Cuentas Inc 10-Q for FY2021 Q2
Cuentas Inc. (CUEN)
About this 10-Q
Cuentas Inc filed this 10-Q on August 23, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $155K
- up 32.5% from $117K a year earlier
- Net loss
- $2M
- compared with a net loss of $1.24M a year earlier
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
FOR THE THREE MONTH PERIOD ENDED:
For the transition period from ______________ to ______________
Commission File Number:
(Exact name of Registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
800-611-3622
(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 | ||
| The | ||||
| 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.
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).
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 | ☐ |
| ☒ | 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 ☐
Indicate the number of shares outstanding of each of
the issuer’s classes of common equity, as of the latest practicable date: As of August 23, 2021, the issuer had
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUENTAS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2021
TABLE OF CONTENTS
i
CUENTAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands except share and per share data)
| June 30, 2021 | December 31, 2020 | |||||||
| Unaudited | Audited | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | ||||||||
| Accounts Receivables | ||||||||
| Marketable securities | ||||||||
| Related parties | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and Equipment, net | ||||||||
| Intangible assets | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | ||||||||
| Other accounts liabilities | ||||||||
| Deferred revenue | ||||||||
| Notes and Loan payable | ||||||||
| Convertible Note | ||||||||
| Related parties’ payables | ||||||||
| Stock based liabilities | ||||||||
| Total current liabilities | ||||||||
| Other long-term loans | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 1 |
CUENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
(U.S. dollars in thousands except share and per share data)
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUE | ||||||||||||||||
| COST OF REVENUE | ||||||||||||||||
| GROSS PROFIT (LOSS) | ( | ) | ( | ) | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Amortization of Intangible Assets | ||||||||||||||||
| General and administrative | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME | ||||||||||||||||
| Other income (loss) | ( | ) | ||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on derivative liability | ||||||||||||||||
| Gain from Change in fair value of stock-based liabilities | ||||||||||||||||
| TOTAL OTHER INCOME (LOSS) | ( | ) | ( | ) | ||||||||||||
| NET LOSS BEFORE CONTROLLING INTEREST | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST | ( | ) | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO CUENTAS INC. | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per basic share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per diluted share | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average number of basic shares of common stock outstanding | ||||||||||||||||
| Weighted average number of diluted shares of common stock outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 2 |
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 | Deficit | ||||||||||||||||
| Balance as of December 31, 2020 | ( | ) | ||||||||||||||||||
| Issuance of Shares of Common Stock, net of issuance expenses ** | ||||||||||||||||||||
| Issuance of Warrants | ||||||||||||||||||||
| Shares issued for services and for employees | ||||||||||||||||||||
| Shares issued due to exercise of Warrants, net of issuance expenses ** | ||||||||||||||||||||
| Shares issued due to conversion of Convertible Note | ||||||||||||||||||||
| Return of Commitment Shares | ( | ) | ||||||||||||||||||
| Roundup Differences due to Reverse Split | ||||||||||||||||||||
| Net income for the period ending June 30, 2021 | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| * |
| ** |
| *** | Issuance expenses totaled to $103 |
The accompanying notes are an integral part of these consolidated financial statements
| 3 |
CUENTAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
| Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income (loss) before non-controlling interest | ( | ) | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock based compensation and shares issued for services | ||||||||
| Loss on fair value of marketable securities | ( | ) | ( | ) | ||||
| Interest on loans | ||||||||
| Gain on derivative fair value adjustment | ( | ) | ||||||
| Gain from change in on fair value of stock-based liabilities | ( | ) | ( | ) | ||||
| Depreciation and amortization expense | ||||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other receivables | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Other Accounts payable | ( | ) | ||||||
| Related parties, net | ( | ) | ||||||
| Deferred revenue | ||||||||
| Net Cash Used by Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of Intangible Asset | ( | ) | ||||||
| Net Cash used for Investing Activities | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Related party, net | ( | ) | ||||||
| Proceeds from issuance of common stock due to exercise of warrants | ||||||||
| Repayment of loans | ( | ) | ||||||
| Proceeds from issuance of common stock, net of issuance expense | ||||||||
| Proceeds from issuance of warrants | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase in Cash | ||||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | ||||||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Common stock issued for conversion of convertible note principal | ||||||||
| Common stock issued for settlement of stock-based liabilities and accrued salaries | ||||||||
| Issuance fee with connection to issuance of common stock due to exercise of warrants | - | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| 4 |
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 focused on financial technology (“FINTECH”) services, delivering mobile banking, online banking, prepaid debit and digital content services to unbanked, underbanked and underserved communities. The Company derives its revenue from the sales of prepaid and wholesale calling minutes. 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 GPR cards targeted towards the Latin American market.
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 subsidiaries are Meimoun and Mammon,
LLC (
On December 6, 2017, the Company completed its
formation of SDI NEXT DISTRUBUTION LLC (“SDI Next”) in which the Company owns a
On December 31, 2019, the Company entered into a series of integrated transactions to license the Platforms (as defined below) from CIMA Telelcom Inc. (“CIMA”) , through CIMA’s wholly owned subsidiaries Knetik, and Auris (the “Transaction Closing”) pursuant to that certain Platform License Agreement, dated December 31, 2019 by and among (i) the Company, (ii) CIMA, (iii) Knetik and (iv) Auris (the “License Agreement”) and the various other agreements listed below. The platforms are comprised of CIMA Group’s Knetik and Auris software platforms (the “Platforms”). The platforms are built on a powerful integrated component framework delivering a variety of capabilities accessible by a set of industry standard REST-based API endpoints. In addition to handling electronic transactions such as deposits and purchasing, the platform will have the capability of organizing virtual currencies into wallets, essentially future proofing it in today’s evolving financial environment. It enables the organizing of the user’s monetary deposits into a tree-based set of wallets, through strictly enforced user permissions, to delineate proper controls in a tiered monetary asset organizational structure, thus providing a sound basis for family and/or corporate control and distribution of funds across individuals.
