UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q10-Q/A

(Amendment No. 1)

(Mark One)

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

FOR THE NINE MONTH PERIOD ENDED: MARCH 31,SEPTEMBER 30, 2018

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

For the transition period from  ______________ to ______________

Commission File Number:333-148987

NEXT GROUP HOLDINGS, INCCUENTAS, INC.

(Exact name of Registrant as specified in its charter)

19 W. FLAGER ST, SUITE 507,902, MIAMI, FL 33130

(Address of principal executive offices)

800-611-3622

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of June 4,December 19, 2018, the issuer had 357,591,3311,454,615 shares of its common stock issued and outstanding.

EXPLANATORY NOTE

Cuentas Inc. (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment No. 1”) to its Quarterly Report on Form 10-Q for the period ended September 30, 2018, filed with the Securities and Exchange Commission on December 19, 2018 (the “Form 10-Q”), to correct an error on the face of the Form 10-Q to reflect that the Company has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months prior to the filing date.  

In connection with the foregoing, and pursuant to the rules of the SEC, we are including with this Amendment No. 1 new certifications by our principal executive officer and principal financial officer. Accordingly, Part II, Item 6 of the Form 10-Q is being amended to reflect the filing of a new Exhibits 31.1, 31.2, 32.1 and 32.2.

Other than with respect to the foregoing, this Amendment No. 1 does not modify or update in any way the disclosures made in the Form 10-Q. This Amendment No. 1 speaks as of the original filing date of the Form 10-Q and does not reflect events that may have occurred subsequent to such original filing date. 

Part I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEXT GROUP HOLDINGS, INCCUENTAS, INC.

Table of Contents(FORMERLY NEXT GROUP HOLDINGS, INC.)

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2018

TABLE OF CONTENTS

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INCINC.)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands except share and per share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INCINC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)

 (Unaudited)

(U.S. dollars in thousands except share and per share data)

NEXT GROUP HOLDINGS, INC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INCINC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(U.S. dollars in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESSGENERAL

Organizational Background:

Cuentas, Inc. (formerly Next Group Holdings, Inc. (the, the “Company”) was incorporated under the laws of the State of Florida on September 21, 2005 to act as a holding company for its subsidiaries, both current and future. Its subsidiaries are Meimoun and Mammon, LLC (100% owned), Next Cala, Inc (94% owned), NxtGn, Inc. (65% owned), Next Mobile 360, Inc. (100% owned) and SDI Next Distribution, LLC (51% owned). Additionally, Next Cala, Inc. has a 60% interest in NextGlocal, a subsidiary incorporated in May 2016. During the year ended December 31, 2016, the Company acquired a business segment, Tel3, from an existing corporation. Tel3 was merged into Meimoun and Mammon, LLC effective as of January 1, 2017. On October 23, 2017, the Company acquired 100% of the outstanding interests in Limecom, Inc.

In September 2018, the Company changed its name to Cuentas, Inc. to better position its intended business activities.

The Company invests in financial technology and currently derives its revenues from the sales of prepaid and wholesale calling minutes. Additionally, the Company has an agreement with Incomm, a leading processor of general purpose reloadable (“GPR”) debit cards, to market and distribute a line of GPR cards targeted towards the Latin American market. The Company intends to launch the cards upon successful completion of appropriate financing and has yet to generate revenues from this activity.

Next Group Holdings, Inc was incorporated under the laws of the State of Florida on September 21, 2005 to act as a holding company for its subsidiaries, both current and future. Its subsidiaries are Meimoun and Mammon, LLC (100% owned), Next Cala, Inc (94% owned), NxtGn, Inc. (65% owned) and Next Mobile 360, Inc. (100% owned) and Transaction Processing Products (100% owned). Additionally, Next Cala, Inc. has a 60% interest in NextGlocal, aThe Company through it fully owned subsidiary, formed in May 2016. During the year ended December 31, 2016, the Company acquired a business segment, Tel3, from an existing corporation. Tel3 was merged into Meimoun and Mammon, LLC effective January 1, 2017. On October 23, 2017, the Company acquired 100% of the outstanding interests in Limecom, Inc.

