UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED: JUNE 30, 2022MARCH 31, 2023
☐ 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: 001-39973
CUENTAS, INC.
(Exact name of Registrant as specified in its charter)
| Florida | 20-3537265 | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
235 Lincoln Rd., Suite 210, Miami Beach, FL 33139
(Address of principal executive offices)
800 - 611-3622800-611-3622
(Registrant’s telephone number)
Securities registered under Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, par value $0.001 per share | CUEN | The Nasdaq Stock Market LLC | ||
| Warrants, each exercisable for one share of Common Stock | CUENW | The Nasdaq Stock Market LLC |
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ | ||
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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of AugustMay 15, 2022,2023, the issuer had 16,720,6902,103,365 shares of its common stock issued and outstanding.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUENTAS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF june 30, 2022MARCH 31, 2023
TABLE OF CONTENTS
i1
CUENTAS, INC.
CUENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands except share and per share data)
| June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Unaudited | Audited | Unaudited | Audited | |||||||||||||
| ASSETS | ||||||||||||||||
| CURRENT ASSETS: | ||||||||||||||||
| Cash and cash equivalents | 1,798 | 6,607 | 3,328 | 466 | ||||||||||||
| Accounts Receivables, net | 129 | 11 | ||||||||||||||
| Accounts Receivables net of allowance for credit losses of $177 as of March 31, 2023 and December 31, 2022, respectively. | 221 | 209 | ||||||||||||||
| Related parties | 88 | - | ||||||||||||||
| Other current assets | 99 | 162 | 52 | 14 | ||||||||||||
| Total current assets | 2,026 | 6,780 | 3,689 | 689 | ||||||||||||
| Property and Equipment, net | 9 | 2 | 6 | 6 | ||||||||||||
| Investment in unconsolidated Entities | 902 | 38 | 1,468 | 776 | ||||||||||||
| Intangible assets | 4,533 | 5,438 | 26 | 28 | ||||||||||||
| Total assets | 7,470 | 12,258 | 5,189 | 1,499 | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| CURRENT LIABILITIES: | ||||||||||||||||
| Trade payable | 1,919 | 810 | 1,224 | 1,231 | ||||||||||||
| Other accounts liabilities | 990 | 1,126 | 775 | 681 | ||||||||||||
| Deferred revenue | 524 | 683 | 109 | 113 | ||||||||||||
| Notes and Loan payable | 103 | 97 | 112 | 109 | ||||||||||||
| Stock based liabilities | 1 | 3 | 1 | - | ||||||||||||
| Total current liabilities | 3,537 | 2,719 | 2,221 | 2,134 | ||||||||||||
| Other long-term loans | 89 | 89 | 89 | 89 | ||||||||||||
| TOTAL LIABILITIES | 3,626 | 2,808 | 2,310 | 2,223 | ||||||||||||
| STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Common stock, authorized 360,000,000 shares, $0.001 par value; 15,065,690 issued and outstanding as of June 30, 2022 and 14,965,690 December 31, 2021, respectively | 15 | 15 | ||||||||||||||
| Common stock, authorized 360,000,000 shares, $0.001 par value; 2,103,365 and 1,473,645 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 2 | 2 | ||||||||||||||
| Additional paid in capital | 48,858 | 47,654 | 57,355 | 52,053 | ||||||||||||
| Treasury Stock | (33 | ) | (29 | ) | ||||||||||||
| Accumulated deficit | (45,029 | ) | (38,219 | ) | (54,445 | ) | (52,750 | ) | ||||||||
| Total stockholders’ equity | 3,844 | 9,450 | 2,879 | (724 | ) | |||||||||||
| Total liabilities and stockholders’ equity | 7,470 | 12,258 | 5,189 | 1,499 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-1
CUENTAS, INC.
CUENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(U.S. dollars in thousands except share and per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | 670 | 155 | 1,064 | 380 | ||||||||||||
| COST OF REVENUE | 615 | 23 | 875 | 270 | ||||||||||||
| GROSS PROFIT (LOSS) | 55 | 132 | 189 | 110 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Amortization of Intangible assets | 452 | 453 | 905 | 905 | ||||||||||||
| Selling, General and Administrative | 2,744 | 1,673 | 6,033 | 2,811 | ||||||||||||
| TOTAL OPERATING EXPENSES | 3,196 | 2,126 | 6,938 | 3,716 | ||||||||||||
| OPERATING LOSS | (3,141 | ) | (1,994 | ) | (6,749 | ) | (3,606 | ) | ||||||||
| OTHER EXPENSES | ||||||||||||||||
| Other Income (loss) | (32 | ) | (50 | ) | (32 | ) | 3 | |||||||||
| Interest expense | (3 | ) | - | (4 | ) | (172 | ) | |||||||||
| Gain from Change in fair value of stock-based liabilities | 1 | 43 | 1 | 99 | ||||||||||||
| TOTAL OTHER EXPENSES | (34 | ) | (7 | ) | (35 | ) | (70 | ) | ||||||||
| NET LOSS BEFORE EQUITY LOSSES | (3,175 | ) | (2,001 | ) | (6,784 | ) | (3,676 | ) | ||||||||
| Equity losses in non-consolidated entity | (11 | ) | - | (26 | ) | - | ||||||||||
| NET LOSS | (3,186 | ) | (2,001 | ) | (6,810 | ) | (3,676 | ) | ||||||||
| Net loss per basic and diluted share | (0.21 | ) | (0.15 | ) | (0.45 | ) | (0.29 | ) | ||||||||
| Weighted average number of basic and diluted common shares outstanding | 15,047,212 | 13,438,215 | 15,006,899 | 12,878,116 | ||||||||||||
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| REVENUE | 64 | 394 | ||||||
| COST OF REVENUE | 123 | 260 | ||||||
| GROSS PROFIT (LOSS) | (59 | ) | 134 | |||||
| OPERATING EXPENSES | ||||||||
| Amortization of intangible assets | 2 | 453 | ||||||
| Selling, general and administrative | 1,625 | 3,289 | ||||||
| TOTAL OPERATING EXPENSES | 1,627 | 3,742 | ||||||
| OPERATING LOSS | (1,686 | ) | (3,608 | ) | ||||
| OTHER EXPENSES | ||||||||
| Other income | 1 | - | ||||||
| Interest expense | - | (1 | ) | |||||
| Loss from change in fair value of stock-based liabilities | (1 | ) | - | |||||
| TOTAL OTHER EXPENSES | - | (1 | ) | |||||
| NET LOSS BEFORE EQUITY LOSSES | (1,686 | ) | (3,609 | ) | ||||
| Equity losses in non-consolidated entity | (9 | ) | (15 | ) | ||||
| NET LOSS | (1,695 | ) | (3,624 | ) | ||||
| Net loss per basic and diluted share | (1.00 | ) | (3.15 | ) | ||||
| Weighted average number of basic and diluted common shares outstanding | 1,696,022 | 1,151,207 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-2
CUENTAS, INC.
CUENTAS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(U.S. dollars in thousands, except share and per share data)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of December 31, 2021 | 14,965,690 | 15 | 47,654 | (38,219 | ) | 9,450 | ||||||||||||||
| Shares issued for services and for employees | 100,000 | - | 1,204 | - | 1,204 | |||||||||||||||
| Net income for the period ending June 30, 2022 | - | - | - | (6,810 | ) | (6,810 | ) | |||||||||||||
| Balance as of June 30, 2022 | 15,065,690 | $ | 15 | $ | 48,858 | $ | (45,029 | ) | $ | 3,844 | ||||||||||
| Common Stock | Additional Paid-in | Treasury | Accumulated | Total Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Stock | Deficit | Equity | |||||||||||||||||||
| Balance as of December 31, 2022 | 1,473,645 | 2 | 52,053 | (29 | ) | (52,750 | ) | (724 | ) | |||||||||||||||
| Issuance of Shares of Common Stock, net of issuance expenses ** | 291,376 | * | 4,319 | - | - | 4,319 | ||||||||||||||||||
| Share based Compensation | - | 27 | - | - | 27 | |||||||||||||||||||
| Issuance of Shares of Common due to acquisition of an asset | 295,282 | * | 700 | - | - | 700 | ||||||||||||||||||
| Treasury stock | (227 | ) | - | (4 | ) | - | (4 | ) | ||||||||||||||||
| Reverse split | 145 | - | -- | - | -- | |||||||||||||||||||
| Shares issued for services | 27,759 | * | 136 | - | - | 136 | ||||||||||||||||||
| Shares issued due to a settlement | 15,385 | * | 120 | - | 120 | |||||||||||||||||||
| Net income for the period ending March 31, 2023 | - | - | - | - | (1,695 | ) | (1,695 | ) | ||||||||||||||||
| Balance as of March 31, 2023 | 2,103,365 | $ | 2 | $ | 57,355 | (33 | ) | $ | (54,445 | ) | $ | 2,879 | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of April 1, 2022 | 14,965,690 | 15 | 48,191 | (41,843 | ) | 6,363 | ||||||||||||||
| Shares issued for services and for employees | 100,000 | - | 667 | - | 667 | |||||||||||||||
| Net income for the period ending June 30, 2022 | - | - | - | (3,186 | ) | (3,186 | ) | |||||||||||||
| Balance as of June 30, 2022 | 15,065,690 | $ | 15 | $ | 48,858 | $ | (45,029 | ) | $ | 3,844 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of December 31, 2020 | 10,590,491 | 11 | 28,411 | (27,491 | ) | 931 | ||||||||||||||
| Issuance of Shares of Common Stock, net of issuance expenses ** | 2,790,697 | 3 | 10,611 | - | 10,614 | |||||||||||||||
| Issuance of Warrants | - | 4 | - | 4 | ||||||||||||||||
| Shares issued for services and for employees | 73,334 | * | 324 | - | 324 | |||||||||||||||
| Shares issued due to exercise of Warrants, net of issuance expenses *** | 298,500 | * | 1,204 | - | 1,204 | |||||||||||||||
| Shares issued due to conversion of Convertible Note | 30,233 | * | 81 | - | 81 | |||||||||||||||
| Return of Commitment Shares | (43,525 | ) | * | |||||||||||||||||
| Roundup Differences due to Reverse Split | 17 | * | ||||||||||||||||||
| Net income for the period ending June 30, 2021 | - | - | - | (3,676 | ) | (3,676 | ) | |||||||||||||
| Balance as of June 30, 2021 | 13,739,747 | $ | 14 | $ | 40,635 | $ | (31,167 | ) | $ | 9,482 | ||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of April 1, 2021 | 13,411,014 | 14 | 39,340 | (29,166 | ) | 10,188 | ||||||||||||||
| Shares issued due to exercise of Warrants, net of issuance expenses ** | 298,500 | * | 1,204 | - | 1,204 | |||||||||||||||
| Issuance of warrants | * | - | 4 | 4 | ||||||||||||||||
| Shares issued for services and for employees | - | 6 | - | 6 | ||||||||||||||||
| Shares issued due to conversion of Convertible Note | 30,233 | - | 81 | 81 | ||||||||||||||||
| Net income for the period ending June 30, 2021 | - | - | - | (2,001 | ) | (2,001 | ) | |||||||||||||
| Balance as of June 30, 2021 | 13,739,747 | $ | 14 | $ | 40,635 | $ | (31,167 | ) | $ | 9,482 | ||||||||||
| * | Less than $1. |
| ** | Issuance expenses totaled to |
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance as of December 31, 2021 | 1,157,207 | 1 | 47,668 | (38,219 | ) | 9,450 | ||||||||||||||
| Shares issued for services and for employees | - | - | 537 | - | 537 | |||||||||||||||
| Net income for the period ending March 31, 2022 | - | - | - | (3,624 | ) | (3,624 | ) | |||||||||||||
| Balance as of March 31, 2022 | 1,157,207 | $ | 1 | $ | 48,205 | $ | (41,843 | ) | $ | 6,363 | ||||||||||
| * | Less than $1. |
The accompanying notes are an integral part of these consolidated financial statements
F-3
CUENTAS, INC.
CUENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | (1,695 | ) | (3,624 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock based compensation and shares issued for services | 283 | 537 | ||||||
| Equity losses in non-consolidated entity | 9 | 15 | ||||||
| Interest | 3 | 3 | ||||||
| Gain from Change in on fair value of stock-based liabilities | 1 | - | ||||||
| Depreciation and amortization expense | 2 | 453 | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts receivable | (13 | ) | (81 | ) | ||||
| Other current assets | (38 | ) | (30 | ) | ||||
| Accounts payable | (7 | ) | 727 | |||||
| Other Accounts liabilities | 94 | (137 | ) | |||||
| Related Parties, net | (88 | ) | - | |||||
| Deferred revenue | (4 | ) | (88 | ) | ||||
| Net Cash Used by Operating Activities | (1,453 | ) | (2,225 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment in non-consolidated entity | - | (40 | ) | |||||
| Purchase of equipment | - | (7 | ) | |||||
| Net Cash used for Investing Activities | - | (47 | ) | |||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of common stock, net of issuance expense | 4,319 | - | ||||||
| Treasury stock | (4 | ) | - | |||||
| Net Cash Provided by Financing Activities | 4,315 | - | ||||||
| Net Increase (Decrease) in Cash | 2,862 | (2,272 | ) | |||||
| Cash at Beginning of Period | 466 | 6,607 | ||||||
| Cash at End of Period | 3,328 | 4,335 | ||||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Issuance of Shares of Common due to acquisition of an asset | 700 | - | ||||||
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) before non-controlling interest | (6,810 | ) | (3,676 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock based compensation and shares issued for services | 1,204 | 286 | ||||||
| Equity losses in non-consolidated entity | 26 | - | ||||||
| Loss on fair value of marketable securities | - | (1 | ) | |||||
| Interest on loans | 6 | 88 | ||||||
| Gain from change in on fair value of stock-based liabilities | (2 | ) | (50 | ) | ||||
| Depreciation and amortization expense | 905 | 905 | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts receivable | (351 | ) | (13 | ) | ||||
| Other receivables | 63 | (317 | ) | |||||
| Accounts payable | 1,109 | (964 | ) | |||||
| Other Accounts payable | (136 | ) | (1,084 | ) | ||||
| Related parties, net | - | 44 | ||||||
| Deferred revenue | (159 | ) | 6 | |||||
| Net Cash Used by Operating Activities | (4,145 | ) | (4,776 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of Intangible Asset | - | (47 | ) | |||||
| Investment in non-consolidated entity in non-consolidated entity | (657 | ) | - | |||||
| Purchase of equipment | (7 | ) | - | |||||
| Net Cash used for Investing Activities | (664 | ) | (47 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Related party, net | - | (355 | ) | |||||
| Proceeds from issuance of common stock due to exercise of warrants | - | 1,307 | ||||||
| Repayment of loans | - | (730 | ) | |||||
| Proceeds from issuance of common stock, net of issuance expense | - | 10,614 | ||||||
| Proceeds from issuance of warrants | - | 4 | ||||||
| Net Cash Provided by Financing Activities | - | 10,840 | ||||||
| Net Increase (decrease) in Cash | (4,809 | ) | 6,017 | |||||
| Cash at Beginning of Period | 6,607 | 227 | ||||||
| Cash at End of Period | 1,798 | 6,244 | ||||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Common stock issued for conversion of convertible note principal | - | 81 | ||||||
| Investment in non-consolidated entity in non-consolidated entity against accounts receivables | 233 | - | ||||||
| Issuance fee with connection to issuance of common stock due to exercise of warrants | - | 103 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-4
CUENTAS, INC.
CUENTAS, 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 BUSINESS
Cuentas, Inc. (the “Company”) together with its subsidiaries, is mainly focused on financial technology (“FINTECH”) services, delivering mobile financial services, prepaid debit and digital content services to unbanked, underbanked and underserved communities. During 2023-Q1, the Company initiated its first investment into the Real Estate market and recently, made its second, more significant investment in Real Estate. The Company derivesderived its revenue from GPR “Debit” Card fees and the sales of prepaid products and services including third party digital content, gift cards, remittances, mobile phone topups and other digital services. Additionally, The Company has an agreement with Interactive Communications International, Inc. (“InComm”) a leading processor of general purpose reloadable (“GPR”) debit cards, to market and distribute a line of GPRprepaid digital content and gift cards targeted towards the Latin American market. Cuentas is able to purchase InComm’s prepaid digital content and gift cards at a discount and resell these same products in real time through its mobile app and through the Cuentas SDI network of over 31,000 bodegas. Cuentas is able to offer these digital products to the public through its mobile app and the Cuentas SDI distribution network, many at discounted prices, while making a small profit margin which varies from product to product. The prepaid digital content and gift cards include Amazon Cash, XBox, PlayStation, Nintendo, Karma Koin, Transit System Loads & Reloads (LA TAP, NY Transit, Grand Rapids, CT GO and more coming in 2023), Burger King, Cabela’s, Bass Pro Shops, AT&T, Verizon, Mango Mobile, Black Wireless and many more prepaid wireless carriers in the US and in foreign countries. Cuentas accountholders can also send up to $500 anywhere in the world that WesternUnion operates at a discounted rate. The Company’s real estate investments are intended to broaden its reach into the unbanked, underbanked and underserved communities by using a patented, low cost, sustainable technology that should allow the Company to provide reasonably priced rental apartments to working class residents who have been priced out of rental communities due to severe rent hikes in Florida and other areas in the US.
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. Its subsidiary is Meimoun and Mammon, LLC (100% owned) (“M&M”),Tel3, a business segment of Meimoun and Mammon, LLC provides prepaid calling cards to consumers directly and operates in a complimentary space as Meimoun and Mammon, LLC. The Company also owns 50% of CUENTASMAX LLC which installs WiFi6 shared network (“WSN”) systems in locations in the New York metropolitan tristate area using access points and small cells to provide users with access to the WSN.
On May 27, 2022,February 3, 2023, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”)(MIPA) with SDI Black 011, LLCCore Development Holdings Corporation (“SDI Black”Core”), the holders of all the membership interests of SDI Black and Cuentas SDI, LLC,. Core is a Florida limited liabilitycorporation that holds approximately 29.3% of 4280 Lakewood Road Manager, LLC (“Cuentas SDI”Lakewood Manager”), for the acquisition of 19.99%which in turn owns 86.45% of the membership interests in 4280 Lakewood Road, LLC (“4280 Project”), an affordable multi-family real estate project located in Lake Worth, Florida. Core sold 6% of Cuentas SDIits interest in exchange for $750,000.the Lakewood Manager to the Company and the Company has agreed to issue to Core 295,282 of the Company’s common shares to acquire the 6% equity in the Lakewood Manager valued at approximately $700. The 295,282 of the Company’s shares were equal to 19.9% of the total number of issued and outstanding shares of the Company as of the date of the Agreement. The Company also hasclosed this transaction on or about March 9th, 2023.
On April 13, 2023, the rightCompany signed an Operating Agreement to closebe a majority member in Brooksville Development Partners, LLC (“Brooksville”) with 2 minority members for the purpose of acquiring land for the development of a residential apartment community consisting of approximately 360 apartments. All real and personal property owned by Brooksville shall be owned by Brooksville as an entity, and the Members nor Manager shall not have any ownership interest in such property. One of the minority members will be the manager of the project.
On April 28, 2023, the Company and minority partners in Brooksville closed on the potential acquisitiontransaction to acquire a 21.8 acre site for development of the remaining 80.01%Brooksville project. Cuentas had deposited an “Initial Capital Contribution” of $2,000 into a title insurance escrow account which was released from escrow by the membership interestsTitle Agent to fund the balance of Cuentas SDI within 60 days (with a potential 30 day extension, the “Potential Acquisition Period”) in exchange for a purchase price of an additional $2,459,000. SDI Black previously transferred allthe Vacant Land, together with a $3,050 bank loan from Republic Bank of its assets includingChicago. Brooksville owns the platform, portals, domain names,Vacant Land, free and related software necessary to conduct its business to Cuentas SDI.clear of any liens, claims and encumbrances with the sole exception being the Republic Bank loan. The MIPA further providesCompany is currently a 63% interest holder in Brooksville but that duringmay change in the Potential Acquisition Period,future if the Company will invoice and Cuentas SDI will pay invoices on a seven-net-ten day basis and during this same period, Cuentas SDI will allowis not able to raise sufficient financing to complete the Company to realize 40% of the Cuentas SDI gross revenues and reflect 40% of the gross revenues on its books and records.The MIPA contains a number of representations and warranties by each of the parties thereto which we believe are customary for transactions similar to the transactions contemplated by the MIPA. The 60 day option to acquire the remaining 80.01% of the membership interests of Cuentas SDI expired on July 27, 2022.project.
COVID-19
F-5
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NASDAQ
On June 21, 2022, the Nasdaq Listing Qualifications Staff (the “Staff”) issued the Company a delist letter citing its failure to comply with the minimum bid price requirement under Listing Rule 5550(a)(2). In accordance with Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until December 2019,19, 2022, to regain compliance with Rule 5550(a)(2). On December 20, 2022, Staff notified the Company that it had determined to delist the Company as it did not comply with bid price requirement for listing on the Exchange. On April 14, 2023, the Nasdaq Listing Qualifications Staff issued the Company a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts ofcompliance letter citing that that the world, includingCompany regained compliance with the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020 the World Health Organization characterized the outbreak as a “pandemic”. A significant outbreak of COVID-19 and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, as well as our business and operations. COVID- 19 effectively reduced the Company’s capability to acquire accounts holders as a significant portion of our target demographic lost their ability to earn wages and subsequently could not load funds to the Company’s product. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our business and results of operations may be materially adversely affectedbid price concern.
REVERSE SPLIT
On March 24, 2023, the Company completed a reverse stock split of its common stock. As a result of the reverse stock split, the following changes have occurred (i) every thirteen 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 or common stock warrant have been proportionately decreased on a 13-for-1 basis, and the exercise price of each such outstanding stock option and common warrant has been proportionately increased on a 13-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 13-for-1 reverse stock split. On April 14, 2023, the Nasdaq Listing Qualifications Staff issued the Company a compliance letter citing that that the Company regained compliance with the bid price concern.
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of June 30, 2022,March 31, 2023, the Company had approximately $1,798$3,328 in cash and cash equivalents, approximately $1,511$1,468 in negative working capital, shareholder equity of $2,879 and an accumulated deficit of approximately $45,029.$54,445. 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.
