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 (“Kwick”),
a wholly-owned subsidiary.
On
September 24, 2013, Kwick Community GmbH & Co. KG signed an equity purchase agreement to acquire Interscholz Internet Services
GmbH and Co KG, a German limited liability company, and all the equity of its general partner, Interscholz Beteiligungs GmbH.
As of the balance sheet date, and pursuant to the terms of the contract, since full payment was not made for the purchase price
of Interscholz Internet Services GmbH & Co KG, ownership does not transfer to Kwick Community GmbH & Co KG. Full payment
must be made for ownership to transfer to Kwick. As of December 31, 2013 only $515,037 of the total purchase price of $1,352,000
was made. On December 9, 2013 the acquisition of Interscholz Internet Services GmbH and Co KG by Kwick was rescinded due to non
compliance with the terms of the addendum to the contract, calling for the full purchase price to have been paid. However, Kwick
did acquire all the equity of the general partner, Interscholz Beteiligungs GmbH, as full payment was not a requirement for transfer
of ownership of that entity.
On
December 10, 2013, the Company signed an Equity Purchase Agreement with Marcus Winkler to sell to him eighty (80%) percent of
the equity of its German subsidiary, KWICK! Community GmbH & Co. KG, a German limited liability company, and Kwick! Beteiligungs
GmbH, its general partner (collectively, “Kwick”). The sale was approved on December 18, 2013. Due to the fact that
the parent company ceased to have a controlling financial interest in Kwick, the subsidiary was deconsolidated from that date
forward. On December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive
Officer of Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral,
on behalf of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs
GmbH, as general partner (managing partner) for Interscholz Internet Services GmbH & Co KG; as it is the duty of the general/managing
partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing
partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15%
of Kiwibox’s 20% of Kwick was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition
to the collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs
GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value
of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.
Cash
and Cash Equivalents
The
Company accounts for cash and other highly liquid investments with original maturities of three months or less as cash and cash
equivalents.
Kiwibox.Com,
Inc.
Notes
to Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Depreciation
and Amortization
Property
and equipment are recorded at cost. Depreciation on equipment, furniture and fixtures and leasehold improvements is computed on
the straight-line method over the estimated useful lives of such assets between 3-10 years, or lease term for leasehold improvements,
if for a shorter period. Maintenance and repairs are charged to operations as incurred. Software costs are amortized using the
straight line method and amortized over their estimated useful lives. Amortization begins when the related software is ready for
its intended use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software, Subsequent
Measurement.
Advertising
Costs
Advertising
costs are charged to operations when incurred. Advertising expense was $5,500 and $4,698 for the years ended December 31, 2015
and 2014, respectively.
Evaluation
of Long Lived Assets
Long-lived
assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets,
their carrying value would be reduced by the excess, if any, of the long-lived asset over management’s estimate of the anticipated
undiscounted future net cash flows of the related long-lived asset.
Any
impairment of the Company’s internally-developed software is recognized and measured in accordance with the provisions of
ASC 360-10-35,
Intangibles-Goodwill and Other, Internal-Use Software, Subsequent Measurement,
which requires that assets
be grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The guidance is applicable, for example, when one of the following events or changes in circumstances occurs
related to computer software being developed or currently in use indicating that the carrying amount may not be recoverable:
a. Internal-use
computer software is not expected to provide substantive service potential.
b. A
significant change occurs in the extent or manner in which the software is used or is expected to be used.
c. A
significant change is made or will be made to the software program.
d. Costs
of developing or modifying internal-use computer software significantly exceed the amount originally expected to develop or modify
the software.
Fair
Value Measurements
The
Company adopted the provisions of ASC 820,
Fair Value Measurements and Disclosures
, which is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. Under ASC 820, a framework was established for
measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.
The Company accounted for certain convertible debentures modified in the years ended December 31, 2015 and 2014 as derivative
liabilities required to be bifurcated from the host contract in accordance with ASC 815-40,
Contracts in Entity’s Own
Equity
, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued
interest being converted to a variable number of the Company’s common shares (see Note 13).
Securities
Issued for Services
The
Company accounts for stock, stock options and stock warrants issued for services and compensation by employees under the fair
value method. For non-employees, the fair market value of the Company’s stock on the date of stock issuance or option/grant
is used. The Company has determined the fair market value of the warrants/options issued under the Black-Scholes Pricing Model.
The Company has adopted the provisions of ASC 718, “Compensation – Stock Compensation”, which establishes accounting
for equity instruments exchanged for employee services. Under the provisions of ASC 718, share-based compensation cost is measured
at the grant date, based on the fair value of the award, and is recognized as an expense over the employee's requisite service
period (generally the vesting period of the equity grant).
Reclassification
of Certain Securities Under ASC 815-15
Pursuant
to ASC 815-15, “Contracts in Entity’s own Equity”, if a company has more than one contract subject to this Issue,
and partial reclassification is required, there may be different methods that could be used to determine which contracts, or portions
of contracts, should be reclassified. The Company's method for reclassification of such contracts is reclassification of contracts
with the latest maturity date first.
Capitalization
of Software /Website Development Costs
The
Company capitalizes outside-contracted development work in accordance with the guidelines published under ASC 350-50, “Website
Development Costs”. Under ASC 350-50, costs incurred during the planning stage are expensed, while costs relating to software
used to operate a web site or for developing initial graphics should be accounted for under ASC 350-50,
Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
, unless a plan exists or is being developed to market the
software externally. Under ASC 350-50, internal and external costs incurred to develop internal-use computer software during the
application development stage should be capitalized. Costs to develop or obtain software that allows for access or conversion
of old data by new systems should also be capitalized, excluding training costs.