Meimoun and Mammon, LLC (“M&M”) was formed under the laws of the State of Florida on May 21, 2001 as a real estate investment company. During the year ended December 31, 2010, M&M began winding down real estate operations and engaged in telecommunications services. M&M acquired telecom registrations, licenses and authorities to provide, provides telecom services to the retail and wholesale markets including sales of prepaid long distancelong-distance telecom services and Mobile Virtual Network Operator (MVNO) services. The services are sold under the brand name Next Mobile 360 and through the subsidiary of the same name.360.

Next Cala, Inc, (“Cala”) was formed under the laws of Florida on July 10, 2009 for the purpose of offeringoffers prepaid and reloadable debit cards to the retail market. Cala serves consumers in the underbanked and unbanked populations through Incomm, a leading provider of payment remittance services worldwide.

NxtGn, Inc. (“NxtGn”) was formed under the laws of Florida on August 24, 2011 to developdevelops a High Definition telepresence product (AVYDA)(“AVYDA”) which allows users to connect with celebrities, public figures, healthcare and education applications via a mobile phone, tablet or personal computer.  NxtGn has entered into a joint venture with telephony platform industry leader Telarix, Inc. to develop and market the AVYDA Powered by Telarix™ HD telepresence platform. The AVYDA Powered by Telarix™ product is marketed throughout the world by the Telarix sales force.

On January 1,Since September 17, 2016 NGH completed an Agreement and Plan of Merger (the “Merger Agreement”) with Pleasant Kids, Inc. (“Pleasant Kids”) and its wholly owned subsidiary, NGH Acquisition Corp. (“Acquisition Sub”), pursuant to which NGH merged with Acquisition Sub and Acquisition Sub was then merged into PLKD effective January 1, 2016. Under the terms of the Merger Agreement, the NGH shareholders received shares of PLKD common stock such that the NGH shareholders received approximately 80% of the total common shares and 100% of the preferred shares of PLKD issued and outstanding following the merger. Due to the nominal assets and limited operations of PLKD prior to the merger, the transaction was accorded reverse recapitalization accounting treatment under the provision of Financial Accounting Standards Board Accounting Standards (“FASB”) Codification (“ASC”) 805 whereby NGH became the accounting acquirer (legal acquiree) and PLKD was treated as the accounting acquiree (legal acquirer). The historical financial records of the Company are those of the accounting acquirer (NGH) adjusted to reflect the legal capital of the accounting acquiree (PLKD).As the transaction was treated as a recapitalization, no intangibles, including goodwill, were recognized. Concurrent with the effective date of the reverse recapitalization transaction, the Company adopted the fiscal year end of the accounting acquirer of December 31.

On May 27, 2016, Next Cala entered into a Joint Venture Agreement (the “Agreement”) with Glocal Payments Solutions, Inc (“Glocal”) to form a joint venture, NextGlocal, in which Cala has a 60% controlling interest and Glocal has a 40% interest. The Joint Venture sought to launch and activate up to 45,000 prepaid debit cards under the Cala brand by December 31, 2016 and 360,000 additional cards during the 2017 calendar year. Neither milestone was achieved. Either party may terminate the agreement at December 31, 2016 if certain objectives are not met. The joint venture has not had activity since the year ended December 31, 2016 but has not been formally dissolved.

On July 22, 2016, the Company completed its acquisition of Transaction Processing Products, Inc. (“TPP”) which has a 64% interest in Accent InterMedia, LLC (“AIM”) and no other assets or liabilities. The Company disposed of TPP during the year ended December 31, 2017.