SECURITIES OFFERING
On February 6, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor (the “Investor”) for the purpose of raising approximately $5,000 in gross proceeds for the Company. Pursuant to the terms of the Purchase Agreement, the Company agreed to sell, in a registered direct offering, an aggregate of (i) 163,344 shares (the “Shares”) of the Company’s common stock (“Common Stock”) and (ii) pre-warrants to purchase up to 128,031 shares of Common Stock (the “Pre-Funded Warrants” and such shares of Common Stock issuable upon exercise of the Pre-Funded Warrants, the “Pre-Funded Warrant Shares”) and, in a concurrent private placement, warrants (the “Purchase Warrants”) to purchase 291,375 shares of Common Stock (the shares of Common Stock issuable upon exercise of the Purchase Warrants, the “Purchase Warrant Shares”). The combined purchase price per Share and Purchase Warrant is $17.16 and the combined purchase price per Pre-Funded Warrant and Purchase Warrant of $17.16. The Pre-Funded Warrants were sold, in lieu of shares of Common Stock, to any Investor whose purchase of shares of Common Stock in the Registered Offering would otherwise result in such Investor, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at such Investor’s option upon issuance, 9.99%) of the Company’s outstanding Common Stock immediately following the consummation of the Registered Offering. Each Pre-Funded Warrant represents the right to purchase one share of Common Stock at an exercise price of $0.0013 per share. As of March 31, 2023 the Pre-Funded Warrants were exercised in full. The Purchase Warrants will be exercisable on or before August 5, 2023 and will expire on August 5, 2028 at an exercise price of $17.36 per share. The closing of the sales of these securities under the Purchase Agreement occurred on or about February 8, 2023, subject to satisfaction of customary closing conditions. H.C. Wainwright & Co., LLC (“Wainwright”) is acting as exclusive placement agent for the offering pursuant to an engagement agreement between the Company and Wainwright dated as of December 13, 2022. As compensation for such placement agent services, the Company has agreed to pay Wainwright an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company from the offering, plus a management fee equal to 1.0% of the gross proceeds received by the Company from the offerings, a non-accountable expense of $65 and $16 for clearing expenses. The Company has also agreed to issue to Wainwright or its designees warrants to purchase 20,397 shares of Common Stock (the “PA Warrants” and the shares of Common Stock issuable upon exercise of the PA Warrants, the “PA Warrant Shares”). The PA Warrants have a term of five years from the issuance date and have an exercise price of $23.17 per share. The net proceeds to the Company from the registered direct offering and concurrent private placement, after deducting the Placement Agent’s fees and expenses and the Company’s offering expenses were approximately $4,300.
F-6
CUENTAS, 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 six-monthsthree-months ended June 30, 2022.March 31, 2023. However, these results are not necessarily indicative of results for any other interim period or for the year endingended December 31, 2022.2023. 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 on Form 10-K for the fiscal year ended December 31, 2021,2022, filed with the SEC on April 1, 2022March 31, 2023 (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, 2021.2022.
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.
F-7
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
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 three months ended June 30, 2022:March 31, 2023:
| Deferred Revenue | ||||
| Balance at December 31, 2021 | $ | 683 | ||
| Change in deferred revenue | (159 | ) | ||
| Balance at June 30, 2022 | $ | 524 | ||
| Deferred Revenue | ||||
| Balance at December 31, 2022 | $ | 113 | ||
| Change in deferred revenue | (4 | ) | ||
| Balance at March 31, 2023 | $ | 109 | ||
Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”). Contracted not recognized revenue was $524$109 as of June 30, 2022,March 31, 2023, of which the Company expects to recognize 100% of the revenue over the next 12 months.
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.
F-8
CUENTAS, 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:
| Balance as of June 30, 2022 | Balance as of March 31, 2022 | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Stock based liabilities | 1 | - | - | 1 | 1 | - | - | 1 | ||||||||||||||||||||||||
| Total liabilities | 1 | - | - | 1 | 1 | - | - | 1 | ||||||||||||||||||||||||
| Balance as of December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | 3 | - | - | 3 | ||||||||||||
| Total liabilities | 3 | - | - | 3 | ||||||||||||
| Balance as of December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | - | - | - | - | ||||||||||||
| Total liabilities | - | - | - | - | ||||||||||||
F-9
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
Recently Issued Accounting Standards
New pronouncementsIn June 2016, the Financial Accounting Standards Board (“FASB”) issued butAccounting Standards Update (“ASU”) 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This updated guidance sets forth a current expected credit loss model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance becomes effective for the Company beginning in interim periods starting in fiscal year 2023. The impact of adopting the new standard did not effective as of June 30, 2022 are not expected to have a material impact on the Company’sCompany's consolidated financial statements.
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 – STOCK OPTIONS
The following table summarizes all stock option activity for the sixthree months ended June 30,March 31, 2023:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2022 | 128,477 | $ | 56.44 | |||||
| Granted | - | - | ||||||
| Forfeited | 6,093 | 186.55 | ||||||
| Outstanding, March 31, 2023 | 122,384 | $ | 49.96 | |||||
The following table discloses information regarding outstanding and exercisable options as of March 31, 2023:
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | 97.50 | 2,769 | 97.50 | 0.46 | 2,769 | 97.50 | ||||||||||||||||
| 67.99 | 1,538 | 67.99 | 0.99 | 1,538 | 67.99 | |||||||||||||||||
| 36.40 | 118,077 | 36.40 | 8.68 | 110,382 | 36.40 | |||||||||||||||||
| 122,384 | $ | 49.96 | 8.38 | 114,689 | $ | 38.30 | ||||||||||||||||
The following table discloses information regarding outstanding and exercisable options at March 31, 2022:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2021 | 1,585,200 | $ | 3.69 | |||||
| Granted | 400,000 | 2.80 | ||||||
| Forfeited | - | - | ||||||
| Outstanding, June 30, 2022 | 1,985,200 | $ | 3.51 | |||||
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | 186.55 | 6,093 | $ | 186.55 | 0.99 | 6,093 | $ | 186.55 | ||||||||||||||
| 97.50 | 2,769 | 97.50 | 1.46 | 2,769 | 97.50 | |||||||||||||||||
| 67.99 | 1,538 | 67.99 | 1.99 | 1,538 | 67.99 | |||||||||||||||||
| 36.40 | 126,923 | 36.40 | 9.59 | 53,846 | 36.40 | |||||||||||||||||
| 137,323 | $ | 47.97 | 8.88 | 64,246 | $ | 54.08 | ||||||||||||||||
F-10
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
The following table discloses information regarding outstanding and exercisable options at June 30, 2022:
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | 14.35 | 79,200 | $ | 14.35 | 0.74 | 79,200 | $ | 14.35 | ||||||||||||||
| 7.50 | 36,000 | 7.50 | 1.21 | 36,000 | 7.50 | |||||||||||||||||
| 5.23 | 20,000 | 5.23 | 1.74 | 20,000 | 5.23 | |||||||||||||||||
| 2.80 | 1,850,000 | 2.80 | 9.38 | 800,000 | 2.80 | |||||||||||||||||
| 1,985,200 | $ | 3.69 | 9.09 | 935,200 | $ | 4.01 | ||||||||||||||||
On May 17, 2022, the Company issued 200,000 options to its two members of the board of the Directors of the Company. The options carry an exercise price of $2.80 per share. half of the options vested on May17, 2022 and the balance shall vest on the first anniversary of grant date, so long as they engaged by the Company on that date. The Options are exercisable until May 17, 2032. The Company has estimated the fair value of such options at a value of $134 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
On February1, 2022, the Company issued 200,000 options to its Chief Operating Officer of the Company. The options carry an exercise price of $2.80 per share. Fifty Thousand (50,000) of the options vested on February1, 2022. The option shall vest on the first, second and third anniversary of grant date, so long as its Chief Operating Officer is employed by the Company on that date. The Options are exercisable until January 31, 2032. The Company has estimated the fair value of such options at a value of $213 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
The following table discloses information regarding outstanding and exercisable options at December 31, 2021:
| Outstanding | Exercisable | |||||||||||||||||||||
| Exercise Prices | Number of Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $ | 14.35 | 79,200 | $ | 14.35 | 1.24 | 79,200 | $ | 14.35 | ||||||||||||||
| 7.50 | 36,000 | 7.50 | 1.71 | 36,000 | 7.50 | |||||||||||||||||
| 5.23 | 20,000 | 5.23 | 2.24 | 20,000 | 5.23 | |||||||||||||||||
| 2.80 | 1,450,000 | 2.80 | 9.84 | 785,000 | 2.80 | |||||||||||||||||
| 1,585,200 | $ | 3.69 | 9.13 | 920,200 | $ | 4.24 | ||||||||||||||||
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 54 – RELATED PARTY TRANSACTIONS
Related partyparties balances at June 30, 2022March 31, 2023 and December 31, 20212022 consisted of the following:
Related party payablesDue from related parties
| June 30, 2022 | December 31, 2020 | |||||||
| (dollars in thousands) | ||||||||
| (a) Due to Cima Telecom Inc. | $ | 746 | 552 | |||||
| Total Due to related parties | $ | 746 | $ | 552 | ||||
| March 31, 2023 | December 31, 2022 | |||||||
| (dollars in thousands) | ||||||||
| Arik Maimon (Chairman of the Board and the CEO) | 42 | - | ||||||
| Michael De Prado (Vice Chairman of the Board and President) | 46 | - | ||||||
| SDI Cuentas LLC, net of allowance for credit losses of $157 as of March 31, 2023 and December 31,2022, respectively. | 210 | 198 | ||||||
| Total Due from related parties | 298 | 198 | ||||||
Related party transactions
| 6 months ends at June 30, 2022 | 6 months ends at June 30, 2021 | Period ends at March 31, 2023 | Period ends at March 31, 2022 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Sales to SDI Cuentas LLC | $ | 12 | $ | 214 | ||||||||||||
| Carol Pepper (b) | 40 | - | - | 40 | ||||||||||||
| Cima Telecom Inc. (a) | $ | 878 | 292 | $ | - | 324 | ||||||||||
| $ | 918 | $ | 292 | $ | - | $ | 364 | |||||||||
| (a) | Composed of periodic fees in the amount of |
| (b) | Composed of a consulting fee |
| 3 months ends at June 30, 2022 | 3 months ends at June 30, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Carol Pepper (b) | 40 | - | ||||||
| Cima Telecom Inc. (a) | $ | 559 | 246 | |||||
| $ | 599 | $ | 246 | |||||
F-11
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 65 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On December 20, 2017, a complaint was filed by J. P. Carey Enterprises, Inc. (“JP Carey”) alleging a claim for $473 related to Franjose Yglesias-Bertheau, a former Vice President of PLKD. Even though the Company made the agreed payment of $10on January 2, 2017 and issued 6,001 shares of Common Stock as conversion of the $70,000 note as agreed in its settlement agreement, JP Carey alleges damages that the Company claims are without merit because JP Carey 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. On January 29, 2019, the Company was served with another complaint by JP Carey claiming similar issues as to the previous complaint, with the new claimed damages totaling $1,108. JP Carey and the Company filed motions for a summary judgment. On June 23, 2020, the case was transferred to the Business Court at the request of the Superior Court Judge previously assigned to the case. Judge Ellerbe from the Business Court has been assigned as the new judge. On October 1, 2020, the court granted the Company’s motion for summary judgment and denied JP Carey’s motion for summary judgment. On October 30, 2020, JP Carey filed a notice of appeal to the trial court’s October 1 and 7, 2020 orders granting summary judgment in favor of the Company. The briefing in the appeal was completed during the first quarter of 2021. Oral argument held on April 13, 2021 but no decision has been rendered yet. On November 16, 2020, the Company filed a motion seeking payment from JP Carey of $141 in attorney fees and costs accrued as of November 13, 2020. JP Carey’s respondent brief was filed on or about December 21, 2020 and thereafter the Company filed its reply. JP Carey’s petition to the Georgia Supreme Court for a writ of certiorari remains pending and is fully briefed as of January 14, 2022. On May 5, 2022 the Georgia Supreme Court denied JP Carey’s petition. On or about July 20, 2022 the parties settled the Company’s claim regarding attorney fees and costs for the amount of $40.