Fees
incurred for web site hosting, which involve the payment of a specified, periodic fee to an Internet service provider in return
for hosting the web site on its server(s) connected to the Internet, are expensed over the period of benefit, and included in
cost of sales in the accompanying financial statements.
No
costs were capitalized for web-site development work during the years ended December 31, 2015 and 2014.
Income
Taxes
The
Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses are expected
to be settled in the Company’s income tax return. Certain items of revenue and expense are reported for Federal income tax
purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes
are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses
for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income
taxes has been offset entirely by a valuation allowance against the related federal and state deferred tax asset.
Net
Loss Per Share
Net
loss per share, in accordance with the provisions of ASC 260, “Earnings Per Share” is computed by dividing net loss
by the weighted average number of shares of Common Stock outstanding during the period. Common Stock equivalents have not been
included in this computation since the effect would be anti-dilutive. Such common stock equivalents totaled 84,722,520 common
shares at December 31, 2015, comprised of 6,000,000 shares issuable upon exercise of stock purchase warrants, 4,500,000 shares
issuable upon exercise of stock options, 729,537 shares exercisable upon conversion of convertible preferred shares, and 72,773,703
shares potentially issuable upon conversion of convertible debt. Such debt and the related accrued interest, is presently convertible
at the option of four holders at a conversion price of 50% of the ten day trailing market price. The total principal due under
these notes of $12,353,700 would yield in excess of 24.7 billion shares if fully converted, however, the respective
notes, all of which were issued to these four investors, carry a stipulation whereby the number of all shares issued pursuant
to a conversion, may in the aggregate not exceed a number that would increase the total share holdings beneficially owned by such
investor to a level above 9.99%. At the end of the year, this clause limits any conversion to the aforementioned number
of shares. All of the aforementioned conversions or exercises, as the case may be, are at the option of the holders.
Revenue
Recognition
The
Company’s revenue is derived from advertising on the Kiwibox.com website. Most contracts require the Company to deliver
the customer impressions, click-throughs or new customers, or some combination thereof. Accordingly, advertising revenue is estimated
and recognized for the period in which customer impressions, click through or new customers are delivered. Licensing or hosting
revenue consists of an annual contract with clients to provide web-site hosting and assistance.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2.
GOING CONCERN
The
ability of the Company to continue its operations is dependent on increasing sales and obtaining additional capital and financing.
Our revenues during the foreseeable future are insufficient to finance our business and we are entirely dependent on the willingness
of existing investors to continue supporting the Company with working capital loans and equity investments, and our ability to
find new investors should the financial support from existing investors prove to be insufficient. If we were unable to obtain
a steady flow of new debt or equity-based working capital we would be forced to cease operations. In their report for the fiscal
year ended December 31, 2015, our auditors have expressed an opinion that, as a result of the losses incurred, there is substantial
doubt regarding our ability to continue as a going concern. The accompanying financial statements do not include any adjustments
that might be necessary if the Company were unable to continue as a going concern. Management’s plans are to continue seeking
equity and debt capital until cash flow from operations cover funding needs.
3.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The
Company maintains cash balances in a financial institution which is insured by the Federal Deposit Insurance Corporation up to
$250,000. Balances in these accounts may, at times, exceed the federally insured limits. At December 31, 2015, cash balances in
bank accounts did not exceed this limit. The Company provides credit in the normal course of business to customers located throughout
the U.S. and overseas. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful
accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
4.
PREPAID EXPENSES
|
Prepaid
expenses consist of the following at:
|
|
|
December
31, 2015
|
|
|
|
December
31, 2014
|
|
|
Rent
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
insurance
|
|
|
9,038
|
|
|
|
8,075
|
|
|
Consulting
|
|
|
220,000
|
|
|
|
220,000
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
229,038
|
|
|
|
228,075
|
|
5.
PROPERTY AND EQUIPMENT
|
Property
and equipment consist of the following at:
|
|
|
December
31, 2015
|
|
|
|
December
31, 2014
|
|
|
Furniture
|
|
$
|
15,040
|
|
|
$
|
14,322
|
|
|
Leasehold
Improvements
|
|
|
24,130
|
|
|
|
24,130
|
|
|
Office
Equipment
|
|
|
78,101
|
|
|
|
77,102
|
|
|
|
|
|
117,271
|
|
|
|
115,554
|
|
|
Less
accumulated depreciation
|
|
|
114,225
|
|
|
|
110,583
|
|
|
Total
|
|
$
|
3,046
|
|
|
$
|
4,971
|
|
Depreciation
expense charged to operations was $3,642 and $4,788 for the years ended December 31, 2015 and 2014, respectively.
6.
INTANGIBLE ASSETS
Intangible
assets consisted of software for website development costs is as follows:
|
|
|
|
December
31, 2015
|
|
|
|
December
31, 2014
|
|
|
Website
development costs
|
|
$
|
254,264
|
|
|
$
|
254,264
|
|
|
Less
accumulated amortization
|
|
|
254,264
|
|
|
|
254,264
|
|
|
Total
|
|
$
|
0
|
|
|
$
|
0
|
|
Amortization
expense for the years ended December 31, 2015 and 2014 was $0 and $2,576, respectively.