On August 10, 2016, M&M, a wholly owned subsidiary of the Company, closed the acquisition of Tel3 from a related party. Tel3 provides prepaid calling cards to consumers directly and operates in a complimentary space as M&M. Tel3 was originally acquired by the Company’s CEO in a private transaction and sold to the Company for $10 cash. See

On October 23, 2017, the Company closed the acquisition of Limecom, Inc. (“Limecom”). Limecom is a global telecommunication company, providing services to telecommunication providers from all over the world. Limecom operates a network built on internet protocol (“IP”) switching equipment. It was organized as a Florida limited liability company (“LLC”) on November 21, 2014 and known as Limecom LLC. On September 29, 2015, Limecom converted to a Florida C-Corporation. 

The Company has a Market Partner Agreement with InsightPOS, LLC since September 17, 2016.LLC. InsightPOS is a “State of the Art”, “Super Functional Point Ofof Sale” system that has a combination of tools that we believe makes the retail experience quicker and better both for the shopper and for store management. The Company previously installed about 10 units including training by InsightPOS. These units were withdrawn due to required programming development and improved network interconnections.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

On October 23, 2017, the Company closed the acquisition of Limecom, Inc. (“Limecom”). Limecom is a global telecommunication company, providing services to telecommunication providers from all over the world. Limecom operates a network built on internet protocol (“IP”) switching equipment.

On December 6, 2017, the Company completed its formation of SDI NEXT Distribution LLC in which it holds a 51% interest, previously announced August 24, 2017 as a Letter of Intent with Fisk Holdings, LLC. As Managing Member of the newly formed LLC, the Company will contribute a total of $500,000,$500, to be paid per an agreed-upon schedule over a twelve-month period beginning December 2017. Fisk Holdings, LLC will contribute 30,000 active Point of Sale locations for distribution of retail telecommunications and prepaid financial products and services to include, but not be limited to: prepaid general purposegeneral-purpose reloadable cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products. There has been no activity in or cash contributions to this entity since formation.

The Company, through its affiliate, Next Communications, Inc., has the right to sell STI Mobile, Next Cala and any Next products to 8,800 locations that were serviced by a prepaid distribution network. The Company will offer the InsightPOS system to clients of this distribution network as well via direct sales through its own sales force and affiliates. When a system is installed, NGHthe Company receives 50% of the gross profits received by InsightPOS after retailer commissions are paid.

GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2018, the Company had approximately $48 in cash and cash equivalents, approximately $7,915 in negative working capital, a stockholders’ deficiency of approximately $4,032 and an accumulated deficit of approximately $14,419. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Company’s ability to continue as a going concern is dependent upon raising capital from financing transactions and revenue from operations. Management anticipates their business will require substantial additional investments that have not yet been secured. Management is continuing in the process of fund raising in the private equity and capital markets as the Company will need to finance future activities. These financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern.

REVERSE SPLIT

The Company completed a reverse stock split of its common stock, by filing articles of amendment to its Articles of Incorporation (the “Articles of Amendment”) with the Secretary of State of Florida to effect the Reverse Stock Split on August 8, 2018. As a result of the reverse stock split, the following changes have occurred (i) every three hundred shares of common stock have been combined into one share of common stock; (ii) the number of shares of common stock underlying each common stock option, common stock warrant or any other convertible instrument of the Company have been proportionately decreased on a 300-for-1 basis, and the exercise price of each such outstanding stock option, common warrant or any other convertible instrument of the Company have been proportionately increased on a 300-for-1 basis. Accordingly, all option numbers, share numbers, warrant numbers, share prices, warrant prices, exercise prices and losses per share have been adjusted within these consolidated financial statements, on a retroactive basis, to reflect this 300-for-1 reverse stock split. No fractional shares were issued as a result of the reverse stock split. In lieu of issuing fractional shares, each holder of common stock who would otherwise have been entitled to a fraction of a share was entitled to receive one full share for the fraction of a share to which he or she was entitled.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Unaudited Interim Financial Statements

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant toinclude the rules and regulationsaccounts of the SecuritiesCompany and Exchange Commission (“SEC”) for reporting of interim financial information. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statementsits subsidiaries, prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of U.S. Securities and Exchange Commission Regulation S-X. Accordingly, these statementsthey do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial statements presented herein have not been audited by an independent registered public accounting firm but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations and cash flows for the for the nine- months and three-months ended September 30, 2018. However, these results are not necessarily indicative of results for any other interim period or for the year ended December 31, 2018. The preparation of financial statements in conformity with GAAP requires the Company to make certain estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual amounts could differ from these estimates.