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 December 7, 2018, with a complaint alleging damages including unspecified damages for product, advertising and other damages in addition to $50 paid to the Defendants. The Company retained an attorney and has taken steps to defend itself vigorously in this case. Depositions are in process of being scheduled. On or about April 27, 2022, the Company settled the Telco Cuba Inc. matter in consideration of a settlement amount of $32,000.
On May 1, 2019, the Company received a notice of demand for arbitration from Secure IP Telecom, Inc. (“Secure IP), who allegedly had a Reciprocal Carrier Services Agreement (“RCS”) exclusively with Limecom and not with the Company. The arbitration demand originated from another 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. On or about October 5, 2020, the trial court appointed a receiver over Limecom, Inc. (“Limecom”) in the matter of Spectrum Intelligence Communications Agency, LLC. v. Limecom, Inc., case no. 2018-027150-CA-01 pending in the 11th Circuit for Miami-Dade County, Florida. On June 5, 2020, Secure IP Telecom, Inc. (“Secure IP”) filed a complaint against Limecom, Heritage Ventures Limited (“Heritage”), an unrelated third party and owner of Limecom, and the Company, case no. 20-11972-CA-01. Secure IP alleges that the Company received certain transfers from Limecom during the period that the Company wholly owned Limecom that may be an avoidable under Florida Statute § 725.105. On July 13, 2021, the two cases were consolidated, and are now pending before the same trial court under the former case number. The Company has answered and denied any liability with respect to both complaints. To the extent the Company has exposure for any transfers from Limecom, Heritage has indemnified the Company for any such liability and the Company has a pending cross-claim against Heritage for purposes of enforcing the indemnification obligation. A review of the books and records of the Company reflect aggregate transfers from Limecom to the Company or its affiliates of less than $600,000.$600. The Company’s books and records reflect that the Company fully reimbursed Limecom through direct payment of expenses of Limecom and through issuance of shares by the Company to employees or other vendors on behalf of Limecom for settlement and release of claims the employees or vendors may have asserted against Limecom. The books and records of the Company therefore do not reflect an identifiable avoidable transfer, but this analysis may change as the discovery process continues. At this time, based upon an analysis of the Company’s books and records, the loss contingency is not capable of reasonable estimation under the above circumstances, and the likelihood of an adverse judgment is not probable at this time. An adverse judgment in this matter is reasonably possible and based upon an analysis of litigation costs and likelihood of a settlement, the undersigned recommends a litigation reserve of $200 to $300 thousand. As of June 30, 2022March 31, 2023, the company accrued $300 thousand due to this matter.
On May 25,October 4, 2022, Crosshair Media Placement, LLC, a Kentucky based marketing company, filed and served a complaint on Cuentas for breach of contract alleging breach of contract damages of $630, which case remains pending in the United States District Court for the Western District of Kentucky, case no. 3:22-CV-512-CHB. The Company is vigorously defending itself against this complaint and on November 8, 2022, filed a Motion to Dismiss for Lack of Jurisdiction and a Motion to Change Venue. As of March 31, 2023, the company accrued $630 thousand due to this matter.
On March 14, 2023, the Company receivedwas served with a noticecomplaint for Breach of default from CIMA Telecom, Inc. (“CIMA”) related to that certain Platform Exclusive LicenseContract of an Employment Agreement maintenance,in excess of $30. The Company has retained counsel and related agreements by and among Cuentas, CIMA, Knetik, Inc., and Auris, LLC. The notice provides that Cuentas has failed to pay $700,000 of maintenance and pass-through fees that CIMA alleges are owed under the License Agreement and also afforded Cuentas the required sixty-day period (through July 24, 2022) to cure the default as provided under the License Agreement. Cuentas disagrees with the amount owed under the License Agreement. Please refer to Note 8,is aggressively defending its rights.
On April 1, 2021 the Company executed a lease for office space effective April 1, 2021. The lease requires monthly rental payments of $7.$9.
F-12
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 76 – SEGMENTS OF OPERATIONS
The Company reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable operating segments. The Company manages its business primarily on a product basis. The accounting policies of the various segments are the same as those described in Note 2, “Summary of Significant Accounting Policies.” The Company evaluates the performance of its reportable operating segments based on net sales and gross profit.
Revenue by product for the sixthree months ended June 30, 2022,March 31, 2023, and the sixthree months ended June 30, 2021March 31, 2022 are as follows:
| June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Telecommunications | $ | 318 | $ | 353 | $ | 49 | $ | 175 | ||||||||
| General Purpose Reloadable Cards | 746 | 27 | ||||||||||||||
| Digital products and General Purpose Reloadable Cards | 15 | 219 | ||||||||||||||
| Total revenue | $ | 1,064 | $ | 380 | $ | 64 | $ | 394 | ||||||||
Gross profit (loss)loss by product for the sixthree months ended June 30, 2022,March 31, 2023, and the sixthree months ended June 30, 2021March 31, 2022 are as follows:
| June 30, 2022 | June 3031, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | 200 | $ | 149 | ||||
| General Purpose Reloadable Cards | (11 | ) | (39 | ) | ||||
| Total revenue | $ | 189 | $ | 110 | ||||
Revenue by product for the three months ended June 30, 2022, and the three months ended June 30, 2021 are as follows:
| June 30, 2022 | June 30, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | 143 | $ | 147 | ||||
| General Purpose Reloadable Cards | 527 | 8 | ||||||
| Total revenue | $ | 670 | $ | 155 | ||||
Gross profit (loss) by product for the three months ended June 30, 2022, and the three months ended June 30, 2021 are as follows:
| June 30, 2022 | June 30, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | 81 | $ | 83 | ||||
| General Purpose Reloadable Cards | (26 | ) | 49 | |||||
| Total revenue | $ | 55 | $ | 132 | ||||
Long lived assets by product for June 30, 2022 and December 31, 2021 are as follows:
| June 30, 2022 | December 31, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | - | $ | - | ||||
| General Purpose Reloadable Cards | 4,500 | 5,400 | ||||||
| Total revenue | $ | 4,500 | $ | 5,400 | ||||
| March 31, 2023 | March 31, 2022 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | (7 | ) | $ | 66 | |||
| Digital products and General Purpose Reloadable Cards | (52 | ) | (88 | ) | ||||
| Total Gross Loss | $ | (59 | ) | $ | (22 | ) | ||
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 87 – SUBSEQUENT EVENTS
On August 2, 2022,April 14, 2023, the Nasdaq Listing Qualifications Staff (the “Staff”) issued the Company and CIMA, alonga compliance letter citing that the Company regained compliance with two of CIMA’s wholly-owned subsidiaries, Knetik, Inc.the bid price concern, as required by the Hearing Panel’s (“Knetik”Panel”) and Auris, LLC, (“Auris” ) executed a Settlement Agreement and General Release (“Settlement Agreement”) which resolves the issues related to the July 8, 2022 notice of default from CIMA Telecom, Inc. (“CIMA”) related to that certain Platform Exclusive License Agreement, maintenance, and related agreements (collectively, the “License Agreement”) by and among Cuentas, CIMA, Knetik, Inc., and Auris, LLC.decision dated February 23, 2023.
The Parties executed Mutual General ReleasesOn April 13, 2023, the Company signed an Operating Agreement to be a majority member in Brooksville Development Partners, LLC (“Brooksville”) with 2 minority members for the purpose of acquiring land for the development of a residential apartment community consisting of approximately 360 apartments. All real and personal property owned by Brooksville shall be owned by Brooksville as an entity, . One of the settlement terms are as follows:minority members is qualified and will be the manager of the project.
In exchangeOn April 28, 2023, the Company and minority partners in Brooksville closed on the transaction to acquire a 21.8 acre site for development of the consideration provided inBrooksville project for total purchase price of $5,050. Cuentas had deposited an “Initial Capital Contribution” of $2,000 into a title insurance escrow account which was released from escrow by the Settlement Agreement, (1) Cuentas paid CIMA $350,000.00 on August 2, 2022 and (2) on or before 5:00 p.m New York City time, on August 15, 2022, Cuentas will pay CIMATitle Agent to fund the balance of the Unpaid Fees ($420,239.78) by wire transfer (3) Cuentas will a period of 30 days from execution date, the exclusive right to facilitate a third party (including to current shareholders and directors of Cuentas) purchase (without markup or broker fee) of, allprice of the sharesVacant Land, together with a $3,050 bank loan from Republic Bank of Cuentas held by CIMA atChicago. Brooksville owns the higher of: (i) the average per share trading price for the three day average before notice in writing is provided by Cuentas of the intent to purchase CIMA’s Cuentas shares, or (ii) the minimum price of $0.50 per share on or before 5:00 p.m. New York City time, on August 31, 2022 pursuant to a purchase agreement delivered by and acceptable to CIMA without any changes thereto (provided, that CIMA shall not be required to provide any representations or warranties other than fundamental warranties related to (a) organization and good standing, (b) power and authority to undertake the transaction and (c) ownership of such shares, and ordinary representations and warranties that the Cuentas shares are being transferredVacant Land, free and clear of any liens, claims or encumbrances); and (iv) on or before 5:00 p.m. New York City time, on August 2, 2022, Cuentas shall, and shall cause (x) Dinar Zuz, LLC, (y) Michael De Prado and (z) Arik Maimon to provide signed waiver letters, expressly waiving any right of first refusal and co-sale rights granted in their favor under that certain letter agreement, dated December 31, 2019, by and among CIMA, Dinar Zuz, LLC, Michael Del Prado and Arik Maimon, and (y) CIMA agrees: (i) to restore immediately Cuentas’s access to the Platform upon receipt of the $350,000.00 payment ; (ii) to provide Cuentas with a limited license to utilize the Platform the terms of which are detailed specifically in Section 6 of the agreement, and to use reasonable efforts, subject to Cuentas’ compliance hereto, to provide Cuentas’ customer data to Cuentas through the end of the limited license term described below in Section 6 of the agreement; (iii) deliver to Cuentas the Source Code (as that term is defined in paragraph 1.18 of the License Agreement) relating to Out-Of-Scope Services, and as further detailed in Section 6 of the agreement; (iv) not enforce its rights under the Side Letter (as that term is defined in the paragraph 1.1 of the Purchase Agreement) through and including August 31, 2022, and (v) shall not transfer, sell, or encumber its Cuentas shares through and including August 31, 2022, except as permitted herein. Cuentas acknowledges and agrees that the amount of Unpaid Fees ($770,239.78) is valid and outstanding, and waives any right to dispute them. If Cuentas fails to comply with any term of this Settlement Agreement, in addition to the Stipulated Judgment described in Section 5 of the agreement, the limited license set forth in Section 6 and any of CIMA’s obligations under this Settlement Agreement shall become null and CIMA shall have the right to shut off Cuentas access to the Platform without notice. The Settlement Agreement also provides for mutual general releases by Cuentas for the benefit of CIMA and by CIMA for the benefit of Cuentas of all claims other than claims relating to a breach of the Settlement Agreement. The settlement agreement by its terms in effect terminates the obligations under the license agreement, dated December 31, 2019 by and between Cuentas and CIMA.