7.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On
December 10, 2013, the company signed an equity purchase agreement with Marcus Winkler to sell to him eighty (80%) percent of
the equity of its German subsidiary, Kwick. Pursuant to the terms of the agreement, the purchaser paid 36,000 Euros as the purchase
price and the company was required to obtain shareholder approval of the sale as required under applicable Delaware Law. The majority
shareholder approval was obtained on December 18, 2013. In addition, the Company and Mr. Winkler signed a Lock-Up and Standstill
Agreement pursuant to the general terms of which the Company agreed not to participate in the management, operations or finances
of Kwick, which shall be exclusively managed and under control of the purchaser. Accordingly, the Company’s minority ownership
position shall be subject, in all respects, to the exclusive control of the purchaser. Mr. Winkler also has investment and voting
control over Kreuzfeld Ltd., a major creditor of the company, which holds a Class AA convertible promissory note with an outstanding
balance (including accrued interest) of $5,490,858 as of December 31, 2015. On June 22, 2015, a Class A Senior Revolving Promissory
Note with a principal amount of $340,000 was assigned from Ulrich Schuerch to Mr. Winkler.
On
December 30, 2013 a total of 15% of the remaining 20% of the equity of Kwick was transferred to the Chief Executive Officer of
Kwick (the “Kwick CEO”), in consideration for the Kwick CEO pledging to the bank 5,000 Euros as collateral, on behalf
of Kiwibox, for bank overdrafts incurred by “Kwick’s” wholly-owned subsidiary Interscholz Beteiligungs GmbH,
as general partner (managing partner) for Interscholz Internet Services GmbH & Co KG: as it is the duty of the general partner/managing
partner to secure liquidity for the partnership. Since Kiwibox owned 20% of Kwick they were required, under German law, as managing
partner of Interscholz Beteiligungs GmbH to secure liquidity for Interscholz Internet Services GmbH & Co KG. Therefore, 15%
of Kiwibox’s 20% was given to the Kwick CEO in exchange for the CEO pledging the necessary collateral. In addition to the
collateral given by the Kwick CEO, as new 15% shareholder of Kwick, the Kwick CEO also agreed to keep the Interscholz Beteiligungs
GmbH business going. This transfer was unanimously approved with written consent of the Board of Directors. Since the fair value
of Kiwibox’s interest in Kwick is zero, this transaction had no material impact on the financial statements.
Due
to the significant reductions in fair value of this reporting unit that were considered other than temporary, and impairment of
the related goodwill, the carrying value of this cost method investment was zero at December 31, 2015 and 2014.
8.
ACCRUED EXPENSES
Accrued
expenses consisted of the following at:
|
|
|
|
December
31, 2015
|
|
|
|
December
31, 2014
|
|
|
Accrued
interest
|
|
$
|
4,443,178
|
|
|
$
|
3,237,414
|
|
|
Accrued
payroll, payroll taxes and commissions
|
|
|
41,541
|
|
|
|
26,619
|
|
|
Accrued
professional fees
|
|
|
114,900
|
|
|
|
111,900
|
|
|
Accrued
rent / deferred rental obligation
|
|
|
11,209
|
|
|
|
12,196
|
|
|
Miscellaneous
accruals
|
|
|
23,935
|
|
|
|
20,735
|
|
|
Total
|
|
$
|
4,634,763
|
|
|
$
|
3,408,864
|
|
9.
OBLIGATIONS TO BE SETTLED IN STOCK
Obligations
to be settled in stock consisted of the following at
|
|
|
|
December
31, 2015
|
|
|
|
December
31, 2014
|
|
|
Obligation
for warrants granted for compensation
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
600,000
common shares issuable to a consultant
who was a director of the company, for services
rendered.
|
|
|
36,000
|
|
|
|
36,000
|
|
1,200,000
(2015) and 1,200,000 (2014) common
shares, and 2,900,000 (2015) and 2,900,000 (2014)
stock options issuable to two
officers of the
Company pursuant to their respective employment
Agreements
|
|
|
58,178
|
|
|
|
62,258
|
|
7,800,000
(2015) and 6,600,000 (2014) stock options
issuable to one director who also serves as the
Company’s general
counsel
|
|
|
80,190
|
|
|
|
68,310
|
|
1,000,000
warrants granted on the Pixunity.de asset
Purchase
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
$
|
284,368
|
|
|
$
|
276,568
|
|
10.
LOANS PAYABLE
The
Company (Formerly Magnitude, Inc.) had borrowings under short term loan agreements with the following terms and conditions at
December 31, 2015 and 2014:
|
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
|
|
11.
NOTES PAYABLE
|
|
|
December
31, 2015
|
|
December
31, 2014
|
Balance
of non-converted notes outstanding. Attempts to
locate the holder of this note, to settle this liability, have been
unsuccessful.
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
|
From
September 2008 through December 2014 five creditors loaned the Company funds under the terms of the convertible notes issued,
as modified in March 2009 and July 2010 and April 2011 and August 2012 (see Note 13).
|
|
|
12,353,700
|
|
|
|
11,193,700
|
|
|
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 %. On June 22, 2015 this shareholder assigned
all of his right, title and interest in this note to Mr. Marcus Winkler. Mr. Winkler has an investment and voting control
over two of the company’s lenders.
|
|
|
340,000
|
|
|
|
340,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,718,700
|
|
|
$
|
11,558,700
|
|
12.
LONG-TERM DEBT
Long-term
debt as of December 31, 2015 and 2014 is comprised of the following:
|
Discounted
present value of a non-interest bearing $70,000 settlement with a former investor of Magnitude, Inc. to be paid in 24 equal
monthly payments commencing July 1, 1997. The imputed interest rate used to discount the note is 8% per annum. This obligation
is in default.
|
|
$
|
33,529
|
|
|
Total
|
|
|
33,529
|
|
|
Less
current maturities
|
|
|
33,529
|
|
|
Long-term
debt, net of current maturities
|
|
$
|
—
|
|
13.