Certain information and footnote disclosures normally required byincluded in financial statements in accordance with generally accepted accounting principles generally accepted inhave been omitted pursuant to the United States for annualrules of the U.S. Securities and Exchange Commission (“SEC”). The accompanying unaudited consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on June 4, 2018 (the “Annual Report”). For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and notes thereto and other pertinent information contained in our annual report on form 10-K as filed with the Securities and Exchange Commission. The unaudited condensed consolidated statements of operations and cash flows for the three months ended March 31, 2018 are not necessarily indicative of the consolidated results of operations or cash flows to be expected for any future period or for the year ending December 31, 2018.

The accompanying unaudited condensed consolidated financial statements have been prepared by management and in the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position and results of operations as of the dates and for the periods presented.2017.

Basis of Presentation

This summary of accounting policies for the Company is presented to assist in understanding the Company’s financial statements. The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP” accounting) and have been consistently applied in the preparation of the unaudited consolidated financial statements.

Principles of Consolidation

The consolidated financial statements are prepared in accordance with US GAAP. The consolidated financial statements of the Company include the Company and its wholly-owned and majority-owned subsidiaries. All inter-company balances and transactions have been eliminated.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, certain revenues and expenses, and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. Estimates are used when accounting for allowances for bad debts, stock basedstock-based compensation, collectability of loans receivable, potential impairment losses of intangible assets and goodwill, and fair value calculations related to embedded derivative features of outstanding convertible notes payable.

Cash

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. The Company held no cash equivalents as of March 31, 2018 or December 31, 2017. The Company did not hold cash with any onepayable and other financial institution in excess of the FDIC insured limit of $250,000.

instruments.

Revenue recognition

The Company follows ASC 606 of the FASB Accounting Standards Codification for revenue recognition. Adoption of ASC 606 did not have a significant impact on the Company’s financial statements. The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. The Company primarily generates revenues through the sale of prepaid calling minutes to consumers through its Tel3 division and the sale of wholesale telecom minutes through its Limecom subsidiary. While the Company collects payment for prepaid consumer minutes in advance, revenue is recognized upon delivery to and consumption of minutes by the consumer or upon the forfeiture of minutes with forfeitures occurring after 12 consecutive months of non-use.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

Consumer Prepaid Minutes Revenues

The Company recognizes revenues from the sale of prepaid telecommunications minutes directly to consumers at the retail level. While the Company collects payment for prepaid consumer minutes in advance, revenue is recognized upon delivery to and consumption of minutes by the consumer or upon the forfeiture of minutes with forfeitures occurring after 12 consecutive months of non-use. Generally, consumers will prepay a fixed dollar amount then consume the prepayment upon making telephone calls on the Company’s telecommunications network. Revenues from direct to consumer retail sales were $411,223$266 and $500,591$469 and $1,118 and $1,463 during the three and nine months ended March 31,September 30, 2018 and 2017, respectively.

Wholesale Telecommunications Revenues

The Company recognizes revenues from the brokering of sales of minutes from one telecommunications carrier to another. The Company receives an order for a defined number of minutes to a defined geographic region at which point it sources those minutes and purchases them with an immediate resale to the customer. Revenues from wholesale telecommunications minutes were $19,586,997$20,297 and $0 and $60,352 and $0 during the three and nine months ended March 31,September 30, 2018 and 2017, respectively.

Significant Judgments

The Company’s contracts with consumers and telecommunications wholesalers can include promises to transfer multiple products and services. Determining whether multiple products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The Company’s retail products are sold with a limited right of return and the Company may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize.

