PartPART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INC.)

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBERjune 30, 20182019

TABLE OF CONTENTS

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INC.)

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.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(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, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)

 (Unaudited)

(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, INC.)

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 – GENERAL

Organizational Background:

Cuentas, Inc. (formerly Next Group Holdings, Inc., the “Company”) was incorporated under the laws of the State of Florida on September 21, 2005 to act as a holding company fortogether with its subsidiaries, both currentis focused on Financial Technology (“FINTECH”) services, delivering mobile banking, online banking, prepaid debit and future. Its subsidiaries are Meimoundigital content services to unbanked, underbanked 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.

underserved communities. The Company invests in financial technology and currently derives its revenuesrevenue from the sales of prepaid and wholesale calling minutes. Additionally, theThe 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.

The Company throughwas incorporated under the laws of the State of Florida on September 21, 2005 to act as a holding company for its subsidiaries. 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). Additionally, Next Cala, Inc. has a 60% interest in NextGlocal, a subsidiary formed in May 2016. During the year ended December 31, 2016, the Company acquired a business segment, Tel3, from an existing corporation. Tel3 provides prepaid calling cards to consumers directly and operates in a complimentary space as Meimoun and Mammon, LLC. 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, and in January 30, 2019 it fully owned subsidiary, rescinded the acquisition.

Meimoun and Mammon, LLC (“M&M”), provides 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 telecom services to the retail and wholesale markets including sales of prepaid long-distance telecom services and Mobile Virtual Network Operator (MVNO) services. The services are sold under the brand name Next Mobile 360.360 and through the subsidiary of the same name.

Next Cala, Inc, (“Cala”) offerswas formed under the laws of Florida on July 10, 2009 for the purpose of offering prepaid and reloadable debit cards to the retail market. Cala serves consumers in the underbanked and unbanked populations through Incomm, a leading provider of 3^rd party gift cards, GPR debit cards and payment remittance services worldwide.

NxtGn, Inc. (“NxtGn”) developswas formed under the laws of Florida on August 24, 2011 to develop 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.

Since September 17, 2016 the Company has a Market Partner Agreement with InsightPOS, LLC. InsightPOS is a “State of the Art”, “Super Functional Point of 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 itsthe formation of SDI NEXT Distribution LLC in which it holds aowns 51% interest, previously announced August 24, 2017 as a Letter of Intent withthe membership interests. The remainder of the membership interests is owned by Fisk Holdings, LLC. AsThe Company acts as the Managing Member of SDI NEXT Distribution LLC. Under the newly formed LLC,Operating Agreement, the Company will contribute a total of $500, to be paid per an agreed-upon schedule over a twelve-month period beginning December 2017.$500. 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-purpose reloadable cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products. There has been no activity

On October 23, 2017, the Company, completed 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 Acquisition was completed for total consideration of $3,927 which included an issuance of 172,683 shares of common stock, which were valued at $1,295 as of the acquisition date.

On January 29, 2019, the Company and Heritage agreed to extend the right of the Company to rescind at its option, to sell back the stock in or cash contributionsLimecom back to this entity since formation.Heritage in consideration for the following:

(a) The 138,147 shares of the Company issued to Heritage and its Stockholders will not be returned to the Company, and the remaining 34,537 shares of the Company will not be issued to Heritage. Instead, it was agreed that the Company will issue an additional 90,000 shares of the Company as directed by Heritage. The Company also agreed to issue 20,740 shares of the Company’s restricted stock to several Limecom employees in exchange for salaries due to them.

(b) The $1,807 payment under the Limecom Purchase Agreement will be cancelled.

(c) The Employment Agreement with Orlando Taddeo as International CEO of Limecom will be terminated.

(d) Heritage and the Limecom agreed that the intercompany loans in the amount of $231 will be cancelled.

On January 30, 2019, Cuentas sent an executed document to Limecom rescinding the acquisition of Limecom, Inc. (“Limecom”) according to the Amendment signed January 29, 2019.

CUENTAS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Pro forma results

The Company, through its affiliate, Next Communications, Inc., hasfollowing are unaudited pro forma financial information for the right to sell STI Mobile, Next Cala6 months period ended June 30, 2018 and any Next products to 8,800 locations that were serviced by a prepaid distribution network. The Company will offerpresents the InsightPOS system to clientscondensed consolidated statements of this distribution network as well via direct sales through its own sales force and affiliates. When a system is installed,operations of the Company receives 50%due to the rescission of the gross profits received by InsightPOS after retailer commissionsacquisition described above, as if the acquisitions had not occurred. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations.

The following are paid.unaudited pro forma financial information for the 3 months period ended June 30, 2018 and presents the condensed consolidated statements of operations of the Company due to the rescission of the acquisition described above, as if the acquisitions had not occurred. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations.

GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of SeptemberJune 30, 2018,2019, the Company had approximately $48$60 in cash and cash equivalents, approximately $7,915$2,554 in negative working capital, a stockholders’ deficiency of approximately $4,032$2,549 and an accumulated deficit of approximately $14,419.$16,525. 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 consolidated financial statements include the accounts of the Company and its subsidiaries, prepared in accordance with accounting principles generally accepted in the United States 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, they 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-monthssix-months ended SeptemberJune 30, 2018.2019. However, these results are not necessarily indicative of results for any other interim period or for the year ended December 31, 2018.2019. 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 included in financial statements in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the U.S. Securities and Exchange Commission (“SEC”). The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2017,2018, filed with the SEC on June 4, 2018April 15, 2019 (the “Annual Report”). For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2017.2018.

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-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 and other financial 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 $266 and $469 and $1,118 and $1,463 during the three and nine months ended 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 $20,297 and $0 and $60,352 and $0 during the three and nine months ended September 30, 2018 and 2017, respectively.

Deferred Revenue

Deferred revenue is comprised mainly of unearned revenue related to prepayments from retail consumers for telecommunications minutes. The following table represents the changes in deferred revenue for the ninesix months ended SeptemberJune 30, 2018:2019:

Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”). Contracted not recognized revenue was $561$524 as of SeptemberJune 30, 2018,2019, 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 September 30, 2018.

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)

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

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, accounts 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 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.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis by level within the fair value hierarchy are as follows:

A summary of the changes in derivative liabilities balance for the six months ended June 30, 2019 is as follows:

CUENTAS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The value of the embedded derivative liabilities for the convertible notes payable and outstanding option awards was determined using the Black-Scholes option pricing model based on the following assumptions:

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 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 for total convertible debt as of September 30, 2018 of $5 representing 2,506 new dilutive common shares if converted at the applicable rates. Additionally, the Company has committed to issue a total of 179,851 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 excluded from net income per diluted share for the three and nine months ended September 30, 2018.

At 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 $985 plus accrued interest of $388 for total convertible debts as of September 30, 2017 of $1,328 representing 243,268 new dilutive common shares if converted at the applicable rates. The effects of these notes have been included in net income per diluted share for the three months ended 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 follow:

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 anti-dilutive.

Reclassified Amounts

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications did not have material effect on the reported results of operations, shareholder’s deficit or cash flows.

Recent Accounting Standards announced

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments apply 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 disclosures. ASU 2018-13 categorized the changes into those disclosures that were removed, those that were modified, and those that were added. The primary disclosures that were removed related to transfers between Level 1 and Level 2 investments, along with the policy for timing of transfers between levels. In addition, disclosing the valuation processes for Level 3 fair value measurements was removed. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company notes that this guidance will impact its disclosures beginning January 1, 2020. 

Recently adopted accounting pronouncements

In January 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 2016-01 as of January 1, 2018 which resulted in a $300 reclassification of net unrealized gains from accumulated other comprehensive income to the retained earnings. The adoption of ASU 2016-01 increases the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities.

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 3 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLESTOCK OPTIONS

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 to the Company for future payments totaling $169 from future receivables and requires daily repayments of $1. The second resulted in cash proceeds of $50 for future payments totaling $68 from future receivables and requires daily cash repayments of $10. There was $0 and $46 due for the agreements as of 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. 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 as of 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 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 payablestock option activity for the nine months ended SeptemberJune 30, 2018:2019:

The following is a summary of all convertible notestable discloses information regarding outstanding as of Septemberand exercisable options at June 30, 2018:2019:

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 4 – DERIVATIVE LIABILITIES

The Company analyzed the conversion features of the convertible notes payable as discussed inNote 3 – Notes Payable and Convertible Notes Payable for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative liability because the exercise price of these convertible notes are subject to a variable conversion rate.  The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

As of September 30, 2018, the Company had a $64 derivative liability on the balance sheet and recorded gains from derivative liability fair value adjustments of $27 and $483 during the three and nine months ended September 30, 2018. The derivative liability activity comes from convertible notes payable as discussed inNote 3 –Notes Payable and Convertible Notes Payable. In addition to derivative liabilities associated with convertible notes payable, the Company recorded a derivative liability due to a ratchet strike price feature associated with the options issued in the sale of TPP, taking into account the effect of the reverse stock split (seeNote 9 – Stockholders’ Equity), the options are exercisable at $54 per share unless the Company’s common stock is quoted at a price greater than $150 per share at which point the options are exercisable at $90 per share.

A summary of the changes in derivative liabilities balance for the nine months ended September 30, 2018 is as follows:

The value of the embedded derivative liabilities for the convertible notes payable and outstanding option awards was determined using the Black-Scholes option pricing model based on the following assumptions:

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 5 – STOCK OPTIONS

The following table summarizes all stock option activity for the nine months ended September 30, 2018:

The following table discloses information regarding outstanding and exercisable options at September 30, 2018:

On September 13, 2018, the Company issued 60,000 options to its President and Chief Executive Office. The options carry an exercise price of $3 per share. A third of the options vested immediately with the remaining vesting over the course of two years. The Options are exercisable until September 12, 2023. The Company has estimated the fair value of such options at a value of $302 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:

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 September 13, 2018, the Company issued 30,000 options to its member of the Board. The options carry an exercise price of $3 per share. Third of the options vested immediately with the remaining vesting over the course of two years. The Options are exercisable until September 12, 2023. The Company has estimated the fair value of such options at a value of $151 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:

During the nine months ended September 30, 2018, the Company recorded an option-based compensation expense of $164 associated with these grants.

NOTE 64 – STOCKHOLDERS’ EQUITY

Common Stock

The following summarizes the common stock activity for the ninesix months ended SeptemberJune 30, 2018:2019:

On January 7, 2019, the Company issued 16,667 shares of its common stock pursuant to a Securities Purchase Agreement which it entered on September 21, 2018. The fair market value of the shares at the subscription date was $50.

On January 9,7, 2019, the Company received $50 under a private placement of equity and issued 16,667 shares of its common stock and warrants to purchase up to 16,667 shares of its common stock at an exercise price equal to $3.25 per share under a private placement of securities closed on December 13, 2018.

On January 29, 2019, the Company issued 125,243 shares of the Company to Heritage and its officers under the agreement to rescind the Company’s option to sell the stock in Limecom back to Heritage.

On February 12, 2019, the Company issued warrants to purchase up to 35,834 shares of its common stock at an exercise price equal to $3.25 per share under the October 25, 2018 private placement. 

On February 28, 2018, the Company issued 11,483309,497 shares of its common stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $155.$464.

On January 12, 2018,February 28, 2019, The Company signed a Binding Term Sheet with Optima Fixed Income LLC (“Optima”) for a total investment of $2,500 over one year and received $500 on the same date. Under the Binding Term Sheet, it was agreed that the initial invested amount of $500 will in consideration of 166,667 shares of Common Stock of the Company. These shares will be issued in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act. It was also agreed that Optima may purchase a Convertible Note in the amount of $2,000 which may be funded on a quarterly basis. The term of the Convertible Note shall be three years and it may be converted with a discount of 25% on the share price at date of conversion, but in any case, not less than $3 per share. Optima will additionally get rights to vote some of the Series B Preferred. In any case, the total investment in the Company shall be not be less than 25% of the outstanding shares at the first anniversary of this Binding Term Sheet.

On May 10, 2019 the Company signed an Amendment to the Binding Term Sheet with Optima whereas Optima will make an additional deposit of $550 to the Company and whereas that additional deposit will be provided to the Company in the form of a Convertible Note as discussed in the Binding Term Sheet. It was also agreed that Optima will provide an additional amount of $1,450 to the Company which will be provided in a form of a Convertible Note at the following dates:

All the other terms and conditions of the Binding Term Sheet, will remain in full force and effect. On May 11, 2019 Optima made an additional deposit of $550.

On May 28, 2019 Optima made an additional deposit of $200.

On June 18, 2019, the Company issued 2,00065,978 shares of its common stock to a note holder in connection with outstanding convertible note payable and convertible accrued interest on convertible notes payable in accordance with a settlement agreement. The fair market value of the shares was $27.

On February 7, 2018, the Company issued 38,096 shares of its common stockprivate investor pursuant to a common stock subscription. The fair market value of the shares at the subscription date was $400.

On September 11, 2018, the Company issued 2,167 shares of its common stock to a note holder in connection with outstanding convertible note payable and convertible accrued interestSecurities Purchase Agreement which it entered on convertible notes payable in accordance with a settlement agreement. The fair market value of the shares was $11.

On September 27, 2018, the Company issued 13,333 shares of its common stock to a consultant, pursuant to a consulting agreement dated September 18, 2018, in consideration for consulting services. The fair market value of the shares at grant date was $60.

On September 27, 2018, the Company issued 61,002 shares of its common stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $335.

On September 21^st 2018, the Company entered into a securities purchase agreement with various purchasers to issue 146,669 shares of common stock in consideration of $440. As of the September 30, 2018October 25, 2018. Under that particular Securities Purchase Agreement , the Company has received $140. Oneto issue additional shares of Common Stock to the private investor in an amount sufficient such that, when sold and the net proceeds thereof are added to the net proceeds from the sale of any of the purchasers ispreviously issued and sold Shares, the Company’s President and CEO who purchased 16,667 shares. Another purchaser is a current shareholder which controlled by the former owner of Limecom (a fully subsidiary of the Company), who purchased 16,667 shares.private investor shall have received total net funds equal to $3.60 per Share.

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 75 – RELATED PARTY TRANSACTIONS

The Company has had extensive dealings with related parties including those in which our Chief Executive Officer holds a significant ownership interest as well as an executive position during the ninesix months ended SeptemberJune 30, 20182019 and year ended December 31, 2017.2018. Due to our operational losses, the Company has relied to a large extent on funding received from Next Communications, Inc., an organization in which the Company’s Chief Executive Officer holds a controlling equity interest and 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 be compelled to repay the amounts due. On January 29, 2019, the United States Bankruptcy Court Southern District of Florida Miami Division approved a Plan of Reorganization for Next Communications, Inc., whereby Cuentas Inc. would pay $600 to a specific creditor in consideration for the forgiveness of the balance of the payable balance. On March 5, 2019, Cuentas paid $50 to the trust account of the specific creditor and on May 10, 2019, the Company paid $550 to the trust account of the specific creditor per the order and satisfied its obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida Miami Division on January 29, 2019.

With the exception of the Company’s purchase of a 9% interest in Next Cala, Inc. from a related party and the related party payable to Orlando Taddeo for the acquisition of Limecom as described below, amounts scheduled below as “due to related parties” and “due from related parties” have not had their terms, including amounts, collection or repayment terms or similar provisions memorialized in formalized written agreements.

Related party balances at SeptemberJune 30, 20182019 and December 31, 20172018 consisted of the following:

Due from related parties

Related party payables, net of discounts

Accounts Receivable, Related Party

The Company had outstanding accounts receivable of $78 from related parties as of September 30, 2018 of which $71 was due from Next Communications, $6 was due from Next Cala 360 and $14 was due from Asiya Communications SAPI de C.V. The accounts receivable was recorded as a result ofDuring the sale of wholesale telecommunications minutes to these entities.

As of September 30, 2018 Limecom, had outstanding accounts receivable of $4,094 from Airtime Sp.z.o.o., which is a subsidiary of one the Company’s shareholders ofsix months period ended June 2019, the Company recorded interest expense of $67, using an interest rate equal to that on the outstanding convertible notes payable as imputed interest on the related party payable due to Next Communications. During the year ended December 31, 2018, the Company recorded interest expense of $237 using an interest rate equal to that on the outstanding convertible notes as imputed interest on the related party payable due to Next Communications. The interest was immediately forgiven by the related party and a former owner of Limecom. The accounts receivable was recorded as a result of the sale of wholesale telecommunications minutes to this entity.additional paid in capital. 

Accounts Payable, Related Party

The Company had outstanding accounts payable of $507 to related parties as of September 30, 2018 all of which was to Asiya Communications SAPI de C.V.

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)

Revenues (Related Party)

The Company made sales to and generated revenues from related parties of $15,942$0 and $155$11,189 during the threesix months ended SeptemberJune 30, 20182019 and 20172018 as itemized below:

The Company made sales to and generated revenues from related parties of $36,850$0 and $233$8,941 during the ninethree months ended SeptemberJune 30, 20182019 and 20172018 as itemized below:

Costs of Revenues (Related Party)

The Company made purchases from related parties totaling $8,954and $0 during the three months ended September 30, 2018 and 2017 which are included in cost of revenues as itemized below:

The Company made purchases from related parties totaling $20,389 and $0 during the nine months ended September 30, 2018 and 2017 which are included in cost of revenues as itemized below:

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 86 – CUSTOMER CONCENTRATION 

The Company generated approximately 70% of its revenues for the three months ended September 30, 2018 and 52% of its revenues for the nine months ended September 30, 2018 from three related parties. The Company did not have any one customer account for more than 10% of its revenues during the six and three or nine months ended SeptemberJune 30, 2017.

As2019. The Company generated approximately 51% of September 30,its revenues for the six months ended June, 2018 from three separate customers accounted for approximately 98% of the Company’s total accounts receivable. As of December 31, 2017, three separate customers accounted for approximatelyand 78% of the Company’s total accounts receivable.

NOTE 9 – RESTATEMENT OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017

The Company has restated its statement of operations and statement of cash flows for the nine months ended September 30, 2017 to correct an error in the treatment of the disposal of a subsidiary. The Company had originally recorded the elimination of the non-controlling interest component of equity of the sold subsidiary as an equity only transaction by absorbing $2,541 of non-controlling interest equity into that of the Company. The correct treatment of the disposal necessitates the amount of non-controlling interest to be included in the calculation of the gain or loss on the disposal of a subsidiary recognized through the income statement. The impact to the financial statements is an increase in loss from discontinued operations and net loss by $2,541 for the nine months ended September 30, 2017 and no changerevenues for the three months ended September 30, 2017. Net loss per common share increasedJune, 2018 from $0.00 as originally stated to $2.73 as restated for the nine months ended September 30, 2017 with no change for the three months ended September 30, 2017. There was no impact on the net cash used in operations during the nine months ended September 30, 2017 as a result of the restatement.Although not presented, the impact of the restatement on the Company’s consolidated balance sheet as of September 30, 2017 is an increase to additional paid in capital and increase to accumulated deficit of $2,541.separate customers

NOTE 107 – COMMITMENTS AND CONTINGENCIES

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

On April 7, 2016, the Company executed an agreement with a service provider to provide certain services for the Company. In addition to cash and stock compensation, the agreement requires 1% of the outstanding common share equivalent to be issued to the third party when the market capitalization of the Company reaches $500 and an additional 1% when it reaches $750. The Company recorded an expense associated with the non-variable portion of the agreement. However, the probability of the Company’s market capitalization reaching these thresholds is uncertain at present and the Company has not accrued a contingent fee as of SeptemberJune 30, 2018 or December 31, 2017 as a result.2019.

On October 14, 2014, one of our operating subsidiaries, NxtGn Inc.,

CUENTAS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in U.S. dollar thousands, except share and Next Communications, Inc., an entity controlled by our CEO, (collectively the “Plaintiffs”) filed suit in the United States District Court for the Southern district of New York against Viber Media, Inc. (“Viber”).  Plaintiffs filed an Amended Complaint asserting four claims: misappropriation of a business idea, misappropriation of trade secrets, breach of contract, and unjust enrichment. Viber moved the Court to dismiss the Amended Complaint.  On March 30, 2016, U.S. District Judge Richard Sullivan issued an opinion and order on Viber’s motion to dismiss. Specifically, Judge Sullivan ordered that Viber’s motion to dismiss is granted on Plaintiffs’ misappropriation of a business idea claim, but denied as to their misappropriation of trade secrets, breach of contract, and unjust enrichment claims. The Company has not accrued any gains associated with this case as it would be a contingent gain and recorded when received.per share data)

On February 12, 2018, the Company was served with a complaint from Viber Media, Inc. (“Viber”) for reimbursement of attorney’s fees and costs totaling $528 arising from a past litigation with Viber. The Company is vigorously defending their rights in this case as we believe this demand is premature as litigation is ongoing. The Company has not accrued an estimated lossno accrual related to this complaint as of SeptemberJune 30, 2018 or December 31, 20172019 given the premature nature of the motion.

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 20, 2016, the Company received a notice it has been named as a defendant in a suit brought against Next Communications, an entity controlled by our CEO. In addition to being named a defendant, it was requested the Company provide certain documents for the discovery process. Due to the original suit being filed against a related party and not against the Company or its subsidiaries, we believe it likely the Company and its subsidiaries will be dismissed as defendants and has not accrued a contingent loss as of September 30, 2018 or December 31, 2017 as a result.

On July 6, 2017, the Company received notice an existing legal claim against Accent InterMedia (“AIM”) had been amended to include claims against the Company. The claims brought against the Company include failure to comply with certain judgments for collection of funds by the plaintiff while having a controlling interest in AIM via its ownership of Transaction Processing Products (“TPP”). The Company believes the amended case is without merit and that, per its agreement to sell its interest in TPP, any claims brought against AIM or TPP would be the responsibilities of the current interest holders. Due to the original suit being filed against AIM and amended to includeOn April 17, 2019, the Company after it disposedsigned a Settlement Agreement with Comdata, Inc. d/b/a Stored Value Solutions (“SVS”) whereby Cuentas will pay a total of its interest$38 over a period of 7 months, starting July 1, 2019. Only in TPP, which had a controlling interest in AIM, we believe it likelythe event that the Company and its subsidiaries will be dismissed as defendants.default by failing to make timely payments, SVS may file in Kentucky for the judgment of $70.

On December 20, 2017, a Complaint was filed by J. P. Carey Enterprises, Inc., alleging a claim for $473 related to the Franjose Yglesias-Bertheau filed lawsuit against PLKD listed above. Even though the Company made the agreed payment of $10 on January 2, 2017 and issued 12,002 shares as conversion of the $70 note as agreed in the settlement agreement, the Plaintiff alleges damages which the Company claims are without merit because they received full compensation as agreed. The Company is in the process of defending itself against these claims. The Company has not accrued losses related to this claim due to the early stages of litigation.

During 2016, Limecom had disputed accounts payable with three (3) carriers, for which On January 28, 2019, J. P. Carey Enterprises, Inc. filed a similar claim against the Company entered into separate settlement agreements, totaling approximately $1,147. Under the terms of these settlement agreements, the Company was provided with extended payment terms on the outstanding balances. These settlement agreements are non-interest bearing and include certain default provisions as disclosed in the related agreements. On October 23, 2017, this liability was $676. Limecom repaid $10 from the date of acquisition through December 31, 2017 and $95 during the nine months ended September 30, 2018. The remaining outstanding principal balance of these settlement agreements amounted to approximately $571 and $666 as of September 30, 2018 and December 31, 2017, respectively. Of these totals, $571 and $546 is current and included in accrued liabilities and $0 and $120 is long term and represented by other long-term liabilities as of September 30, 2018 and December 31, 2017, respectively.

Prior to October 23, 2017 (the date of Limecom acquisition), Limecom had entered into a settlement agreement with American Express.As of the date of the Limecom acquisition, there was a total outstanding balance of $892.Fulton County, Georgia. The Company made repayments totaling $385 leaving a remaining balance due of $507, as of September 30, 2018. The balance of $410 is includedvigorously defending its position in other accounts liabilities and the balance of $97 is included in other long-term accounts liabilities.

On August 9, 2018, Limecom was served with a complaint by Spectrum Intelligence Communications Agency LLC (SICA) whereby SICA claims that Limecom owes them a total of $439. Limecom is in the process of defending and potentially negotiating a settlement with SICA.

this case.

On September 28, 2018, the Company was notified of a complaint filed against it by a former supplier. The Company has not yet received formal service of the complaint and is awaiting such service at which time it can fully assess the complaint. The Company has not accrued any losses as of SeptemberJune 30, 20182019, related to the complaint given the early nature of the process.

CUENTAS, INC.

(Formerly NEXT GROUP HOLDINGS, INC)On October 23, 2018, the Company was served by Telco Cuba Inc. for an amount in excess of $15 but the total amount was not specified. The Company was served on Dec. 7, 2018 with a complaint alleging damages including unspecified damages for product, advertising and other expenses in addition to $50 paid to Defendants. The Company has taken steps to defend itself vigorously in this case. Depositions are in process of being scheduled.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(AmountsOn October 25, 2018, the Company was served with a complaint by former company CFO, Michael Naparstek claiming breach of contract for 1,666,666 shares (pre-split), $25 of compensation and $9 of expenses. This case was withdrawn in U.S. dollar thousands, except sharePalm Beach County and per share data)on January 11, 2019, a similar complaint was filed in Miami-Dade county. The Company has taken steps to defend itself vigorously in this case.

On November 7, 2018, the Company was served with a complaint by a service provider claiming Breach of Contract for $29. The Company settled this complaint in consideration of $5.

On November 7, 2018, the Company was served with a complaint by IDT Domestic Telecom, Inc. vs the Company and its former subsidiary Limecom, Inc. for telecommunications services provided to the Subsidiary during 2018 in the amount of $50. The Company has no accrual as of June 30, 2019, related to the complaint given the early nature of the process. The Company intends to file a motion to dismiss the Company as a defendant since the Company has no contractual relationship with the plaintiff.

On May 1, 2019, the Company received a Notice of Demand for Arbitration from Secure IP Telecom, Inc. who supposedly had a Reciprocal Carrier Services Agreement (RCS) exclusively with Limecom, Inc. and not with Cuentas. The Demand originated from a Demand for Arbitration that Secure IP received from VoIP Capital International (VoIP) in March 2019 demanding $1,053 in damages allegedly caused by unpaid receivables that Limecom assigned to VoIP based on the RCS. The Company will vigorously defend its position to be removed as a named Party in this Notice of Demand due to the fact that Cuentas rescinded the Limecom acquisition on January 30, 2019.

The Company executed a lease for office space effective July 10, 2018 with a term to October 31, 2018. The lease requires monthly rental payments of $5. Total future guaranteed payments under this lease are $5.

NOTE 11 – PRO FORMA STATEMENTS OF OPERATIONS

On October 23, 2017, the Company completed its acquisition of Limecom as discussed inNote 1 – Organization and Description of Business. The Company is furnishing the following pro forma statements of operations representing the combined results of the Company and Limecom for the nine months ended September 30, 2017 had the acquisition been completed on January 1, 2017.

CUENTAS, INC.

(FORMERLY NEXT GROUP HOLDINGS, INC.)

COMBINED PRO FORMA STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2017

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 128 – SUBSEQUENT EVENTS

On October 20, 2018, J. P. Carey Enterprises, Inc. voluntarily withdrew its claim against the Company.

On October 25, 2018, the Company received $108 under a private placement of securities closed on October 25, 2018 and issued 35,834 shares of its common stock. The issuance cost was $8.

October 25, 2018, the Company was notified by its registered agent in the state of Florida it had received notification of a filed complaint by a former employee that alleges breach of contract. The Company is in the early stages of discovery with a response to the complaint due on November 14, 2018. The Company has not accrued any losses as of September 30, 2018 related to the complaint given the early nature of the process.

On November 6, 2018,July 30, 2019 Optima assigned its rights under the Binding Term Sheet to Dinar Zuz LLC. On the same date, the Company through Limecom,and Dinar Zuz LLC executed a Subscription Agreement with the Company’s wholly owned subsidiary, finalizedsame terms as reflected in the Binding Term Sheet and its First Amendment. Under the Subscription Agreement Dinar Zuz LLC made an accounts receivable factoring agreement whereby the factor agent will purchase outstanding accounts receivable at its sole discretion less certain commissions. The factoring agent commission due under the agreement is 1.19%additional deposit of the face value$250 and agreed to provide an additional amount of the purchased accounts receivable for the twenty days immediately following invoice issuance plus 0.59% for each twenty days thereafter. The factoring agent may advance cash$1,000 to the Company which will be provided in a form of a Convertible Note at its sole discretion up to 90% of the purchase price with an initial maximum advance capacity of $4,000. The Company may request increases to the maximum advance allowed under the agreement not to exceed an additional $1,000 during each 90-day period immediately following execution for up to a maximum advance of $8,000.dates:

The Company agreed to pay ThinkEquity, a division of Fordham Financial Management Inc. (“Think”), a 2.5% fee on the initial $4 million factoring limit, equal to $100 in 4 installments for acting as a financial advisor to the Company with respect to the Agreement. Think will be paid additional fees of 3% of any increase in the facility size above the $4,000 facility up to the $8,000 total amount of the factoring facility. Think will also receive a warrant, valid for 5 years, entitling it to purchase a number of shares equal to 3.5% of the maximum facility size. The warrant shall have an exercise price equal to the five (5) day volume weighted average price of common shares on the date of closing, or if the Company is not publicly traded, equal to the per share price paid by investors in the Company’s most recent equity investment round prior to the execution of the Agreement. The shares underlying the warrant shall entitle the holder to one-time “piggyback” registration rights (unless Rule 144 is then available). The warrant may be exchanged without the payment of any additional consideration for the Company’s stock based upon the values of the warrant and the stock at the time of the exchange.

On November 20, 2018 and November 28, 2018,August 2, 2019, Dinar Zuz LLC converted the outstanding note with the Company received $100 underin the amount of $1,000 at a private placementconversion rate of securities closed on December 13, 2018 and$3 per share. On August 5, 2019, the Company issued 36,667500,000 shares of its common stock and warrantspursuant to purchase up to 36,667 shares of its common stock at an exercise price equal to $3.25 per share. The issuance cost was $10.

On November 26, 2018, the Company received notice of a complaint through its registered agent regarding a Complaint by American Express claiming damages incurred by Limecom for the amount of $507. On December 18, 2018, Limecom had entered into a second Amendment of the Settlement Agreement with American Express. Under the second Amendment Limecom paid $25 on December 19, 2018 and the remaining balance in 13 installments through December 15, 2019.

During December, 2018, the Company received $248 under a private placement of securities closed on December 13, 2018 and issued 82,667 shares of its common stock and warrants to purchase up to 82,667 shares of its common stock at an exercise price equal to $3.25 per share. 

On December 13, the Company issued 30,001 shares of its common stock for the consideration of $90 which it received of under the Securities Purchase Agreement which it entered on September 21^st, 2018.July 30, 2019.

On August 5, 2019, the Company issued 55,000 shares of its common stock pursuant to a Service Agreements which it entered. The fair market value of the shares at the issuance date was $50. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

The following discussion and analysis provide information which management of the Company believes to be relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read together with the Company’s financial statements and the notes to the financial statements, which are included in this report.

Forward-Looking Statements

This Report contains forward-looking statements that relate to future events or our future financial performance. Some discussions in this report may contain forward-looking statements that involve risk and uncertainty. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this Report. Forward-looking statements are often identified by words like “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project” and similar words or expressions that, by their nature, refer to future events.

In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements in an effort to conform these statements to actual results.

Company Overview

Cuentas, Inc. (the “Company”) invests in financial technology and engages in use of certain licensed technology to provide innovative telecommunications, mobility, and remittance solutions to unserved, unbanked, and emerging markets. The Company uses proprietary technology and certain licensed technology to provide innovative telecommunications and telecommunications mobility and remittance solutions in emerging markets. The Company also offers prepaid telecommunications minutes to consumers through its Tel3 division and also offers wholesale telecommunications minutes through its Limecom subsidiary.

The Company was incorporated under the laws of the State of Florida on September 21, 2005 to act as an 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), SDI Next Distribution LLC (51% owned). Additionally, Next Cala, Inc. has a 60% interest in NextGlocal, a 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.

Formation of SDI NEXT Distribution LLC (“SDI NEXT”)

 On December 6, 2017, the Company completed its formation of SDI NEXT Distribution in which it owns a 51% membership 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, to be paid per an agreed-upon schedule over a twelve-month period. Fisk Holdings, LLC will contribute 30,000 (thirty thousand) 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 Purpose Reload (“GPR”) cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products. The completed formation of an established distribution business for third-party gift cards, digital content, mobile top up, financial services and digital content, which presently includes more than 31,600 U.S. active Point of Sale locations, including store locations, convenience stores, bodegas, store fronts, etc. The parties agreed that additional product lines may be added with unanimous decision by the Managing Members of the LLC. During 2018, it was agreed between the parties to distribute the Company’s recently announced CUENTAS GPR card and mobile banking solution aimed to the unbanked, underbanked and financially underserved consumers, making them available to customers at the more than 31,600 retail locations SDI presently serves.

Limecom

On October 23, 2017, the Company acquired 100% of the outstanding interests in Limecom, Inc.

On January 29, 2019, the Company and Heritage agreed to extend the right of the Company to rescind the agreement, to sell the stock in Limecom back to Heritage as the follows:

(a) The 138,147 shares of the Company issued to Heritage and its Stockholders will not be returned to the Company, and the remaining 34,537 shares of the Company in escrow will not be issued to Heritage. Instead, the Company will issue an additional 90,000 shares of the Company as directed by Heritage.

(b) The $1,807,000 payment obligation under the Limecom Purchase Agreement will be cancelled.

(c) The Employment Agreement with Orlando Taddeo as International CEO of Limecom will be terminated.

(d) Heritage, its Stockholders and the current management of Limecom agreed to indemnify and hold harmless Next Group Acquisition and the Company from any liabilities (known and unknown) incurred by Limecom (accrued, disclosed or undisclosed by Limecom) up to and including the rescission date.

(e) Heritage and Limecom’s current management agreed to cooperate with Next Group Acquisition and/or the Company with any information required to be disclosed to the Securities and Exchange Commission (“SEC”) as a part of Cuentas’ SEC disclosure obligations with respect to the recession.

(f) Heritage, Limecom and its current management and Stockholders agreed to cooperate with Cuentas’ auditors in providing all material information to Cuentas’ auditors as is reasonably required.

(g) Heritage and the Limecom current management agreed that the intercompany loan in the approximate sum of $231,000 will be cancelled.

(h) Cuentas agreed to issue 20,740 shares of Cuentas restricted stock to several Limecom employees in exchange for salaries due to them. Those shares will be issued and held in escrow until the full satisfaction of the terms of this Amendment.

(i) Cuentas agreed to advance the sum of $25,000 toward the payments agreed upon to be paid to American Express (“AMEX”) by Limecom, and Limecom agrees to pay the sum of $25,000 to AMEX and the balance of the payments under the Stipulation of Settlement with American Express as agreed upon by Limecom.

On January 30, 2019, Cuentas sent an executed document to Limecom rescinding the acquisition of Limecom, Inc. (the “Company”(“Limecom”) invests in financial technology and engages in use of certain licensed technologyaccording to provide innovative telecommunications, mobility, and remittance solutionsthe Amendment signed January 29, 2019.

Cuentas fulfilled its obligation to unserved, unbanked, and emerging markets. The Company uses proprietary technology and certain licensed technologypay $25,000 to provide innovative telecommunications and telecommunications mobility and remittance solutions in emerging markets. The Company also offers prepaid telecommunications minutesAMEX pursuant to consumers through its Tel3 division and also offers wholesale telecommunications minutes through its Limecom subsidiary.the Amendment dated January 29, 2019.

Next Communications, Inc. Bankruptcy

The Company has historically received financing from Next Communications, Inc., an entity controlled by our CEO, and had a related party payable balance of approximately $0 and approximately $2,972,000 due to Next Communications, Inc. as of June 30, 2019 and December 31, 2018. 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. On January 29, 2019, the United States Bankruptcy Court Southern District of Florida Miami Division approved a Plan of Reorganization for Next Communications, Inc., whereby the Company would pay $600,000 to a specific creditor in consideration for the forgiveness of the balance of the payable to Next Communications, Inc. On March 10, 2019, the Company paid $50,000 to the trust account of the specific creditor per the order and on May 10, 2019, the Company paid $550,000 to the same trust account of the specific creditor per the order and satisfied its obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida Miami Division on January 29, 2019.

Entrance into Non-Binding Letter of Intent with Facio

On March 14, 2019, The Company has entered into a Letter of Intent with Facio Ltd, an Israeli FinTech company that has developed innovative artificial intelligence and big data technologies to deliver digital banking services autonomously, without human intervention. This agreement, if consummated and implemented, will enable the Cuentas GPR Card users to purchase popular digital content, products and services at a discounted price within an advanced and personalized mobile app experience which combines traditional banking services with new innovative services. The Company will enable its Cuentas GPR Card users to use Facio’s innovative point of sale directly from their mobile phone using Facio’s Tap-to-pay NFC or QR technology. However, the Company cautions its shareholders and others considering trading its securities that, due to the nature of the Letter neither the Company or Facio Ltd. are obligated to consummate and implement the above transaction.

Entrance into a Term Sheet with Cima Telecom Inc. (“Cima”)

On May 16, 2019, the Company entered into a Term Sheet outlining its License for Cima’s Knetik and Auris technology platforms. Collectively, the platforms would provide the back-end software for the Cuentas General Purpose Card and compatibility via APIs with 3rd party software and the mobile app. Under the Term Sheet, Cima Group would receive a 1-time licensing fee in consideration of $8,000,000 is a form of a convertible note that may be converted into up to 25% of the total shares of the Company on a fully diluted basis within two years from the closing of the transaction. Cima will grant the Company a world-wide, perpetual, non-sublicensable license (the “License”) to utilize the Auris and Knetic platforms and intellectual properties included in such platforms for the Financial Technology (“FINTECH”) worldwide vertical markets. (the “Platforms”). The License to be granted shall be exclusive for use within the FINTECH space, which for purposes of the License shall be defined as “connecting banking and prepaid card usage”. In addition, the Company shall have the right to grant its customers, and its customers’ end-users, access to the services provided by the Platforms.

Entrance into a Prepaid Card Program Management Agreement (PCPMA) with Sutton Bank (“Sutton”)

On June 27, 2019, Cuentas, Inc. entered into a Prepaid Card Program Management Agreement (PCPMA) with Sutton Bank (“Sutton”), an Ohio chartered bank Corporation. The PCPMA establishes that Sutton Bank operates a prepaid card service and is an approved issuer of prepaid cards on the Discover, Mastercard, and Visa Networks and provides services in connection with Card Transactions processed on one or more Networks. The PCPMA designates Cuentas to become Manager of the “Cuentas Mastercard Prepaid Card” Management Program, a General Purpose Reload (GPR) debit card program, subject to the terms and conditions of the PCPMA.

Entrance into a Prepaid Services Agreement (PSA) with Interactive Communications International, Inc. (“InComm”)

On July 23, 2019, the Company entered into a five (5) years Processing Services Agreement with Incomm, a leading processor of general purpose reloadablepayments technology company, to power and expand the Cuentas General Purpose Reload (“GPR”) debit cards, to marketcard network. Per the PSA, InComm, through its VanillaDirect network, will act as prepaid card processor and distribute a line ofexpand the Cuentas GPR cards targeted towardsCard network. VanillaDirect is currently available at major retailers such as: Walmart, Seven Eleven, Walgreens, CVS Pharmacy, Rite Aid and many more. In addition, the Latin American market. The Company intends to launchwill implement the cards upon successful completion of appropriate financing and has yet to generate revenues from this activity.On June 25, 2018, holders of a majority of the Company’s voting stock approved by written consent in lieu of a special meeting of stockholders in accordance with 607.0704 of the Florida Business Corporation Act to change the company name to Cuentas, Inc and effect a reverse stock split of 1:300. In early August 2018, FINRA approved the new stock symbol CUEN and also approved the 1:300 reverse stock split.VanillaDirect cash reload services into its 31,600 U.S. locations under SDI NEXT Distribution LLC.

The Cuentas General Purpose Reload (“GPR”) card is intended to be launched during the third quarter of 2019, provides comprehensive solution for the approximately twenty million unbanked community in the United States, uniquely enabling access to the U.S. financial system to those without the necessary documented to bank with the traditional financial institutions in the U.S. The Cuentas General Purpose Reload (“GPR”) will provide an FDIC insured bank account and electronic wallet. The Cuentas FDIC insured bank account will embed with functionality such as: international remittance, bill pay, ATM, direct deposit, cash reload and mobile banking capabilities. The Cuentas’ electronic Wallet will have unique features such as, Digital Content, Gaming, Internet Shopping, Tolling and Public Transportation, Food & Restaurants as well as Mobile Topups.

Results of operations for the three months ended SeptemberJune 30, 20182019 and 20172018

Revenue

The Company generates revenues through the sale and distribution of prepaid telecom minutes and other related telecom services.

Revenues during the three months ended SeptemberJune 30, 20182019 totaled $20,563 thousand$262,000 compared to $625 thousands$20,909,000 for the three months ended SeptemberJune 30, 2017.2018. The increase of $19,938 thousandsdecrease in the total Revenue is mainly due to the acquisitionrecession of the Limecom acquisition which was consolidated for the full three months ended SeptemberJune 30, 2018 and not consolidated in the three months ended SeptemberJune 30, 2017.2019. The Company no longer owns Limecom as of January 2019.

Costs of Revenue

Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs.resale. Cost of revenues during the three months ended SeptemberJune 30, 20182019 totaled $20,458 thousands$ 230,000 compared to $503 thousands$20,655,000 for the three months ended SeptemberJune 30, 2017.2018. The increasedecrease in costthe total Cost of revenuesRevenue is mainly due to the acquisitionrecession of the Limecom acquisition which was consolidated for the full three months ended SeptemberJune 30, 2018 and not consolidated in the three months ended SeptemberJune 30, 2017.2019. The Company no longer owns Limecom as of January 2019.

Operating Expenses

Operating expenses totaled $1,119 thousands$510,000 during the three months ended SeptemberJune 30, 20182019 compared to $522 thousands$828,000 during the three months ended SeptemberJune 30, 20172018 representing a net increasedecrease of $597 thousands.$318,000. The increasedecrease in the operating expenses is mainly due to the increaserecession of the Limecom acquisition which was consolidated for the full three months ended June 30, 2018 and not consolidated in the officer compensation expenses, professional fees and the acquisitionthree months ended June 30, 2019. The Company no longer owns Limecom as of Limecom.January 2019.

Other Income

The Company recognized other income of $545 thousand$2,370,000 during the three months ended SeptemberJune 30, 20182019 compared to $2,087 thousandan expense $405,000 during the three months ended SeptemberJune 30, 2017.2018. The net change from the prior period is mainly due to the changeother income in the gain recognized onamount of $2,362,000 from the fair value measurementsatisfaction of our derivative and stock-based liabilities. It was also due to forgivenessthe Company’s obligation under the Approved Plan of accounts payable during the three months ended September 30, 2017Reorganization for Next Communications, Inc., that was not present duringapproved by the current period. The fair value measurements relatedUnited States Bankruptcy Court Southern District of Florida Miami Division on January 29, 2019 pursuant to derivative liabilities is driven by market inputs and inherently subjectwhich we paid $600,000 to volatility. The decrease in other income is the resultsatisfy an obligation of the Company recognizing forgiveness of accounts payable during the three months ended September 30, 2017 that was not present during the current period.approximately $2,962,000.

Net Income (Loss)

Gain from Change in Fair ValueDue to the above, we incurred a net income of stock-based liabilities$1,865,000 for the three-month period ended SeptemberJune 30, 2018 was $632 thousand2019, as compared to a gainnet loss of 0$969,000 for the three-month period ended SeptemberJune 30, 2017. 2018.

Pro forma results

The gain is attributable tofollowing are unaudited pro forma financial information for the decrease in3 months period ended June 30, 2018 and presents the Fair Valuecondensed consolidated statements of our stock-based liabilities mainlyoperations of the Company due to the decrease inrescission of the priceacquisition described above, as if the acquisitions had not occurred. The unaudited pro forma financial information is not intended to represent or be indicative of sharethe Company’s condensed consolidated statements of our common stock.

Net Income (Loss)operations that would have been reported had these acquisitions been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations.

We incurred a net loss of $466 thousand for the three-month period ended September 30, 2018, as compared to a net income of $1,689 for the three-month period ended September 30, 2017. The increase in net loss is mainly attributable to increase in General and Administrative Expenses and decrease in other income.

Results of operations for the Ninesix months ended SeptemberJune 30, 20182019 and 20172018

Revenue

The Company generates revenues through the sale and distribution of prepaid telecom minutes and other related telecom services.

Revenues during the ninesix months ended SeptemberJune 30, 20182019 totaled $61,472 thousand$564,000 compared to $1,700 thousands$40,908,000 for the threesix months ended SeptemberJune 30, 2017.2018. The increasedecrease in the total Revenue is mainly due to the acquisitionrecession of the Limecom acquisition which was consolidated for the full nineSix months ended SeptemberJune 30, 2018 and not consolidated in the nineSix months ended SeptemberJune 30, 2017.2019. The Company no longer owns Limecom as of January 2019.