Under the License Agreement CIMA received a one-time licensing fee in the amount of $9,000 in the form of a convertible note that may be converted, at the option of CIMA, into up to 25% of the total shares of Common Stock of the Company, par value $0.001 per share (the “Common Stock”) on a fully diluted basis as of December 31, 2019. On December 31, 2019, CIMA exercised its option to convert the Convertible Promissory Note into 702,992 shares of Common Stock of the Company. Upon the conversion of the Series B Preferred shares into common stock, CIMA received an additional two million shares pursuant to their anti-dilution warrant agreement.
| 5 |
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
The intangible assets acquired from CIMA consisted
of a perpetual software license that had an estimated fair value of $
| Asset | Amount | Life (months) | ||||||
| Intangible Assets | $ | |||||||
| Total | $ | |||||||
On March 5, 2021, the Company purchased the domain
www.cuentas.com in consideration of $
| Asset | Amount | Life (months) | ||||||
| Intangible Assets | $ | |||||||
| Total | $ | |||||||
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment.
Amortization of intangible assets for each of the next five years and thereafter is expected to be as follows:
| Year ended December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | $ | |||
Amortization expense
was $
Pursuant to the License Agreement, the Company shall pay CIMA annual fees for the maintenance and support services in accordance with the following schedule: (i) for the first (1st) calendar year from the Effective Date, $300 were paid in 2020; (ii) for the second (2nd) calendar year from the Effective Date, $500 to be paid on December 31, 2020; (iii) for the third (3rd) calendar year from the Effective Date, $700 to be paid on December 31, 2021; (iv) for the fourth (4th) calendar year from the Effective Date, $1,000 to be paid on December 31, 2022; (v) for the fifth (5th) calendar year from the Effective Date, $640 to be paid on December 31, 2022; and (vi) for each calendar year thereafter, $640 to be paid on the anniversary date.
REVERSE SPLIT
On February 2, 2021, the Company completed a reverse
stock split of its common stock. As a result of the reverse stock split, the following changes have occurred
On February 2, 2021 the Company’s common stock and warrants began trading on The Nasdaq Capital Market under the symbols “CUEN” and “CUENW,” respectively.
COVID-19
In December 2019, 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 of the world, including 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. The extent to which COVID-19 impacts our business and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. 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 affected.
| 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-months ended June 30, 2021. However, these results are not necessarily indicative of results for any other interim period or for the year ended December 31, 2021. 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, 2020, filed with the SEC on March 25, 2021 (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, 2020.
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.
| 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 six months ended June 30, 2021:
| Deferred Revenue | ||||
| Balance at December 31, 2020 | $ | |||
| Change in deferred revenue | ||||
| Balance at June 30, 2021 | $ | |||
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.
| 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, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | ||||||||||||||||
| Total assets | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | ||||||||||||||||
| Total liabilities | ||||||||||||||||
| Balance as of December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | ||||||||||||||||
| Total assets | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | ||||||||||||||||
| Total liabilities | ||||||||||||||||
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity.
| 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 pronouncements issued but not effective as of June 30, 2021 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.
NOTE 3 – STOCK OPTIONS
The following table summarizes all stock option activity for the nine months ended June 30, 2021:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Forfeited | ||||||||
| Outstanding, June 30, 2021 | $ | |||||||
The following table discloses information regarding outstanding and exercisable options at June 30, 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 | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
| 10 |
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 4 – STOCKHOLDERS’ EQUITY
Common Stock
The following summarizes the Common Stock activity for the six months ended June 30, 2021:
| Summary of common stock activity for the six months ended June 30, 2021 | Outstanding shares | |||
| Balance, December 31, 2020 | ||||
| Shares of Common Stock issued in public offering | ||||
| Shares issued due to exercise of Warrants | ||||
| Roundup Differences due to Reverse Split | ||||
| Shares issued due to conversion of Convertible Note | ||||
| Return of commitment shares | ( | ) | ||
| Shares issued for services | ||||
| Shares issued to employees | ||||
| Balance, June 30, 2021 | ||||
On February 2, 2021, the Company issued
On February 2, 2021 the Company’s common
stock and warrants began trading on The Nasdaq Capital Market under the symbols “CUEN” and “CUENW,” respectively.
On February 4, 2020 the Company sold an aggregate of
On March 4, 2021 and pursuant to the Underwriting
Agreement, Maxim exercised its 45-day option to purchase up to
On March 17, 2021, the Company issued
On April 20, 2021 the Company paid off its loan
and accrued interest in the amount of $
On June 17, 2021 the Board of the Company approved
the Cuentas Inc. 2021 Share Incentive Plan (the “2021 Plan”). which will be approved by the shareholders in a future date.