Deferred Revenue

Deferred revenue is comprised mainly of unearned revenue related to prepayments from retail consumers for telecommunications minutes. The following table presentsrepresents the changes in deferred revenue for the threenine months ended March 31,September 30, 2018:

Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”). Contracted not recognized revenue was $654,173$561 as of March 31,September 30, 2018, of which the Company expects to recognize 100% of the revenue over the next 12 months.

Assets Recognized from the Costs to Obtain a Contract with a Customer

The Company has elected to immediately expense contract acquisition costs that would be amortized in one year or less. The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. There were no capitalized contract acquisition costs as of March 31,September 30, 2018.

PropertyCUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and equipmentper share data)

Property and equipment are stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the related assets, which range from three to five years.Maintenance and repair costs are expensed as they are incurred while renewals and improvements which extend the useful life of an asset are capitalized. At the time of retirement or disposal of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated results of operations.

Goodwill and Intangible Assets

Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year. The Company determines the fair value of each subsidiary the goodwill relates to and compares the fair value to the carrying amount of the subsidiary. To the extent the carrying amount of the subsidiary exceeds the fair value of it, an impairment loss is recorded.

Amortization of intangible assets for each of the next five years and thereafter is expected to be as follows:

Amortization expense was $107,143$107 and $356 and $0 and $0 for the three and nine months ended March 31,September 30, 2018 and 2017, respectively. Amortization expense for each period is included in cost of revenue.

Impairment of Long-Lived Assets

In accordance with ASC Topic 360, formerly SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of its asset based on estimates of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its carrying value. There was no impairment losses recorded to long-lived assets during the three months ended March 31, 2018 or 2017.

Non-Controlling Interest

The Company reports the non-controlling interest in its majority owned subsidiaries in the consolidated balance sheets within the stockholders’ deficit section, separately from the Company’s stockholders’ deficit. Non-controlling interest represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.

Derivative and Fair Value of Financial Instruments

Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement of their fair value for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt under ASC 470, the Company will continue its evaluation process of these instruments as derivative financial instruments under ASC 815.

Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.

Fair value of certain of the Company’s financial instruments including cash, accounts receivable, accountaccounts payable, accrued expenses, notes payables, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.measurements.

Fair value, as defined in ASC 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of nonperformance, which includes, among other things, the Company’s credit risk.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity, and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.

Except as discussed inNote 5 – Derivative Liabilitiesthe Company did not identify any otherThe Company’s financial assets orand liabilities that are required to be presented on the consolidated balance sheetmeasured at fair value in accordance with ASC 825-10on a recurring basis by level within the fair value hierarchy are as of March 31, 2018 or December 31, 2017.follows:

Income Taxes

Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Use of net operating loss carry forwards for income tax purposes may be limited by Internal Revenue Code section 382 if a change of ownership occurs.

Basic Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and per share data)

At March 31,September 30, 2018, the Company had one outstanding convertible note payable with conversion rights that are exercisable. The amount of outstanding principal on this convertible note is $0 plus accrued interest of $5,326$5 for total convertible debtsdebt as of March 31,September 30, 2018 of $5,326$5 representing 455,2152,506 new dilutive common shares if converted at the applicable rates. Additionally, the Company has committed to issue a total of 30,699,159179,851 shares of common stock for the settlement of a related party note payable and services which are not yet issued or outstanding. The effects of this note and total common shares committed to be issued have been included inexcluded from net income per diluted share for the three and nine months ended March 31,September 30, 2018.

At March 31,September 30, 2017, the Company had eighteen outstanding convertible notes payable with conversion rights that are exercisable. The amount of outstanding principal on these convertible notes total $1,179,828$985 plus accrued interest of $261,537$388 for total convertible debts as of March 31,September 30, 2017 of $1,441,365$1,328 representing 76,304,181243,268 new dilutive common shares if converted at the applicable rates. The effects of these notes have been excludedincluded in net income per diluted share for the three months ended March 31,September 30, 2017 and excluded from the nine months ended September 30, 2017.

