provided for late payment fees, and the third payment due date was changed to on or before the date the parties sign the amendment (“Amendment 2”). The second payment was paid on April 19, 2012 in the amount of $2,436,588. On May 14, 2012, the final payment was made in the amount of $2,069,479. During the year ended December 31, 2012, the Company paid a total of $5,221,093 against the acquisition indebtedness, plus $78,263 for late payment fees in accordance with Amendment 2.

 

Kwick! is a leading Social network Community in Europe focused on the German speaking market, with more than 1 million members.

 

The Company completed its purchase price allocation in the third quarter of 2012. The allocation resulted in $41,500 being allocated to identified intangible assets (website development costs), which are being amortized over their estimated life of three years.

 

The following table represents the fair values of the assets acquired and liabilities assumed as of the date of the acquisition:

 

Cash  $339,198 
Accounts receivable, net   643,403 
Related party receivables   16,225 
Other receivables   120,352 
Prepaid expenses and other current assets   43,348 
Fixed assets   314,479 
Software   80,101 
Deferred tax asset   1,106,047 
Other assets   24,486 
Income tax payable   (78,852)
Accounts payable   (8,061)
Accrued expenses   (171,093)
      
Net assets acquired with acquisition  $2,429,633 

 

F-34
 

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

21. ACQUISITION OF KWICK! (continued)

 

The excess of purchase price over tangible net assets acquired at September 30, 2011 was initially allocated to goodwill in the amount of $6,138,210. Due to exchange rate fluctuation, the carrying amount of goodwill that resulted from the acquisition of Kwick increased in value, with a total of $31,217 in unrealized appreciation from acquisition through December 31, 2012.

 

According to ASC 350 an impairment test has to be carried out for: Assets with a useful life which bear a triggering event, assets with an indefinite useful life, or Goodwill (related to a cash generating unit). We engaged an outside company to prepare an impairment test for the intangible assets (including Goodwill) identified within the acquisition of Kwick by Kiwibox, which became effective on September 30, 2011. The impairment test was carried out as of September 30, 2012, and is to be carried out at least annually by the Company. The scope of the engagement included analysis of the industry in which Kwick and Kiwibox operate, identification of those intangible assets with a useful life which bear triggering events, valuation of value in use and fair value less cost to sell for assets with a useful life which bear a triggering event as well as assets with indefinite useful life.

 

The outside company engaged to prepare the impairment test for the intangible assets identified within the acquisition of Kwick in accordance with the regulations of ASC 350, determined that the recoverable amount is the higher of the value in use and the fair value less cost to sell. Based on their assessment the value in use of developed technology exceeds the carrying amount of the assets, and an impairment of the underlying assets was not necessary. The outside company also concluded that the determination of the fair value of the reporting unit less cost to sell did not lead to impairment of the Goodwill acquired by the Company. The following assumptions were used to make this determination. The management of Kwick prepared a cash flow forecast for the months October to December 2012 as well as for the business years 2013 and 2014.These forecasts were based on actual estimations of the management of Kwick. Due to the expectations of the management of Kwick, a decrease in sales was considered in the forecast. Because of the decrease in sales management will try to reduce costs correspondingly. In order to apply present value factors to estimates of future streams of income or cash flow, asset specific discount rates must be developed.The discounted cash flow analysis was done, but since the future expected revenues were determined to be attributable to other intangible assets (computer software), the ultimate basis for value was determined utilizing a market approach, as follows. Company management examined and determined what it believed to be comparable market transactions since the Kwick acquisition through the date of the impairment test. According to the Company’s assessment, the value of “unique visitors and users” in general has increased significantly since the acquisition of Kwick. In this context the Company referred to three transactions with comparable business in 2012. Based upon their analysis of these transactions, the outside company noted that the range of value per user spans from $18.5 to $ 240 in the referred company acquisitions. According to the analysis, Kwick had approximately 1.15 million members by the end of September 2012. Taking into account a value of $40 and assuming a total number of Kwick 1.15 million members at valuation date this would lead to an implied total per member value of $46 of Kwick. This value would imply that the value per user that was determined for the acquisition of the other acquirees could also be applied for the valuation of Kwick. However, the outside company determined that there was no solid basis to support this assumption. The fact that the values per user range from $18.5 to $240 in the transactions analyzed by the Kiwibox management leads to the assumption that values per user are highly volatile overall. This may be attributed to a highly heterogeneous market environment but also to subjective considerations in individual transactions. Consequently a sufficient safety margin needed to be deducted from such a gross value determined on the basis of values per user in order to gain sufficient assurance by deriving a potential fair value on that basis.

 

F-35
 

 

Kiwibox.Com, Inc.

Notes to Financial Statements

 

21. ACQUISITION OF KWICK! (Continued)

 

There is a wide range of potential safety deductions depending on the level of heterogeneity between the business value under review and other business transactions. The heterogeneity however is not measurable on the basis of objective facts and therefore the determination of an appropriate safety margin requires a solid basis of reasoning. The outside company determined that a deduction of a considerably high safety margin and costs to sell from the gross value as determined, would lead to an amount that would still exceed the carrying value of goodwill for Kwick. Under this circumstance, they concluded that the determination of the fair value less cost to sell on the basis of values per user does not lead to impairment of the goodwill acquired in the acquisition of Kwick.

 

In addition, the goodwill of $6,169,426 has been tested by the management of the Company in qualitative assessments throughout 2012. These assessments did not lead management to identify impairment indicators related to goodwill.

 

The following unaudited pro forma financial information for the year ended December 31, 2011 combines the historical results of the company Kiwibox.com and its acquired subsidiary Kwick! as if the acquisition occurred on January 1, 2011, as follows:

 

Year ended December 31, 2011     
      
Revenues  $3,426,181 
      
Net Operating (Loss)   (883,298)
      
Net (Loss)   (5,113,049)
      
Net (loss) per share   (0.010)

 

22. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Cash, accounts receivable, accounts payable, accrued expenses, notes payable, long-term debt and capitalized lease obligations: The carrying amount approximates fair value because of the short term maturity of these instruments.

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates

 

F-36
 

 

Kiwibox.Com, Inc. and Subsidiary

Notes to the Financial Statements

 

23. FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). The revised standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a "qualitative" assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company is currently evaluating the effect that this guidance will have on its consolidated financial position, results of operations and cash flows.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

 

24. LITIGATION

 

At the time of this report, the Company is not a party in any legal proceedings.

 

25. BUSINESS SEGMENTS

 

The Company operates in only one business segment - youth targeted online social networks - through its dedicated proprietary internet website.

 

26. SUBSEQUENT EVENTS

 

During January, February, March and April 2013 we received an aggregate $215,000 working capital loans from one accredited investor, which is covered by convertible promissory notes carrying interest at 10% per year.

 

During February and March 2013 we received three short term loans by companies controlled by our Chief Executive Officer. The loans are for a term of 2 months and carry no interest.

 

In April 2013 an agreement was reached with one investor to pay off two loans totaling $90,000 in principal plus interest over the next six months. The first payment of $35,000 was made on April 2, 2013.

 

During the first quarter of 2013 Kwick received a private loan bearing a 6% interest rate and due on demand and used the proceeds to pay off a bank line of credit.

 

F-37