The maximum number of shares of stock reserved and available for issuance under the 2021 Plan is
On June 30, 2021,
| 11 |
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 5 – RELATED PARTY TRANSACTIONS
Related party balances at June 30, 2021 and December 31, 2020 consisted of the following:
Related party payables, net of discounts
| June 30, 2021 | December 31, 2020 | |||||||
| (dollars in thousands) | ||||||||
| (a) Due to Next Communications, Inc. (current) | $ | $ | ||||||
| (b) Principal and interest due to Dinar Zuz LLC due to Dinar Zuz LLC | ||||||||
| (c) Due to Cima Telecom Inc. | ||||||||
| Total Due to related parties | $ | $ | ||||||
| (a) | Next Communication, Inc. is a corporation in which the Company’s Chief Executive Officer had a controlling interest and served as the Chief Executive Officer. |
| (b) | Due to the April 6, 2020 Loan Agreement with the Company to borrow up to $ |
| (c) | Composed from annual fees in the amount of $ |
Employment Agreements
On February 24, 2021, the employment agreement dated July 24, 2020 for Arik Maimon expired in accordance with its terms and as previously disclosed by the Company. As a result of the expiration of the employment agreement, Mr. Maimon was no longer employed as the Chief Executive Officer of the Company, but he continued to act as Chairman of the Board of Directors of the Company. On February 25, 2021, the Board appointed Mr. Maimon to act as interim Chief Executive Officer, which position will terminate upon the earlier of August 25, 2021 or the date on which his successor is duly elected and appointed by the Board of the Company.
On February 24, 2021, the employment agreement dated July 24, 2020 for Michael De Prado expired in accordance with its terms and as previously disclosed by the Company. As a result of the expiration of the employment agreement, Mr. De Prado is no longer the President of the Company but has become the Vice Chairman of the Board.
On March 5, 2021 and pursuant to the Side Letter Agreement, the Board
of Directors of the Company approved a special bonus in the amount of $
NOTE 6 – 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 $
| 12 |
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
On October 23, 2018, the Company was served by
Telco Cuba Inc. for an amount in excess of $
On October 25, 2018,
On
November 7, 2018, the Company and its now former subsidiary, Limecom, were served with a complaint by IDT Domestic Telecom, Inc. for telecommunications
services provided to Limecom during 2018 in the amount of $
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 Cuentas.
On May 25, 2021, the Company received a notice of
demand from Vitco LLC and Vitaliy Yurchenko, who allegedly had a licensing agreement entered into with NextGn LLC, a former subsidiary
of the Company. The alleged terms of the agreement require payment of $
On April 1, 2021 the Company executed a lease
for office space effective April 1, 2019. The lease requires monthly rental payments of $
NOTE 7 – SUBSEQUENT EVENTS
On July 1, 2021,
On July 1, 2021, the Company issued
On July 2, 2021,
On or about July 15, 2021, the Company, its CEO and
other third parties were served with a complaint by Larry Kolb (“Kolb”) as part as shareholder’s derivative action under
the law of the State of Florida for Breach of Agreement, Breach of Contract, Wage theft, Fraud, Fraudulent Transfer, Breach of Covenant
against the Company, its CEO and other third parties.
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CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
On July 21, 2021, The Company and WaveMAX entered
into a Definitive Joint-Venture Agreement (the “Agreement”). Pursuant to the Agreement, Cuentas and WaveMax are to form a
joint venture (“JVLLC”) which would install WiFi6 shared network (“WSN”) systems in 1,000 retail locations
in the New York metropolitan tristate area using access points and small cells to provide users with access to the WSN (the “JV
Project”). The WSN will allow the JVLLC to generate location-based advertising configured by advertisers using WaveMAX’s advertising
dashboard technology directly to users over the WSN, or permit users to pay a service fee for ad-free access to the WSN. The ownership
and management of the JVLLC shall be as follows:
On August 2, 2021, the Company’s Board of
Directors approved the payment of the remainder of the up-listing bonus to Mr. Maimon and Mr. De Prado in the amount of $
On August 4, 2021,
| ● | 6 months to register 3,000 active cardholders |
| ● | 1 year to register 15,000 active GPR cardholders, |
| ● | 2 years to register 30,000 active GPR cardholders; and |
| ● | 3 years to register 50,000 [active] GPR cardholders. |
If Benelisha reaches these milestone goals, it will be rewarded with Most Favored Nation (MFN) status along with compensation consisting of 32% of Net Revenue from new cardholders that Benlisha registers and maintain on the Cuentas GPR Platform. After year 3, Benelisha may continue to maintain MFN status by registering 50,000 new cardholders each year after. If Benelisha does not maintain MFN status, it will still receive compensation of 32% of Net Revenue for the active cardholders it maintains.
On August 5, 2021, the Company and its Chief Financial Officer entered
in an Amendment of his Employment Agreement where his annual base salary will be $
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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, 2020. 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, 2020, and in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021.
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
Company Overview
The Company is a corporation incorporated under the laws of Florida on September 21, 2005, which focuses on the business of using proprietary technology to provide e-banking and e-commerce services delivering mobile banking, online banking, prepaid debit and digital content services to the unbanked, underbanked and underserved communities. The Company’s exclusivity with CIMA’s proprietary software platform enables Cuentas to offer comprehensive financial services and additional robust functionality that is absent from other General-Purpose Reloadable Cards (“GPR”).
Amendment to Bylaws
On December 30, 2020, in connection with the Company’s IPO, the Company amended its Bylaws to, among other items:
| ● | allow a majority of the directors to have the power to determine and declare whether a director was nominated in accordance with the prescribed procedures; |
| ● | allow a majority of the directors to have the power to determine and declare whether a business proposal was made in accordance with the prescribed procedures; |
| ● | allow the directors to appoint the chairman for each meeting of the shareholders; |
| ● | require that committees of the board be comprised of at least three members, each of whom must be independent; and |
| ● | allow for the compensation committee to review and approve compensation. |
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Reverse Split
On January 28, 2021, the Company filed Articles of Amendment to the Articles of Incorporation of the Company with the Secretary of State of Florida, pursuant to which, effective as of February 2, 2021, the Company effected a 1-for-2.5 reverse split of its authorized and issued and outstanding shares of Common Stock. No fractional shares will be issued as a result of the reverse stock split. Fractional shares will be rounded up the nearest whole share, after aggregating all fractional shares held by a stockholder.
Entry into and Repayment of a Short-Term Loan with Labrys Funds LP
On September 2, 2020, the Company issued the Labrys Note to Labrys Funds LP (“Labrys”). The Labrys Note bears interest at a rate of 12% per annum, and was to mature on September 2, 2021. An amortized, monthly payment of principal and interest in the sum of $67,760 started in December 2020, with ability to extend the starting date of such amortized payments for up to two months upon notice, and the remaining loan principal becomes payable on maturity. The Labrys Note had an original issue discount in the amount of $60,500, and the issuing expenses were $40,000, resulting in net proceeds of $505,000. The Company also issued 70,906 shares of its Common Stock to Labrys. Out of those, 16,500 shares of Common Stock were issued in consideration of a commitment fee and the balance are subject to return to the Company once the Labrys Note is paid in full, if there were no defaults. In the event of a default, as defined in the Labrys Note, Labrys would have the right, to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the date of the Labrys Note, or any shares of capital stock or other securities of the Company into which such Common Stock shall be changed or reclassified, at the conversion price as set forth in the Labrys Note. On February 12, 2021, the Company prepaid its loan to Labrys and Labrys returned the Second Commitment shares to the Company.
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The Company 2021 Share Incentive Plan
On June 17, 2021 the Board of the Company approved the Cuentas Inc. 2021 Share Incentive Plan (the “2021 Plan”). which will be approved by the shareholders in a future date. The maximum number of shares of stock reserved and available for issuance under the 2021 Plan is 1,800,000 shares. The 2021 Plan is designed to enable the flexibility to grant equity awards to the Company’s officers, employees, directors and consultants as determined by the Company’s Compensation Committee.
Entry into a Joint-Venture Agreement with WaveMAX Corporation (“WaveMax”)
On July 21, 2021, The Company and WaveMAX entered into a Definitive Joint-Venture Agreement (the “Agreement”). Pursuant to the Agreement, Cuentas and WaveMax are to form a joint venture (“JVLLC”) which would install WiFi6 shared network (“WSN”) systems in 1,000 retail locations in the New York metropolitan tristate area using access points and small cells to provide users with access to the WSN (the “JV Project”). The WSN will allow the JVLLC to generate location-based advertising configured by advertisers using WaveMAX’s advertising dashboard technology directly to users over the WSN, or permit users to pay a service fee for ad-free access to the WSN. The ownership and management of the JVLLC shall be as follows: 50% to Cuentas, 25% to WaveMAX and 25% to Consultoria y Asesoria de Redes, S.A. de C.V. (“Execon”). Execon currently manages approximately 20,000 WiFi endpoints with WaveMax in Mexico. Each of the Company and WaveMAX agrees to fund $120,000 (for a total of $240,000) initially upon execution of the Agreement. In addition, each of Cuentas and WaveMAX has agreed to fund an additional $127,500 over the succeeding five months, in each case, subject to approval of each party’s board of directors and $500,000 from revenue in the first year of operation. The expenses of the JV Project shall include acquiring the Access Points hardware, the installation and configuration of the Access Points hardware for use with the broadband internet service at each Retail Location, entering into the necessary agreements with the Retail Locations, instore marketing and promotion of the WSN program, and expenses relating to commercialization of the digital advertising program.
The Board of Directors of the JVLLC shall initially be comprised of four persons, two designated by Cuentas, one designated by WaveMAX, and one designated by Execon. The officers of the JVLLC shall be the persons from time to time designated by mutual agreement of Cuentas and WaveMAX, with the initial officers to be determined.
The 1,000 high traffic, prime location convenience stores and “bodegas” (small community markets) will be signed up in conjunction with Cuentas’ distribution network that sells prepaid debit card, e-store, e-wallet and digital services.
A fee of 2% (two percent) of the Net Revenue of the JVLLC will be paid by the JVLLC on a monthly basis as a commission to Innovateur Management SAPI de CV
WaveMax and Innovateur Management, SAPI de CV will be included in the Cuentas Share Incentive plan subject to approval by the Cuentas BOD and approval by Cuentas shareholders and Side Letter Participants at the next scheduled Annual Shareholders meeting.
WaveMAX grants the JVLLC exclusive rights to use and deploy the WaveMAX Technology, including any and all patents owned or to be owned by WaveMAX and any and all related enhancements or applications of the WaveMAX Technology and any and all prior and subsequent improvements and/or new technology developed by WaveMAX solely in Cuentas BODEGAS network throughout the United States.
The parties have agreed to expand the JVLLC to other areas of the US once the current deployment is in progress or has been completed.
Entry into a Joint-Venture Agreement with Benelisha Group, Inc. (“Benelisha”)
On August 4, 2021, the Company and Benelisha entered into a Definitive Marketing and Promotion Agreement (the “Belisha Agreement”). Pursuant to the Belisha Agreement, the Company and Benelisha will market and promote Cuentas GPR cards and the mobile phone application (“DC/MA”) products to Benelisha customers. During the Term, Benelisha’s goal is to register Benelisha customers to become activated users of Cuentas DC/MA products by the following milestone goals.
| ● | 6 months to register 3,000 active cardholders |
| ● | 1 year to register 15,000 active GPR cardholders, |
| ● | 2 years to register 30,000 active GPR cardholders; and |
| ● | 3 years to register 50,000 [active] GPR cardholders. |
If Benelisha reaches these milestone goals, it will be rewarded with Most Favored Nation (MFN) status along with compensation consisting of 32% of Net Revenue from new cardholders that Benlisha registers and maintain on the Cuentas GPR Platform. After year 3, Benelisha may continue to maintain MFN status by registering 50,000 new cardholders each year after. If Benelisha does not maintain MFN status, it will still receive compensation of 32% of Net Revenue for the active cardholders it maintains.
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Results of operations for the six months ended June 30, 2021 and 2020
Revenue
Revenues during the six months ended June 30, 2021 totaled $380,000 compared to $251,000 for the six months ended June 30, 2021. The Company generated most of its revenue through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services.
Costs of Revenue
Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs. Cost of revenues during the six months ended June 30, 2021 totaled $270,000 compared to $385,000 for the six months ended June 30, 2020. Cost of revenue consists mainly of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products. Cost of revenue also included costs related to the sale of the Company’s GPR Card in the amount of $38,000 due to additional developments and testing that the Company conducted on its GPR product.
Gross Profit (Loss)
Gross profit (loss) is the net profit (loss) existing after the Cost of Sales. Gross Profit increased to $110,000 for the six months ended June 30, 2021, as compared to a loss of $134,000 for the same period in the prior year. The increase in gross profit for the six months ended June 30, 2021, as compared to the same period in the prior year, was primarily a result of higher profits in our telecom business.
Stock-based Compensation and shares issued for services
Stock-based compensation and shares issued for services expenses decreased to $286,000 for the six months ended June 30, 2021 from $1,205,000 for the six months ended June 30, 2020 as a result of fewer issuance of shares issued for employees and for service providers and a decrease in the share price.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses totaled $2,525,000 during the six months ended June 30, 2021 compared to $1,593,000 during the six months ended June 30, 2021 representing a net increase of $857,000. The increase in the operating expenses is mainly due to increase in the agreed Incomm payment in the amount of $260,000, increase in the agreed maintenance and support services in accordance with the software maintenance agreement with CIMA in the amount of $100,000, increase in our D&O insurance expenses in the amount of $237,000, settlement expense in the amount of $75,000 and increase in our compensation and director fees in the approximate amount of $145,000.
decrease in Stock based compensation and shares issued for services which was mitigated by an increase in compensation cost, software development and maintenance and the agreed Incomm monthly payment.
Amortization of Intangible assets
Amortization of Intangible assets totaled $905,000 for the six months ended June 30, 2021 and $900,000 for six months ended June 30, 2020, respectively. The increase is due to the amortization of the domain cuentas.com which was purchased by the Company during the six months ended June 30, 2021 in consideration of approximately $47,000.
Operating Expenses
Operating expenses totaled $3,716,000 for the six months ended June 30, 2021 compared to $3,698,000 during the six months ended June 30, 2020 representing a net increase of $18,000. The increase in the operating expenses is mainly due to an increase in compensation cost, software development and maintenance, settlement expense and the agreed Incomm monthly payment which were mitigated by the decrease in Stock based compensation and shares issued for services.
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Other Income (Expenses)
The Company recognized other expense of $70,000 during the ended June 30, 2021 compared to income of $436,000 during the six months ended June 30, 2020. The net change from the prior period is mainly due to the change in our stock-based liabilities and interest expenses that we occurred. Gain from Change in Fair Value of stock-based liabilities for the six-month period ended June 30, 2021 was $359,000 as compared to a gain of $99,000 for the six-month period ended June 30, 2020. The gain (loss) is attributable to the decrease in the Fair Value of our stock-based liabilities mainly due to the decrease (increase) in the price of share of our common stock.
Net Income (Loss)
We incurred a net loss of $3,676,000 for the six-month period ended June 30, 2021, as compared to a net loss of $3,399,000 for the six-month period ended June 30, 2020.
Results of operations for the three months ended June 30, 2021 and 2020
Revenue
Revenues during the three months ended June 30, 2021 totaled $155,000 compared to $117,000 for the three months ended June 30, 2021. The Company generated most of its revenue through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services.
Costs of Revenue
Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs. Cost of revenues during the three months ended June 30, 2021 totaled $23,000 compared to $208,000 for the three months ended June 30, 2020. Cost of revenue consists mainly of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products. Cost of revenue also consisted from cost related to the sale of the Company’s GPR Card in the amount of $7,000 due to additional developments and testing that the Company conducted on its GPR product.
Gross Profit
Gross profit (loss) is the net profit (loss) existing after the cost of sales. Gross Profit increased to a profit of $132,000 for the three months ended June 30, 2021, as compared to a loss of $91,000 for the same period in the prior year. The increase in gross profit for the three months ended June 30, 2021, as compared to the same period in the prior year, was primarily a result of higher profits in our telecom business.
Stock-based Compensation and shares issued for services
Stock-based compensation and shares issued for services expenses decreased to $10,000 for the three months ended June 30, 2021 from $80,000 for the three months ended June 30, 2020 as a result of fewer issuance of shares issued for employees and for service providers and a decrease in the share price.
Other Selling, General and Administrative Expenses
Other selling, general and administrative expenses totaled $1,673,000 during the three months ended June 30, 2021 compared to $675,000 during the three months ended June 30, 2020, representing a net increase of $913,000. The increase in the operating expenses is mainly due increase in the agreed Incomm payment in the amount of $120,000, increase in the agreed maintenance and support services in accordance with the software maintenance agreement with CIMA in the amount of $50,000, settlement expense in the amount of $75,000, increase in our D&O insurance expenses in the amount of $142,000, increase in our marketing expenses of $112,000 and increase in our compensation and director fees in the approximate amount of $259,000. ..
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Amortization of Intangible assets
Amortization of Intangible assets totaled $453,000 for the three months ended June 30, 2021 and $450,000 for three months ended June 30, 2020, respectively. The increase is due to the amortization of the domain cuentas.com which was purchased by the Company during the six months ended June 30, 2021 in consideration of approximately $47,000.
Operating Expenses
Operating expenses totaled $2,126,000 for the three months ended June 30, 2021 compared to $1,159,000 during the three months ended June 30, 2020 representing a net increase of 967,000. The increase in the operating expenses is mainly due increase in compensation cost, settlement expense, software development and maintenance and the agreed Incomm monthly fee during the three months ended June 30, 2021.
Other Income
The Company recognized other expense of $7,000 during the ended June 30, 2021 compared to income of $14,000 during the three months ended June 30, 2020.
Net Loss
We incurred a net loss of $2,001,000 for the three-month period ended June 30, 2021, as compared to a net loss of $1,236,000 for the three-month period ended June 30, 2020.
We may incur future operating losses. To regain and sustain profitability, we must, among other things, incrementally grow and maintain our customer base, sell our GPR products to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.
We believe that our success will depend in large part on our ability to (a) grow sales, (b) manage our operating expenses, (c) add customers to our client base, (d) meet evolving customer requirements and (e) adapt to technological changes in an emerging market. We continue to invest in our sales force and technology platforms to drive revenue growth.
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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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.
As of June 30, 2021, the Company had $6,244,000 of cash, total current assets of $6,590,000 and total current liabilities of $3,290,000 creating a working capital of $3,300,000. As of December 31, 2020, the Company had $227,000 of cash, total current assets of $296,000 and total current liabilities of $6,480,000 creating a working capital deficit of $6,184,000. The increase in our working capital was mainly attributable to the decrease in Accounts Payables in the amount of $861,000, decrease in our other Accounts Payables in the amount of $1,165,000 and increase in our Cash and Cash equivalents in the amount of $6,017,000.
During the first fiscal half of 2021, we sold 3,089,197 shares of common stock under our equity offering. We generated approximately $13,283 thousand in gross proceeds from the Offering and paid fees to the underwriting fee of $960 thousand, underwriter expense of $100 thousand, legal fees of $500 thousand, advisory fees of $120 thousand and installment of our director and officer insurance premium in the amount of $138 thousand. From the net proceeds of approximately $11,465 thousand we repaid the loan and accrued interest to Labrys in approximate amount of $635 thousand and a convertible note and accrued interest from a private investor in the approximate amount of $130 thousand. We also repaid our loan to loan and accrued interest from Dinar Zuz in the approximate amount of $378 thousand. In total, we prepaid an approximate amount of $1,143 thousand in principal loans and accrued interest. Additionally, we paid a special bonus in the amount of $250 thousand to each of Mr. Maimon and Mr. De Prado due to the successful up-listing of the Company’s shares on the Nasdaq Capital Markets. We also paid a special bonus in the amount of $100 thousand to Mr, Daniel due to the successful up-listing of the Company’s shares on the Nasdaq Capital Markets. We paid $200 thousand in sales and marketing fees to SDI for sale and marketing of pout GPR card in the New York and Connecticut. We also paid a settlement amount of $75 thousand. We have used the rest of funds, and intend to continue to use, the net proceeds generated from the Offering for Sales and Marketing, Purchase of chip-based debit card stock for GPR and Starter cards, Research and Development and Working capital, accrued salaries and other operating expenses.
On February 4, 2021 the Company sold an aggregate of 2,790,697 units at a price to the public of $4.30 per unit (the “Offering”), each unit consisting of one share of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and a warrant exercisable for five years to purchase one share of Common Stock at an exercise price of $4.30 per share (the “Warrants”), pursuant to that certain Underwriting Agreement, dated as of February 1, 2021 (the “Underwriting Agreement”), between the Company and Maxim Group LLC (the “Representative” or “Maxim”), as representative of the sole underwriter. In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to 418,604 additional shares of Common Stock, and/or 418,604 additional Warrants, to cover over-allotments in connection with the Offering. The Company received gross proceeds of approximately $12.0 million, before deducting underwriting discounts and commissions of 8% of the gross proceeds and estimated Offering expenses. Pursuant to the Underwriting Agreement, the Company also issued to the Underwriter warrants (the “Underwriter’s Warrants”) to purchase up to a total of 223,256 shares of Common Stock (8% of the shares of Common Stock sold in the Offering). The Underwriter’s Warrants are exercisable at $5.375 per share of Common Stock and have a term of five years. The total expenses of the offering were approximately $1.4 million, which included Maxim’s expenses relating to the offering.
On February 12, 2021, the Company prepaid its loan to Labrys and Labrys returned the Second Commitment shares to the Company. The prepayment amount was approximately $635,000.
On March 4, 2021 and pursuant to the Underwriting Agreement, Maxim exercised its 45-day option to purchase up to 418,604 additional Warrants in consideration of approximately $4,000, to cover over-allotments in connection with the Offering.
On March 5, 2021 the Company prepaid its loan to Dinar Zuz. The prepayment amount was approximately $378,000.
On April 20, 2021 the Company paid off its convertible promissory note and accrued interest in the amount of $260,000 to the private investor. The Company paid an amount equal to $125,000 plus $5,000, which represents the amount of interest accrued on such $125,000 since the date on which the loan was made under the Note through April 16, 2021. In addition, The Company issued 30,233 shares of Common Stock of the Company. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On June 30, 2021, 298,500 Warrants issued in the Offering were exercised for 298,500 shares of the Company’s common stock in consideration of $1,204,000.
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On July 1, 2021, 57,500 Warrants issued in the Offering were exercised for 57,500 shares of the Company’s common stock in consideration of $247,000.
On July 1, 2021, the Company issued 2,943 of its Common Stock par value $0.001 per share to a private investor due to a cashless exercise of warrants to purchase up to 6,667 shares of its Common Stock at an exercise price equal to $4.30 per share.
On July 2, 2021, 1,095,500 Warrants issued in the Offering were exercised for 1,095,500 shares of the Company’s common stock, par value $0.001 per share in consideration of approximately $4,711,000.
Cash Flows
Net cash used in operating activities was $4,776,000 for the six-month period ended June 30, 2021, as compared to cash used in operating activities of $1,011,000 for the six-month period ended June 30, 2020. The Company’s primary uses of cash in operating activities have been for working capital purposes as described in the Company’s Statement of Cash Flow,
Net cash used in investing activities was $47,000 for the six-month period ended June 30, 2021. Net cash used in investing activities was $0 for the six-month period ended June 30, 2020.
Net cash provided by financing activities was approximately $10,840,000 for the six-month period ended June 30, 2021, as compared to net cash provided by financing activities of approximately $1,017,000 for the six-month period ended June 30, 2020.
Due to our operational losses, we have principally financed our operations through the sale of our Common Stock and the issuance of convertible debt.
We have principally financed our operations through the sale of our Common Stock and warrants in public offerings, sales to private investors, issuance of convertible loans debt and loans from our shareholders.
Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. Such risks for us include, but are not limited to, an evolving and unpredictable business model and the management of growth.
To address these risks, we must, among other things, implement and successfully execute our business and marketing strategy surrounding the Cuentas Mastercard, continually develop and upgrade our website, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
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Off-Balance Sheet Arrangements
As at June 30, 2021, 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 3 to our consolidated audited financial statements filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 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, 2021 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.
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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. |
Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:
| ● | Lack of appropriate segregation of duties, |
| ● | Lack of information technology (“IT”) controls over revenue, |
| ● | Lack of adequate review of internal controls to ascertain effectiveness, |
| ● | Lack of control procedures that include multiple levels of supervision and review, and |
Implemented or Planned Remedial Actions in response to the Material Weaknesses
We will continue to strive to correct the above noted weakness in internal control once we have adequate funds to do so. We believe appointing a director who qualifies as a financial expert will improve the overall performance of our control over our financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management is in the process of determining how best to change our current system and implement a more effective system to ensure that information required to be disclosed has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this issue, and intends to develop procedures to address it to the extent possible given limitations in financial and human resources in and to remediate all the material weaknesses by the end of the fiscal quarter ending June 30, 2021.
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, 2021. 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, 2021 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 Cuentas. 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, Cuentas 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 Cuentas filed its reply. As of date the trial court has not yet set a date to hear this motion. In the trial court proceedings, the case remains stayed pending the outcome of the appeal. After the appeal is decided, the trial court will consider Company’s motion seeking payment from JP Carey of the Company’s attorneys’ fees and costs.
On October 23, 2018, Cuentas 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. Cuentas has hired an attorney and has taken steps to defend itself vigorously in this case. Depositions are in process of being scheduled.
On October 25, 2018, the Company was served with a complaint by former company Chief Financial Officer, Michael Naparstek, claiming breach of contract for 833,333 shares (pre-2018 reverse stock split), $25,554 of compensation and $8,823 of expenses. This case was withdrawn in Palm Beach County and on January 11, 2019, a similar complaint was filed in Miami-Dade County. During the recent mediation, the Company and Mr. Naparstek reached an understanding of full settlement amount of $2,500. The Company has deposited the settlement amount to an escrow account of its counsel until a stipulation of settlement will be executed by both parties.
On November 7, 2018, the Company and its now former subsidiary, Limecom, were served with a complaint by IDT Domestic Telecom, Inc. for telecommunications services provided to Limecom during 2018 in the amount of $50,000. The Company has no accrual expenses as of December 31, 2019, related to the complaint given the early nature of the process. Limecom was a subsidiary of the Company during this period but since the Limecom Acquisition was rescinded on January 30, 2019, and Limecom agreed to indemnify and hold harmless Cuentas from this and other debts. Cuentas hired an attorney and is defending itself vigorously in this case. A court ordered mandatory arbitration session took place and the arbitration findings were issued on June 19, 2020, and a request for trial de novo was filed on July 16, 2020, in order to have the matter docketed on the calendar. The motion for summary judgment filed by Cuentas Inc. with the New Jersey Superior Court initially set for October 16, 2020 was heard on October 30, 2020 after being rescheduled by the court. Oral arguments were held over the phone via conference call. The court came to the determination that while not indicative of success at trial, the court denied Plaintiff’s motion for summary judgment. Presently, there is a current trial date set for July 6, 2021.
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 Cuentas. 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 in damages allegedly caused by unpaid receivables that Limecom assigned to VoIP based on the RCS. On June 5, 2020, SecureIP filed a complaint against Limecom, Heritage Ventures Limited (“Heritage”), an unrelated third party and owner of Limecom, and the Company. The complaint primarily concerns alleged indebtedness owed SecureIP by Limecom. SecureIP also alleges that Cuentas received certain transfers of funds which it alleges may be an avoidable transfer under Florida Statute §725.105 up to $1,052,838.09. Cuentas is contemplating filing a motion to dismiss the complaint and disputes that it received the alleged $1,052,838.09 from Limecom. Moreover, to the extent Cuentas has exposure for any transfers from Limecom, both Limecom and Heritage have indemnified Cuentas for any such liability. The Company will vigorously defend its position to be removed as a named party in this action due to the fact that Cuentas rescinded the Limecom Acquisition on January 30, 2019.
On May 25, 2021, the Company received a notice of demand from Vitco LLC and Vitaliy Yurchenko, who allegedly had a licensing agreement entered into with NextGn LLC, a former subsidiary of the Company. The alleged terms of the agreement require payment of $180,000 per annum for use of software and Vitco LLC's consulting. The alleged amount due to Vitco LLC and Vitaliy Yurchenko is $1,095,000. Vitco LLC and Vitaliy Yurchenko will also seek all attorneys' fees and costs associated with the filing, maintenance, and enforcement of any formal action. The Company retained an attorney and has taken steps to defend itself vigorously in this case.
On or about July 15, 2021, the Company, its CEO and other third parties were served with a complaint by Larry Kolb (“Kolb”) as part as shareholder’s derivative action under the law of the State of Florida for Breach of Agreement, Breach of Contract, Wage theft, Fraud, Fraudulent Transfer, Breach of Covenant against the Company, its CEO and other third parties. The Complaint demands a transfer of 74,558 Common Shares of the Company or a payment of $265,000. Kolb also demands a payment of $59,652.05 for stolen wages and on order awarding him a reasonable attorney’s fees. The Company retained an attorney and has taken steps to defend itself vigorously in this case.
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ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 2, 2021, the Company issued 20,000 shares of its Common Stock to its Chief Financial Officer, 40,000 shares of its Common Stock to a member of the Board of Directors of the Company and 3,334 shares of its Common Stock to a former employee. The fair market value of the shares was $245,000. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On March 17, 2021, the Company issued 10,000 shares of its Common Stock pursuant to a service Agreement between the Company and a service provider, dated May 16, 2019. The fair market value of the shares at the issuance date was $38,000. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On April 20, 2021 the Company paid off its loan and accrued interest in the amount of $260,000 to a private investor. The Company paid an amount equal to $125,000 plus $5,000, which represents the amount of interest accrued on such $125,000 since the date on which the loan was made under the Note through April 16, 2021. In addition, the Company issued 30,233 shares of Common Stock of the Company. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On July 1, 2021, the Company issued 2,943 shares of its Common Stock par value $0.001 per share to a private investor due to a cashless exercise of warrants to purchase up to 6,667 shares of its Common Stock at an exercise price equal to $4.30 per share. We issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR DEBT
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
Amendment to the Employment Agreement with Ran Daniel
As of November 28, 2018, the Company and Ran Daniel entered into an employment agreement (the “Employment Agreement”) pursuant to which Mr. Daniel serves as the Company’s Chief Financial Officer. The Employment Agreement is attached hereto as Exhibit 10.3. On August 5, 2021, the Company and Mr. Daniel entered into an amendment to the Employment Agreement (the “Amendment”). Pursuant to the Amendment, Mr. Daniel’s annual base salary will be $245,000 and Mr. Daniel will not be entitled to a cash payment of his accrued vacation and sick days. The amendment is attached hereto in its entirety as exhibit 10.4.
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ITEM 6. EXHIBITS
| Exhibit No. | Description | Location | ||
| 10.1 | Definitive Joint- Venture Agreement with WaveMAX Corporation | Form 8-K filed at July 27, 2021 | ||
| 10.2 | Definitive Marketing and Promotion Agreement with the Belisha Group | Form 8-K filed at August 5, 2021 | ||
| 10.3 | Ran Daniel Employment Agreement, dated as of November 28, 2018 | Filed herewith | ||
| 10.4 | Amendment to Ran Daniel Employment Agreement, dated August 5, 2021 | Filed herewith | ||
| 10.5 | Filed herewith | |||
| 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 | ||
| 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: August 23, 2021 |
By: | /s/ Arik Maimon |
| Interim Chief Executive Officer | ||
| By: | /s/ Ran Daniel | |
| Chief Financial Officer | ||
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