The Net income (loss) attributable to common shareholders for the period ended September 30, 2018 is as the impactsfollow:

For the nine months ended September 30, 2018, potentially dilutive securities consisted of 179,851 shares which the Company is obligated to issue and 162,044 options to purchase of common stock at prices ranging from $3 to $54 per share. Of these potentially dilutive securities, only 179,851 shares which the Company is obligated to issue and 90,000 options to purchase of common stock at price of $3 per share are included in the computation of diluted earnings per share because the effect of including the remaining instruments would be antidilutive due to the Company recording a net loss for the period.anti-dilutive.

DividendsReclassified Amounts

The Company has not adopted any policy regarding payment of dividends. No dividendsCertain prior year amounts have been paid during anyreclassified for consistency with the current year presentation. These reclassifications did not have material effect on the reported results of the periods shown.

As discussed in the report on form 8K filed on May 18, 2016, the Company declared a special dividend on its outstanding common stock of one share of Class D Redeemable Preferred Stock.  Pursuant to the dividend, the special stock dividend will be distributed to owners of the Company’s common stock as of the record date in a ratio of one share of Class D Redeemable Preferred Stock   for every 1 share of common stock owned as of the record date.  The Company originally had set the record date as June 10, 2016 but was later modified to July 22, 2016. The Class D Preferred Stock must be redeemed within six months within six (6) months (or as soon thereafter as permitted by law) following final resolution of the Corporation’s affiliates lawsuit against ViberMedia, Inc. (Next Communications, Inc. and Nxtgn, Inc. v. Viber Media, Inc.) which is, as of the date of this filing, pending in U.S. District Court for the Southern District of New Yorkoperations, shareholder’s deficit or any successor or other lawsuit relating to the subject matter thereof in which the Corporation (or any successor-in-interest) is named as a plaintiff (the “Lawsuit”). The Designation fixes the redemption price of each share of class D Preferred stock as the greater of par value or the amount obtained by dividing (a) 9.03 percent of the net proceeds to the Corporation of the Lawsuit after payment of fees and expenses incurred in connection with such law suit and the resolution of  any creditor claims against Next Communications and all taxes on net income accrued or paid with respect to such amount, by (b) the total number of shares of Class D Preferred stock issued and outstanding as of the Redemption Date, which amount shall be rounded to the nearest whole cent.

The Company has accrued common stock dividends payable of $30,000 as of March 31, 2018 and December 31, 2017 as the Class D Preferred Stock has yet to be issued for the dividend.cash flows.

Stock-Based CompensationRecent Accounting Standards announced

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of subtopic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”) and subtopic 718-20 for awards classified as equity to employees. 

Derivative Liabilities

The Company records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates. An instrument determined to be a derivative liability is recorded at fair value with a debt discount being recorded up to the face value of the related convertible note payable with any excess value being recognized as a day one loss on initial measurements of derivative liabilities. The debt discount is amortized as interest expense over the life of the convertible notes. Changes in value of the derivative liabilities that result from conversions of the underlying instrument to common stock are written off to earnings.

Related Parties

The registrant follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

Pursuant to Section 850-10-20 the Related parties include (a) affiliates of the registrant; (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the registrant; (e) management of the registrant; (f) other parties with which the registrant may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Accounts Receivable

Accounts receivable balances are established for amounts owed to the Company from its customers from the sales of services and products. The Company closely monitors the collectability of outstanding accounts receivable and provides an allowance for doubtful accounts based on estimated collections of outstanding amounts. The Company had an allowance for doubtful accounts of $20,000 and $20,000 as of March 31,In August 2018, and December 31, 2017, respectively.