DERIVATIVE CONVERSION FEATURES
On
July 27, 2010, the Company issued two Class A Senior Convertible Revolving Promissory Notes (“Class A Notes”), one
to Cambridge Services, Inc., in the principal amount of $683,996, consolidating the series of loans (and related accrued interest)
made to the Company since June 26, 2009, and one to Discover Advisory Company, in the principal amount of $1,160,984, consolidating
the series of loans (and related accrued interest) made to the Company since September 19, 2008 and including advances through
September 30, 2010. Each of these promissory notes are due on demand, accrue interest at the rate of 10%, per annum, are convertible
(including accrued interest) at the option of each lender into Common Stock of the Company at 50% of the averaged ten closing
prices for the Company's Common Stock for the ten (10) trading days immediately preceding the Conversion Date but in no event
less than $0.001 (the "Conversion Price"). Both promissory notes contain conversion caps, limiting conversions under
these notes to a maximum beneficial ownership position of Company common stock to 9.99% for each lender. Each of these notes contains
Company covenants, requiring the lenders’ prior written consent in order for the Company to merge, issue any common or preferred
stock or any convertible debt instruments, declare a stock split or dividends, increase any compensation to its officers or directors
by more than five (5%) during any calendar year. During the years ended December 31, 2015 and 2014, there were no note conversions.
The
Company renegotiated certain outstanding promissory notes with its four major creditors, Discover Advisory Company of the Bahamas
(“DAC”), Kreuzfeld Ltd. of Switzerland (“Kreuzfeld”), Cambridge Services, Inc. of Panama (“CSI”)
and Vermoegensverwaltungs-Gesellschaft Zurich LTD of Switzerland (“VGZ”). As of August 1, 2012, the Company authorized
the issue of a new series of corporate notes, the Class AA Senior Secured Convertible Revolving Promissory Notes, dated as of
August 1, 2012 (the New Note(s)”) and issued New Notes: (1) to DAC, with a maximum credit facility of $5,000,000 which replaced
the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated July 27, 2010, in the original principal
amount of $1,080,984, now cancelled, which has an outstanding balance due (including accrued interest) of $5,916,921 as of December
31, 2015; (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 $5,490,657 as of December 31, 2015; (3) to CSI,
with a maximum credit facility of $2,000,000 which replaced the Company’s outstanding Class A Senior Convertible Revolving
Promissory Note, dated August 1, 2011, in the original principal amount of $1,303,996, now cancelled, with an outstanding balance
due (including accrued interest) of $4,040,407 as of December 31, 2015, and; (4) to VGZ, with a maximum credit facility of $2,000,000
which replaced the Company’s outstanding Class A Senior Convertible Revolving Promissory Note, dated September 30, 2010,
in the original principal amount of $2,000,000, now cancelled, with an outstanding balance due (including accrued interest) of
$1,109,550 as of December 31, 2015. All of the New Notes accrue interest at the rate of 10%, are convertible into common shares
at the conversion rate equal to 50% of the averaged ten closing prices for the Company's Common Stock for the ten (10) trading
days immediately preceding the Conversion Date but in no event less than $0.001, and are due on demand.. Pursuant to an Equity
and Stock Pledge Agreement, also negotiated and executed as of August 1, 2012, the repayment of the outstanding indebtedness of
the New Notes is secured by all of the limited partnership interests of the Company’s partly-owned (now deconsolidated)
German subsidiary, KWICK! Community GmbH & Co. KG, a private German limited partnership (“KG”), and all of its
shares of the sole general partner of KG, KWICK! Community Beteiligungs GmbH.
The
Company accounted for the conversion features underlying these convertible debentures in accordance with ASC 815-40,
Contract
in Entity’s Own Equity
, as the conversion feature embedded in the convertible debentures could result in the note principal
and related accrued interest being converted to a variable number of the Company’s common shares. The Company determined
the value of the derivate conversion features of the new advances under these debentures under these terms at the relevant commitment
dates to be $2,392,694 and $2,444,269 for the years ending December 31,2015 and 2014 respectively utilizing a Black-Scholes valuation
model. The fair value of the derivative conversion features was determined to be $16,596,381and $14,482,427 at December 31, 2015
and 2014 respectively. The change in fair value of the liability for the conversion feature resulted in income of $278,741 and
$30,075 for the years ended December 31, 2015 and 2014 respectively, which is included in Other Income (Expense) in the accompanying
financial statements.
14.
COMMITMENTS AND CONTINGENCIES
We
maintain offices for our operations at 330 W. 42th Street, New York, New York 10036, for approximately 990 square feet. This lease
requires minimum monthly rentals of $4,037 plus tenants’ share of utility/cam/property tax charges which average
approximately $291 per month. During 2013 the Company successfully negotiated a 5 year lease, with future minimum rentals as follows:
|
|
2016
|
|
|
|
49,289
|
|
|
|
2017
|
|
|
|
50,768
|
|
|
|
2018
|
|
|
|
47,847
|
|
In
May 2010 the Company negotiated a lease of an apartment in New York City for the CEO in order to reduce travel costs. The lease
was for 12 months at $2,775 per month through May 31, 2011. In May 2011 the lease was extended through August 31, 2011 at the
rate of $2,837. In August 2011 the lease was extended through December 31, 2011 at the rate of $2,837 per month. In December 2011
the lease was again extended through May 31, 2012 with no change in the base rent. In May 2012 the lease was extended through
December 31, 2012 at a monthly rate of $2,943, this lease was then extended through December 31, 2013 at the same terms. In December
2013 the lease was extended through May 31, 2014. This lease was again extended to May 31, 2016 in March of 2015.
Our
total rent expenses were $88,679 and $83,129 during the year ended December 31, 2015 and 2014, respectively.
The
Company is party to a consulting agreement with its Chief Executive Officer. During the fourth quarter of 2013 the terms of this
agreement were modified. The new terms called for an increased monthly consulting fee to $18,333, from $16,667 in 2011-2013, effective
January 1, 2014 through December 31, 2014. During the fourth quarter of 2014 the terms of this agreement were again modified.
The new terms have the same monthly consulting fee as 2013, $18,333 a month, or $220,000 per year, however; the prepayment provision
called for the entire amount payable in advance and as soon as practicable following the execution and delivery of this restated
agreement. Payment for the period January 1, 2015 through December 31, 2015 was made on November 20, 2014 in accordance with the
terms of this new agreement. This agreement was extended thru December 31, 2016. Payment for the period January 1, 2016 through
December 31, 2016 was made on December 1, 2015 in accordance with the terms of this extended agreement. There were no changes
to the stock compensation portion of any earlier agreement.
In
the years ended December 31, 2015 and December 31, 2014 this officer was granted 1,200,000 shares.
On
March 7, 2011 the Company announced its acquisition of the assets of Pixunity.DE a German photo book community. We purchased the
internet domain name, the software codes for capturing, uploading and sharing images and the list of its approximate 15,000 members.
The principal reason for this purchase was to acquire the source code and technology for image sharing which could have cost us
up to $100,000 to develop this technology in house. We are currently integrating the image sharing software into our Kiwibox website
and do not intend to market or rely upon the pixunity brand for our business.
15.
FAIR VALUE
Some
of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
Effective
July 1 2009, the Company adopted ASC 820,
Fair Value Measurements and Disclosures
. This topic defines fair value for certain
financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that
require or permit fair value measurements. The Company accounted for the conversion features underlying certain convertible debentures
in accordance with ASC 815-40,
Contracts in Entity’s Own Equity
, as the conversion feature embedded in the convertible
debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s
common shares.
Effective
July 1 2009, the Company adopted ASC 820-10-55-23A,
Scope Application to Certain Non-Financial Assets and Certain Non-Financial
Liabilities
, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes
a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
Level
1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that
the Company
has
the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs
include
active exchange- traded securities and exchange-based derivatives.
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|
|
|
|
|
Level
2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset
or
liability or indirectly observable through corroboration with observable market data. Financial assets and
liabilities
utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual
funds,
and fair-value hedges.
|
|
|
|
|
|
Level
3 — unobservable inputs for the asset or liability only used when there is little, if any, market
activity
for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3
|
|
inputs
include infrequently- traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value
pricing models. The company values the conversion liabilities using the Black-Scholes model and the assumptions are updated using
independent data such as the risk free rate, volatility and expected life for each valuation date based on changes over time.
For
2014, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value
based on the conversion discount as well as the term and short-term bond rate. During the year ended December 31, 2014 the following
assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.01% to 0.04% and
(4) volatility range of 67% to 883%.
For
2015, the fair value of the embedded conversion liabilities was determined using the Black-Scholes model calculating fair value
based on the conversion discount as well as the term and short-term bond rate. During the year ended December 31, 2015 the following
assumptions were used: (1) conversion discounts of 50%; (2) a look back period of 10 days (3) bond rates of 0.01% to 0.23% and
(4) volatility range of 0% to 351%.
Fluctuation
in value is largely based on the change in the daily share price accompanied by the conversion discount. The change in volatility
has the greater affect on the conversion liability during each reporting period, as higher volatility levels will yield larger
values.
The
following table reconciles, for the years ended December 31, 2014 and 2015, the beginning and ending balances for financial instruments
that are recognized at fair value in the consolidated financial statements:
|
Conversion Liability at January
1, 2014
|
|
$
|
12,068,233
|
|
|
Value of beneficial
conversion features of new debentures
|
|
|
2,444,269
|
|
|
Change
in value of beneficial conversion features during period
|
|
|
(30,075
|
)
|
|
|
|
|
|
|
|
Conversion Liability at December 31, 2014
|
|
|
14,482,427
|
|
|
|
|
|
|
|
|
Value of beneficial
conversion features of new debentures
|
|
|
2,392,694
|
|
|
Change
in value of beneficial conversion features during period
|
|
|
(278,741
|
)
|
|
Conversion Liability at December 31, 2015
|
|
$
|
16,596,380
|
|
The
fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for
the calculated value. The Company recognizes interest expense for the recognition of the conversion liability.
16.
PREFERRED STOCK
Preferred
stock is non-voting, $.001 par value per share with 3,000,000 shares authorized.
Cumulative
Preferred Stock has 2,500 shares designated of which 1 share is issued and outstanding. The total Cumulative Preferred Stock at
December 31, 2006 is $0 with a liquidation price of $100,000. As of December 31, 2015, there was $9,000 of cumulative preferred
dividends in arrears representing $9,000 per cumulative preferred share.
Series
A of the Senior Convertible Preferred Stock series which was issued in 2000 has 300,000 shares designated, 22,000 shares issued
and outstanding. The total outstanding Series A Senior Convertible Preferred Stock at December 31, 2015 is $22 with a liquidation
price of $120,000. The following is a description of the Series A convertible preferred stock:
|
|
(1)
|
The
holders of said shares of Series A Senior Preferred shall be 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.
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|
|
(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").
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|
|
|
|
|
(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, 2015 there were $165,664 Series A Senior Convertible Preferred share dividends accrued and unpaid representing
$7.53 per share.
Series
B of the Senior Convertible Preferred Stock series which was issued in 2000 has 350,000 shares designated, no shares issued and
outstanding. The total outstanding Series B Senior Convertible Preferred Stock at December 31, 2015 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.
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|
|
|
|
|
|
(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, 2015 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, 2015. 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.
|
|
|
(4)
|
The
Company shall have the right to redeem pro rata any or all of its Series C Senior Preferred
issued and outstanding at any time, with the Board of Directors of the Company in its
sole discretion deciding how many shares to redeem, provided, however, that any such
shares called for redemption have been issued and outstanding for a minimum of three
(3) years at the time of notice of redemption to the holders of such shares, by paying
to the holders thereof the Liquidation Price for each share of Series C Senior Preferred
held by such holder plus a "call premium" of 10% of the Liquidation Price together
with the amount of any accrued and unpaid dividends as may have accumulated thereon at
the time of redemption (the "Redemption Price").
|
|
|
(5)
|
Each
share of Series C Senior Preferred shall be convertible at any time prior to the Redemption
Date, at the holder’s option, into shares of Common Stock of the Company on the
basis of ten (10) shares of Common Stock for 1 share of Series C Senior Preferred.
|
As
of December 31, 2015 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, 2015 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.
|
|
|
(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, 2015 there were $612,255 Series D Senior Convertible Preferred share dividends accrued and unpaid representing
$9.58 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.
|
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
|
|
(3)
|
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.
|
|
|
(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, 2015 there were no Series E Senior Convertible Preferred share dividends accrued.
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, 2015.
|
|
(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 on 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 would have been issued upon surrender of the original preferred stock
certificates.
|
|
|
(8)
|
In
the event that, prior to the conversion of the Series G Senior Preferred Stock by the
holder thereof into Common Stock of the company, there shall occur any change in the
outstanding shares of Common Stock of the Company by reason of the declaration of stock
dividends, or through a re-capitalization resulting from stock splits or combinations,
without the receipt by the Company of fair consideration therefore in the form of cash,
services or property, the conversion ratio of the Series G Senior Preferred Stock into
Common Stock of the Company shall be adjusted such that any holder of Series G Senior
Preferred Stock converting such stock into Common Stock subsequent to such change in
the outstanding shares of Common Stock of the Company be entitled to receive, upon such
conversion, a number of shares of Common Stock of the Company representing the same percentage
of common shares outstanding as presented by the shares that he would have received had
he converted his Series G Senior Preferred Stock to Common Stock prior to such change
in the outstanding shares of Common Stock of the Company.
|
17.
INCOME TAXES
The
income tax provision (benefit) is comprised of the following:
|
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
2014
|
|
State
current provision (benefit)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The
Company’s total deferred tax asset and valuation allowance are as follows:
|
|
|
December
31,
|
|
|
|
2015
|
|
2014
|
|
Total
deferred tax asset, noncurrent
|
|
$
|
18,000,000
|
|
|
$
|
14,650,000
|
|
|
Less
valuation allowance
|
|
|
(18,000,000
|
)
|
|
|
(14,650,000
|
)
|
|
Net
deferred tax asset, noncurrent
|
|
$
|
0
|
|
|
$
|
0
|
|
The
differences between income tax benefits in the financial statements and the tax benefit computed at the combined state and U.S.
Federal statutory rate of 40% are as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
2015
|
|
2014
|
|
Tax
benefit
|
|
|
40
|
%
|
|
|
40
|
%
|
|
Valuation
allowance
|
|
|
(40
|
%)
|
|
|
(40
|
%)
|
|
Effective
tax rate
|
|
|
—
|
|
|
|
—
|
|
At
December 31, 2015, the Company has available approximately $45,000,000 of net operating losses to carry-forward and which may
be used to reduce future federal taxable income and expire between December 31, 2016 and 2035.
At
December 31, 2015, the Company has available approximately $14,300,000 of net operating losses to carry-forward and which may
be used to reduce future state taxable income which expire between December 31, 2016 and 2035.
The
Company believes that all of its positions taken in tax filings are more likely than not to be sustained upon examination by tax
authorities. The Company is subject to examination by the tax authorities for the period January 1, 2012 and forward.
18.
STOCK BASED COMPENSATION
During
2015 and 2014 the Company issued the following securities to officers, directors, and non-employees as part of their compensation.
Andre
Scholz (president and Chief Executive Officer and Chief Financial Officer): During 2015 and 2014 earned 1,200,000 restricted shares
(100,000 per month) valued at $1,320 and $5,400, 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 2015 and 2014, respectively.
Joseph
J. Tomasek (Director): In each of the years ended December 31, 2015 and 2014 Mr. Tomasek earned options for 1,200,000 restricted
shares, valued at $11,880.
At
January 1, 2015 we granted 1,200,000 of restricted common stock to five individuals (employees and consultants) valued at $0.0142
per restricted common share, the public market price of the Company’s common shares traded in the over-the-counter market
on January 1, 2015. These shares were issued in October 2015.
19.
STOCK OPTION PLANS
In
April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan (“the 1996 Plan”). The 1996 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for authorization of up to 480,000 shares. Pursuant to the above described stock exchange
offer on July 2, 1997, all options under the 1996 Plan were converted into shares of the Company at a rate of 3.4676 shares of
Magnitude, Inc. to 1 share of the Company.
In
September 1997, the Company adopted its 1997 Stock Incentive Plan (“the 1997 Plan”). The 1997 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while non-qualified options may also be granted under the Plan. The initial
plan and subsequent amendments provided for the grant of options for up to 1,000,000 shares. The purchase price per share of common
stock deliverable upon exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date
such option is granted. If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined
voting power of all classes of the Company’s common stock, the exercise price of such option shall be at least 110% of the
fair market value of the common stock on the date of grant and the term of the option shall not exceed five years from the date
of grant. The purchase price of shares subject to non-qualified stock options shall be determined by a committee established by
the Board of Directors with the condition that such prices shall not be less than 85% of the fair market value of the common stock
at the time of grant.
In
May 2000 the Company adopted its 2000 Stock Incentive Plan (“the 2000 Plan”). The 2000 Plan provides that certain
options granted thereunder are intended to qualify as “incentive stock options” (ISO) within the meaning of Section
422A of the United States Internal Revenue Code of 1986, while nonqualified options may also be granted under the Plan. The initial
Plan provides for the grant of options for up to 5,000,000 shares. The purchase price per share of common stock deliverable upon
exercise of each ISO shall not be less than 100% of the fair market value of the common stock on the date such option is granted.
If an ISO is issued to an individual who owns, at the time of grant, more than 10% of the total combined voting power of all classes
of the Company’s common stock, the exercise price of such option shall be at least 110% of the fair market value of the
common stock on the date of the grant, and the term of the option shall not exceed five years from the date of grant. The purchase
price of shares subject to non-qualified stock options shall be determined by a compensation committee established by the Board
of Directors.
|
|
|
|
Qualified
and Non-Qualified Shares Under Option Pursuant to the 1997 Plan
December
31,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
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, 2015 and 2014, no options were outstanding.
At
December 31, 2015, 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,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
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, 2015 and 2014, no options were outstanding.
At
December 31, 2015, there were 5,000,000 shares reserved for future option grants.
At
December 31, 2015 the company has two stock-based employee compensation plans, which are described more fully above. The company
accounts for those plans under the recognition and measurement principles of the Financial Accounting Standards Board Accounting
Standards Codification (ASC) 718,
Compensation-Stock Compensation
. The Company has not granted any options under these
plans to employees during 2015 or 2014.
The
Company also issues options outside of the Stock Incentive Plans which are comprised as follows:
|
|
|
December
31,
|
|
|
|
2015
|
|
2014
|
|
Outstanding,
beginning of year
|
|
|
4,500,000
|
|
|
|
4,900,000
|
|
|
Granted
during the year
|
|
|
1,200,000
|
|
|
|
1,200,000
|
|
|
Exercised
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered
or cancelled during the year
|
|
|
—
|
|
|
|
|
|
|
Expired
during the year
|
|
|
(1,200,000
|
)
|
|
|
(1,600,000
|
)
|
|
Outstanding,
end of year (at $0.05)
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible
for exercise, end of year (at $0.05)
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
At
December 31, 2015 and 2014 the weighted average exercise price and weighted average remaining contractual life were $0.05 and
$0.05 per share, and 1 year 10 months and 2 years 10 months, respectively.
The
weighted average exercise price for options granted during the years ended December 31, 2015 and 2014 were $0.05 and $0.05, respectively.
The weighted average exercise price for options expired during the years ended December 31, 2015 and 2014 were $0.05 and $0.03,
respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2015 and 2014
was $0.05 and $0.05, respectively.
20.
WARRANTS
The
Company’s warrant activity between January 1, 2014 and December 31, 2015 is as follows:
|
|
|
December
31,
|
|
|
|
2015
|
|
2014
|
|
Outstanding,
beginning of year
|
|
|
12,750,000
|
|
|
|
26,500,000
|
|
|
Granted during the
year
|
|
|
—
|
|
|
|
—
|
|
|
Exercised during the
year
|
|
|
—
|
|
|
|
—
|
|
|
Surrendered / cancelled
during the year
|
|
|
—
|
|
|
|
—
|
|
|
Expired
during the year
|
|
|
(6,750,000
|
)
|
|
|
(13,750,000
|
)
|
|
Outstanding, end of
year (at prices ranging from $.025 to $.075)
|
|
|
6,000,000
|
|
|
|
12,750,000
|
|
|
Eligible, end of year
(at prices ranging from $.025 to $.075)
|
|
|
6,000,000
|
|
|
|
12,750,000
|
|
At
December 31, 2015 and 2014, the weighted average exercise price and weighted average remaining contractual life is $0.06 and $0.04
per share and 1 year 4 months and 1 year 5 months, respectively.
21.
RELATED PARTY TRANSACTIONS
During
the twelve months ended December 31, 2015, the Company sold advertising space on its Kiwibox.com website to Kwick totaling $23,752.
The balance due from Kwick at December 31, 2015 for these transactions is $51,898. The Company also has outstanding loans due
to Kwick of $21,524 at December 31, 2015. Kwick is majority-owned by Mr. Winkler, who in turn is a related party of the Company
(see Note 7).
During
the year ended December 31, 2015 and 2014 one outside director of the Company who also serves as the Company’s general and
securities counsel, incurred an aggregate $36,000 and $34,288, respectively, for each period for legal services. The director
also received 100,000 common stock options per month during the year ended December 31, 2015, valued at $11,880. The director
also received 100,000 common stock options per month during the year ended December 31, 2014, valued at $11,880. The balance due
to this director at December 31, 2015 and 2014 was $3,000 and $0, respectively.
For
the year ended December 31, 2015 and 2014 we incurred an aggregate $343,293 and $389,055, respectively, to companies controlled
by the Chief Executive Officer of the Company, for website hosting, website development and technical advisory services, server
farm installations and IT equipment purchases. The officer also earned 100,000 common shares per month during the year ended December
31, 2015 under a consulting agreement, valued at $1,320. The officer also received $220,000 in November 2014 for prepaid consulting
fees towards 2015 under the terms of a consulting agreement. The balance due to this officer and/or his affiliated companies at
December 31, 2015 and 2014 was $72,876 and $55,816, respectively .
The
balance due from Kwick at December 31, 2015 and 2014 was $51,898 and $28,146, respectively, and is shown on the balance sheet
as Accounts Receivable - affiliate. The balance due to Kwick at December 31, 2015 and 2014 was $21,524 and $137,577 and is included
in the balance sheet as Due To Related Parties (see Note 27).
During
2015 and 2014, approximately 10% of the Company’s voting stock was beneficially held by Discovery Advisory Company, located
in the Bahamas, and Cambridge Services Inc., Kreuzfeld, Ltd. and Vermoegensverwaltungs-Gesellschaft Zurich Ltd. (VGZ) of Switzerland.
Discovery Advisory Company, Cambridge Services Inc., Kreuzfeld, Ltd. and VGZ are major creditors, having advanced operating capital
against issuance by the Company of convertible promissory notes during 2014 and 2015.
During
the year ended December 31, 2015, Discovery Advisory Company advanced an additional $745,000 and Kreuzfeld, Ltd advanced an additional
$415,000; during the year ended December 31, 2014, Cambridge Services Inc. advanced $720,000, Discovery Advisory Company advanced
an additional $485,000 and Kreuzfeld, Ltd advanced an additional $70,001. At December 31, 2015, $4,451,722 and $3,080,060 of such
notes were outstanding and owed to Discovery Advisory Company and Cambridge Services Inc, respectively and $4,049,959 and $771,958
owed to Kreuzfeld, Ltd. and VGZ, respectively.
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
23.
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
April 2016 the FASB issued ASU 2016-09, Accounting for Stock Compensation. ASU 2016-09 is effective for annual reporting periods
beginning after December 15, 2016, and interim periods within those periods. Under this update the intention is to improve and
simplify accounting for stock compensation. The areas of accounting for share- based payments that the standard is designed to
simplify include:
*The
income tax consequences
*
Classification of awards as either equity or liabilities
*
Classification on the statement of cash flows
ASU
2016-09 codifies previous guidance that requires an award granted for past or future employee services to remain subject to the
measurement and recognition provisions of Topic 718 for the entire existence of the award, unless the award is subsequently modified
when the holder is no longer an employee. The company is currently evaluating the possible impact of ASU 2016-09, but does not
anticipate that it will have a material impact on the Company’s financial statements.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under this amendment, management is now required
to determine every interim and annual period whether conditions or events exist that raise substantial doubt about an entity’s
ability to continue as a going concern within one year after the date the financial statements are issued. If management indicates
that it is probable the entity will not be able to meet its obligations as they become due within the assessment period, then
management must evaluate whether it is probable that plans to mitigate those factors will alleviate that substantial doubt. The
Company is currently evaluating the possible impact of ASU 2014-15, but does not anticipate that it will have a material impact
on the Company's financial statements.
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 through April 2016 we received an aggregate $300,000 working capital loans from two accredited investors, which are both
covered by convertible promissory notes carrying interest at 10% per year.
At
February 3, 2016 the board of directors of the company granted and authorized the issuance of 1,200,000 stock grants of restricted
common stock to two directors valued at $0.0019 per restricted common share, the public market price of the Company’s common
shares traded in the over-the-counter market on the commitment date. These shares were issued to the two directors on March 2,
2016. The directors and the respective stock grants to these individuals were as follows:
|
Andre
Scholz
|
800,000
restricted common shares
|
|
Joseph J. Tomasek
|
400,000 restricted
common shares
|
At
February 3, 2016 the board of directors authorized the issuance of 1,200,000 stock grants of restricted common stock to Andre
Scholz; 100,000 of which shares were earned by Mr. Scholz for each of the twelve months during the period, January 1,2015 through
December 31, 2015. These shares were issued to Mr. Scholz on March 2, 2016. These amounts were accrued for 2015 in the amount
of $1,320 and is included in the balance sheet account Obligations to be Settled in Stock
27.
Prior Period Restatement
In
March 2016, the Company discovered that there was a failure to record accrued website expenses in the 2014 financial statements
in the amount of $180,175 as well as a gain on foreign currency exchange in the amount of $12,598. These expenses were billed
from a related party, Kwick Community GmbH & co. KG. At December 31, 2014 this accrual was overlooked in adjusting the accounts.
Pursuant to ASC 250 Accounting Changes and Error Corrections, an entry has been made to record this expense and foreign currency
gain on the December 31, 2014 Balance Sheet, Statement of Operations, Statement of Stockholders’ Equity, and Statement of
Cash Flow. As such, all of these prior year statements have been labeled as “Restated” within these comparative financial
statements. The change affected the Balance Sheet account Due to Related Party in the amount of $167,577 and the income statement
accounts Selling Expenses in the amount of $180,175 and Gain on Foreign Currency Exchange in the amount of $12,598.