On August 4, 2022, the Company, entered into a Securities Purchase Agreement with an institutional investor pursuant to which the Purchaser agreed to purchase, and the Company agreed to issue and sell to the Purchaser in a private placement, an aggregate of 1,655,000 shares of the Company’s common stock, $0.001 par value, pre-funded warrants to purchase up to 2,569,044 shares of Common and warrants to purchase up to 4,224,044 shares of Common Stock. The purchase price per Share and associated Common Stock Warrant was $0.71022 and the purchase price per Pre Funded Warrant and associated Common Stock Warrant was $0.71012. Each Common Stock Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $0.59 per share. Each Pre Funded Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $0.0001 per share. The Common Stock Warrants are exercisable for a period of five years and six months commencing on the issuance date and the Pre Funded Warrants are exercisable until exercised. The Warrants also contain customary beneficial ownership limitations that may be waived at the option of each holder upon 61 days’ notice to the Company. The Private Placement closed on August 8, 2022. The gross proceeds to the Company, before deducting placement agent fees and other offering expenses, are approximately $3.0 million. On August 4, 2022, in connectionencumbrances with the Private Placement,sole exception being the Company entered into a registration rights with the Purchaser, pursuant to which the Company agreed to file a registration statement with the Securities and Exchange Commission (the “SEC”) to register for resale the Shares and any shares of the Company’s common stock issuable upon exercise of the Warrants within 30 days of the signing of the Registration Rights Agreement, with such registration statement becoming effective within 60 days after the signing of the Registration Rights Agreement, subject to adjustment in the event of a review by the SEC.Republic Bank loan. The Company is subject to customary penalties and liquidated damagescurrently a 63% interest holder in Brooksville but that may change in the event it does not meet certain filing requirements and deadlines set forth in the Registration Rights Agreement.
Pursuant to an engagement agreement, H.C. Wainwright & Co., LLC was engaged byfuture if the Company is not able to act as its placement agent forraise sufficient financing to complete the Private Placement. The Company agreed to pay the Placement Agent a cash fee equal to 7.0% of the gross proceeds received by the Company in the Private Placement, in addition to the reimbursement of certain expenses. The Company also agreed to issue to the Placement Agent warrants to purchase up to 295,683 shares of Common Stock, exercisable for a period of five years and six months commencing on the issuance date, at an exercise price of $0.8878 per share. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.project.
F-13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021.2022. Some of the information contained in this discussion and analysis, particularly with respect to our plans and strategy for our business and related financing, includes forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including statements regarding expectations, beliefs, intentions or strategies for the future. When used in this report, the terms “anticipate,” “believe,” “estimate,” “expect,” “can,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and words or phrases of similar import, as they relate to our company or our management, are intended to identify forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance, and we undertake no obligation to update or revise, nor do we have a policy of updating or revising, any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required under applicable law. Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements as a result of several factors including those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and in this Quarterly Report on Form 10-Q for the quarter ended June, 2022.
The Company notes that in addition to the description of historical facts contained herein, this report contains certain forward-looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company’s other filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those, described in the forward-looking statements. These factors include, among others: (a) the Company’s fluctuations in sales and operating results; (b) regulatory, competitive and contractual risks; (c) development risks; (d) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth across the business segments through a combination of enhanced sales force, new products, and customer service; and (e) pending litigation.
Overview and Outlook
OVERVIEW AND OUTLOOK
The Company was incorporated inunder the laws of the State of Florida on September 21, 2005 to act as an operational company and as a holding company for its subsidiaries. Its subsidiaries are Meimoun and Mammon, LLC (100% owned) (“M&M”),Tel3, a business segment of Meimoun and Mammon, LLC provides prepaid calling cards to consumers directly and operates in a complimentary space as Meimoun and Mammon, LLC. The Company also owns 50% of CUENTASMAX LLC which is a joint venture and installs WiFi6 shared network (“WSN”) systems in locations in the technology, telecomNew York metropolitan tristate area using access points and banking industries.small cells to provide users with access to the WSN.update
The Company mainly 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 wholesale telecommunications minutes and prepaid telecommunications minutes to consumers through its Tel3 division.
During 2023-Q1, the Company initiated its first investment into the Real Estate market and recently, made its second, more significant investment in Real Estate. The Company’s subsidiary, Meimounreal estate investments are intended to broaden its reach into the unbanked, underbanked and Mammon, LLC (100% owned) (“M&M”), through. Tel3,underserved communities by using a business segmentpatented, low cost, sustainable technology that should allow it to provide reasonably priced rental apartments to working class residents who have been priced out of Meimounrental communities due to severe rent price hikes in Florida and Mammon, LLC provides prepaid calling cards to consumers directly.
The Company also owns 50% of CUENTASMAX LLC which installs WiFi6 shared network (“WSN”) systems in locationsother areas in the New York metropolitan tristate area using access points and small cells to provide users with access to the WSN.US.
2
On May 27, 2022,February 3, 2023, the Company (“ Cuentas” or “Buyer”) entered into a Membership Interest Purchase Agreement (the “MIPA”)(MIPA) with SDI Black 011, LLCCore Development Holdings Corporation (“SDI Black”Core” or “Seller”), the holders of all the membership interests of SDI Black and Cuentas SDI, LLC, a Florida limited liabilitycorporation that holds approximately 29.3% of 4280 Lakewood Road Manager, LLC (“Cuentas SDI”Lakewood Manager”), for the acquisition of 19.99%which in turn owns 86.45% of the membership interests in 4280 Lakewood Road, LLC (“4280 Project”), an affordable multi-family real estate project located in Lake Worth, Florida. Core sold 6% of its interest in the Lakewood Manager to Cuentas. and Cuentas SDIissued to Core 295,282 of the Company’s common shares to acquire $700,000 of equity in exchange for $750,000.the Lakewood Manager. The 295,282 of the Company’s share was equal to the 19.9% of the total number of current issued and outstanding shares of the Company as of the date of the Agreement. Lakewood Manager an affiliate of RENCo USA, Inc., is constructing the 4280 Lakewood Project with RENCO Structural Building System, a proprietary composite structural system distributed by RENCo USA, Inc. The Company closed this transaction and issued the aforementioned shares on March 7, 2023.
On March 1, 2023, the Company announced that it signed a 10 year supply agreement with Renco USA, Inc (“Renco”), to provide Renco’s patented building materials for new, sustainable rental housing projects. Renco is an innovative green construction technology company that has a patented MCFR (Mineral Composite Fiber Reinforced) Construction System which provides cost efficiency, reduced build time, and sustainable benefits. Renco’s system is hurricane proof up to Category 5, which is a major benefit for developing housing projects in the South Florida market and other hurricane prone areas where we are planning to develop projects. Renco’s system is also earthquake resistant. Renco USA was the supplier of building technology and materials for the abovementioned affordable housing project in the USA using its MCFR system. Renco USA has the rightexclusive rights in the USA to closethe patented building process. The Renco Wall, Floor and Roofing System is a unique MCFR Building System that creates interlocking, fiber reinforced, composite building blocks and other construction related products that can be connected in an almost limitless variety of designs. Renco’s system can be used to create homes, apartment buildings, hotels, office buildings, warehouses, infrastructure products and more.
On April 13, 2023, the Company signed an Operating Agreement to be a majority member in Brooksville Development Partners, LLC (“Brooksville”) with 2 minority members for the purpose of acquiring land for the development of a residential apartment community consisting of approximately 360 apartments. All real and personal property owned by Brooksville shall be owned by Brooksville as an entity. One of the minority members will be the manager of the project.
On April 28, 2023, the Company and minority partners in Brooksville closed on the potential acquisitiontransaction to acquire a 21.8 acre site for development of the remaining 80.01%Brooksville project. Cuentas had deposited an “Initial CapitalnContribution” of $2,000,000.00 (Two Million Dollars) into a title insurance escrow account which was released from escrow by the membership interestsTitle Agent to fund the balance of Cuentas SDI within 60 days (with a potential 30 day extension, the “Potential Acquisition Period”) in exchange for a purchase price of an additional $2.459,000. SDI Black previously transferred allthe Vacant Land, together with a $3.05 million bank loan from Republic Bank of its assets includingChicago. Brooksville owns the platform, portals, domain names,Vacant Land, free and related software necessary to conduct its business to Cuentas SDI.clear of any liens, claims and encumbrances with the sole exception being the Republic Bank loan. The MIPA further providesCompany is currently a 63% interest holder in Brooksville but that duringmay change in the Potential Acquisition Period,future if the Company will invoice and Cuentas SDI will pay invoices on a seven-net-ten day basis and during this same period, Cuentas SDI will allowis not able to raise sufficient financing to complete the Company to realize 40% of the Cuentas SDI gross revenues and reflect 40% of the gross revenues on its books and records.The MIPA contains a number of representations and warranties by each of the parties thereto which we believe are customary for transactions similar to the transactions contemplated by the MIPA. The 60-days option to acquire the remaining 80.01% of the membership interests of Cuentas SDI expired on July 27, 2022.project.
OUTLOOK
Business Environment
We are mainly a technology payment platform company that enables digital and mobile payments on behalf of under-bank and unbanked individuals. During 2023-Q1, the Company initiated its first investment into the Real Estate market and recently, made its second, more significant investment in Real Estate. We believe in providing simple, affordable, secure and reliable financial services and digital payments to help our customers to achieve their financial goals. The Company’s real estate investments are intended to broaden its reach into the unbanked, underbanked and underserved communities by using a patented, low cost, sustainable technology that should allow it to provide reasonably priced rental apartments to working class residents who have been priced out of rental communities due to severe rent price hikes in Florida and other areas in the US.
We strive to increase our relevance for consumers, and family to access and move their money anywhere in the world, anytime, on any platform and through any device (e.g., mobile, tablets, personal computers or wearables). We provide safer and simpler ways for businesses of all sizes to accept payments from merchant websites, mobile devices and applications, and at offline retail locations through a wide range of payment solutions. We also facilitate person to person payments through Cuentas GPR Card.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy and consumer protection. Some of the laws and regulations to which we are subject were enacted recently and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Non-compliance with laws and regulations, increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition. Therefore, we monitor these areas closely to ensure compliant solutions for our customers who depend on us.
Industry Trends
Our industry is dynamic and highly competitive, with frequent changes in both technologies and business models. Each industry shift is an opportunity to conceive new products, new technologies, or new ideas that can further transform the industry and our business. At Cuentas, we push the boundaries of what is possible through a broad range of research and development activities that seek to anticipate the changing demands of customers, industry trends and competitive forces. The Company’s entrance into the real estate market should allow it to provide reasonably priced rental apartments to working class residents who should benefit from Cuentas’ financial solutions in parallel with the residential solutions.
3
RESULTS OF OPERATIONS
Comparison of the sixthree months ended June 30, 2022March 31, 2023 to the sixthree months ended June 30, 2021March 31, 2022
Revenue
The Company generates revenues through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services. The Company also generated sales from its Fintech products and services commencing in the third quarter of 2020. Revenues during the six months ended June 30, 2022 totaled $1,064,000 compared to $380,000 for the six months ended June 30, 2021. The increase in the sales of General-Purpose Reloadable Cards is mainly due to online marketing campaigns and other marketing initiatives.
Revenue by product for the six months ended June 30, 2022, and the six months ended June 30, 2022 are as follows:
| June 30, 2022 | June 30, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | 318 | $ | 353 | ||||
| General Purpose Reloadable Cards | 746 | 27 | ||||||
| Total revenue | $ | 1,064 | $ | 380 | ||||
Costs of Revenue and Gross profit
Cost of revenues during the six months ended June 30, 2022 totaled $869,000 compared to $380,000 for the six months ended June 30, 2022.
Cost of revenue consists of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products in the amount of $118,001 during the six months ended June 30, 2022 and $270,000 during the six months ended June 30, 2021.
Cost of revenue also consists of costs related to the sale of the Company’s GPR Card in the amount of $751,000 during the six months ended June 30, 2022 and $115,000 during the six months ended June 30, 2021.
Gross profit (loss) by product lines for six months ended June 30, 2022, and 2021 are as follows:
| June 30, 2022 | June 3031, 2021 | |||||||
| (dollars in thousands) | ||||||||
| Telecommunications | $ | 200 | $ | 149 | ||||
| General Purpose Reloadable Cards | (11 | ) | (39 | ) | ||||
| Total revenue | $ | 189 | $ | 110 | ||||
The gross loss stemmed from the lower margins of since most of the sales derived from the sale of digital products with minimal gross margins in both periods.
Operating Expenses
Operating expenses consist of selling, general and administrative Expenses and amortization of Intangible assets as discussed below and totaled $6,938,000 during the six months ended June 30, 2022, compared to $3,716,000 during the six months ended June 30, 2021 representing a net increase of $3,222,000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $6,033,000 during the six months ended June 30, 2022 compared to $2,811,000 during the six months ended June 30, 2022, representing a net increase of 3,222,000. Included in in the Selling, general and administrative expenses, Stock-based compensation amounted to $1,094,000 and shares issued for services expenses amounted to $110,000 during the six months ended June 30, 2022 compared to $286,000 during the six months ended June 30, 2021. This increase was mainly due to issuance of 1,550,000 stock options to directors and officers of the Company in the 2021 and 400,000 stock options to officer and directors of the Company in the 2022. Such options can be exercised until 2032. The increase in the other operating expenses is mainly due to an increase in the agreed maintenance and support services in accordance with the software maintenance agreement with CIMA in the amount of $100,000 to $700,000 during the six months ended June 30, 2022 due to the settlement agreement with CIMA, increase in the agreed payments in accordance with the processing service agreement with Incomm in the amount of $115,000 to $375,000 during the six months ended June 30, 2022, increase in our compensation and director fees in the approximate amount of $471,000 to $1,064,000 and increase of approximately of $944,000 in our selling and marketing expenses during the six months ended June 30, 2022.
Amortization of Intangible assets
Amortization of Intangible assets totaled $905,000 during the six months ended June 30, 2022 and 2021. The amortization expense mainly stems from the one-time licensing fee in the amount of $9,000,000 that was paid in shares to Cima, on December 31, 2019. The acquired intangible assets that consisted of a perpetual software license had an estimated fair value of $9,000,000. The Company amortizes the intangible assets on a straight-line basis over their expected useful life of 60 months which is approximately $453,000 per quarter.
Other Income
The Company recognized other expense of $34,000 during the six months ended June 30, 2022 compared to other expense of $70,000 during the six months ended June 30, 2021.
Net Income (Loss)
We incurred a net loss of $6,810,000 for the six months ended June 30, as compared to a net loss of 3,676,000 for the six months ended June 30, 2022 due to the increase in selling and general administrative expenses as described above.
Comparison of the three months ended June 30, 2022 to the three months ended June 30, 2021
Revenue
The Companycurrently generates revenues through the sale and distribution of prepaid telecom minutes, digital products, and other related telecom services. The Company also generated sales from its Fintech products and services commencing in the third quarter of 2020. Revenues during the three months ended June 30, 2022March 31,2023, totaled $,000$64,000 compared to $155,000$394,000 for the three months ended June 30, 2021.March 31,2022. The increasedecrease in theour sales of General Purposedigital products and General-Purpose Reloadable Cards is mainly due to decreasing our sales with Cuentas SDI including online marketing campaigns and other marketing initiatives, including but not limited to distribution agreements. The decrease in our sales of digital products and General-Purpose Reloadable Cards is mainly due to reducing our cooperation with Cuentas SDI including online and other marketing initiatives. The decrease in our sales of telecommunications products is mainly due to reducing our activities in this segment. The Company has studied and evaluated its previous mobile phone offerings and has modified its mobile phone program to be aggressively priced within marketing standards that have been proven to be successful by other prepaid cellular carriers in the US. The Company has invested the past 6 months to re-organize its “Cuentas Mobile” prepaid cellular phone service offering, website and marketing strategy and is currently in the testing and provisioning phase. These efforts and testing are ongoing and should be fully implemented during 2023-Q2, allowing the formal launch of the services. We expect to produce significant revenue with Cuentas Mobile due to its low-cost pricing structure which has proven to be successful by other prepaid cellular phone carriers. Cuentas anticipates the real estate investments to produce direct and indirect revenue streams as the projects come to completion and begin to produce rental revenue and the property values appreciate. This is not anticipated to happen until at least 2023-Q4.
Revenue by product for the three months ended June 30, 2022,March 31, 2023, and the three months ended June 30, 2021March 31, 2022 are as follows:
| June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Telecommunications | $ | 143 | $ | 147 | $ | 49 | $ | 175 | ||||||||
| General Purpose Reloadable Cards | 527 | 8 | ||||||||||||||
| Digital products and General Purpose Reloadable Cards | 15 | 219 | ||||||||||||||
| Total revenue | $ | 670 | $ | 155 | $ | 64 | $ | 394 | ||||||||
Costs of Revenue and Gross profit
Cost of revenues during the three months ended June 30, 2022March 31, 2023 totaled $615,000$123,000 compared to $32,000$260,000 for the three months ended June 30, 2021.March 31, 2022.
Cost of revenue consists of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products in the amount of $62,000$56,000 during the three months ended June 30, 2022March 31, 2023 and $64,000$57,000 during the three months ended June 30, 2021.March 31, 2022.
Cost of revenue also consists of costs related to the sale of the Company’s GPR Card in the amount of $553,000$67,000 during the three months ended June 30, 2022March 31, 2023 and $57,000$203,000 during the three months ended June 30, 2021.March 31, 2022.
Gross profit (loss) by product lines for three months ended June 30,March 31, 2022 and 2021 are as follows:
| June 30, 2022 | June 30, 2021 | March 31, 2023 | March 31, 2022 | |||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||
| Telecommunications | $ | 81 | $ | 83 | $ | (7 | ) | $ | 119 | |||||||
| General Purpose Reloadable Cards | (26 | ) | 49 | |||||||||||||
| Digital products and General Purpose Reloadable Cards | (52 | ) | 15 | |||||||||||||
| Total revenue | $ | 55 | $ | 132 | $ | (59 | ) | $ | 134 | |||||||
Gross profit margin for the three months ended March 31, 2023 was negative for both the telecommunications segment and the digital product and general purpose reloadable cards segment. The gross loss stemmed from the lower margins of since most of the sales derived fromfor the sale of digital productsproduct and general-purpose reloadable cards stemmed from ceasing all activities with minimal gross margins in both periods.Cuentas SDI LLC. The Company is actively pursuing related and symbiotic business relationships and projects that will produce significant revenue with higher profit potential. Cuentas previously signed an agreement and continues to develope technology to supply financial solutions for contractors who deal with vendors and installers for the maintenance, repair and construction industries.
Operating Expenses
Operating expenses consist of selling, general and administrative Expenses and amortization of Intangible assets as discussed below and totaled $3,196,000$1,686,000 during the three months ended June 30 2022,March 31, 2023, compared to $2,126,000$3,742,000 during the three months ended June 30, 2021March 31, 2022 representing a net increasedecrease of $1,070,000.$ 2,056,000.
4
Selling, General and Administrative Expenses
The table below summarizes our general and administrative expenses incurred during the periods presented:
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| (Unaudited in thousands) | ||||||||
| General and Administrative Expenses: | ||||||||
| Officers compensation | $ | 227 | $ | 353 | ||||
| Directors fees | 50 | 56 | ||||||
| Share-based compensation | 283 | 537 | ||||||
| Directors’ and officers’ insurance | - | 186 | ||||||
| Professional services | 258 | 361 | ||||||
| maintenance and support services | 120 | 175 | ||||||
| Legal fees | 100 | 42 | ||||||
| payments in accordance with the processing service agreement with Incomm | 50 | 150 | ||||||
| Selling and Marketing | 142 | 919 | ||||||
| Settlements | 299 | - | ||||||
| Other | 157 | 863 | ||||||
| Total | $ | 1,686 | $ | 3,289 | ||||
Selling, general and administrative expenses totaled $2,744,0001,566,000 during the three months ended June 30, 2022March 31, 2023 compared to $1,673,000$3,289,000 during the three months ended June 30, 2021,March 31, 2022, representing a net increasedecrease of $1,071,000.$1,978,000. Included in in the Selling, general and administrative expenses, Officers compensation in the amount of $227,000 during the three months ended March 31, 2023 as opposed to $353,000 during the three months ended March 31, 2022. The decrease was due to the departure of Jeffery Johnson in 2022 and the reduction in the number of the officers of the Company in 2023. Stock-based compensation and shares issued for services expenses amounted to $659,000$283,000 during the three months ended June 30, 2022March 31, 2023, and $32,000$537,000 during the three months ended June 30, 2021. This increase wasMarch 31, 2022. The decrease is mainly due to issuance of 1,550,000 stock options to directors and officersthe decrease in the amount of the Companyvested option in 2023 as opposed to 2022 which was mitigated by an increase in the 2021number of shares that were issued for services and 400,000 stock options to officer and directors of the Company in the 2022. Such options can be exercised until, 2032.
settlement. The increasedecrease in the other operating expenses is mainly due to an increasedecrease in the agreed maintenance and support services in accordance with the software maintenance agreement withthat were provided by CIMA in the amount of $50,000 to $175,000 during the three months ended June 30, 2022, increase$55,000, decrease in the agreed payments in accordance with the processing service agreement with Incomm in the amount of $105,000 to $225,000$50,000 during the three months ended June 30, 2022, and decrease in our compensation and director fees in the approximate amount of $84,000 to $506,000March 31, 2023 from $150,000 during the three months ended June 30, 2021March 31, 2022, decrease in Directors’ and officers’ insurance from $186,000 to 0 since the Company cancelled its policy during the fourth quarter of 2022,an increase of approximately $299,000 in our settlements expenses and decrease of $29,000approximately $777,000 in our selling and marketing expenses during the three months ended June 30, 2022.March 31, 2023 since the Company reduced significantly its selling and marketing campaigns in 2023 .
Amortization of Intangible assets
Amortization of Intangible assets totaled $2,000 during the three months ended March 31, 2023 and $453,000 during the three months ended June 30, 2022 and 2021.March 31, 2022. The amortization expense of $453,000 during the three months ended March 31, 2022, mainly stemsstemmed from the one-time licensing fee in the amount of $9,000,000 that was paid in shares to Cima, on December 31, 2019. The acquired intangible assets that consisted of a perpetual software license had an estimated fair value of $9,000,000. TheDuring the fourth quarter of 2022, the Company amortizesrecorded an impairment charge of $3,600,000 whereas as no amount was assigned to the intangible assetsacquired platforms on a straight-line basis over their expected useful life of 60 months which is approximately $453,000 per quarter.
Other Income
The Company recognized other expense of $33,000 during the three months ended June 30,December 31, 2022 compared to other expense of $7,000 during the three months ended June 30, 2021.and after.
Net Income (Loss)
We incurred a net loss of $3,186,000$1,695,000 for the three-month period ended June 30, 2022,March 31, 2023, as compared to a net loss of 2,001,0003,624,000 for the three-month period ended June 30, 2021dueMarch 31, 2022 due to the increase in selling and general administrative expenses as described above.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
5
As of June 30,March 31, 2023, the Company had total current assets of $3,689,000, including $3,328,000 of cash, accounts receivables of $221,000, related parties in the amount of $88,000 and other current assets of $52,000 and total current liabilities of $2,221,000 creating a working capital of $ 1,468,000.
As of December 31, 2022, the Company had total current assets of $2,026,000,$689,000, including $1,798,000$466,000 of cash, accounts receivables of $129,000,$209,000, and other current assets of $99,000 and total current liabilities of 3,537,000 creating a working capital deficit of $1,511,000.
$14,000. As of December 31, 2021,2022, the Company had total current assets of $6,780,000, including $6,607,000 of cash, accounts receivables of $11,000, and other current assets of $162,000 and total current liabilities of $2,719,000$ 2,134,000 creating a negative working capital of $4,061,000.$1,445,000.
The decreaseincrease in our working capital deficit was mainly attributable to the decreaseincrease in our Cash and Cash equivalents in the amount of $4,809,000$2,862,000 due to the sale of our losses.shares.
To date, we have principally financed our operations through the sale of our Common Stock. Nevertheless, management anticipates that our current cash and cash equivalents position and generating revenue from the sales of our digital products, General-Purpose Reloadable Cards and prepaid cellular phone services will provide us limited financial resources for the near future to continue implementing our business strategy of further developing our digital products, General Purpose Reloadable Card, enhance our digital products offering and increase our sales and marketing. Therefore. Management plans to secure additional financing sources, including but not limited to the sale of our Common Stock in future financings. This is expected to be used to further support our operations as described above and to complete the acquisitiondevelopment of the SDI’s assets, including the Black011.com domainits new portal and its network of approximately 31,600 bodegas.financial technology capabilities. There can be no assurance, however, that the company will be successful in raising additional capital or that the company will have net income from operations to fund the business plan of the company for the near future or long term.
As of June 30, 2022, the Company had approximately $1,798 thousand in cash and cash equivalents, approximately $1,511 in negative working capital and an accumulated deficit of approximately $45,029 thousand . These conditions raise substantial doubt about the Company’s ability to continue as a going concern. On August 4, 2022, the Company, sold an aggregate of 1,655,000 shares of the Company’s common stock, $0.001 par value, pre-funded warrants to purchase up to 2,569,044 shares of Common and warrants to purchase up to 4,224,044 shares of Common Stock in consideration of $3.0 million. The net proceeds to the Company, after deducting placement agent fees and other offering expenses, are approximately $2.7 million. 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.
Cash Flows – Operating Activities
The Company’s operating activities for the sixthree months ended June 30, 2022,March 31, 2023, resulted in net cash used of $4,145,000.$1,453,000. Net cash used in operating activities consisted of a net loss of $6,786,000,$1,695,000, partially mainly offset by non-cash expenses mainly consisting of share-based compensation of $1,196,000 and amortization of intangible assets of $905,000.$256,000. Changes in operating assets and liabilities generatedutilized cash of $510,000,$56,000, resulting mainly from an increase in accounts payablesrelated parties of $1,093,000 which was mitigated in an increase of in accounts receivables of $351,000.$88,000.
The Company’s operating activities for the sixthree months ended June 30, 2021,March 31, 2022, resulted in net cash used of $4,776,000.$2,225,000. Net cash used in operating activities consisted of a net loss of $3,676,000,$3,233,000, partially mainly offset by non-cash expenses consisting of share-based compensation of $286,000$537,000 and amortization of intangible assets of $905,000.$453,000. Changes in operating assets and liabilities utilizedgenerated cash of $2,328,000,$6,000, resulting mainly from an increase in accounts receivable of $13,000,$81,000, decrease in accrued expenses and other current liabilities of $1,084,000, and a$137,000, decrease of $88,000 in deferred revenue which was mitigated by an increase in accounts payables of $964,000.$245,000.
Cash Flows – Investing Activities
The Company had no investing activities for the three months ended March 31, 2023. The Company’s investment activities for the sixthree months ended June 30,March 31, 2022 resulted in net cash used of $664,000 and net cash used of $47,000 for the same period in 2021. The increase was mainly due to the investment in Cuentas SDI LLC.$47,000.
Cash Flows – Financing Activities
The Company’s financing activities for the three months ended March 31, 2023, resulted in net cash received of $4,315,000, mainly consisting of $4,319,000 received from the sale of our common stock.
The Company had no financing activities for the sixthree months ended June 30,March 31, 2022. The Company’s financing activities for the six months ended June 30, 2021, resulted in net cash received of $10,840,000, consisting of $10,614,000 received from the sale of our common stock and $1,307,000 from the issuance of shares due to exercise of warrants, partially offset by repayments of loans of $605,000 and repayments of $355,000 of loans from a related party.
Inflation and Seasonality
In management’s opinion, our results of operations have not been materially affected by inflation or seasonality, and management does not expect that inflation risk or seasonality would cause material impact on our operations in the future.
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Off-Balance Sheet Arrangements
As of June 30, 2022,March 31, 2023, we had no off-balance sheet arrangements of any nature.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. Note 32 to our consolidated audited financial statements filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, describes the significant accounting policies and methods used in the preparation of our financial statements.
Recently Issued Accounting Standards
New pronouncements issued but not effective as of June 30, 2022,March 31, 2023, are not expected to have a material impact on the Company’s consolidated financial statements.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, we are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, and as discussed in greater detail below, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, disclosure controls and procedures are not effective:
| ● | to give reasonable assurance that the information required to be disclosed in reports that are file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and |
| ● | to ensure that information required to be disclosed in the reports that are file or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our CEO and our Treasurer, to allow timely decisions regarding required disclosure. |
Changes in Internal Control over Financial Reporting
Our management, with the participation of our CEO and CFO, performed an evaluation to determine whether any change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three-month period ended June 30, 2022.March 31, 2023. Based on that evaluation, our CEO and our CFO concluded that no change occurred in the Company’s internal control over financial reporting during the three-month period ended June 30, 2022,March 31, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On December 20, 2017, a complaint was filed by J. P. Carey Enterprises, Inc. (“JP Carey”) alleging a claim for $473,000 related to Franjose Yglesias-Bertheau, a former Vice President of PLKD. Even though the Company made the agreed payment of $10,000 on January 2, 2017, and issued 6,001 shares of Common Stock as conversion of the $70,000 note as agreed in its settlement agreement, JP Carey alleges damages that the Company claims are without merit because JP Carey 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. On January 29, 2019, the Company was served with another complaint by JP Carey claiming similar issues as to the previous complaint, with the new claimed damages totaling $1,108,037.85. JP Carey and the Company filed motions for a summary judgment. On October 1, 2020, the Superior Court of Fulton County, State of Georgia granted the Company’s motion for summary judgment and denied JP Carey’s motion for summary judgment. On October 30, 2020, JP Carey filed a notice of appeal to the trial court’s October 1 and 7, 2020 orders granting summary judgment in favor of the Company. The briefing in the appeal was completed during the first quarter of 2021. Oral argument held on April 13, 2021 but no decision has been rendered yet. On November 16, 2020, the Company filed a motion seeking payment from JP Carey of $140,970.82 in attorney fees and costs accrued as of November 13, 2020. JP Carey’s responded brief was filed on or about December 21, 2020 and thereafter the Company filed its reply. JP Carey’s petition to the Georgia Supreme Court for a writ of certiorari remains pending and is fully briefed as of January 14, 2022. On May 5, 2022 the Georgia Supreme Court denied JP Carey’s petition. On or about July 20, 2022 the parties settled the Company’s claim regarding attorney fees and costs for the amount of $40,000.
On October 23, 2018, the Company was served by Telco Cuba Inc. for an amount in excess of $15,000 but the total amount was not specified. The Company was served on December 7, 2018, with a complaint alleging damages including unspecified damages for product, advertising and other damages in addition to $50,000 paid to Defendants. The Company has hired an attorney and has taken steps to defend itself vigorously in this case. Depositions are in process of being scheduled. On or about April 27, 2022, the Company settled the Telco Cuba Inc. matter in consideration of a settlement amount of $32,000.
On May 1, 2019, the Company received a notice of demand for arbitration from Secure IP Telecom, Inc. (“Secure IP”)IP), who allegedly had a Reciprocal Carrier Services Agreement (“RCS”) exclusively with Limecom and not with the Company. The arbitration demand originated from another demand for arbitration that Secure IP received from VoIP Capital International (“VoIP”) in March 2019, demanding $1,052,838.09$1,053 in damages allegedly caused by unpaid receivables that Limecom assigned to VoIP based on the RCS. On or about October 5, 2020, the trial court appointed a receiver over Limecom, Inc. (“Limecom”) in the matter of Spectrum Intelligence Communications Agency, LLC. v. Limecom, Inc., case no. 2018-027150-CA-01 pending in the 11th Circuit for Miami-Dade County, Florida. On June 5, 2020, Secure IP Telecom, Inc. (“Secure IP”) filed a complaint against Limecom, Heritage Ventures Limited (“Heritage”Heritage”), an unrelated third party and owner of Limecom, and the Company. The complaint primarily concerns alleged indebtedness owedCompany, case no. 20-11972-CA-01. Secure IP by Limecom. Secure IP also alleges that the Company received certain transfers of funds which it allegesfrom Limecom during the period that the Company wholly owned Limecom that may be an avoidable transfer under Florida Statute §725.105 up to $1,052,838.09.§ 725.105. On July 13, 2021, the two cases were consolidated, and are now pending before the same trial court under the former case number. The Company is contemplating filing a motionhas answered and denied any liability with respect to dismiss the complaint and disputes that it received the alleged $1,052,838.09 from Limecom. Moreover, toboth complaints. To the extent the Company has exposure for any transfers from Limecom, both Limecom and Heritage havehas indemnified the Company for any such liability. Theliability and the Company continues to vigorously defend its position to be removed ashas a named party in this action duepending cross-claim against Heritage for purposes of enforcing the indemnification obligation. A review of the books and records of the Company reflect aggregate transfers from Limecom to the factCompany or its affiliates of less than $600,000. The Company’s books and records reflect that the Company rescindedfully reimbursed Limecom through direct payment of expenses of Limecom and through issuance of shares by the Company to employees or other vendors on behalf of Limecom Acquisition on January 30, 2019. Cuentas has provided requestedfor settlement and release of claims the employees or vendors may have asserted against Limecom. The books and records of the Company therefore do not reflect an identifiable avoidable transfer, but this analysis may change as the discovery process continues. At this time, based upon an analysis of the Company’s books and expects depositions to be scheduled shortly.records, the loss contingency is not capable of reasonable estimation under the above circumstances, and the likelihood of an adverse judgment is not probable at this time. An adverse judgment in this matter is reasonably possible and based upon an analysis of litigation costs and likelihood of a settlement. As of June 30, 2022March 31, 2023, the company accrued $300,000$300 thousand due to this matter.
On October 4, 2022, Crosshair Media Placement, LLC, a Kentucky based marketing company, filed and served a complaint on Cuentas for breach of contract alleging breach of contract damages of $629,807.74, which case remains pending in the United States District Court for the Western District of Kentucky, case no. 3:22-CV-512-CHB. On May 9, 2023, a Federal mediation session was held between the parties and a 1 year payment plan was agreed for the final amount of $630,000. Final settlement stipulation documentation is in process of being prepared.
On May 25, 2022,March 14, 2023, the Company received a notice of default from CIMA Telecom, Inc. (“CIMA”) related to that certain Platform Exclusive License Agreement, maintenance, and related agreements by and among Cuentas, CIMA, Knetik, Inc., and Auris, LLC. The notice provides that Cuentas has failed to pay $700,000 of maintenance and pass-through fees that CIMA alleges are owed under the License Agreement and also afforded Cuentas the required sixty-day period (through July 24, 2022) to cure the default as provided under the License Agreement. Cuentas disagrees with the amount owed under the License Agreement. On August 2, 2022, the Company and CIMA, along with two of CIMA’s wholly-owned subsidiaries, Knetik, Inc. (“Knetik”) and Auris, LLC, (“Auris” ) executed a Settlement Agreement and General Release (“Settlement Agreement”) which resolves the issues related to the July 8, 2022 notice of default from CIMA Telecom, Inc. (“CIMA”) related to that certain Platform Exclusive License Agreement, maintenance, and related agreements (collectively, the “License Agreement”) by and among Cuentas, CIMA, Knetik, Inc., and Auris, LLC. The Parties have signed Mutual General Releases and the settlement terms are as follows: In exchange for the consideration provided in the Settlement Agreement, (1) Cuentas paid CIMA $350,000.00 on August 2, 2022 and (2) on or before 5:00 p.m New York City time, on August 15, 2022, Cuentas will pay CIMA the balance of the Unpaid Fees ($420,239.78) by wire transfer (3) will have a period of 30 days from execution date, the exclusive right to facilitate a third party (including to current shareholders and directors of Cuentas) purchase (without markup or broker fee) of, all of the shares of Cuentas held by CIMA at the higher of: (i) the average per share trading price for the three day average before notice in writing is provided by Cuentas of the intent to purchase CIMA’s Cuentas shares, or (ii) the minimum price of $0.50 per share on or before 5:00 p.m. New York City time, on August 31, 2022 pursuant to a purchase agreement delivered by and acceptable to CIMA without any changes thereto (provided, that CIMA shall not be required to provide any representations or warranties other than fundamental warranties related to (a) organization and good standing, (b) power and authority to undertake the transaction and (c) ownership of such shares, and ordinary representations and warranties that the Cuentas shares are being transferred free and clear of any liens, claims, or encumbrances); and (iv) on or before 5:00 p.m. New York City time, on August 2, 2022, Cuentas shall, and shall cause (x) Dinar Zuz, LLC, (y) Michael De Prado and (z) Arik Maimon to provide signed waiver letters, expressly waiving any right of first refusal and co-sale rights granted in their favor under that certain letter agreement, dated December 31, 2019, by and among CIMA, Dinar Zuz, LLC, Michael Del Prado and Arik Maimon, and (y) CIMA agrees: (i) to restore immediately Cuentas’s access to the Platform upon receipt of the $350,000.00 payment ; (ii) to provide Cuentaswas served with a limited license to utilize the Platform the termscomplaint for Breach of which are detailed specifically in Section 6Contract of the agreement, and to use reasonable efforts, subject to Cuentas’ compliance hereto, to provide Cuentas’ customer data to Cuentas through the end of the limited license term described below in Section 6 of the agreement; (iii) deliver to Cuentas the Source Code (as that term is defined in paragraph 1.18 of the License Agreement) relating to Out-Of-Scope Services, and as further detailed in Section 6 of the agreement; (iv) not enforce its rights under the Side Letter (as that term is defined in the paragraph 1.1 of the Purchase Agreement) through and including August 31, 2022, and (v) shall not transfer, sell, or encumber its Cuentas shares through and including August 31, 2022, except as permitted herein. Cuentas acknowledges and agrees that the amount of Unpaid Fees ($770,239.78) is valid and outstanding, and waives any right to dispute them. If Cuentas fails to comply with any term of this Settlementan Employment Agreement in additionexcess of $30,000. As of March 31, 2023, the company accrued $35,000 due to the Stipulated Judgment described in Section 5 of the agreement, the limited license set forth in Section 6 and any of CIMA’s obligations under this Settlement Agreement shall become null and CIMA shall have the right to shut off Cuentas access to the Platform without notice. The Settlement Agreement also provides for mutual general releases by Cuentas for the benefit of CIMA and by CIMA for the benefit of Cuentas of all claims other than claims relating to a breach of the Settlement Agreement. The settlement agreement by its terms in effect terminates the obligations under the license agreement, dated December 31, 2019 by and between Cuentas and CIMA.matter.
ITEM 1A. RISK FACTORS
Not applicable.
8
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 4, 2022,February 3, 2023, the issued Core 295,282 of the Company’s common shares to acquire the 6% equity in the Lakewood Manager valued at $700,000. The 295,282 of the Company’s share was equal to 19.9% of the total number of current issued and outstanding shares of the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) withas of the date of this Agreement. The Company closed this transaction on or about March 9th, 2023.
On February 6, 2023, issued an institutional investor (the “Purchaser”“Investor”) pursuant to whichfor the Purchaser agreed to purchase, andpurpose of raising approximately $5 million in gross proceeds for the Company agreed to issue and sell to the Purchaser in a private placement, an aggregate of 1,655,000(i) 163,344 shares (the “Shares”) of the Company’s common stock $0.001 par value, pre-funded warrants(“Common Stock”) and (ii) pre-warrants to purchase up to 2,569,044128,031 shares of Common Stock (the “Pre-Funded Warrants” and warrants to purchase up to 4,224,044such shares of Common Stock. TheStock issuable upon exercise of the Pre-Funded Warrants, the “Pre-Funded Warrant Shares”) and, in a concurrent private placement, warrants (the “Purchase Warrants”) to purchase price per Share and associated291,375 shares of Common Stock Warrant was $0.71022 and the purchase price per Pre Funded Warrant and associated(the shares of Common Stock issuable upon exercise of the Purchase Warrants, the “Purchase Warrant was $0.71012. Each Common Stock Warrant entitlesShares”).As of March 31, 2023 the holder to purchase one share of Common StockPre-Funded Warrants were exercised in full. The Purchase Warrants will be exercisable on or before August 5, 2023 and will expire exercisable on or before August 5, 2028 at an exercise price of $0.59 per share. Each Pre Funded Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $0.0001$17.16 per share. The Common Stock Warrants are exercisable for a period of five years and six months commencing on the issuance date and the Pre Funded Warrants are exercisable until exercised. The Warrants also contain customary beneficial ownership limitations that may be waived at the option of each holder upon 61 days’ notice to the Company. The Private Placement closed on August 8, 2022. The gross proceeds to the Company, before deducting placement agent fees and other offering expenses, are approximately $3.0 million. On August 4, 2022, in connection with the Private Placement, the Company entered into a registration rights with the Purchaser, pursuant to which the Company agreed to file a registration statement with the Securities and Exchange Commission (the “SEC”) to register for resale the Shares and any sharesclosing of the Company’s common stock issuable upon exercisesales of these securities under the Warrants within 30 days of the signing of the Registration RightsPurchase Agreement with such registration statement becoming effective within 60 days after the signing of the Registration Rights Agreement,occurred on or about February 8, 2023, subject to adjustment in the eventsatisfaction of a review by the SEC. The Company is subject to customary penalties and liquidated damages in the event it does not meet certain filing requirements and deadlines set forth in the Registration Rights Agreement.
Pursuant to an engagement agreement,closing conditions. H.C. Wainwright & Co., LLC (the “Placement Agent’(“Wainwright”) was engaged by the Company to actis acting as itsexclusive placement agent for the Private Placement. Theoffering pursuant to an engagement agreement between the Company and Wainwright dated as of December 13, 2022. As compensation for such placement agent services, the Company has agreed to pay the Placement Agent aWainwright an aggregate cash fee equal to 7.0% of the gross proceeds received by the Company infrom the Private Placement, in additionoffering, plus a management fee equal to 1.0% of the reimbursementgross proceeds received by the Company from the offerings, a non-accountable expense of certain$65,000 and $15,950 for clearing expenses. The Company has also agreed to issue to the Placement AgentWainwright or its designees warrants to purchase up to 295,68320,397 shares of Common Stock exercisable for(the “PA Warrants” and the shares of Common Stock issuable upon exercise of the PA Warrants, the “PA Warrant Shares”). The PA Warrants have a periodterm of five years and six months commencing onfrom the issuance date atand have an exercise price of $0.8878$23.17 per share. We
On March 16, 2023, the Company issued such15,385 shares of its Common Stock pursuant to a settlement agreement with a shareholder of the Company. The fair market value of the shares at the issuance date was approximately $120,000.
On March 27, 2023, the Company issued 27,759 shares of its Common Stock pursuant to a Service Agreement between the Company and a service provider. The fair market value of the shares at the issuance date was approximately $136,000.
9
Each of the transactions described in this Item II give effect to the Reverse Stock Split (as defined below) and were exempt from the registration requirements of the Securities Act of 1933, as amended (“Securities Act”), in reliance on the exemptions from registration pursuant toupon Section 4(a)(2) of the Securities Act.Act, Regulation D promulgated under the Securities Act .
ITEM 3. DEFAULTS UPON SENIOR DEBT
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
On May 27, 2022, the Company entered into a Membership Interest Purchase Agreement (the “MIPA”) with SDI Black 011, LLC (“SDI Black”), the holders of all the membership interests of SDI Black and Cuentas SDI, LLC, a Florida limited liability (“Cuentas SDI”), for the acquisition of 19.99% of the membership interests of Cuentas SDI in exchange for $750,000. The Company also has the right to close on the potential acquisition of the remaining 80.01% of the membership interests of Cuentas SDI within 60 days (with a potential 30 day extension, the “Potential Acquisition Period”) in exchange for a purchase price of an additional $2.459,000. SDI Black previously transferred all of its assets including the platform, portals, domain names, and related software necessary to conduct its business to Cuentas SDI. The MIPA further provides that during the Potential Acquisition Period, the Company will invoice and Cuentas SDI will pay invoices on a seven-net-ten day basis and during this same period, Cuentas SDI will allow the Company to realize 40% of the Cuentas SDI gross revenues and reflect 40% of the gross revenues on its books and records. The MIPA contains a number of representations and warranties by each of the parties thereto which we believe are customary for transactions similar to the transactions contemplated by the MIPA.None.
10
None
ITEM 6. EXHIBITS
| Exhibit No. | Description | Location | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith | ||
| 10.1 | Operating Agreement signed April 13, 2023 | Form 8-K filed at April 19, 2023 | ||
| 10.2 | Addendum to Purchase and Sale Agreement signed April 14, 2023 | Form 8-K filed at April 19, 2023 | ||
| 101.INS | Inline XBRL Instance Document. | Filed herewith | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | Filed herewith | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith | ||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | Filed herewith |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Cuentas, Inc. | ||
| (Registrant) | ||
| Date: | By: | /s/ |
| Interim Chief Executive Officer | ||
| By: | /s/ Ran Daniel | |
| Chief Financial Officer | ||
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