Accounts Receivable Factoring

Limecom executed a factoring and security agreement with a financial institution on June 22, 2017, whereby it sells certain of its accounts receivable in exchange for cash. These factoring transactions qualify for sales treatment in accordance with FASB ASC 860, Transfers and Servicing. Upon purchase of the accounts receivable, the Company shall be deemed to have sold, transferred, assigned, set over and conveyed to the financial institution, without recourse except as expressly stated in the agreement, all of the Company’s right, title and interest in and to the purchased accounts receivable. Purchases have an initial gross liquidation advance rate of 90%, up to a maximum cumulative outstanding face amount of $4,000,000. The initial discount fee is 2.1%, and an additional 0.85% of certain receivables.

The Company has a credit insurance policy covering all factored accounts receivable, under which the financial institution is the beneficiary on the policy if default were to occur.

License Fee

The Company entered into an agreement with a certain vendor whereby it obtained a license to market and distribute certain closed loop general purpose reloadable debit cards for an initial term of three years. The Company remitted $250,000 as a license fee in connection with the agreement which it is recognizing over the initial term of the agreement on a straight line basis. The unamortized balance of the license fee was $13,889 and $34,722 as of March 31, 2018 and December 31, 2017, respectively.

Investments

The Company accounts for equity investments under ASC 321. Equity investments with a readily determinable market price are measured at fair value as of the date of the financial statements with any unrealized gains or losses being recognized in current period income or loss.

During the year ended December 31, 2017, the Company acquired 50,000 shares of common stock of Green Spirit Industries, a publicly held company, as a referral fee. The total value of the common shares was recorded as other income using the price of the common stock as quoted on Nasdaq on the date received resulting in other income of $550,000. At December 31, 2017, the Company marked the value of the shares to fair value resulting in an unrealized loss of $300,000 being recorded as other comprehensive loss for the year ended December 31, 2017. There was no change in the fair value of the shares during the three months ended March 31, 2018. The fair value of the common shares, as quoted by Nasdaq, as of March 31, 2018 and December 31, 2017 was $250,000 and $250,000, respectively.

On January 1, 2018, the Company adoptedFASB Accounting Standards Update (“ASU) 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company’s adoption of ASU 2016-01 resulted in an adjustment to beginning retained earnings in the current period equal to the accumulated unrealized net losses on available for sale securities previously carried in other accumulated comprehensive income totaling $300,000.

Recently Issued Accounting Standards

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation2018-13, Fair Value Measurement (Topic 718)820): ImprovementsDisclosure Framework – Changes to Employee Share-Based Payment Accounting.”  the Disclosure Requirements for Fair Value Measurement. The amendments in this update simplify several aspectsapply to reporting entities that are required to make disclosures about recurring or nonrecurring fair value measurements and should improve the cost, benefit, and effectiveness of the accounting for employee share-based payment transactions, includingdisclosures. ASU 2018-13 categorized the accounting for income taxes, forfeitureschanges into those disclosures that were removed, those that were modified, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the new guidance on January 1, 2017.those that were added. The primary impactdisclosures that were removed related to transfers between Level 1 and Level 2 investments, along with the policy for timing of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital. A corresponding adjustment was recorded to increasetransfers between levels. In addition, disclosing the valuation allowance.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Testprocesses for Goodwill Impairment”.Level 3 fair value measurements was removed. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update isare effective for annual orall organizations for fiscal years, and interim goodwill impairment tests inperiods within those fiscal years, beginning after December 31,15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which revises the definition of a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company notes that this guidance will impact its acquisitionsdisclosures beginning January 1, 2018.2020. 

Recently adopted accounting pronouncements

In AprilJanuary 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01) “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. We adopted ASU 2016-10, “Revenue2016-01 as of January 1, 2018 which resulted in a $300 reclassification of net unrealized gains from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”).accumulated other comprehensive income to the retained earnings. The amendments in this update clarify the following two aspects to Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The entity first identifies the promised goods or services in the contract and reduces the cost and complexity. An entity evaluates whether promised goods and services are distinct. Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The Company evaluated the impactsadoption of ASU 2016-10 and determined it did not have an impact on2016-01 increases the Company’s revenue recognition practices.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)volatility of our other income (expense),” which supersedes the guidance in ASC 840, “Leases.” The purpose net, as a result of the new standard is to improve transparency and comparability related to the accounting and reporting of leasing arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations created by leases with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Modified retrospective application is required. Early adoption is permitted. The Company does not expect the standard to have a material impact on its consolidated balance sheets or consolidated statements of operations.

On August 26, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company has adopted this standard and did not have an impact on the Company’s presentation of the consolidated statements of cash flows.

On May 10, 2017, The FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms of conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, ASU 2017-09 is effective to annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not anticipate this standard to have an impact on its accounting practices.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

NOTE 3 – LIQUIDITY AND PROFITABILITY

During the three months ended March 31, 2018 the Company’s net loss from operations was $130,811 and cash provided by operations was $14,564, which included the reduction of accounts payable in the amount of $1,595,835. As of March 31, 2018, the Company had $37,846 of cash, a working capital deficit of $5,168,077, which included accounts payable of $5,404,276, and the Company’s stockholders’ deficit was $2,777,029.

Due to our operational losses, the Company has relied to a large extent on funding received from Next Communications, Inc., an organization in which our Chief Executive Officer and Chairman holds a controlling equity interest and holds an executive position. During the first calendar quarter of 2017, Next Communications, Inc. filed for bankruptcy protection. As a result, the related party payable is being handled by a court appointed trustee as an asset of Next Communications, Inc. and the Company may need to begin repaying the amounts due on a more fixed schedule.

Our liquidity needs for the next 12 months and beyond are principally for the fundingremeasurement of our operationsequity securities.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and the purchase of property and equipment. Based on the foregoing, management believes the Company will generate sufficient funds from operations and certain available debt financings available to finance its operations over the next twelve months. The Company is actively engaging in various strategies to ensure the continuance of operations for the foreseeable future. Specifically;per share data)

Based on the foregoing, management believes the Company will generate sufficient funds from operations and certain available debt financings available to finance its operations over the next twelve months.

NOTE 43 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE

Notes Payable

During the year ended December 31, 2017, the Company entered into two separate loans to be paid by collection of its future accounts receivable and secured by substantially all assets of the Company including accounts receivable, cash, equipment, intangible assets, inventory and other receivables. The first loan resulted in cash proceeds of $125,000$125 to the Company for future payments totaling $168,750$169 from future receivables and requires daily repayments of $1,339.$1. The second resulted in cash proceeds of $50,000$50 for future payments totaling $68,000$68 from future receivables and requires daily cash repayments of $540.$10. There was $0 and $46,048$46 due for the agreements as of March 31,September 30, 2018 and December 31, 2017, respectively, included in current notes payable.

On May 1, 2017, the Company received a loan from an unrelated party for $25,000.$25. The loan is due on demand and as such is included in current notes payable. The note does not accrue interest and had a principal balance due of $25,000$25 as of March 31,September 30, 2018 and December 31, 2017, respectively.

On April 25, 2018, the Company entered into a loan agreement to be paid by collection of its future accounts receivable and secured by substantially all assets of the Company including accounts receivable, cash, equipment, intangible assets, inventory and other receivables. The loan resulted in cash proceeds to the Company of $180 for future payments totaling $234 from future receivables and requires daily repayments of $2. There was $0 and $0 due as of September 30, 2018 and December 31, 2017, respectively, included in current notes payable.

Convertible Notes Payable

The Company has entered into a series of convertible notes payable to fund operations. While with differing noteholders, the terms of the outstanding convertible notes are substantially similar and accrue interest at 8% annually with a default interest rate of 24% and allow for the conversion of outstanding principal and interest to common stock at a price equal to a 45% to 50% from the lowest trading price in the preceding 20 days.

The Company settled the majority of its convertible notes payable in December 2017 for a combination of cash and shares of common stock. An additional convertible note payable was settled in January 2018 for a combination of cash and shares of common stock.

The following table summarizes all convertible notes payable activity for the threenine months ended March 31,September 30, 2018:

The following is a summary of all convertible notes outstanding as of March 31,September 30, 2018: