Cuentas Inc S-1/A, filed Dec 17, 2020
Cuentas Inc. (CUEN)
As filed with the Securities and Exchange Commission on December 17, 2020.
Registration Statement No. 333-249690
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Cuentas Inc.
(Exact name of registrant as specified in its charter)
| Florida | 5140 | 20-3537265 | ||
| (State
or jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(IRS Employer Identification No.) |
19 W. Flagler Street, Suite 902
Miami, FL 33130
800-611-3622
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Arik Maimon
Chief Executive Officer
19 W. Flagler Street, Suite 902
Miami, FL 33130
800-611-3622
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| Barry I. Grossman, Esq. David Selengut, Esq. Ellenoff Grossman & Schole LLP 1345 Avenue of the Americas New York, New York 10105 Phone: (212) 370-1300 Fax: (212) 370-7889 |
Mitchell S. Nussbaum, Esq. Angela M. Dowd, Esq. Loeb & Loeb LLP 345 Park Avenue New York, New York 10154 Phone: (212)407-4000
|
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If delivery of the Prospectus is expected to be made pursuant to Rule 434, check the following box. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to Be Registered (1) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee | ||||||
| Units, each consisting of one share of Common Stock, par value $0.001 per share and warrants to purchase Common Stock (2) | $ | 6,900,000 | $ | 752.79 | ||||
| Common Stock included as part of the units | — | — | ||||||
| Warrants to purchase shares of Common Stock included as part of the units (3) | — | — | ||||||
| Shares of Common Stock underlying warrants (1) (2) (4) | $ | 6,900,000 | $ | 752.79 | ||||
| Representative’s warrants (3) | — | $ | — | |||||
| Shares of Common Stock underlying representative’s warrants (5) | $ | 690,000 | $ | 75.28 | ||||
| Total | $ | 14,490,000 | $ | 1,580.86 | (6) | |||
| (1) | Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the securities being registered hereunder include such indeterminate number of additional shares of Common Stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions. |
| (2) | Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act. Includes shares of our Common Stock and/or warrants that the underwriters have the option to purchase to cover over-allotments, if any. |
| (3) | In accordance with Rule 457(g) under the Securities Act, because the shares of our Common Stock underlying the warrants and representative’s warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby. |
| (4) | The warrants are exercisable at a per share price of 100% of the per Unit public offering price. |
| (5) | Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants issued to the representative of the underwriters are exercisable at a per share exercise price equal to 125% of the per share public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the representative’s warrants is $690,000 (which is equal to 125% of $552,000 (8% of $6,900,000)). |
| (6) | Previously paid. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED DECEMBER 17, 2020 |
$6,000,000
769,230 Units
Cuentas Inc.
This is a public offering of units of Cuentas Inc. We are offering 769,230 units at an assumed offering price of $7.80 per unit (representing the closing price of our common stock on December 15, 2020 after giving effect to a proposed reverse stock split at a ratio of 2-for-1 as described elsewhere herein), with each unit consisting of one (1) share of our common stock, par value $0.001 per share (“Common Stock”), and one (1) warrant (“Warrant”), exercisable on or before the fifth anniversary of issuance, to purchase one (1) share of our Common Stock at an exercise price of $7.80 per share (or 100% of the price per unit). The Common Stock and the Warrants comprising the units will separate upon the closing of the offering and will be issued separately but may only be purchased as a unit. The units will not be certificated and will not trade as a separate security.
Our Common Stock is currently trading on the OTCQB under the symbol “CUEN.” On December 15, 2020, the closing price of our Common Stock was $3.90 (or $7.80 after giving effect to a proposed reverse stock split at a ratio of 2-for-1). We have applied to list our Common Stock and Warrants on the Nasdaq Capital Market, or Nasdaq, under the symbols “CUEN” and “CUENW”, respectively. There can be no assurance that we will be successful in listing our Common Stock or our Warrants on the Nasdaq Capital Market. Prices of our common stock as reported on the OTCQB may not be indicative of the prices of our common stock if our common stock were traded on Nasdaq.
The assumed offering price used throughout this prospectus has been included for illustration purposes only. The actual offering price may differ materially from the assumed price used in the prospectus and will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market.
For illustration purposes, the share and per share information in this prospectus reflects, other than in our Financial Statements and the Notes thereto, a proposed reverse stock split of the authorized and outstanding common stock at an anticipated ratio of 2-for-1 to occur immediately following the effective date but prior to the closing of the offering. However, depending on market conditions, at the sole discretion of the Board of Directors, the final ratio may be greater or less than 2-for-1 but in the range of 1.5-for-1 and 3-for-1 as previously approved by our shareholders. (see “Recent Developments” beginning on page 2 for more information about our anticipated reverse stock split).
Investing in our securities is highly speculative and involves a significant degree of risk. See “Risk Factors” beginning on page 7 of this prospectus for a discussion of information that should be considered before making a decision to purchase our securities.
Neither the U.S. Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
| Per Unit | Total | |||||||
| Public offering price | ||||||||
| Discounts and commissions to underwriters (1) | ||||||||
| Proceeds, before expenses, to us | ||||||||
| (1) | The underwriters will receive compensation in addition to the underwriting discount and commissions. See “Underwriting” for additional information regarding total underwriter compensation. |
We have granted a 45 day option to the representatives of the underwriters to purchase, based on the assumed offering price, up to an additional 115,384 shares of Common Stock at a price of $___ per share and/or up to an additional 115,384 Warrants at a price of $___ per Warrant to cover over-allotments, if any.
The underwriters expect to deliver the shares of Common Stock and Warrants offered hereby to purchasers on or about , 2020.
Book Running Manager
Maxim Group LLC
Prospectus dated , 2020
TABLE OF CONTENTS
Please read this prospectus carefully. It describes our business, our financial condition and our results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with any information or to make any representations about us, the securities being offered pursuant to this prospectus or any other matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Common Stock. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. This prospectus will be updated and made available for delivery to the extent required by the federal securities laws.
This prospectus includes estimates, statistics and other industry data that we obtained from industry publications, research, surveys and studies conducted by third parties and publicly available information. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. This prospectus also includes data based on our own internal estimates. We caution you not to give undue weight to such projections, assumptions and estimates.
For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.
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This summary highlights selected information contained elsewhere in this prospectus. To understand this offering fully, you should read the entire prospectus carefully, including the “Risk Factors” section, the consolidated financial statements and the notes to the consolidated financial statements. Unless the context otherwise requires, references contained in this prospectus to “we,” “us,” “our” or similar terminology refers to Cuentas Inc., a Florida corporation. All share amounts and per share amounts in this prospectus reflect a reverse stock split of the outstanding shares of our Common Stock at a ratio of 300-for-1 shares that was effected on August 8, 2018 and an assumed reverse stock split of the outstanding shares of our Common Stock at a ratio of 2-for-1 to be effected prior to this offering.
Overview
Cuentas Inc. (the “Company” or “Cuentas”) is a corporation formed under the laws of Florida, 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 proprietary software platform enables Cuentas to offer comprehensive financial services and additional robust functionality that is absent from other general-purpose reloadable cards (“GPR”).
Cuentas is a Fintech (Financial Technology) company utilizing technical innovation together with existing and emerging technologies to deliver accessible, efficient and reliable mobile, new-era and traditional financial services to consumers. Cuentas is proactively applying technology and compliance requirements to improve the availability, delivery, reliability and utilization of financial services especially to the unbanked, underbanked and underserved segments of today’s society. Its products are supported by its core methods, procedures, contracts and intellectual property The Company has extensive experience in the communications field, will provide consumers with an end-to-end array of financial and lifestyle applications, processes, products and solutions that have previously been impossible to deliver. CUEN’s strategically integrated solutions platform is hoped to reshape and improve the financial services industry for the mobility and remittance sectors and digital content for emerging markets.
The Cuentas mobile application (the “Cuentas App”), available for download now on the Apple App Store and on the Google Play Store for Android, allows consumers to easily activate their prepaid Cuentas Mastercard®, a GPR debit card program (the “Cuentas Mastercard”), review their account balance and conduct financial transactions. Cuentas introduced free card to card transfers from one Cuentas card to other Cuentas cards, which is a very useful and competitive feature.
The Cuentas Mastercard could act as a comprehensive banking solution for the 20+ million unbanked U.S. Latino community, enabling access to the U.S. financial system to those without the necessary paperwork to bank at a traditional financial institution while enabling greater functionality than a traditional bank account. Funds deposited to the proprietary general-purpose reloadable card are FDIC insured and, with the Cuentas App, provide features such as ATM withdrawals, direct deposit, cash reload, free Cuentas card to Cuentas card transfers and other mobile banking capabilities. Additional key features are available such as purchasing discounted gift cards and adding “mass transit credits” to digital accounts (available in Connecticut and Michigan with the expected addition of other regional transit agencies including Los Angeles and other cities,). Upcoming Cuentas App upgrades are expected to include international remittance, international bill pay and other services.
People can register from their home with instant approval, and a Prepaid Cuentas Mastercard will be sent to their address in a few days, so they can purchase products and services online from the safety of their home.
Cuentas Mobile LLC
Cuentas Mobile is our MVNO, which provides prepaid voice, text, and data mobile phone services designed for Cuentas’ target market that should enhance and reinforce its marketing campaigns and consumer affinity. Cuentas Mobile operates this business pursuant to contracts with Sprint Corporation which was recently acquired by T-Mobile. This new relationship could provide additional network capabilities and capacity to allow Cuentas Mobile to provide better, more complete services.
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Meimoun & Mammon LLC
Meimoun& Mammon LLC (“M&M”), our subsidiary, is a retail provider of domestic and international long-distance voice, text, and data telephony services to consumers in the United States and throughout the world. M&M holds International and Domestic Section 214 authority issued by the Federal Communications Commission (“FCC”). M&M operates the retail Tel3 business as a separate division. M&M uses both private and public Internet services to function as the backbone of the M&M network.
Fintech App
The Cuentas Fintech App (“Fintech App”) is a mobile application that when combined with the Prepaid Cuentas Mastercard® integrates into a proprietary robust ecosystem that provides many services typically not available through prepaid debit cards or other mobile apps. Cuentas protects customers by depositing their funds in a bank account insured by the Federal Deposit Insurance Corporation (“FDIC”) at the issuing bank. The comprehensive financial services include:
| Direct ACH Deposits | ATM Cash Withdrawal | Bill Pay and Online Purchases | ||
| Debit Card Network Processing | Peer to Peer Payments | Cash Reload at over 50,000 retailers | ||
| Online banking | Major Transit Authority Tokens | Discounted Gift Cards |
The Ecosystem includes a mobile wallet for digital currency, stored value card balances, prepaid telecom minutes, loyalty reward points, and purchases made in the Company’s virtual marketplace (the “Cuentas Virtual Marketplace”). The Fintech Card is integrated with the Connecticut Transit Authority and Grand Rapids Transit system to store mass transit currency and pay for transit access via a digital wallet (the “Cuentas Digital Wallet”). Additional regional transit systems such as Los Angeles Metro are expected to be added to the offerings in the near future.
The Fintech App allows cardholders to store and manage their products purchased in the Cuentas Virtual Market Place where Tier-1 retailers, virtual in-game currencies, Amazon Cash, and cellular telecom prepaid minutes “top ups” can be purchased, usually at discounted prices. Additionally, Cuentas cardholders can purchase discounted prepaid gift cards from well-known brand name restaurants in the Cuentas marketplace.
The Western Union Company
On December 8, 2020, the Company entered into an Agency Agreement with Western Union Financial Services, Inc. (“Western Union”) whereby the Company has been appointed as Western Union’s delegate and authorized to offer Western Union Money Transfer Services. This cooperation would allow Cuentas cardholders to transfer money internationally via the Western Union network directly from the Cuentas Mobile App. Western Union has been providing money transfer services around the world for more than a century and currently has more than 500,000 Agent locations worldwide.
Recent Developments
Approval for reverse stock split for uplisting purposes
On November 16, 2020, holders of a majority of our voting stock of the Company approved, by written consent in lieu of a special meeting of stockholders, giving the board of Directors authority to effectuate a reverse stock split ranging between a ratio of 1:1.5 and 1:3, to be determined by the Board of Directors prior to the effective time of the amendment to the Certificate of Incorporation to be effectuated, if at all, no later than March 16, 2021. For illustration purposes only, we have assumed that we will implement a reverse stock split of our issued and outstanding shares of common stock at a ratio of 2-for-1 prior to the closing of this offering. However, depending on market conditions, at the sole discretion of the Board of Directors, the final ratio may be greater or less than 2-for-1. We will effectuate the reverse stock split immediately prior to pricing this offering.
Entrance into 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 matures on September 2, 2021. An amortized, monthly payment of principal and interest in the sum of $67,760 starts in December 2020, with ability to extend the starting date of such amortized payments for up to 2 months upon notice, and the remaining loan principal becomes payable on maturity. The Labrys Note bears 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 has 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.
Entrance into a Series of Integrated Agreements with CIMA Telecom Inc.
On December 31, 2019, the Company entered into a series of integrated transactions to license the Platforms from CIMA Telecom Inc., a Florida corporation (“CIMA”), through CIMA’s wholly owned subsidiaries Knetik, and Auris (the “CIMA 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 “CIMA License Agreement”) and the various other agreements. Pursuant to the “CIMA Transaction Closing, CIMA fully converted the note into 878,739 shares of Common Stock. Upon the conversion of the Series B Preferred shares into Common Stock, CIMA received an additional 2.5 million shares of Common Stock pursuant to their anti-dilution right.
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From February 28, 2019 thru March 3, 2020, the Company received a total investment of $2,500,000 from Dinar pursuant to a convertible promissory note. On March 3, 2020, Dinar fully converted the note in exchange for 878,739 shares of Common Stock. Upon the conversion of the Series B Preferred shares into Common Stock, Dinar received an additional 2.5 million shares of Common Stock pursuant to their anti-dilution right.
Entrance into a Prepaid Card Program Management Agreement with Sutton Bank (“Sutton”)
On September 27, 2019, the Company entered into a Prepaid Card Program Management Agreement (“PCPMA”) with Sutton Bank (“Sutton”), an Ohio chartered bank Corporation. The PCPMA provides that Sutton operates a prepaid card service and is an approved issuer of prepaid cards on the Discover, Mastercard, and Visa networks and provides services in connection with card transactions processed on one or more networks. The PCPMA designated Cuentas to become manager of the Cuentas Mastercard management program subject to the terms and conditions of the PCPMA.
Entrance into a Prepaid Services Agreement with Interactive Communications International, Inc. (“InComm”)
On July 23, 2019, the Company entered into a five-year processing services agreement (the “InComm PSA”) with InComm, a leading payments technology company, to power and expand the Company’s GPR card network. Per the InComm PSA, InComm, through its VanillaDirect network, will act as prepaid card processor and expand the Company’s GPR card network. VanillaDirect is currently available at major retailers such as: Walmart, 7-Eleven, Walgreens, CVS Pharmacy, Rite Aid and many more. In addition, the Company will implement the VanillaDirect cash reload services into many of its 31,600 U.S. locations under SDI NEXT.
Conversion of Preferred B Stock
On August 21, 2020, in connection with a special meeting of shareholders of the Company (the “Shareholders Meeting”), the Company filed with the Secretary of State of the State of Florida the Company’s Amended and Restated Articles of Incorporation (the “Amended and Restated Articles”) to, among other things, cause all outstanding shares of Series B Preferred Stock, par value $0.001 per share (the “Preferred Stock”) to be converted into 5,000,000 shares of the Company’s Common Stock.
Summary of Risks Affecting Our Company
Our business is subject to numerous risks described in the section titled “Risk Factors” and elsewhere in this prospectus. The main risks set forth below and others you should consider are discussed more fully in the section entitled “Risk Factors” beginning on page 7, which you should read in its entirety.
| ● | We will require additional funding to progress our business, which brings substantial doubt regarding our ability to continue as a “going concern” given our current lack of financial liquidity. |
| ● | We have a limited operating history and therefore we cannot ensure, either in the near- or long-term, that we will be able to generate cash flow or profit or execute our business plan. |
| ● | We may never achieve profitability from operations or generate sufficient cash flows to make or sustain distributions to our shareholders given our reliance on outside financing to fund operations and existing contractual obligations. |
| ● | Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer. |
| ● | We operate in an ever-evolving and complex legal and regulatory environment, and any change of laws and regulations applicable to our business might adversely affect our ability to execute our business plan and achieve profitable operating results. |
| ● | We are searching for a new Chief Executive Officer, the results of which may not be successful and may significantly change the management of the Company. |
Corporate Information
We were organized as a corporation under the laws of the State of Florida on September 21, 2005. Our principal executive office is located at 19 W. Flagler Street, Suite 902, Miami, FL 33130, and our phone number is (800) 611-3622.
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The Offering
| Securities Offered: | 769,230 units (at the assumed offering price), each unit consisting of one (1) share of our Common Stock and one (1) Warrant to purchase one (1) share of our Common Stock. The Common Stock and the Warrants comprising the units will separate upon the closing of the offering and will be issued separately but may only be purchased as a unit. The units will not be certificated and will not trade as a separate security. | |
| Over-allotment Option: | We have granted the underwriters a 45-day option to purchase, based on the assumed offering price, up to an additional 115,384 shares of Common Stock and/or up to an additional 115,384 Warrants to cover over-allotments, if any. | |
| Assumed Offering Price Per Unit: | $7.80 (representing the closing price of our common stock on December 15, 2020 after giving effect to a proposed reverse stock split at a ratio of 2-for-1) | |
| Common Stock Outstanding Before this Offering: (1) | 13,237,958 shares | |
| Common Stock to be Outstanding After this Offering: (1) | 14,007,188 shares (or 14,122,572 shares if the underwriters exercise their over-allotment option in full) | |
| Terms of Warrants Offered: | The Warrants will have an exercise price equal to 100% of the public offering price per unit and will be exercisable any time after the date of issuance until the 5 year anniversary of the date of issuance. For more information regarding the Warrants, you should carefully read the section entitled “Description of Securities” in this prospectus. | |
| Lock-up | Each of our officers, directors and 3% or more holders of our outstanding Common Stock as of the effective date of this prospectus (and all holders of securities exercisable for or convertible into shares of Common Stock) have agreed to enter into customary “lock-up” agreements in favor of the underwriters pursuant to which such persons and entities have agreed, for a period of six (6) months from the effective date of this prospectus. See “Underwriting” for additional information. | |
| Use of Proceeds: | We estimate that we will receive net proceeds of approximately $5,201,319 from our sale of Units in this offering (or $6,101,319 if the underwriters exercise their over-allotment in full) after deducting underwriting discounts and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to provide funding for the following purposes: sales and marketing; purchase of chip-based debit card stock for GPR and Starter cards; repayment of $677,600 aggregate principal amount of outstanding notes issued in a sum of $605,000 (the “Labrys Note”) and repayment of $355,000 aggregate principal amount of a loan from Dinar Zuz LLC (“Dinar”); research and development; and working capital and operating expenses purposes. See “Use of Proceeds.” |
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| Proposed Nasdaq Symbol: | Our Common Stock is currently trading on the OTCQB under the symbol “CUEN.” We have applied to list our Common Stock and Warrants on Nasdaq under the symbols “CUEN” and “CUENW”, respectively. There can be no assurance that we will be successful in listing our Common Stock or our Warrants on the Nasdaq Capital Market. | |
| Reverse Stock Split: | For illustration purposes only, we have assumed that we will implement a reverse stock split of our issued and outstanding shares of common stock at a ratio of 2-for-1 prior to the closing of this offering . However, depending on market conditions, at the sole discretion of the Board of Directors, the final ratio may be greater or less than 2-for-1 but in the range of 1.5-for-1 and 3-for-1 as previously approved by our shareholders. | |
| Risk Factors: | An investment in our company is highly speculative and involves a significant degree of risk. See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our securities. | |
| Transfer Agent, Registrar and Warrant Agent | The transfer agent and registrar of our Common Stock and the Warrant Agent for the Warrants is Olde Monmouth Stock Transfer Co., Inc. Its address is 200 Memorial Parkway, Atlantic Highlands, NJ 07716 (Phone (732) 872-2727, Ext 101). |
| (1) | The number of shares of Common Stock outstanding before and after the completion of this offering is based on 13,237,958 shares of Common Stock outstanding as of December 15, 2020 and excludes: |
| ● | 115,384 shares of Common Stock issuable if the underwriters exercise their over-allotment option for shares of Common Stock in full; |
| ● | 769,230 shares of Common Stock issuable upon exercise of the Warrants offered hereby (or 884,614 shares of Common Stock issuable upon exercise of the Warrants if the underwriters exercise their over-allotment option for Warrants in full); |
| ● | 61,538 shares of Common Stock issuable upon exercise of the representative’s warrants (or 70,768 shares of Common Stock issuable upon exercise of the representative’s warrants if the underwriters exercise their over-allotment option for Shares in full) at an exercise price of $___per share; |
| ● | (a) 169,000 shares of our Common Stock issuable upon the exercise of outstanding options at a weighted average exercise price of $8.94 per share; (b) 68,452 shares of our Common Stock issuable upon exercise of our currently outstanding warrants at a weighted average exercise price of $8.27 per share; (c) 45,493 shares of our Common Stock issuable upon exercise of currently outstanding convertible note at a conversion price of $5.50 per share and (d) 95,583 shares of our Common Stock issuable upon the vesting of Common Stock awards granted to some of our employees and consultants. |
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Summary Financial Data
The summary financial data below as of September 30, 2020 and as of December 31, 2019, for the year ended December 31, 2019, and for the periods of three and nine months ended September 30, 2020 and 2019. The summary financial data as of as of September 30, 2020 and the periods of three and nine months ended September 30, 2020 and 2019 have been derived from our unaudited condensed consolidated financial statements, and the summary financial data below as of December 31, 2019, and for the years ended December 31, 2019, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. There were no accounting changes as accounting changes, business combinations or dispositions of business operations that materially affect the comparability of the information reflected in selected financial data since January 1, 2019. The following summary financial information should be read in connection with, and is qualified by reference to, our consolidated financial statements and their related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Statements of Operations Data
For the (unaudited) |
For the (unaudited) |
For the (unaudited) |
For the (unaudited) |
For the (audited) |
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| Revenue | $ | 385,000 | $ | 134,000 | $ | 811,000 | $ | 247,000 | $ | 967,000 | ||||||||||
| Gross Profit (Loss) | $ | (235,000 | ) | $ | (103,000 | ) | $ | 194,000 | $ | 97,000 | $ | 159,000 | ||||||||
| Loss from Operations | $ | (4,918,000 | ) | $ | (1,086,000 | ) | $ | (1,469,000 | ) | $ | (566,000 | ) | $ | (2,146,000 | ) | |||||
| Other Income (Loss) | $ | 383,000 | $ | (53,000 | ) | $ | 2,349,000 | $ | (126,000 | ) | $ | 860,000 | ||||||||
| Net Income (Loss) | $ | (5,153,000 | ) | $ | (1,754,000 | ) | $ | 853,000 | $ | (692,000 | ) | $ | (1,320,000 | ) | ||||||
| Net income (loss) per basic share | $ | (0.60 | ) | $ | (0.12 | ) | $ | 0.41 | $ | (0.31 | ) | $ | (0.58 | ) | ||||||
| Net income (loss) per diluted share | $ | (0.60 | ) | $ | (0.12 | ) | $ | 0.34 | $ | (0.31 | ) | $ | (0.58 | ) | ||||||
| ● | The Net income (loss) per basic and diluted share data does not reflect the proposed reverse stock split at a ratio of 2-for-1. |
Balance Sheet Data
As of September 30, 2020 (unaudited) | As of December 31, 2019 (audited) | |||||||
| Current Assets | $ | 405,000 | 165,000 | |||||
| Total Assets | $ | 8,060,000 | 9,170,000 | |||||
| Total Liabilities | $ | 4,340,000 | 3,917,000 | |||||
| Total Stockholders’ Equity | $ | 3,720,000 | 5,253,000 | |||||
6
An investment in our securities involves substantial risks, including the risks described below. You should carefully consider the risks described below before purchasing our securities. The risks highlighted here are not the only ones that we may face. For example, additional risks presently unknown to us or that we currently consider immaterial or unlikely to occur could also impair our operations. If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, prospects, financial condition or results of operations could be negatively affected, and you might lose all or part of your investment.
Risks Related to Our Financial Position and Need for Additional Capital
We will require additional funding to progress our business. Such financing may only be available on disadvantageous terms, or may not be available at all. Any new equity financing could have a substantial dilutive effect on our existing stockholders.
At September 30, 2020, we had cash and cash equivalents of $343,000, a working capital deficit of $3,846,000 and an accumulated deficit of $24,543,000. Our cash position may decline in the future, and we may not be successful in maintaining an adequate level of cash resources. Accordingly, we will be required to seek additional debt or equity financing in order to support our growing operations. We may not be able to obtain additional financing on satisfactory terms, or at all, and any new equity financing could have a substantial dilutive effect on our existing stockholders. If we cannot obtain additional financing, we will not be able to achieve the sales growth that we need to cover our costs, and our results of operations would be negatively affected.
As a result of our current lack of financial liquidity, there is substantial doubt regarding our ability to continue as a “going concern,” within one year from the issuance date of our financial statements.
As a result of our current lack of financial liquidity, our auditors’ report for our 2019 consolidated financial statements, which are included as part of this prospectus, contains a statement concerning substantial doubt regarding our ability to continue as a going concern. Our lack of sufficient liquidity could make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain and our public stock price generally.
Our continuation as a going concern is dependent upon, among other things, achieving positive cash flow from operations and, if necessary, augmenting such cash flow using external resources to satisfy our cash needs. However, we may be unable to achieve these goals and therefore may be unable to continue as a going concern.
Risks Related to the Company
We have a limited operating history and therefore we cannot ensure, either in the near- or long-term, that we will be able to generate cash flow or profit.
We have a limited operating history upon which you may evaluate our business and an investment in our Common Stock may entail significantly more risk than the shares of Common Stock of a company with a substantial operating history. Our ability to successfully develop our products, and to realize consistent, meaningful revenues and profit has not been established and cannot be assured. For us to achieve success, our products must receive broader market acceptance by consumers. Without this market acceptance, we will not be able to generate sufficient revenue to continue our business operation. If our products are not widely accepted by the market, our business may fail.
Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to generate revenues, manage development costs and expenses, and compete successfully with our direct and indirect competitors.
7
Our business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. You should consider an investment in our company in light of these risks, uncertainties, expenses and difficulties. Such risks include: the absence of a lengthy operating history; insufficient capital to fully realize our operating plan; our ability to anticipate and adapt to a developing market; a competitive environment characterized by well-capitalized competitors; our ability to identify, attract and retain qualified personnel; our reliance on key management personnel.
Because we are subject to these risks, evaluating our business may be difficult. We may be unable to successfully overcome these risks, which could harm our business and prospects. Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully address these risks, there may be an adverse effect on our business, results of operations, financial condition and cash flows.
We may never achieve profitability from operations or generate sufficient cash flows to make or sustain distributions to our shareholders.
We may never achieve profitability from operations. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. There can be no assurance that future operations will be profitable or that we will be able to make or sustain distributions to our shareholders from cash from operations. Revenues and profits, if any, will depend upon various factors, including whether we will be able to successfully implement our business plan and operating strategy. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us. In addition, an inability to achieve profitability could have a detrimental effect on the market value of our Common Stock.
We are an early entrant in an emerging industry, and the long-term viability of our business strategy is unproven.
As an early entrant in this emerging Fintech industry, we are subject to the risk that our business model and business plan may not prove to be a viable long-term business strategy. If it turns out that our strategy is not a viable long-term business strategy, we may not be able to generate meaningful cash flows, which would materially and adversely affect the viability of our business and stock price.
We may not be able to secure sufficient capital to effectively execute our business plan.
We may not be able to attract and obtain sufficient capital from the equity and debt markets, or any other capital markets, to execute our business plan and grow our business. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital expenditures necessary to execute our business plan, and in that event our ability to generate revenue may be significantly impaired.
If we cannot obtain financing, our growth may be limited.
Recent events in the financial markets have had an adverse impact on the credit markets, and, as a result, credit has become significantly more expensive and difficult to obtain, if available at all. Some lenders are imposing more stringent credit terms and there has been and may continue to be a general reduction in the amount of credit available. Many banks are either unable or unwilling to provide new asset-based lending. Tightening credit markets may have an adverse effect on our ability to obtain financing on favorable terms, thereby increasing financing costs and/or requiring us to accept financing with increasing restrictions. If adverse conditions in the credit markets, in particular with respect to our industry, materially deteriorate, our business could be materially and adversely affected. Our long-term ability to grow through additional investments will be limited if we cannot obtain additional financing. Market conditions may make it difficult to obtain financing, and we cannot assure you that we will be able to obtain debt or equity financing or that we will be able to obtain it on favorable terms.
8
COVID-19 and its impact on businesses and financial markets could have a material adverse effect on our operations.
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.
We are involved in various litigation matters that are expensive and time consuming, and, if resolved adversely, could harm our business, financial condition, or results of operations.
Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or we may decide to settle lawsuits on similarly unfavorable terms. Any such negative outcome could result in payments of substantial monetary damages or fines, or changes to our products or business practices, and accordingly our business, financial condition, or results of operations could be materially and adversely affected. See “Business-Legal Proceedings” for a description of certain litigation involving the Company.
Although the results of lawsuits and claims cannot be predicted with certainty, we do not believe that the final outcome of those matters that we currently face will have a material adverse effect on our business, financial condition, or results of operations. However, defending these claims is costly and can impose a significant burden on management and employees, and we may receive unfavorable preliminary or interim rulings in the course of litigation, which could adversely affect the market price of our securities. There can be no assurances that a favorable final outcome will be obtained in all cases.
Our business plan involves a number of assumptions that may prove inaccurate, which may cause us to realize substantially different operating results than we hope for.
In developing our business plan and business model, we made a number of assumptions, including assumptions related to annual operating costs, market size and demand, customer retention rates, customer drop-out rates, default rates, and local, national, and worldwide economic conditions. These assumptions may prove inaccurate, causing us our performance and operating results to differ significantly from the performance and operating results we have projected while developing our business plan and business model.
Operating our business on a larger scale could result in substantial increases in our expenses.
As our business grows in size and complexity, we can provide no assurance that we can successfully enter new markets or grow our business without incurring significant additional expenses, that our management platform will ultimately prove to be scalable, and/or that we will be able to achieve economies of scale or we will be able to operate our business on a larger scale than the scale on which we have historically operated.
Debt service obligations could adversely affect our operating results and could adversely affect our ability to make or sustain distributions to our stockholders and the market price of our Common Stock and Warrants.
Incurring debt could subject us to many risks, including the risks that: our cash flows from operations will be insufficient to make required payments of principal and interest; our debt may increase our vulnerability to adverse economic and industry conditions; we will be subject to restrictive covenants that require us to satisfy and remain in compliance with certain financial requirements or that impose limitations on the type or extent of activities we conduct; and we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our shareholders, funds available for operations and capital expenditures, future business opportunities or other purposes. Additionally, if we do not have sufficient funds to repay any debt we incur when it matures, we may need to refinance the debt or raise additional equity. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest expense could adversely affect our cash flows and, consequently, cash available for distribution to our shareholders. To the extent we are required to raise additional equity to satisfy such debt, existing shareholders would see their interests diluted. If we are unable to refinance our debt or raise additional equity on acceptable terms, we may be forced to dispose of assets on disadvantageous terms, potentially resulting in losses or the incurrence of special taxes and fees that apply to dispositions of assets. To the extent we cannot meet any existing or future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances.
9
We are substantially dependent on the CIMA License Agreement, which may be terminated under certain circumstances.
On December 31, 2019, the Company entered into the CIMA License Agreement, pursuant to which the Company has a perpetual, exclusive, non-transferable, non-sublicensable, royalty-free license to access and use the CIMA Licensed Technology in the form provided to the Company via the Hosting Services. While the license agreement provides us with a license in perpetuity, if the license agreement is terminated in accordance with its terms, we will lose access to the licensed technology that comprise the Cuentas technology platform, which will have a significant impact on our business, operations and financial results. Further, if the license agreement is terminated, there is no guarantee that we will be able to enter into a new license agreement on the same or similar terms, if at all, and our competitors could license the technology, which would result in a significant market disadvantage to the Company.
CIMA and Dinar may exert significant influence over our business and affairs as a result of their corporate governance and other rights under the Side Letter Agreement, which may adversely affect the management of our Company.
Pursuant to the Side Letter Agreement, dated December 31, 2019, by and among the Company, Mr. Maimon, Mr. De Prado, Dinar and CIMA (the “Side Letter Agreement”), for as long as the CIMA License Agreement is in effect or CIMA is a shareholder of the Company and owns at least 5% of the Company’s Common Stock, in addition to any other vote or approval required under the Company’s articles of incorporation, bylaws, or any other agreement, each as amended from time to time, the Company has agreed not to take certain actions without certain approval thresholds of the directors appointed by CIMA, Dinar, Mr. Maimon and Mr. De Prado. These negative covenants restrict, among other things, the Company’s ability to incur additional debt, alter certain employment agreements currently in place, enter into any consolidation, combination, recapitalization or reorganization transactions, and issue additional capital stock. Further, CIMA has a co-sale right to participate in a sale of shares of the Common Stock, in the event that Mr. De Prado, Mr. Maimon or any other director or officer of the Company holding greater than 1% of the Common Stock (on a fully diluted basis) proposes to sell any of his, her or its shares of Common Stock. This may hinder our ability to raise the capital needed to improve our financial condition. These rights may limit the ability of our Board of Directors and our management team to make necessary personnel decisions, which may adversely affect the management of our company, particularly if disputes arise between us and CIMA or Dinar (which disputes in and of themselves could have a material adverse effect on our ability to conduct business).
Our financial results in future periods may not be reflective of our earning potential and may cause our stock price to decline.
Our financial results in future periods may not be representative of our future potential. Since we expect to experience rapid growth, we will have a greater percentage of our portfolio invested in assets in the process of stabilization than we would expect to have as a more mature operation. It will take time and significant cash resources to implement our business plan. In addition, future equity or debt financings may impact our financial results in the fiscal periods following such financings for the same reasons listed above.
10
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business we use sophisticated call processing engines and other sophisticated telecommunications technology platforms, and we acquire and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our prospective and current tenants, our employees and third-party service providers on our networks and website. The secure processing and maintenance of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in revenue losses, legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, which could adversely affect our results of operations and competitive position.
We are dependent on our executive officers and dedicated personnel, and the departure of any of our key personnel could materially and adversely affect us.
We rely on a small number of persons to carry out our business and investment strategies. An Executive Search Committee has been established to evaluate and propose qualified executive candidates for approval by the Board of Directors. Any member of our senior management may cease to provide services to us at any time. The loss of the services of any of our key management personnel, or our inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results. As we expand, we will continue to need to attract and retain qualified additional senior management but may not be able to do so on acceptable terms or at all. Cuentas does not yet have but intends to have key man life insurance policies in place. Pursuant to the employment agreement, the CEO’s term expires in November 2020 (which term can be extended by the Board of Directors on a month-to-month basis with the approval of both Dinar and CIMA until a new CEO is appointed by the Board of Directors). The Company has formed an Executive Search Committee and it will begin the process of searching for key executive personnel, including a new CEO. The current CEO will remain as the Chairman of the Board after the hiring of a new CEO.
We are subject to regulation which may adversely affect our ability to execute our business plan.
We operate in an ever-evolving and complex legal and regulatory environment. We, the products and services that we offer and market, and those for which we provide processing services, are subject to a variety of federal, state and foreign laws and regulations, including, but not limited to: federal communications laws and regulations; foreign jurisdiction communications laws and regulations; federal anti-money laundering laws and regulations, including the USA PATRIOT Act (the Patriot Act), the Bank Secrecy Act (the BSA), anti-terrorist financing laws and anti-bribery and corrupt practice laws and regulations in the U.S., and similar international laws and regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in Canada); state unclaimed property laws and money transmitter or similar licensing requirements; federal and state consumer protection laws, including the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (the CARD Act), and the Durbin Amendment to Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), and regulations relating to privacy and data security; and foreign jurisdiction payment services industry regulations. We believe that we are currently operating in compliance with all applicable laws and regulations, but there is no certainty that laws and regulations affecting our business will not change. Any such change of laws and regulations applicable to our business might adversely affect our ability to execute our business plan and achieve profitable operating results.
We are subject to Telecommunications Industry Regulation.
Our subsidiaries Cuentas Mobile and M&M are subject to regulation by the FCC and other government agencies and task forces. M&M holds International and Domestic Section 214 licenses issued by the FCC, which may be suspended or revoked by the FCC if M&M does not strictly comply with all applicable regulations and the terms and conditions under which the International and Domestic Section 214 licenses were issued. Cuentas Mobile and M&M are also subject to foreign jurisdiction communications laws and regulations. We believe that we, including our subsidiaries, are currently operating in compliance with all applicable laws and regulations, but there is no certainty that laws and regulations affecting our business will not change. Any such change of laws and regulations applicable to our business might adversely affect our ability to execute our business plan and achieve profitable operating results.
11
We are subject to Anti-Money Laundering Regulation.
We are subject to a comprehensive federal anti-money laundering regulatory regime that is constantly evolving. The anti-money laundering regulations to which we are subject include the BSA, as amended by the Patriot Act, which criminalizes the financing of terrorism and enhances existing BSA regimes through: (a) expanding AML program requirements to certain delineated financial institutions; (b) strengthening customer identification procedures; (c) prohibiting financial institutions from engaging in business with foreign shell banks; (d) requiring financial institutions to have due diligence procedures and, where appropriate, enhanced due diligence procedures for foreign correspondent and private banking accounts; and (e) improving information sharing between financial institutions and the U.S. government. Pursuant to the BSA, we have instituted a Customer Identification Program, (CIP). The CIP is incorporated into our BSA/anti-money laundering compliance program. We are increasingly facing more stringent anti-money laundering rules and regulations, compliance with which may increase our costs of operation, decrease our operating revenues and disrupt our business” for additional information. Cuentas is or may become subject to reporting and recordkeeping requirements related to anti-money laundering compliance obligations arising under the Patriot Act and its implementing regulations. In addition, provisions of the BSA enacted by the Prepaid Access Rule issued by the Financial Crimes Enforcement Network (“FinCEN”), impose certain obligations, such as registration and collection of consumer information, on “providers” of certain prepaid access programs, including the prepaid products issued by Cuentas and our issuing banks for which we serve as program manager. In order to qualify for certain exclusions under the Prepaid Access Rule, some of our content providers were required to modify operational elements of their products, such as limiting the amount that can be loaded onto a card in any one day. In addition, pursuant to the Prepaid Access Rule, Cuentas and some of our retail distribution partners have adopted policies and procedures to prevent the sale of more than $10,000 in prepaid access (including closed loop and open loop products that fall under the monetary thresholds outlined above) to any one person during any one day.
We are subject to Anti-Terrorism and Anti-Bribery Regulation.
We are also subject to an array of federal anti-terrorism and anti-bribery legislation. For example, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers a series of laws that impose economic and trade sanctions against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other entities that pose threats to the national security, foreign policy or economy of the United States. As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries, as well as those such as terrorists and narcotics traffickers designated under programs that are not country-specific and with whom U.S. persons are generally prohibited from dealing. The Foreign Corrupt Practices Act (“FCPA”), prohibits the payment of bribes to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the Securities and Exchange Commission (the “SEC”). The statute has a broad reach, covering all U.S. companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public office but also local citizens affiliated with foreign government-run or government-owned organizations. The statute also requires maintenance of appropriate books and records and maintenance of adequate internal controls to prevent and detect possible FCPA violations. Abuse of our prepaid products for purposes of financing sanctioned countries, terrorist funding, bribery or corruption could cause reputational or other harm that could have a material adverse effect on our business, results of operations and financial condition.
We are subject to Consumer Protection Regulation.
We are subject to various federal, state and foreign consumer protection laws, including those related to unfair and deceptive trade practices as well as privacy and data security. Failure to comply with, or further expansion of, consumer protection regulations could have a material adverse effect on our business, results of operations and financial condition. A data security breach could expose us to liability and protracted and costly litigation, and could adversely affect our reputation and operating revenues.
12
We are subject to Federal Regulation.
At the federal level, Congress and federal regulatory agencies have enacted and implemented new laws and regulations that affect the prepaid industry, such the CARD Act and FinCEN’s Prepaid Access Rule. Moreover, there are currently proposals before Congress that could further substantially change the way banks, including prepaid card issuing banks and other financial services companies, are regulated and are permitted to offer their products to consumers. Non-bank financial services companies, including money transmitters and prepaid access providers, are now regulated at the federal level by the Consumer Financial Protection Bureau (the “CFPB”), which began operations in July 2011, bringing additional uncertainty to the regulatory system and its impact on our business. We are increasingly facing more stringent anti-money laundering rules and regulations, compliance with which may increase our costs of operation, decrease our operating revenues and disrupt our business. Abuse of our prepaid products for purposes of financing sanctioned countries, terrorist funding, bribery or corruption could cause reputational or other harm that could have a material adverse effect on our business, results of operations and financial condition. Failure to comply with, or further expansion of, consumer protection regulations could have a material adverse effect on our business, results of operations and financial condition. Failure by us to comply with federal banking regulation may subject us to fines and penalties and our relationships with our issuing banks may be harmed.
We are subject to State Unclaimed Property Regulations.
For some of our prepaid products, we or our issuing banks are required to remit unredeemed funds to certain (but not all) states pursuant to unclaimed property laws. However, unclaimed property laws are subject to change. Costs of compliance or penalties for failure to comply with or changes in state unclaimed property laws and regulations and changes in state tax codes could have a material adverse effect on our business, financial condition and results of operations.
We are subject to Money Transmitter Licenses or Permits.
Most states regulate the business of sellers of traveler’s checks, money orders, drafts and other monetary instruments, which we refer to collectively as money transmitters. While many states expressly exempt banks and their agents from regulation as money transmitters, others purport to regulate the money transmittal businesses of bank agents or do not extend exemptions to non-branch bank agents. In those states where we are required to be licensed, we are subject to direct supervision and regulation by the relevant state banking departments or similar agencies charged with enforcement of the money transmitter statutes and must comply with various restrictions and requirements, such as those related to the maintenance of certain levels of net worth, surety bonding, selection and oversight of our authorized delegates, permissible investments in an amount equal to our outstanding payment obligations with respect to some of the products subject to licensure, recordkeeping and reporting, and disclosures to consumers. We are also subject to periodic examinations by the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position and related records, various agreements that we have with our issuing banks, retail distribution partners and other third parties, privacy and data security policies and procedures, and other matters related to our business. As a regulated entity, Cuentas may incur significant costs associated with regulatory compliance. We anticipate that compliance costs and requirements will increase in the future for our regulated subsidiaries and that additional subsidiaries will need to become subject to these or new regulations. If we fail to maintain our existing money transmitter licenses or permits, or fail to obtain new licenses or permits in a timely manner, our business, results of operations and financial condition could be materially and adversely affected.
We are subject to Privacy Regulation.
In the ordinary course of our business, we collect and store or may collect and store personally identifiable information about customers, holders of our cards, subscribers, and users. This information may include names, addresses, email addresses, social security numbers, driver’s license numbers and account numbers. We also maintain or may maintain a database of cardholder data for our proprietary cards relating to specific transactions, including account numbers, in order to process transactions and prevent fraud. These activities subject us to certain privacy and information security laws, regulations and rules in the United States, including, for example, the privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state privacy and information security statutes and regulations, and the Payment Card Industry Data Security Standard. These federal and state laws, as well as our agreements with our issuing banks, contain restrictions relating to the collection, processing, storage, disposal, use and disclosure of personal information, and require that we have in place policies regarding information privacy and security. We have in effect a privacy policy relating to personal information provided to us in connection with requests for information or services, and we continue to work with our issuing banks and other third parties to update policies and programs and adapt our business practices in order to comply with applicable privacy laws and regulations. Certain state laws also require us to notify affected individuals of certain kinds of security breaches of computer databases that contain their personal information. These laws may also require us to notify state law enforcement, regulators or consumer reporting agencies in the event of a data breach. Failure to comply with, or further expansion of, consumer protection regulations could have a material adverse effect on our business, results of operations and financial condition. A data security breach could expose us to liability and protracted and costly litigation, and could adversely affect our reputation and operating revenues.
13
We are subject to Card Association and Network Organization Rules.
In addition to the federal, state, local, and foreign jurisdiction laws and regulations discussed above, we, Cuentas and our issuing banks, are also subject to card association and debit network rules and standards. The operating rules govern a variety of areas, including how consumers and merchants may use their cards and data security. Each card association and network organization audits us from time to time to ensure our compliance with these standards. Noncompliance with these rules or standards due to our acts or omissions or the acts or omissions of businesses that work with us could result in fines and penalties or the termination of the card association registrations held by us or any of our issuing banks. Changes in card association rules or standards set by Visa or Vanilla Reload, or changes in card association and debit network fees or products or interchange rates, could materially and adversely affect our business, financial condition and results of operations.
Our success depends, in part, upon our ability to hire and retain highly skilled managerial, and operational personnel, and the past performance of our senior management may not be indicative of future results.
The implementation of our business plan may require that we employ additional qualified personnel. Competition for highly skilled managerial, telecommunications, financial and operational personnel is intense, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel. If we are unable to hire and retain qualified personnel as required, our growth and operating results could be adversely affected.
The Company and its subsidiaries have well-financed, well-managed competitors and may not be able to adequately compete in its market.
Most of our competitors are larger and have greater financial, technical, marketing, and other resources than we do. Some of our competitors have seasoned management teams with more experience and expertise in our industry than we do. Some competitors may enjoy significant competitive advantages that result from, among other things, having substantially more available capital, having a lower cost of capital, having greater economies of scale, and having enhanced operating efficiencies compared to ours.
Cuentas recently began e-commerce card operations and is much smaller than its competitors, faces competition in the prepaid financial services industry including competitors such as American Express, First Data, Total Systems Services, Green Dot, NetSpend, Money Network, Momentum, Blackhawk, Prepaid MasterCard, MasterCard RePower, PayPal, Apple Pay, Amex Serve, H&R Block Emerald, J.P. Morgan Chase, and others. Cuentas also faces intense competition from existing players in the prepaid card industry.
Cuentas Mobile faces competitors including, without limitation, AT&T, Sprint, Viber, WhatsApp, Skype, MetroPCS, TracFone, Telcel, StraightTalk, Simple Mobile, Virgin Mobile, Boost, Net 10, IDT, Boost, and others.
M&M faces competition from many strong and well-financed competitors and other competitors, engaged in the retail termination of domestic and international long distance as well a mobile voice, text, and data services, including, without limitation, IDT, NobelCom, Access Wireless, Boost Mobile, H2O mobile, Mint Mobile and others.
Cuentas Mobile is dependent on the performance of third-party network operators.
MVNO operators, including Cuentas Mobile, earn revenues by purchasing network capacity from other network operators and reselling it to end users. Cuentas Mobile uses Sprint’s network to offer its services, and is dependent on the performance of Sprint and its network.
To compete effectively, Cuentas needs to improve its offerings continuously.
Cuentas began operations recently and is substantially smaller than its competitors. As a result, to compete effectively, Cuentas needs to improve its offerings rapidly and continuously.
14
Cuentas may be unable to attract and retain users.
As of the date of this filing, Cuentas has an operating history of e-commerce card business of less than one year. If Cuentas cannot increase the number of cardholders using its Cuentas Mastercard and retain its existing cardholders, this will significantly adversely affect Cuentas’ operating results, revenues, financial condition, and ability to remain in business.
Cuentas may be adversely affected by fraudulent activity.
Criminals, including, without limitation, cyber-organized criminal syndicates, and others, use increasingly sophisticated methods to engage in illegal activities involving prepaid cards, reload products, and customer information. Cuentas relies on third parties for certain transaction processing services, which subjects Cuentas and its customers to risks related to the vulnerabilities of these third parties, as well as Cuentas’s own vulnerabilities to criminals engaged in fraudulent activities. Fraudulent activity could result in the imposition of regulatory sanctions, including significant monetary fines, which could adversely affect Cuentas’s business, operating results, and financial condition.
Risks Related to an Investment in Our Securities and this Offering
Our management has broad discretion as to the use of the net proceeds from this offering.
We intend to use the net proceeds from this offering for sales and marketing; purchase of chip-based debit card stock for GPR and Starter cards; repayment of $677,600 aggregate principal amount of outstanding notes issued in the Labrys Note and repayment of $355,000 aggregate principal amount of a loan from Dinar; research and development; and working capital and operating expenses purposes. We cannot specify with certainty, however, the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in “Use of Proceeds.” Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of our securities may not desire or that may not yield a significant return or any return at all. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.
The NASDAQ Capital Market may not list our securities, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
We anticipate that our securities will be listed on The NASDAQ Capital Market, a national securities exchange, upon consummation of this offering. Although, after giving effect to this offering, we expect to meet, on a pro forma basis, The NASDAQ Capital Market’s minimum initial listing standards, which generally mandate that we meet certain requirements relating to stockholders’ equity, market capitalization, aggregate market value of publicly held shares and distribution requirements, we cannot assure you that we will be able to meet those initial listing requirements. If The NASDAQ Capital Market does not list our securities for trading on its exchange, we could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; |
| ● | reduced liquidity with respect to our securities; |
| ● | a determination that our shares of common stock are “penny stock” which will require brokers trading in our shares of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock; |
| ● | a limited amount of news and analyst coverage for our company; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Assuming our common stock will be listed on The NASDAQ Capital Market, our common stock will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Furthermore, if we were no longer listed on The NASDAQ Capital Market, our common stock would not be covered securities and we would be subject to regulation in each state in which we offer our securities.
Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our Common Stock.
If after listing of our Common Stock we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to de-list our securities. Such a de-listing would likely have a negative effect on the price of our Common Stock and would impair your ability to sell or purchase our Common Stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our Common Stock to become listed again, stabilize the market price or improve the liquidity of our Common Stock, prevent our Common Stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
15
The market price of our Common Stock and Warrants may be highly volatile, and you could lose all or part of your investment.
The trading price of our Common Stock and Warrants is likely to be volatile. This volatility may prevent you from being able to sell your securities at or above the price you paid for your securities. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:
| ● | whether we achieve our anticipated corporate objectives; |
| ● | actual or anticipated fluctuations in our quarterly or annual operating results; |
| ● | changes in financial or operational estimates or projections; |
| ● | termination of the lock-up agreement or other restrictions on the ability of our stockholders and other security holders to sell shares after this offering; |
| ● | changes in the economic performance or market valuations of companies similar to ours; and |
| ● | general economic or political conditions in the United States or elsewhere. |
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our Common Stock, regardless of our actual operating performance.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on Nasdaq and if the price of our Common Stock is less than $5.00, our Common Stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock, and therefore shareholders may have difficulty selling their shares.
The financial and operational projections and statements regarding future milestones that we may make from time to time are subject to inherent risks.
The projections and statements regarding future milestones that we provide herein or our management may provide from time to time reflect numerous assumptions made by management, including assumptions with respect to our specific as well as general business, regulatory, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections and targeted milestones themselves, will prove inaccurate or may not be achieved. There may be differences between actual and projected results, and actual results may be materially different from than those contained in the projections and statements regarding future milestones. The inclusion of the projections and statements regarding future milestones in this prospectus should not be regarded as an indication that we, our management or the underwriters considered or consider the projections or such statements to be a guaranteed prediction of future events, and the projections and such statements should not be relied upon as such.
16
Future sales of Common Stock by our shareholders may adversely affect our stock price and our ability to raise funds in new stock offerings.
Sales of our Common Stock by our shareholders and our Warrant or option holders following this offering, or the perception that these sales may occur, could adversely affect the price of the offered securities and impair our ability to raise capital through the sale of additional equity securities. Upon completion of this offering, we will have 14,007,188 shares of Common Stock outstanding (based on the assumed offering price, giving effect to a 2-for-1 reverse stock split and excluding any shares that may be issued upon exercise of any Warrants issued hereunder or exercise by the underwriters’ over-allotment option). Of these outstanding shares, the shares of Common Stock sold in this offering will be freely tradable, without restriction, in the public market unless purchased by our “affiliates,” as defined under Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”). Of the remaining outstanding shares of Common Stock, 11,578,175 shares will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act, and will be freely tradable subject to the applicable holding period, volume, manner of sale and other limitations under Rule 144 of the Securities Act.
Upon completion of this offering, most of the restricted securities will be subject to lock-up agreements with the underwriters, restricting the sale of such shares for 180 days after the date of this offering. These lock-up agreements are subject to a number of exceptions, however, and holders may be released from this agreement with the prior written consent of the representative of the underwriters.
In addition, on August 21, 2020, in connection with the Special Shareholders Meeting, the Company filed with the Secretary of State of the State of Florida the Amended and Restated Articles to, among other things, cause all 10,000,000 outstanding shares of the Series B Preferred Stock to be converted into 5,000,000 shares of Common Stock on a post-split basis and the issuance of an additional 5,000,000 shares of Common Stock to cover certain anti-dilution rights. The converted shares and the additional shares issued due to the anti-dilution rights, are subject to a 12 -month lock-up whereby the holders of such converted shares may not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of their converted shares for 12 months from August 21, 2020. Thereafter, each holder of the converted shares will be limited to selling up to 10% of the converted shares received by such holder in any one-month period.
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of 769,230 units offered in this offering at an assumed public offering price of $7.80 per unit (representing the closing stock price of our Common Stock on December 15, 2020 and giving effect to a proposed 2-for-1 reverse stock split), and after deducting underwriter discounts and commissions and estimated offering expenses payable by us, investors in this offering can expect an immediate dilution of $6.67 per share, or 85.51% at the assumed public offering price, assuming no exercise of the Warrants offered hereby. You may experience further dilution to the extent that shares of Common Stock are issued upon exercise of the Warrants. In addition, as of December 7, 2020, (a) 169,000 shares of our Common Stock are issuable upon the exercise of outstanding options; (b) 68,452 shares of our Common Stock are issuable upon exercise of our currently outstanding warrants; (c) 45,493 shares of our Common Stock issuable upon exercise of currently outstanding convertible note and (d) 95,583 shares of our Common Stock are subject to vesting, granted to some of our employees and consultants. Our outstanding warrants to purchase shares of our Common Stock have a weighted average exercise price of $8.26 per share and expire from November 23, 2023 to November 23, 2025. Our outstanding issued options have a weighted average exercise price of $8.94 per share and expire on dates ranging from September 13, 2023 to March 29, 2025.
The Warrants are speculative in nature.
The Warrants offered in this offering do not confer any rights of Common Stock ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire Common Stock at a fixed price for a limited period of time. Specifically, commencing on the date of issuance, holders of the Warrants may exercise their right to acquire the shares of Common Stock and pay an exercise price of $7.80 per share (100% of the assumed offering price), prior to five years from the date of issuance, after which date any unexercised Warrants will expire and have no further value.
17
Holders of the Warrants will have no rights as a common stockholder until they acquire our Common Stock.
Until holders of the Warrants acquire shares of Common Stock upon exercise of the Warrants, the holders will have no rights with respect to the Common Stock issuable upon exercise of the Warrants. Upon exercise of the Warrants, the holder will be entitled to exercise the rights of a common shareholder as to the security exercised only as to matters for which the record date occurs after the exercise.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Common Stock adversely, the price of our securities and trading volume could decline.
The trading market for our securities may be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our Common Stock adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would likely decline. If any analyst who may cover us was to cease coverage of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our securities or trading volume to decline.
The shares of Common Stock that are issuable upon exercise of the Warrants offered hereby may become unregistered.
We are registering, as part of the registration statement of which this prospectus forms a part, the issuance by us of the shares of Common Stock issuable upon exercise of the Warrants. However, there is no guarantee that the registration statement will remain effective at the time on which you exercise your Warrants. If you exercise your Warrants at a time where there is not an effective registration statement, the shares of Common Stock that you receive upon exercise of your Warrants will be restricted and contain a restrictive legend. In this case, you will only be able to sell these shares of Common Stock issued if a resale registration statement is filed or if there is an exemption from the registration requirements of the Securities Act.
We do not expect to pay dividends for the foreseeable future.
We do not expect to pay dividends on our Common Stock for the foreseeable future. Accordingly, any potential investor who anticipates the need for current dividends should not purchase our securities.
Our existing directors, executive officers and principal shareholders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.
After this offering, our directors, executive officers, principal shareholders and their affiliates will beneficially own or control, directly or indirectly, in the aggregate, approximately 70.30% of our outstanding Common Stock, assuming no exercise of the underwriters’ option to purchase additional securities in this offering. As a result, these shareholders, acting together, could have significant influence over the outcome of matters submitted to our shareholders for approval, including the election or removal of directors; any amendments to our articles of incorporation or bylaws; any merger, consolidation or sale of all or substantially all of our assets; and over the management and affairs of the Company. This concentration of ownership may also have the effect of delaying or preventing a change in control of the Company or discouraging others from making tender offers for our shares and might affect the market price of our Common Stock.
We are searching for a new Chief Executive Officer, and Chief Operating Officer the results of which may not be successful and may significantly change the management of the Company.
Pursuant to an employment agreement between the Company and Arik Maimon, our Chief Executive Officer, dated as of July 24, 2020 (the “2020 Maimon Employment Agreement”), Mr. Maimon agreed to resign as the Chief Executive Officer of the Company within four months of the effective date of the 2020 Maimon Employment Agreement (which term can be extended by the Board of Directors on a month-to-month basis with the approval of both Dinar and CIMA until a new CEO is appointed by the Board of Directors) but continue as a member of the Company’s Board of Directors at the same salary compensation. An Executive Search Committee has been established to evaluate and propose qualified executive candidates for approval by the Board of Directors, including the Chief Executive Officer, President and Chief Operating Officer.
The Company is in the process of appointing a successor Chief Executive Officer. While we intend to do our diligence and identify a suitable person to fill this role, our search for a new Chief Executive Officer entails a risk that the newly appointed officer may bring changes to the management and operations of the Company. Such a change may affect shareholder value and the competitiveness of the Company in the public market.
Pursuant to an employment agreement between the Company and Michael De Prado, our President & Chief Operating Officer, dated as of July 24, 2020 (the “2020 De Prado Employment Agreement”), Mr. De Prado agreed to resign as the President & Chief Operating Officer of the Company within four months of the effective date of the 2020 De Prado Employment Agreement, which term can be extended by the Board of Directors on a month-to-month basis with the approval of both Dinar and CIMA until a new President & Chief Operating Officer is appointed by the Board of Directors, but continue as a member of the Company’s Board of Directors at the same salary compensation. An Executive Search Committee has been established to evaluate and propose qualified executive candidates for approval by the Board of Directors, including President and Chief Operating Officer.
18
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains a number of “forward-looking statements”. Specifically, all statements other than statements of historical facts included in this prospectus regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management at the time these statements were made, as well as assumptions made by and information currently available to management. When used in this prospectus and the documents incorporated by reference herein, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “continue” and “intend,” and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors.
You should understand that the following important factors, in addition to those discussed in our periodic reports to be filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements:
A variety of factors, some of which are outside our control, may cause our operating results to fluctuate significantly. They include:
| ● | our ability to diversify our operations; |
| ● | our ability to attract key personnel; |
| ● | our ability to operate profitably; |
| ● | our ability to efficiently and effectively finance our operations,; |
| ● | inability to achieve future enrollment levels or other operating results; |
| ● | inability to raise additional financing for working capital; |
| ● | inability to efficiently manage our operations; |
| ● | the inability of management to effectively implement our strategies and business plans; |
| ● | effect of COVID-19; |
| ● | the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require management to make estimates about matters that are inherently uncertain; |
| ● | deterioration in general or regional economic conditions; |
| ● | changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate; and |
| ● | adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations. |
Although we believe that our expectations (including those on which our forward-looking statements are based) are reasonable, we cannot assure you that those expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in our forward-looking statements as anticipated, believed, estimated, expected or intended.
Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus and the documents incorporated by reference herein might not occur.
19
Assuming the sale of 769,230 units in this offering at an assumed offering price of $7.80 per unit (representing the closing price of our common stock on December 15, 2020 after giving effect to a proposed reverse stock split at a ratio of 2-for-1), we estimate that the net proceeds from the sale of the units we are offering will be approximately $5.201 million. If the underwriters fully exercise the over-allotment option, the net proceeds of the units we sell will be approximately $6.101 million. “Net proceeds” is what we expect to receive after deducting the underwriting discount and commission and estimated offering expenses payable by us.
While we expect to use the net proceeds for the purposes described below, the amounts and timing of our actual expenditures will depend upon numerous factors, including potential business and marketplace changes. We anticipate an approximate allocation of the use of net proceeds as follows:
| Sales and Marketing | $ | 3,000,000 | ||
| Purchase of chip-based debit card stock for GPR and Starter cards | $ | 259,700 | ||
| Repayment of Labrys Note to Labrys Funds LP and Loan from Dinar Zuz LLC(1) | $ | 1,032,600 | ||
| Research and Development | $ | 125,000 | ||
| Working capital, accrued salaries and operating expenses | $ | 784,019 |
| (1) | The Labrys Note to Labrys Funds LP matures in 12 months and bears an interest rate of 12%. The loan from Dinar matures in 6 months and bears an interest rate of 9%. Both loans were used mainly for working capital purposes. |
The expected net proceeds from the sale of the units offered hereby, if added to our current cash, is anticipated to be sufficient to fund our operations for at least 12 months. In the event that our plans change, our assumptions change or prove to be inaccurate, or the net proceeds of this offering are less than as set forth herein or otherwise prove to be insufficient, it may be necessary or advisable to reallocate proceeds or curtail expansion activities, or we may be required to seek additional financing or curtail our operations. As a result of the foregoing, our success will be affected by our discretion and judgment with respect to the application and allocation of the net proceeds of this offering.
We cannot predict when the Warrants will be exercised, if at all. If all of the Warrants sold in this offering are exercised for cash, then we will receive approximately an additional $6 million of proceeds. It is possible that all or a portion of the Warrants may expire prior to being exercised, in which case we will not receive any additional proceeds. If we receive proceeds from the exercise of Warrants, we expect to use such proceeds for general corporate purposes.
Pending their use, we plan to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.
20
We have never declared or paid any cash dividend on our capital stock. We do not anticipate paying any cash dividends in the foreseeable future and we intend to retain all of our earnings, if any, to finance our growth and operations and to fund the expansion of our business. Payment of any dividends will be made in the discretion of the Board, after its taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. Any dividends that may be declared or paid on our Common Stock, must also be paid in the same consideration or manner, as the case may be, on our shares of preferred stock, if any.
21
The following table sets forth our capitalization as of September 30, 2020:
| ● | on an actual basis; |
| ● | on a pro forma basis to give effect to the units offered by us in this offering at the public offering price of $7.80 per unit (representing the closing price of our common stock on December 15, 2020 after giving effect to a proposed reverse stock split at a ratio of 2-for-1) after deducting the estimated discounts, non-accountable expense allowance and the estimated offering expenses payable by us. |
The tables should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
| As
of September 30, 2020 (unaudited) Amounts in U.S. Dollars | ||||||||
| Stockholders’ Equity | Actual | Pro forma | ||||||
| Common Stock, $0.001 per share par value, Common Stock, authorized 360,000,000 shares, $0.001 par value; 13,237,958 issued and outstanding as of September 30, 2020 | 26,000 | 26,000 | ||||||
| Additional paid-in capital | 28,237,000 | 33,438,319 |
||||||
| Accumulated/Retained deficit | (24,543,000 | ) | (24,543,000 | ) | ||||
| Total Shareholders’ Equity | $ | 3,720,000 | $ | 8,921,319 |
||||
The number of issued and outstanding shares as of September 30, 2020 in the table takes into account our anticipated 2-for-1 reverse stock split and excludes:
| ● | 68,452 shares of Common Stock issuable upon exercise of unregistered warrants at a weighted average exercise price of $8.26 per share; |
| ● | 95,583 shares of Common Stock upon the vesting of Common Stock awards granted to some of our employees and consultants; |
| ● | 45,493 shares of our Common Stock issuable upon exercise of currently outstanding convertible note at a conversion price of $2.75 per share; and |
| ● | 169,000 shares of Common Stock issuable upon exercise of unregistered option at a weighted average exercise price of $8.94 per share. |
22
If you purchase units in this offering your interest in our Common Stock will be diluted immediately to the extent of the difference between the assumed public offering price of $7.80 per unit (representing the closing price of our common stock on December 15, 2020 after giving effect to a proposed reverse stock split at a ratio of 2-for-1) and the as adjusted net tangible book value per share of our Common Stock immediately following this offering.
Our net tangible book value as of September 30, 2020 was $(3,930,000), or approximately ($0.30) per share. Net tangible book value per share represents our total tangible assets less total tangible liabilities, divided by the number of shares of Common Stock outstanding as of September 30, 2020. Net tangible book value dilution per share to new investors represents the difference between the amount per unit paid by purchasers in this offering and the adjusted net tangible book value per share of Common Stock immediately after completion of this offering.
After giving effect to the sale of the units that we are offering at an assumed public offering price of $7.80 per unit, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on an as adjusted basis as of September 30, 2020 would have been $0.09 per share of Common Stock. This amount represents an immediate increase in net tangible book value of $6.76 per share of Common Stock to our existing shareholders and an immediate dilution of per share of Common Stock to new investors purchasing shares of Common Stock in this offering.
The following table illustrates this per share dilution:
| Assumed public offering price per share | $ | 7.80 | ||||||
| Net tangible book value per share as of September 30, 2020 | ($ | 0.30 | ) | |||||
| Increase in net tangible book value per share attributable to new investors | $ | 6.76 | ||||||
| As adjusted net tangible book value per share as of September 30, 2020, after giving effect to the offering | $ | 0.09 | ||||||
| Dilution per share to new investors in the offering | $ | 6.67 |
In addition, for purposes of this section, the foregoing does not take into account any of the following, each of which would cause you to experience further dilution:
| ● | 115,384 shares of Common Stock if the underwriters exercise their over-allotment option for shares of Common Stock in full; | |
| ● | 769,230 shares of Common Stock issuable upon exercise of the Warrants offered hereby (or 884,614 shares of Common Stock issuable upon exercise of the Warrants if the underwriters exercise their over-allotment option for Warrants in full); | |
| ● | 61,538 shares of Common Stock issuable upon exercise of the representative’s warrants (or 70,768 shares of Common Stock issuable upon exercise of the representative’s warrants if the underwriters exercise their over-allotment option for Shares in full); | |
| ● | (a) 169,000 shares of our Common Stock issuable upon the exercise of outstanding options with a weighted average exercise price of $8.94; (b) 68,452 shares of our Common Stock issuable upon exercise of our currently outstanding warrants with a weighted average exercise price of $8.26; (c) 45,493 shares of our Common Stock issuable upon exercise of currently outstanding convertible note at a conversion price of $5.50 per share and (d) 95,583 shares of our Common Stock issuable upon the vesting of Common Stock granted to some of our employees and consultants. |
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on, and should be read in conjunction with our financial statements, which are included elsewhere in this prospectus. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this prospectus, and other factors that we may not know.
All share amounts and per share amounts in this prospectus reflect a reverse stock split of the outstanding shares of our Common Stock at a ratio of 300-for-1 shares that was effected on August 8, 2018 and an assumed reverse stock split at a ratio of 2-for-1 shares that will be effected prior to pricing this offering.
OVERVIEW
The Company was incorporated in September 2005 to act as a holding company for its subsidiaries in the technology, telecom and banking industries.
Company Overview
Cuentas, Inc. (the “Company” or “Cuentas”) 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.
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 (100% owned) (“M&M”), Next Cala, Inc (94% owned -was dissolved on July 3, 2020) (“Cala”), NxtGn, Inc. (65% owned-was dissolved on August 24, 2020) (“NxtGn”) and Cuentas Mobile LLC (formerly Next Mobile 360, LLC. - 100% owned). Additionally, Next Cala, Inc. had a 60% interest in NextGlocal Inc. (“Next Glocal”), a subsidiary formed in May 2016 and which was dissolved on September 27, 2019. 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. On October 23, 2017, the Company acquired 100% of the outstanding shares in Limecom, Inc, (“Limecom” and such acquisition, the “Limecom Acquisition”) from Heritage Ventures Limited (“Heritage”). On January 30, 2019, the Company exercised a right to rescind the Acquisition, principally in an effort to reduce the Company’s continuing debt obligations associated with the Acquisition.
Formation of SDI NEXT DISTRIBUTION LLC (“SDI NEXT”)
On December 6, 2017, the Company completed its formation of SDI NEXT DISTRUBUTION LLC (“SDI Next”) in which the Company owns a 51% membership interest, previously announced August 24, 2017 in a letter of intent with Fisk Holdings, LLC (“Fisk Holdings”). Per the Operating Agreement of SDI NEXT the Company and Fisk Holdings will serve as the Managing Members of SDI Next and the Company will contribute a total of $500,000, to be paid per an agreed-upon schedule over a twelve-month period. Fisk Holdings will contribute 30,000 (thirty thousand) active point of sale locations for distribution of retail telecommunications and prepaid financial products and services to include, but not be limited to: prepaid general purpose reload (“GPR”) cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products. The completed formation of an established distribution business for third-party gift cards, digital content, mobile top up, financial services and digital content, which presently includes more than 31,600 U.S. active Point of Sale locations, including store locations, convenience stores, bodegas, store fronts, etc. The parties agreed that additional product lines may be added with unanimous decision by the Managing Members of SDI Next. During 2018, it was agreed between the parties to distribute the Company’s recently announced CUENTAS GPR card and mobile banking solution aimed to the unbanked, underbanked and financially underserved consumers, making them available to customers at the more than 31,600 retail locations SDI Next presently serves. SDI Next was dissolved on August 22, 2020.
24
Limecom
On October 23, 2017, the Company acquired 100% of the outstanding interests in Limecom.
On January 29, 2019, the Company and Heritage Ventures Ltd. (“Heritage”) agreed to amend the Share Purchase Agreement, dated September 19, 2017 (the “Limecom Purchase Agreement”) to extend the right of the Company to rescind the same Share Purchase Agreement and to return the stock in Limecom back to Heritage in the following manner:
| (a) | The 69,074 shares of the Company issued to Heritage and its stockholders will not be returned to the Company, and the remaining 17,269 shares of the Company in escrow will not be issued to Heritage. Instead, the Company will issue an additional 45,000 shares of the Company as directed by Heritage. |
| (b) | The $1,807,000 payment obligation under the Limecom Purchase Agreement will be cancelled. |
| (c) | The Employment Agreement with Orlando Taddeo as International CEO of Limecom will be terminated. |
| (d) | Heritage, its Stockholders and the current management of Limecom agreed to indemnify and hold harmless Next Group Acquisition, Inc. and the Company from any liabilities (known and unknown) incurred by Limecom (accrued, disclosed or undisclosed by Limecom) up to and including the rescission date. |
| (e) | Heritage and Limecom’s current management agreed to cooperate with Next Group Acquisition and/or the Company with any information required to be disclosed to the Securities and Exchange Commission (“SEC”) as a part of Cuentas’ SEC disclosure obligations with respect to the rescission. |
| (f) | Heritage, Limecom and its current management and stockholders agreed to cooperate with Cuentas’ auditors in providing all material information to Cuentas’ auditors as is reasonably required. |
| (g) | Heritage and the Limecom current management agreed that the intercompany loan in the approximate sum of $231,000 will be cancelled. |
| (h) | Cuentas agreed to issue 10,370 shares of Cuentas restricted stock to several Limecom employees in exchange for salaries due to them. Those shares will be issued and held in escrow until the full satisfaction of the terms of this Amendment. |
| (i) | Cuentas agreed to advance the sum of $25,000 toward the payments agreed upon to be paid to American Express, Inc. (“AMEX”) by Limecom, and Limecom agrees to pay the sum of $25,000 to AMEX and the balance of the payments under the Stipulation of Settlement with AMEX as agreed upon by Limecom. |
On January 30, 2019, Cuentas sent an executed Rescission Letter to Limecom rescinding the acquisition of Limecom according under the Amendment of the Limecom Purchase Agreement, dated January 29, 2019.
Cuentas fulfilled its obligation to pay $25,000 to AMEX pursuant to the Amendment of the Limecom Purchase Agreement dated January 29, 2019.
Next Communications, Inc. Bankruptcy
The Company has historically received financing from Next Communications, Inc. (“Next Communications”), an entity controlled by our CEO, and has a related party payable balance of approximately $0 and approximately $2,972,000 due to Next Communications as of June 30, 2019 and December 31, 2018. During the first calendar quarter of 2017, Next Communications filed for bankruptcy protection. As a result, the related party payable is being handled by a court appointed trustee as an asset of Next Communications. On January 29, 2019, the United States Bankruptcy Court Southern District of Florida, Miami Division, approved a Plan of Reorganization for Next Communications., whereby the Company would pay $600,000 to a specific creditor in consideration for the forgiveness of the balance of the payable to Next Communications. On March 10, 2019, the Company paid $50,000 to the trust account of the specific creditor, per the order, and on May 10, 2019, the Company paid $550,000 to the same trust account of the specific creditor, per the order, and satisfied its obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida, Miami Division, on January 29, 2019.
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Results of operations for the nine months ended September 30, 2020 and 2019
Revenue
Revenues during the nine months ended September 30, 2020 totaled $385,000 compared to $811,000 for the nine months ended September 30, 2019. The Company generated revenues through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services. The Company began generating sales from its Fintech products and services during the third quarter of 2020.
Costs of Revenue
Cost of revenues during the nine months ended September 30, 2020 totaled $620,000 compared to $617,000 for the nine months ended September 30, 2019. Cost of revenue consists mainly of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products. Since the soft launch of the Company’s GPR Product during the second Quarter of 2020, Cost of revenue also consisted from cost related to the sale of the Company’s GPR Card in the amount of $195,000.
Operating Expenses
Operating expenses totaled $4,683,000 during the nine months ended September 30, 2020 compared to $1,663,000 during the nine months ended September 30, 2019 representing a net increase of $3,020,000. The increase in the operating expenses is mainly due to the increase in the amortization expense of intangible assets in the amount of $1,350,000
Other Income
The Company recognized other income of $383,000 during the nine months ended September 30, 2020 compared to an income $2,349,000 during the nine months ended September 30, 2019. The net change from the prior period is mainly due to the change in our stock-based liabilities and other income in the amount of approximately $2,362,000 due to the satisfaction of the Company’s obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida Miami Division on January 29, 2019 pursuant to which we paid $600,000 to satisfy an obligation of approximately $2,962,000. Gain from Change in Fair Value of stock-based liabilities for the nine-month period ended September 30, 2020 was $307,000 as compared to a loss of $133,000 for the nine-month period ended September 30, 2019. 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 $5,153,000 for the nine-month period ended September 30, 2020, as compared to a net income of $853,000 for the nine-month period ended September 30, 2019.
Results of operations for the three months ended September 30, 2020 and 2019
Revenue
Revenues during the three months ended September 30, 2020 totaled $134,000 compared to $247,000 for the three months ended September 30, 2019. The Company generated revenues through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services. The Company began generating sales from its Fintech products and services during the third quarter of 2020.
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Costs of Revenue
Cost of revenues during the three months ended September 30, 2020 totaled $237,000 compared to $150,000 for the three months ended September 30, 2019. 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 $118,000 due to additional developments and testing that the Company conducted on its GPR product.
Operating Expenses
Operating expenses totaled $983,000 during the three months ended September 30, 2020 compared to $663,000 during the three months ended September 30, 2019 representing a net increase of $320,000. The increase in the operating expenses is mainly due to the increase in the amortization expense of intangible assets in the amount of $450,000.
Other Income
The Company recognized other loss of $53,000 during the three months ended September 30, 2020 compared to a loss of $126,000 during the three months ended September 30, 2019.
Results of operations for the years ended December 31, 2019 and 2018
Revenue
The Company generates revenues through the sale and distribution of prepaid telecom minutes and other related telecom services.
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Thousands | Thousands | |||||||
| Revenue from sales | $ | 967 | $ | 24,983 | ||||
| Revenue, sales to related parties | - | 49,667 | ||||||
| Total revenue | $ | 967 | $ | 74,650 | ||||
Revenues during the year ended December 31, 2019 totaled $967,000 compared to $74,650,000 for the year ended December 31, 2018. The decrease in the total revenue is mainly due to the rescission of the Limecom Acquisition, which was consolidated for the year ended December 31, 2018, and not consolidated in the year ended December 31, 2019. The Company no longer owns Limecom as of January 2019.
The Company did not generate sales from its Fintech products and services during the year ended December 31, 2020, due to additional developments and testing that the Company conducted on its GPR product.
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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 year ended December 31, 2019 totaled $808,000 compared to $74,177,000 for the year ended December 31, 2018. The decrease in the total Cost of Revenue is mainly due to the rescission of the Limecom Acquisition.
Operating Expenses
Operating expenses totaled $2,305,000 during the year ended December 31, 2019 compared to $5,686,000 during the year ended December 31, 2018 representing a net decrease of $3,381,000. The decrease in the operating expenses is mainly due to Loss on disposal and impairment of assets in the amount of $1,917,000 that the Company recorded in 2018 and the rescission of the Limecom Acquisition which was consolidated for the full twelve months ended December 31, 2018 and not consolidated in the twelve-month period ended December 31, 2019.
Other Income
The Company recognized other income of $860,000 during the year ended December 31, 2019 compared to an income $1,628,000 during the year ended December 31, 2018. The net change from the prior period is mainly due to other income in the amount of $2,362,000 from the satisfaction of the Company’s obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida, Miami Division, on January 29, 2019 (the “Next Communications Reorganization”), pursuant to which we paid $600,000 to satisfy an obligation of approximately $2,962,000. It is also due to the change in the gain recognized on the fair value measurement of our derivative and stock-based liabilities. The fair value measurements related to derivative liabilities is driven by market inputs and inherently subject to volatility. Loss from Change in Fair Value of stock-based liabilities for year ended December 31, 2019 was $560,000 as compared to a gain of $2,314,000 for the year ended December 31, 2018.
Net Loss
We incurred a net loss of $1,320,000 for the year ended December 31, 2019, as compared to a net loss of $3,562,000 for the year ended December 31, 2018 for the reasons 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.
On November 12, 2020, the Company issued a convertible promissory note to Arie Ghershony in the amount of $250,000, which matures on November 12, 2021. Interest accrues from the date of the note on the unpaid principal amount at a rate equal to 10.00% per annum, calculated as simple interest. The holder may elect to convert all or any part of the then outstanding principal and accrued but unpaid interest due under the note into shares of Common Stock until maturation. The conversion price of the note is $5.50 per share, which may be proportionately adjusted as appropriate to reflect any stock dividend, stock split, reverse stock split or other similar event affecting the number of outstanding shares of Common Stock of the Company without the payment of consideration to the Company therefor at any time prior to conversion.
As of September 30, 2020, we had cash and cash equivalents of $343,000 as compared to $16,000 as of December 31, 2019. As of September 30, 2020, we had a working capital deficit of $3,846,000 thousand, as compared to a deficit of $3,752,000 as of December 31, 2019. The increase in our working capital deficit was mainly attributable to the increase of $521,000 in our Accounts Payables and $354,000 in our loans from related parties which mitigated by decrease of $727,000 in our stocked based liabilities.
As of December 31, 2019, the Company had $16,000 of cash, total current assets of $165,000 and total current liabilities of $3,917,000 creating a working capital deficit of $3,752,000. Current assets as of December 31, 2019 consisted of $16,000 of cash, marketable securities in the amount of $1,000, related parties of $54,000 and other current assets of $94,000.
As of December 31, 2018, the Company had $154,000 of cash, total current assets of $4,033,000 and total current liabilities of $11,581,000 creating a working capital deficit of $7,548,000. Current assets as of December 31, 2018 consisted of $154,000 of cash, marketable securities in the amount of $79,000, accounts receivable net of allowance of $3,673,000, related parties of $36,000 and other current assets of $91,000.
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The decrease in our working capital deficit was mainly attributable to the decrease of $1,659,000 in our trade account payables and decrease of $4,927,000 in our short-term related parties’ payables, which was mitigated by a decrease of $3,673,000 in our trade account receivables.
Net cash used in operating activities was $1,372,000 for the nine-month period ended September 30, 2020, as compared to cash used in operating activities of $1,068,000 for the nine-month period ended September 30, 2019. The Company’s primary uses of cash have been for professional support and working capital purposes.
Net cash used in operating activities was $1,315,000 for the year ended December 31, 2019, as compared to cash used in operating activities of $517,000 for the year ended December 31, 2018. The Company’s primary uses of cash have been for professional support, marketing expenses and working capital purposes.
Net cash used in investing activities was $0 for the year ended December 31, 2019, as compared to net cash generated from investing activities of $9,000 for the year ended December 31, 2018.
Net cash provided by financing activities was approximately $1,699,000 for the nine-month period ended September 30, 2020, as compared to net cash provided by financing activities was approximately $979,000 for the nine-month period ended September 30, 2019. We have principally financed our operations in 2020 through the sale of our common stock to private investors, issuance of convertible loans debt and loans from our shareholders. On September 11, 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 matures on September 2, 2021. Payment of principle and interest starts after 3 months with ability to extend for up to 2 months and the loan principal becomes payable on maturity. The Labrys Note bears 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 has 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. Due to our operational losses, we have principally financed our operations through the sale of our Common Stock and the issuance of convertible debt.
Net cash provided by financing activities was approximately $1,177,000 for the year ended December 31, 2019, as compared to approximately $587,000 for the year ended December 31, 2018. We have principally financed our operations in 2019 through the sale of our Common Stock and the issuance of debt.
On September 2, 2020, the Company issued the Labrys Note, which bears interest at a rate of 12% per annum and matures on September 2, 2021. On December 2, 2020, the Company paid the First Amortization Payment Extension Fee of $12,500.00 and will make the first of 10 equal monthly payments of $67,760.00 on January 15, 2021 and by the 15th of each subsequent month.
The Labrys Note bears an original issue discount in the amount of $60,500, and the issuing expenses were $40,000, resulting with net proceeds of $505,000. The Company also issued 70,906 shares of its Common Stock pursuant to the Labrys Note. Out of those, 16,500 shares of Common Stock were issued in consideration of 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.
Due to our operational losses, we have principally financed our operations through the sale of our Common Stock and the issuance of convertible debt. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2019, contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Despite the capital raise that we have conducted, the above conditions raise substantial doubt about our ability to continue as a going concern. Although we anticipate that cash resources will be available to the Company through its current operations, we believe existing cash will not be sufficient to fund planned operations and projects investments through the next 12 months. Therefore, we are still striving to increase our sales, attain profitability and raise additional funds for future operations. Any meaningful equity or debt financing will likely result in significant dilution to our existing shareholders. There is no assurance that additional funds will be available on terms acceptable to us, or at all.
Since inception, we have financed our cash flow requirements through issuance of Common Stock, related party advances and debt. As we expand our activities, we may, and most likely will, continue to experience net negative cash flows from operations. Additionally, we anticipate obtaining additional financing to fund operations through Common Stock offerings, to the extent available, or to obtain additional financing to the extent necessary to augment our working capital. In the future we need to generate sufficient revenues from sales in order to eliminate or reduce the need to sell additional stock or obtain additional loans. There can be no assurance we will be successful in raising the necessary funds to execute our business plan.
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We anticipate that we will incur operating losses in the next 12 months. 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, lower our financing costs and specifically our accounts receivable factoring costs, 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.
Off-balance Sheet Arrangements
As at September 30, 2020, we had no off-balance sheet arrangements of any nature.
Impact of Inflation
The Company does not expect inflation to be a significant factor in operation of the business.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations”. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that require complex management judgment.
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, 2020. However, these results are not necessarily indicative of results for any other interim period or for the year ended December 31, 2020. 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, 2019, filed with the SEC on March 30, 2020 (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, 2019.
Principles of Consolidation
The consolidated financial statements are prepared in accordance with US GAAP. The consolidated financial statements of the Company include the Company and its wholly-owned and majority-owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, certain revenues and expenses, and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. Estimates are used when accounting for intangible assets, going concern and stock-based compensation.
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Deferred Revenue
Deferred revenue is comprised mainly of unearned revenue related to prepayments from retail consumers for telecommunications minutes. Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”). The Company expects to recognize 100% of the Contracted not recognized 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.
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.
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.
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Recent Accounting Standards announced
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments apply to reporting entities that are required to make disclosures about recurring or nonrecurring fair value measurements and should improve the cost, benefit, and effectiveness of the disclosures. ASU 2018-13 categorized the changes into those disclosures that were removed, those that were modified, and those that were added. The primary disclosures that were removed related to transfers between Level 1 and Level 2 investments, along with the policy for timing of transfers between levels. In addition, disclosing the valuation processes for Level 3 fair value measurements was removed. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company notes that this guidance will impact its disclosures beginning January 1, 2020.
In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will originally become effective for the Company beginning January 1, 2020, with early adoption permitted, on a modified retrospective approach. As a smaller reporting company, the effective date for the Company has been delayed until fiscal years beginning after December 15, 2022, in accordance with ASU 2019-10, although early adoption is still permitted. This standard is not expected to have a material impact to the Company’s consolidated financial statements after evaluation.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes, eliminates certain exceptions to the general principles in Topic 740 and clarifies certain aspects of the current guidance to improve consistent application among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022, though early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. This standard is not expected to have a material impact to the Company’s consolidated financial statements after evaluation.
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The Company
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 GPR.
Operating Subsidiaries. The Company’s business operations are conducted primarily through its subsidiaries, described elsewhere in this report.
Properties. The Company’s headquarters are located in Miami, Florida.
Our Business
The Fintech Card is a GPR integrated into a proprietary robust ecosystem that protects customers by depositing their funds in an FDIC insured bank account at the Issuing Bank. The comprehensive financial services include:
| Direct ACH Deposits | ATM Cash Withdrawal | Bill Pay and Online Purchases | ||
| Debit Card Network Processing | Peer to Peer Payments | Cash Reload at over 50,000 retailers | ||
| Online banking | Major Transit Authority Tokens | Discounted Gift Cards |
The Ecosystem includes a mobile wallet for digital currency, stored value card balances, prepaid telecom minutes, loyalty reward points, and purchases made in the Cuentas Virtual Marketplace. The Fintech Card is integrated with the Los Angeles Metro, Connecticut Transit Authority and Grand Rapids Transit system to store mass transit currency and pay for transit access via the Cuentas Digital Wallet
The Fintech Card stores products purchased in the Cuentas Virtual Market Place where Tier-1 retailers, virtual in-game currencies, Amazon Cash, and cellular telecom prepaid minutes “top ups”. Additionally, well-known brand name restaurants sell discounted prepaid gift cards in the Cuentas Virtual Marketplace.
The Latino Market
The name “Cuentas” is a Spanish word that has multiple meanings and was chosen for strategic reasons, to develop a close relationship with the Spanish speaking population. It means “Accounts” as in bank accounts and it can also mean “You can count on me” as in “Cuentas conmigo”. Additionally, it can be used to “Pay or settle accounts” (saldar cuentas), accountability (rendición de cuentas), to be accountable (rendir cuentas), and other significant meanings.
The U.S. Latino population numbers 43.8 million U.S. Immigrants, according to the 2017 FDIC Survey. It excludes immigrants, illegal aliens and undocumented individuals. The FDIC defines the “unbankable” as those adults without an account at a bank or other financial institution and are considered to be outside the mainstream for one reason or another. The Federal Reserve estimated that there were approximately 55 million unbanked or underbanked adult Americans in 2018, which account for 22 percent of U.S. households. The Latino demographic is more distrusting of banking institutions and generally have more identification, credit, and former bank account issues more so than any other U. S. minority.
The Fintech Card is uniquely positioned to service the Latino demographic with comprehensive financial products that do not require any visits to bank branches, and our fees are completely transparent via the Cuentas Digital Wallet and online banking. Most importantly our strategic banking partner, Sutton Bank, is able to use various forms of U.S. and some foreign government issued identification to confirm qualification.
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Products
The Cuentas General-Purpose Reloadable Card
The Cuentas Mastercard acts as a comprehensive banking solution marketed toward the 20 million+ unbanked U.S. Latino community (The unbanked is described by the FDIC as those adults without an account at a bank or other financial institution and are considered to be outside the mainstream for one reason or another. The Federal Reserve estimated that there were approximately 55 million unbanked or underbanked adult Americans in 2018, which account for 22 percent of U.S. households). The Cuentas Mastercard is uniquely enabling access to the U.S. financial system to those without the necessary paperwork to bank at a traditional financial institution while enabling greater functionality than a traditional bank account. This proprietary GPR card allows consumers that reside in the U.S. to acquire a Cuentas Mastercard using their SSN or ITIN together with their U.S. or Foreign Passport, Driver’s License, Matricula Consular or certain US Residency documentation. The Cuentas Mastercard’s funds are protected in an FDIC-insured bank account at the Issuing Bank. Functionality includes ATM withdrawals, direct deposit, cash reload, fee free Cuentas App to Cuentas App fund transfers and mobile banking capabilities, among other key features such as purchasing discounted gift cards and adding “mass transit credits” to digital accounts (available in California, Connecticut, Michigan and other cities in the future). Upcoming Cuentas App upgrades should also include international remittance and other services. Consumers are able to use funds in their account to purchase 3rd party digital and gift cards (many at discounted prices), U.S. and International mobile phone top-ups, mass transportation and tolling access (select markets - CT, Grand Rapids-MI, LA, etc.) as well as digital content for virtual gaming, dining, shopping and cash reloads.
The Cuentas App is available for download now on the Apple App Store and on the Google Play Store for Android, allows consumers to easily activate their Cuentas Mastercard, review their account balance and conduct certain financial transactions. Cuentas is introducing fee free fund transfers to friends, family and vendors that have their own Cuentas App, which will be a very useful feature to compete with other popular Apps that charges fees for immediate fund transfers and availability on the same day.
The Cuentas Business Model
The Cuentas business model leverages profitability from multiple revenue sources, many of which are synergistic market segments.
The Cuentas Mastercard has several revenue centers. The Company will receive a one-time activation charge for each activated Cuentas Mastercard and a monthly recurring charge. These charges were designed to be very reasonable to both consumers and the Company. In addition to these charges, Cuentas will receive a commission each time funds are loaded and reloaded to the Cuentas Mastercard. Additional fees as seen in the following short form table are designed to cover costs and potentially provide another revenue stream.
The Cuentas Digital Wallet produces recurring profits and is an integral part of the Cuentas offering. It will produce revenue each time that consumers purchase third party gift cards, digital access, mass transit tickets, mobile phone topups (U.S. and International) with most at discounted prices. The actual discount is shown to the consumer and is immediately applied to their purchase, so smart shoppers will be able to get everyday products and services at discounted prices.
The Cuentas Digital Wallet is projected to add several new, profitable, mass market services including bill pay and international remittances.
Cuentas also offers rewards for free long distance calling to its cardholders (“Cuentas Rewards”) who earn value with certain transactions. Our target demographic uses both internet and prepaid calling services to communicate with family members around the U.S. and in their country. This added benefit is designed, at a very low cost, to provide extra benefits to our cardholders, which should help to maintain and solidify valuable relationships with them.
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Prepaid Debit Card Market Overview
The Research and Markets report titled “Prepaid Card Market: Payment Trends, Market Dynamics, and Forecasts 2020 - 2025” released in January 2020 states that, “[i]n the United States, prepaid cards remain the preferred choice for the unbanked market segment....” It also states that “[t]he move towards a cashless society is substantial, further driving the prepaid card market.”
Major competitors to Cuentas are Green Dot, American Express Serve, Netspend Prepaid, Starbucks Rewards, Walmart Money card and Akimbo Prepaid.
Cuentas is strategically positioned in the marketplace to have a lower monthly fee and lower reload fees than most cards. Additional benefits and features should move the Cuentas Mastercard ahead of other offerings as consumers realize the value of the Cuentas Digital Wallet and the Cuentas Rewards program.
The Cuentas Technology platform
The Cuentas technology platform is comprised of CIMA Group’s Knetik and Auris software platforms (the “CIMA Licensed Technology”). The platform is 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.
The Platform also contains a sound and proven gamification engine, capable of driving user behaviors in a manner that entices and rewards using incentivization based on proven behavioral science patterns. At the heart of this gamification engine lies a proven and robust rules engine that can easily integrate and modify process flows and orchestrations between disparate platforms, allowing for a quick and easy integration of complex, orchestrated integrations between internal process automation and invocations of external systems. The platform will provide Android and iOS software for users to execute a wide variety of transactions including, but not limited to, account balances, account transfers and in-app purchases. User messaging are also integrated and are achieved via SMS, email, in-app messaging, and voice.
The user management application uses rich metadata CRM and single-Sign-On (SSO) to track user behavior and personalize the user experience. It is fully integrated with our Strategic Partners, scalable and manages the digital ecosystem entitlements. The platform can process both physical and virtual goods, digital assets, real time currency value exchange, virtual currency support with current exchange rates and support nontraditional assets, in addition to credit card, POS, Debits, and digital wallet management.
The user management application uses rich metadata CRM and single-Sign-On (SSO) to track user behavior and personalize the user experience. The unique rules engine is capable of all aspects of gamification: badging, questing, leveling, points consumption, leader boards, loyalty and reward points and personalization with tracking and messaging to support behavior management. Business intelligence is used for reporting and communication of product management via Rate Deck Management, Pinless ANI Recognition, IV and Call Flows and Access Number Management. The platform has redundant reporting for enhanced billing and fraud control and integrates customer service with Business Intelligence and platform integrity
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The graphic below illustrates Cuentas’ strategic agreements with Sutton Bank and InComm, Sutton Bank is the Issuer of the Cuentas Mastercard while the InComm “Processor” relationship provides access to many third party products and services.
Strategic Partners
Sutton Bank
Sutton is our issuing bank for the Fintech Card. Sutton provides online banking, direct deposit, bank accounts, and debit functionality for our Cuentas Mastercards. Sutton is responsible for know your client (KYC) and AML (Anti Money Laundering) compliance and enables customers to open Cuentas Prepaid Mastercard accounts electronically with non-conventional documentation that may not be accepted at traditional banks. They accept over 13 forms of identification, which, when used together with either Social Security or ITIN, can be used for confirmation of identity: Passport, Driver’s License, Matricula Consular, US Residency documentation, among others.
Interactive Communications International, Inc.
On July 23, 2019, the Company entered into the InComm PSA with InComm to power and expand the Company’s GPR card network. InComm distributes gift and GPR cards through many major U.S. retailers and has long standing partnerships with over 1,000 of the most recognized brands that are eligible for Cuentas’ Discount Purchase Platform.
Under the InComm PSA, InComm will act as prepaid card processor and through its VanillaDirect network, expand the Company’s ability for cardholders to reload their Prepaid Cuentas Mastercards through a nationwide network of retailers. VanillaDirect is currently available at major retailers such as: Walmart, 7-Eleven, Walgreens, CVS Pharmacy, Rite Aid and many more. In addition, the Company is planning to implement the VanillaDirect cash reload services into up to 31,600 U.S. locations through which it has access.
Under the InComm PSA, InComm will provide processing services, telephone support, data storage services, account Servicing, reporting, output and hot carding services to the Company. Processing services will consist mainly of authorization and transaction processing services whereby InComm will process authorizations for transactions made with or on a prepaid product, and any payments or adjustments made to a prepaid product. InComm will also process Company’s data and post entries in accordance with the specifications. Data storage services will consist mainly of storage of the Company’s data in a format that is accessible online by Company through APIs designated by InComm, subject to additional API and data sharing terms and conditions. InComm will also provide Web/API services for prepaid Cuentas GPR applications and transactions.
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In consideration for InComm’s services the company will pay an initial program setup and implementation fees in the amount of $500,000, of which, $300,000 has already been paid in 2020. Cuentas will then pay $50,000 each year at the beginning of the second, third, fourth and fifth anniversary of the agreement. In addition, the Company will pay a minimum monthly fee of $30,000 starting October 2020, $50,000 during the second year following the launch of the Cuentas Mastercard and $75,000 thereafter. The Company will also pay 0.25% of all funds added to the Cuentas Mastercards, excluding Vanilla Direct Reload Network and an API Services fee of $0.005 per transaction. The Company may pay other fees as agreed between the Company and InComm.
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The below graphic illustrates the elements that Cuentas has strategically developed to provide marketplace advantages.
The Cuentas Competitive GPR Advantages
Cuentas strategic overview to augment growth and minimize churn is illustrated below. The goal is to offer the consumer a One Stop Shop, easy to use, mobile wallet that can solve many of their daily needs and desires while saving them time and money.
The Cuentas ECO System
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The Western Union Company
On December 8, 2020, the Company entered into an Agency Agreement with Western Union whereby the Company is appointed as Western Union’s delegate and authorized to offer Western Union Money Transfer Services. This cooperation would allow Cuentas cardholders to transfer money internationally via the Western Union network directly from the Cuentas Mobile App. Western Union has been providing money transfer services around the world for more than a century and currently has more than 500,000 Agent locations worldwide.
Recent Developments
License Agreement with CIMA
On December 31, 2019, the Company entered into the CIMA License Agreement. Pursuant to the CIMA License Agreement, the Company has an exclusive, non-transferable, non-sublicensable, royalty-free license to access and use the CIMA Licensed Technology in the form provided to the Company via the Hosting Services (as defined in the CIMA License Agreement) and solely within the Fintech space for the Company’s business purposes. Under the CIMA License Agreement, CIMA received a one-time licensing fee in the amount of $9,000,000 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 on a fully diluted basis as of December 31, 2019. Pursuant to the CIMA 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 calendar year from the CIMA Transaction Closing, $300,000 to be paid on June 30, 2020; (ii) for the second calendar year from the CIMA Transaction Closing, $500,000 to be paid on December 31, 2020; (iii) for the third calendar year from the CIMA Transaction Closing, $700,000 to be paid on December 31, 2021; (iv) for the fourth (4th) calendar year from the CIMA Transaction Closing, $1,000,000 to be paid on December 31, 2022; (v) for the fifth (5th) calendar year from the CIMA Transaction Closing, $640,000 to be paid on December 31, 2022; and (vi) for each calendar year thereafter, $640,000 to be paid on the anniversary date.
Advisory and Consulting Agreement
On November 20, 2020, the Company entered into an advisory agreement with Jeffrey Wattenberg, effective as of December 1, 2020 (the “Advisory Agreement”), pursuant to which Mr. Wattenberg will provide certain management consulting services to the Company in relation to the operations of the Company, its management, strategic planning, marketing and financial matters until April 30, 2021. In exchange for such advisory services, the Company agreed to pay Mr. Wattenberg a cash fee in the amount of $25,000, payable in five equal installments of $5,000 each with the first payment due on the effective date of the Advisory Agreement and monthly thereafter for the balance of the term. In addition, upon the effective date, the Company issued to Mr. Wattenberg a five-year warrant to acquire up to 50,000 shares of common stock of the Company, exercisable at any time at $7.00 per share, on a cash or cashless basis.
On December 15, 2020, the Company entered into a consulting agreement with Juan Martin Gomez, who is currently the chief executive officer and a 25% shareholder of CIMA (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Martin will have access to the Company’s facilities once a week and provide consulting services to the Company, including support for marketing and corporate structuring, for a term of one year, which term may be extended upon satisfactory performance of his duties. In exchange for his consulting services, the Company will pay Mr. Martin a monthly fee of $5,000.
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Purchase Agreement
Contemporaneously with the Transaction Closing, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) by and between the Company, CIMA and Dinar, pursuant to which the Company made and sold (i) to CIMA a 3% convertible promissory note (the “CIMA Convertible Promissory Note”) in the principal amount of $9,000,000 and (ii) a warrant to each of (a) CIMA (the “CIMA Warrant”) and (b) Dinar (the “Dinar Warrant”), to purchase from the Company an aggregate of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, equal to twenty-five percent (25%) of shares of Common Stock or any other equity issued upon the conversion of the Series B preferred stock. The Purchase Agreement contained customary representations, warranties, covenants, and conditions, including indemnification. Among other conditions to closing, the Company has agreed to take all necessary steps to amend and restate its Articles of Incorporation and to amend and restate its Bylaws.
On December 31, 2019 and pursuant to the CIMA Convertible Promissory Note, CIMA exercised its option to convert the Convertible Promissory Note into 878,739 shares of Common Stock of the Company.
Warrants
Contemporaneously with the Transaction Closing, the Company made and sold a warrant to each of (a) CIMA (the “CIMA Warrant”) and (b) Dinar (the “Dinar Warrant”), each in accordance with the Purchase Agreement. Pursuant to the CIMA Warrant and Dinar Warrant, upon exercise, each of CIMA and Dinar shall be entitled to purchase from the Company, in the aggregate, an amount of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock equal to twenty-five percent (25%) of total outstanding shares of the Company on a fully-diluted basis (taking into account any warrants, options, debt convertible into shares or other rights underlying shares of the Company) as of the conversion date; provided, however, that each of the CIMA Warrant and Dinar Warrant shall increase to include 25% of any additional shares (or warrants, options, debt convertible into shares or other rights underlying shares of the Company) of the Company only to the extent such shares are issued in breach of the Voting Agreement (as defined below). Pursuant to their terms, the CIMA Warrant and Dinar Warrant were exercisable, in whole and not in part during the term commencing on December 31, 2019 and ending on the earlier of (a) thirty (30) days following the date on which the Company amends and restates its Articles of Incorporation, which is amendment and restatement is filed with and accepted by the Secretary of State of the State of Florida or (b) upon a Change of Control, as defined in such warrants. At that point the Warrants are automatically exercised. On September 17, 2020, the Company issued 2,500,000 of its Common Stock to each of Dinar and CIMA, under the automatic exercise of the warrants.
Voting Agreement
Contemporaneously with the CIMA Transaction Closing, on December 31, 2019, the Company entered into a Voting Agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, each of CIMA, Dinar and Mr. De Prado shall have the right to designate one director to the Board, and Mr. Maimon will have the right to designate two directors to the Board as promptly as practicable after the CIMA Transaction Closing. At each meeting of the Company’s shareholders at which the election of directors is to be considered, each of CIMA, Dinar, Mr. Maimon and Mr. De Prado shall have the right to designate one nominee for election at such meeting. Additionally, the Company has granted CIMA board observer rights whereby CIMA shall have the right to invite one representative to attend all meetings of the Board in a non-voting observer capacity. The size of the Board and appointee rights are subject to change in the event that the Company’s shares of Common Stock become listed on Nasdaq. Furthermore, pursuant to the Voting Agreement, each of Mr. Maimon and Mr. De Prado appointed each of CIMA and Dinar as their proxy and attorney-in-fact, with full with full power of substitution and resubstitution, to vote or act by written consent with respect to the shares of Voting Stock (as defined in the Voting Agreement) representing each individual’s pro rata percentage of the CIMA Proxy Stock and Dinar Proxy Stock (each as defined in the Voting Agreement), as may be recalculated from time to time subject to the terms and conditions of the Voting Agreement until the CIMA Warrant and Dinar Warrant are exercised, respectively. CIMA’s rights under the Voting Agreement automatically terminate upon the earliest to occur of: (a) the termination of the CIMA License Agreement; (b) the payment in full of all outstanding principal, accrued and unpaid interest, and all other amounts required to be paid by the Company to CIMA under the Debenture in cash and not as a result of the conversion of the debenture in the principal amount of $9,000,000 that is convertible into Common Stock of the Company (the “Debenture”); or (c) after the conversion of the Debenture into Common Stock of the Company, the date on which CIMA ceases to own 5% or more of the issued and outstanding Common Stock of the Company. Dinar’s rights under the Voting Agreement automatically terminate when Dinar ceases to own 5% or more of the issued and outstanding Common Stock of the Company.
Pledge Agreement
The Company also entered into an Asset Pledge Agreement with CIMA (the “Pledge Agreement”) pursuant to which the Company unconditionally and irrevocably pledged all of its rights, title and interest in and to the Licensed Technology and any rights and assets granted pursuant to the License Agreement to CIMA as a guarantee for the full and punctual fulfillment of its obligations under certain provisions of the Voting Agreement entered into by and among the Company, Arik Maimon, Michael De Prado, Dinar, and CIMA concurrently therewith, which terms expire upon the exercise of the CIMA Warrant and Dinar Warrant, respectively, and the issuance of the securities under the CIMA Convertible Promissory Note and the CIMA Warrant. This occurred September 21, 2020 and the Pledge Agreement expired.
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Side Letter Agreement
Contemporaneously with the CIMA Transaction Closing, the Company entered into a side letter agreement (the “CIMA Side Letter”), dated December 31, 2019, by and among the Company, Mr. Maimon, Mr. De Prado, Dinar and CIMA. Pursuant to the CIMA Side Letter, for as long as the CIMA License Agreement is in effect, the convertible promissory note (the “CIMA Convertible Note”) is outstanding and unpaid, or CIMA is a shareholder of the Company and owns at least 5% of the Company’s Common Stock, in addition to any other vote or approval required under the Company’s articles of incorporation, bylaws, or any other agreement, each as amended from time to time, the Company has agreed not to take certain actions without certain approval thresholds of the directors appointed by CIMA, Dinar, Mr. Maimon and Mr. De Prado. These negative covenants restrict, among other things, the Company’s ability to incur additional debt, alter certain employment agreements currently in place, enter into any consolidation, combination, recapitalization or reorganization transactions, and issue additional capital stock. Additionally, pursuant to the CIMA Side Letter, upon conversion of the CIMA Convertible Note by CIMA, Cuentas shall have the primary right of first refusal, and each of Dinar, Mr. De Prado and Mr. Maimon have a secondary right of first refusal, to purchase any shares of Common Stock that CIMA intends to sell to the bona fide third party purchaser on the same terms and conditions as CIMA would have sold such shares of the Common Stock to any third party purchaser. Further, CIMA has a co-sale right to participate in a sale of shares of the Common Stock, in the event that Mr. De Prado, Mr. Maimon or any other director or officer of the Company holding greater than 1% of the Common Stock (on a fully diluted basis) proposes to sell any of his, her or its shares of Common Stock. In addition, CIMA and/or Dinar have been granted certain information rights, subject to their continued ownership of the CIMA Convertible Note or of 5% or more shares of the Company’s issued and outstanding Common Stock. Furthermore, pursuant to the CIMA Side Letter, upon a successful up-listing of the Company’s shares on Nasdaq, and once the market capitalization of the Company is greater than $50 million for a period of 10 consecutive trading days, each of Mr. Maimon and Mr. De Prado will have a right to earn a special bonus in the amount of $500,000 each.
Entrance into a Prepaid Card Program Management Agreement with Sutton Bank (“Sutton”)
On September 27, 2019, we entered into a Prepaid Card Program Management Agreement (the “PCPMA”) with Sutton. The PCPMA provides that Sutton operates a prepaid card service and is an approved issuer of prepaid cards on the Discover, Mastercard, and Visa networks and provides services in connection with card transactions processed on one or more networks. The PCPMA designates Cuentas to become manager of the Cuentas Mastercard management program, a GPR debit card program subject to the terms and conditions of the PCPMA.
Entrance into a Prepaid Services Agreement (PSA) with Interactive Communications International, Inc.
On July 23, 2019, the Company entered into the InComm PSA with InComm to power and expand the Company’s GPR card network. Per the InComm PSA, InComm, through its VanillaDirect network, will act as prepaid card processor and expand the Cuentas Mastercard network. VanillaDirect is currently available at major retailers such as: Walmart, 7-Eleven, Walgreens, CVS Pharmacy, Rite Aid and many more. In addition, the Company will implement the VanillaDirect cash reload services into its 31,600 U.S. locations under SDI NEXT.
The Cuentas Mastercard provides comprehensive solution for the approximately 20 million unbanked community members in the United States, uniquely enabling access to the U.S. financial system to those without the necessary documentation to bank with the traditional financial institutions in the U.S. The Cuentas Mastercard will provide an FDIC -insured bank account and electronic wallet. The Cuentas FDIC -insured bank account will be embed with functionality such as: international remittance, bill pay, ATM, direct deposit, cash reload and mobile banking capabilities. The Cuentas Digital Wallet will have unique features such as, digital content, gaming, internet shopping, tolling and public transportation, food and restaurants as well as mobile topups.
Under the InComm PSA, InComm will provide processing services, data storage services, account servicing, reporting, output and hot carding services to the Company. Processing services will consist mainly of authorization and transaction processing services whereas InComm will process authorizations for transactions made with or on a prepaid product, and any payments or adjustments made to a prepaid product. InComm will also process Company’s data and post entries in accordance with the specifications. Data storage services will consist mainly of storage of the Company’s data in a format that is accessible online by Company through APIs designated by InComm, subject to additional API and data sharing terms and conditions. InComm will also provide Web/API services for prepaid Cuentas GPR applications and transactions.
In consideration for InComm’s services, the Company paid the initial installment of $300,000 for program setup implementation fees and will then pay $50,000 at the beginning of the second, third, fourth and fifth anniversary of the agreement, for a total of $500,000. In addition, the Company will pay a minimum monthly fee of $30,000 starting on the fourth month of the first year following the launch of the Cuentas Mastercard, $50,000 during the second year following the launch of the Cuentas Mastercard and $75,000 then after. The Company will as also pay 0.25% of all funds added to Cuentas Mastercards excluding Vanilla Direct Reload Network and an API Services fee of $0.005 per transaction. The Company may pay other fees as agreed between the Company and InComm in the future.
Cuentas Mobile
Cuentas Mobile. Cuentas Mobile is our MVNO, which provided NextMobile branded mobile phones and prepaid voice, text, and data mobile phone services to a customer base currently consisting of approximately 1,000 subscribers. The brand name of these services is being migrated to Cuentas Mobile. Cuentas Mobile operates this business pursuant to contracts with Sprint Corporation which allow Cuentas Mobile to use Sprint’s network infrastructure to operate a virtual telecommunications network providing voice, text, and data services of essentially the same quality as those Sprint provides to its own retail subscribers. MVNOs such as Cricket, Boost, Simple and Lyca Moble have been successful at creating brands, without owning the towers, hardware or network. Cuentas is currently reactivating distribution projects through grass roots retailers that normally interact with Cuentas’ target audience, specifically offering low cost mobile phone service with the ability to make international calls to specific Spanish speaking countries in Central and South America.
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Graphic Description: Sample of creative message planned for future advertising campaign.
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We believe that our potential customers worldwide will migrate away from legacy telephone and banking systems to enhanced mobility solutions, the Company’s technological advantage and the synergies created by its unique combination of reloadable bank card and mobile virtual network operator rights will make its products increasingly useful to un-banked, under-banked, under-served and other emerging niche markets.
M&M
M&M. M&M is a retail provider of domestic and international long-distance voice, text, and data telephony services to consumers in the United States and throughout the world. M&M holds International and Domestic Section 214 authority issued by the FCC. M&M operates the retail Tel3 business as a separate division.
The Transmission Medium. M&M uses both private and public Internet services to function as the backbone of the M&M Network.
Regulatory Compliance
We operate in an ever-evolving and complex legal and regulatory environment. We, the products and services that we offer and market, and those for which we provide processing services, are subject to a variety of federal, state and foreign laws and regulations, including, but not limited to: federal communications laws and regulations; foreign jurisdiction communications laws and regulations; federal anti-money laundering laws and regulations, including the Patriot Act, the BSA, anti-terrorist financing laws and anti-bribery and corrupt practice laws and regulations in the U.S., and similar international laws and regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in Canada; state unclaimed property laws and money transmitter or similar licensing requirements; federal and state consumer protection laws, including the CARD Act, and the Dodd-Frank Act, and regulations relating to privacy and data security; and foreign jurisdiction payment services industry regulations.
Employees
As of September 30, 2020, our management team consists of the Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer. We have an additional three full-time employees: our compliance officer, IT Director and VP Retail Operations for the United States market.
Properties
We currently lease office space at 19 W. Flagler St, Suite 902, Miami, FL 33130 as our principal offices. We believe these facilities are in good condition but may need to expand our leased space as our business efforts increase.
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 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.
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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 Parties agreed to a full settlement amount of $2,500 and this has been approved by the Board for payment to Mr. Naparstek.
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.
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.
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Set forth below is information regarding our current directors and executive officers. Each director holds his office until he resigns or is removed and his successor is elected and qualified
| Name | Age | Position | ||
| Arik Maimon | 45 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Ran Daniel | 52 | Chief Financial Officer | ||
| Michael De Prado | 51 | President and Director | ||
| Adiv Baruch | 57 | Director | ||
| Richard J. Berman | 77 | Director | ||
| Yochanon Bruk | 42 | Director | ||
| Jeff Lewis | 61 | Director Upon Effectiveness | ||
| David B. Schottenstein | 37 | Director Upon Effectiveness |
Arik Maimon, our Chairman, is a founder of the Company and has served as its CEO since its inception. In addition to co-founding the Company, Mr. Maimon founded the Company’s subsidiaries Cuentas Mobile, and M&M. Prior to founding the Company and its subsidiaries, Mr. Maimon founded and ran successful telecommunications companies operating primarily in the United States and Mexico. In 1998, Mr. Maimon founded and ran a privately-held wholesaler of long-distance telecommunications services which, later, under Mr. Maimon’s management, grew from a start up to a profitable enterprise with more than $100 million in annual revenues. Mr. Maimon serves on the Company’s Board of Directors due to the perspective and experience he brings as our co-founder, Chairman, CEO, and as our largest stockholder.
Ran Daniel has served as Chief Financial Officer since November 23, 2018. He has over 20 years of financial and business management experience, accounting, auditing, business forecasting, M&A, due diligence, SEC regulations and internal control experiences. He was responsible for the financial and accounting functions in several companies and has extensive experience working as a CFO in both rapidly growing companies and publicly traded companies. He has worked with real estate, fashion, high-tech companies as well as remote institutional and high net worth individuals. Ran is licensed as a CPA, CFA and is admitted to practice law in New York. Mr. Daniel is licensed as a Certified Public Accountant (CPA) in the United States and Israel, admitted to practice law in the State of New York. Mr. Daniel holds a Bachelor of Economics, a Bachelor of Accounting and an MBA in Finance from the Hebrew University, as well as a Graduate Degree in Law from the University of Bar-Ilan.
Michael A. De Prado is a founder of the Company and has served as its President since its inception. Prior to founding the Company, Mr. De Prado spent 20 years in executive positions at various levels of responsibility in the banking, technology, and telecommunications industries. As President of Sales at telecommunications company Radiant/Ntera, Mr. De Prado grew Radiant/Ntera’s sales to more than $200 million in annual revenues. At theglobe.com, Mr. De Prado served as President, reporting directing to Michael S. Egan. Mr. De Prado serves on the Company’s Board of Directors due to the perspective and experience he brings as our co-founder, President, and COO.
Adiv Baruch has been a director of the Company since May 2016. Mr. Baruch is a global leader anchors in the Israeli high-tech industry as well as the Chairman of Israeli Export and International cooperation Institute and several private and public companies. Adiv has over 28 years of experience in equity investment and operation management under distress. Also Mr. Baruch serves as chairman of Jerusalem Technology Investments Ltd. He also currently serves as Chairman of Maayan Ventures, a platform for investments in innovative technology companies. Mr. Baruch has served as a director of the Bank of Jerusalem, and he served as CEO of BOS Better Online Solutions, which, under this leadership, grew into a highly-successful company traded on Nasdaq under the symbol BOSC. Throughout his career, he has championed development and support of new talent in the high tech and entrepreneurial arenas. He is a Technion graduate and the Chairman of the Institute of Innovation and Technology of Israel.
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Richard J. Berman has served as a Director of the Company since September, 2018. Mr. Berman’s career spans over 35 years of venture capital, senior management and merger and acquisitions experience. He possesses a strong track record of providing senior leadership as an executive and Board member of public and private companies, with extensive experience in many business sectors including finance, technology, retail, bio-science and real estate. Richard currently serves as a Director of four public companies: Advaxis, Inc., Catasys, Inc., Cryoport Inc and Immuron. He also served as a Director or Officer of more than a dozen public and private companies, including Chairman of National Investment Managers, a company with $12 billion in pension administration assets, from 2006 to 2011.Mr. Berman has a strong track record of providing corporate leadership in the financial services sector, serving as Director of two leading private companies, Strategic Funding Source, an alternative lender to small businesses; and Honor Capitol, an organization that provides auto and home insurance loans to consumers.
Yochanon Bruk is the managing partner of Dinar Zuz LLC and has served as a Director of the Company since December 2019. Mr. Bruk joined Felman Trading in August 2009 as Logistics Manager and was appointed Corporate Logistics & Transportation Manager in 2011. In this role, he oversees the logistical operations and international distribution networks to ensure the seamless transportation of materials for Felman Production, CCMA, and a number of European-based companies that operate alongside Felman Trading.
Jeff Lewis will join our board of directors as of the effective date of the registration statement of which this prospectus forms a part. Mr. Lewis currently serves as Senior Vice President—Payments and Prepaid of Sutton Bank and has been at Sutton Bank since April 2017. Prior to joining Sutton Bank, Mr. Lewis was a Vice President, General Manger Financial Services at InComm since November 2012. Mr. Lewis has 25 years of payment industry experience with knowledge and experience in networks, card processing, payment processing and program management disciplines. Previously, Mr. Lewis also held key executive positions at Discovery Inc., FIS Global and Metavante Technologies Inc. where he developed a strong background in technology, regulatory and payment processing.
David B. Schottenstein will join our board of directors as of the effective date of the registration statement of which this prospectus forms a part. Mr. Schottenstein is currently the Chief Executive Officer of Privé Revaux, an eyewear company, since June 2017 and has previously served as the Chief Executive Officer of DSCN Capital, an investment fund. He received his Rabbinic degree from Oholei Torah in 2002.
In order to meet the independents requirement of a majority of the members of the Board has agreed to raise the number of directors on the Board of the company to 11 and to fill such vacancies with independent directors meeting the Nasdaq requirements.
Family Relationships
There are no family relationships, or other arrangements or understandings between or among any of the directors, director nominees, executive officers or other person pursuant to which such person was selected to serve as a director or officer.
Indemnification of Directors and Officers
Our Amended and Restated Articles and Amended and Restated Bylaws both provide for the indemnification of our officers and directors to the fullest extent permitted by the Florida law.
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Election of Directors and Officers
Directors are elected to serve until the next annual meeting of shareholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board following the next annual meeting of shareholders and until their successors have been elected and qualified. Currently, pursuant to the Voting Agreement, Dinar, Mr. De Prado and CIMA each have the right to appoint one director to the Board.
At each meeting of the Company’s shareholders at which the election of directors is to be considered, each of CIMA, Dinar, Mr. Maimon and Mr. De Prado have the right to designate one nominee for election at such meeting, and Mr. Maimon has the right to appoint two directors for a total of five Board members. Upon uplisting to Nasdaq, the Board will expand to 11 members with the same appointment rights as before with six additional independent board members elected by the shareholders of the Company pursuant to the Amended and Restated Articles and Amended and Restated Bylaws, each as further amended from time to time.
Involvement in Certain Legal Proceedings
No executive officer or director of the Corporation has been the subject of any order, judgment, or decree of any court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring suspending or otherwise limiting him/her from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.
No executive officer or director of the Company has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding which is currently pending.
No executive officer or director of the Company is the subject of any pending legal proceedings.
Advisors to Management Team
On November 20, 2020, the Company entered into the Advisory Agreement, pursuant to which Mr. Wattenberg will provide certain management consulting services to the Company in relation to the operations of the Company, its management, strategic planning, marketing and financial matters until April 30, 2021. In exchange for such advisory services, the Company agreed to pay Mr. Wattenberg a cash fee in the amount of $25,000, payable in five equal installments of $5,000 each with the first payment due on the effective date of the Advisory Agreement and monthly thereafter for the balance of the term. In addition, upon the effective date, the Company issued to Mr. Wattenberg a five-year warrant to acquire up to 50,000 shares of common stock of the Company, exercisable at any time at $7.00 per share, on a cash or cashless basis.
On December 15, 2020, the Company entered into a consulting agreement with Juan Martin Gomez, who is currently the chief executive officer and a 25% shareholder of CIMA (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Martin will have access to the Company’s facilities once a week and provide consulting services to the Company, including support for marketing and corporate structuring, for a term of one year, which term may be extended upon satisfactory performance of his duties. In exchange for his consulting services, the Company will pay Mr. Martin a monthly fee of $5,000.
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Board Committees and Director Independence
Director Independence
Of our current directors, we have determined that Messrs. Berman, Baruch, Lewis and Schottensten are “independent” as defined by applicable rules and regulations.
Board Committees
Our Board of Directors has established three standing committees—Audit, Compensation, and Nominating and Corporate Governance. All standing committees operate under a charter that has been approved by our Board of Directors.
Audit Committee
Our Board of Directors has an Audit Committee, composed of Messrs. Berman and Baruch, each of whom are independent directors as defined in accordance with section Rule 10A-3 of the Exchange Act and the rules of Nasdaq. Mr. Berman serves as chairman of the committee. The Board has determined that Mr. Berman is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
Our Audit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. For this purpose, the Audit Committee has a charter (which will be reviewed annually) and performs several functions. The Audit Committee:
| ● | evaluates the independence and performance of, and assesses the qualifications of, our independent auditor and engages such independent auditor; |
| ● | approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services and approves in advance any non-audit service and fees therefor to be provided by the independent auditor; |
| ● | monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law; |
| ● | reviews the financial statements to be included in our annual report on Form 10-K and quarterly Reports on Form 10-Q and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements; |
| ● | oversees all aspects of our systems of internal accounting and financial reporting control and corporate governance functions on behalf of the board; and |
| ● | provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the board, including compliance with requirements of Sarbanes-Oxley and makes recommendations to the Board of Directors regarding corporate governance issues and policy decisions. |
The Audit Committee has a charter, which will be reviewed annually.
Compensation Committee
Our Board of Directors has a Compensation Committee composed of Messrs. Berman and Baruch, each of whom are independent in accordance with rules of Nasdaq. Mr. Berman will serve as the chairman of the committee upon the consummation of this offering. Our Compensation Committee reviews or recommends the compensation arrangements for our management and employees and also assists the Board of Directors in reviewing and approving matters such as company benefit and insurance plans, including monitoring the performance thereof. The Compensation Committee has a charter, which will be reviewed annually.
Nominating and Corporate Governance Committee
Our Board of Directors has a Nominating and Corporate Governance Committee composed of Messrs. Berman and Baruch, each of whom are independent in accordance with rules of Nasdaq. Mr Berman serves as the chairman of the committee. The Nominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing potential director nominees to the Board of Directors for consideration. The Nominating and Corporate Governance Committee has a charter which is reviewed annually. The Nominating and Corporate Governance Committee will consider director nominees recommended by security holders.
Code of Business Conduct and Ethics and Insider Trading Policy
Our Board of Directors has adopted a Code of Ethical Conduct and an Insider Trading Policy.
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The following table sets forth all compensation paid to our named executive officers at the end of the fiscal years ended December 31, 2019, and December 31, 2018. Individuals we refer to as our “named executive officers” include our Chief Executive Officer and our most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2019.
The following table sets forth certain information concerning the annual compensation of our Chief Executive Officer and our other executive officers during the last two fiscal years.
| (a) Name and Principal Position | (b) Year | (c) Salary | (d) Bonus | (f) Option Awards | (g) Non-equity incentive plan compensation | (h) Nonqualified deferred compensation earnings | (i) All Other Compensation | (j) Total Compensation | ||||||||||||||||||||||||
| Arik Maimon | 2019 | $ | 180,000 | $ | 93,740 | $ | - | $ | - | $ | - | $ | 10,000 | $ | 283,740 | |||||||||||||||||
| CEO | 2018 | 180,000 | $ | 80,000 | $ | 302,984 | $ | - | $ | - | $ | 30,000 | $ | 592,984 | ||||||||||||||||||
| Michael De Prado | 2019 | $ | 130,000 | $ | 93,740 | $ | - | $ | - | $ | - | $ | 6,000 | $ | 229,740 | |||||||||||||||||
| President | 2018 | 130,000 | $ | 80,000 | $ | 73,033 | $ | - | $ | - | $ | 22,000 | $ | 232,000 | ||||||||||||||||||
| Ran Daniel | 2019 | $ | 175,500 | $ | - | $ | 102,991 | $ | - | $ | - | $ | - | $ | 278,491 | |||||||||||||||||
| CFO | 2018 | $ | 5,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 5,000 | |||||||||||||||||
Outstanding Equity Awards at Fiscal Year End.
As of December 31, 2019, there were 93,522 stock options issued with a weighted average exercise price of $14.56 and 78,522 exercisable with a weighted average exercise price of $16.20. As of December 31 2018, there were 68,522 stock options issued with a weighted average exercise price of $18.36 and 38,522 exercisable with a weighted average exercise price of $27.98.
On July 24, 2020, the Compensation Committee (the “Compensation Committee”) of our Board approved the amendments to the employment agreements with each of Mr. Maimon and Mr. De Prado. The New Employment Agreements shall supersede the terms of the Pre-existing Employment Agreements.
Pursuant to the terms of the New Employment Agreements, among other things:
| (1) | Mr. De Prado will receive the following compensation: (1) (a) a base salary of $265,000 per annum which will continue after appointment of a new President as a Special Board Compensation for a total of 18 months, which may be extended from year to year for an additional 12 months (for up to 36 months in total) (e) participation in the Company’s employee benefits plan; (f) participation in the Company’s Funding and Change in Control Bonus Plans, if and when in effect, as described below in section 5. |
| (2) | Mr. Maimon will receive the following compensation: (a) a base salary of $295,000 per annum, which will continue after appointment of a new CEO because Mr. Maimon will continue as Chairman of the Board at the same salary level. This compensation will be classified as Special Board Compensation for a total of 18 months, which may be extended from year to year for an additional 12 months (for up to 36 months in total) (e) participation in the Company’s employee benefits plan; (f) participation in the Company’s Funding and Change in Control Bonus Plans, if and when in effect, as described below in section 5. |
| (3) | Each of Mr. De Prado and Mr. Maimon will be employed for an initial term of four months which can be extended up to an 18 month period as a Special Board Compensation unless either party terminates the New Employment Agreements. |
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| (4) | Upon the successful up-listing of the Company’s shares of Common Stock, to Nasdaq, each executive would be entitled to receive a $250,000 bonus. |
| (5) | The Executives shall be entitled to a bonus payment in connection with the Change in Control of the Company (the “Change in Control Bonus”). The Change in Control Bonus for the Executive will be based upon a Bonus Percentage (as set forth in the chart below) based upon the cash consideration received by the stockholders of the Company in the Change in Control transaction (minus any expenses, holdback provisions or other deductions from the purchase price), as determined in the sole discretion of the Board. |
(a) The Bonus Percentage in relation to the cash consideration received by the stockholders is as follows:
| Bonus Percentage | Cash Consideration Received by Stockholders | |
| 0% | Less than $150 million | |
| 1% (one percent) | $150 million or more | |
| 2.5% (two and one-half percent) | $250 million or more | |
| 3.75% (three and three-fourths percent) | $500 million or more | |
| 5% (five percent) | $1 Billion or more |
| (6) | The Executives are entitled to participate in the Company’s employee benefit, pension and/or profit-sharing plans, and the Company will pay certain health and dental premiums on their behalf. |
| (7) | Each of the Executives are entitled to certain travel and expense reimbursement. |
| (8) | The Executives have agreed to a one-year non-competition agreement following the termination of their employment. |
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The following table sets forth certain information concerning the ownership of the our Common Stock as of December 7, 2020 (taking into account the reverse stock split), with respect to: (i) each person known to us to be the beneficial owner of more than five percent of our Common Stock; (ii) all directors; (iii) all named executive officers; and (iv) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has voting or investment power with respect to such shares. Shares of Common Stock subject to options or Warrants that are exercisable as of the date of this prospectus or are exercisable within 60 days of such date are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of calculating the percentage ownership of such person but are not treated as outstanding for the purpose of calculating the percentage ownership of any other person.
| Name of beneficial owner | Amount and nature of beneficial ownership of Common Stock | Percentage
of outstanding Common Stock Before the Offering (1) | Amount and nature of beneficial ownership of Common Stock Following the Offering | Percentage
of Outstanding Common Stock Following the Offering (1) | ||||||||||||
| Arik Maimon (2) | 2,111,109 | 15.59 | % | 2,111,109 | 14.75 | % | ||||||||||
| Michael De Prado (3) | 997,787 | 7.37 | % | 997,787 | 6.97 | % | ||||||||||
| Adiv Baruch (4) | 29,167 | * | 29,167 | * | ||||||||||||
| Ran Daniel (5) | 25,000 | * | 25,000 | * | ||||||||||||
| Richard J. Berman (6) | 27,500 | * | 27,500 | * | ||||||||||||
| Yochanon Bruk (7) | 3,379,239 | 24.95 | % | 3,379,239 | 23.61 | % | ||||||||||
| Dinar Zuz LLC (7) | 3,379,239 | 24.95 | % | 3,379,239 | 23.61 | % | ||||||||||
| CIMA Telecom Inc. (8) | 3,379,239 | 24.95 | % | 3,379,239 | 23.61 | % | ||||||||||
| Huseyin Kizanliki | 1,359,302 | 10.04 | % | 1,359,302 | 9.50 | % | ||||||||||
| Jeff Lewis | — | — | — | — | ||||||||||||
| David B. Schottenstein | — | — | — | — | ||||||||||||
| All directors and executive officers as a group (8 persons) | 6,569,902 | 48.52 | % | 6,569,902 | 45.91 | % | ||||||||||
| * | Less than 1% |
| (1) | Applicable percentages based on 13,327,958 shares of Common Stock outstanding before the offering and 14,007,,188 shares of Common Stock outstanding after the offering (based on the assumed offering price and without giving effect to the exercise of any Warrants or the underwriters’ over-allotment option) as of December 7, 2020. It also includes the following: (a) 169,000 shares of our Common Stock are issuable upon the exercise of outstanding options granted; (b) 68,452 shares of our Common Stock issuable upon exercise at a weighted average exercise price of $8.27 of our currently outstanding warrants; (c) 45,493 shares of our Common Stock issuable upon exercise of currently outstanding convertible notes at a weighted average exercise price of $5.50 and (d) 20,583 shares of our Common Stock issuable upon the vesting of Common Stock granted to some of our employees and consultants. It does not include 75,000 shares of our Common Stock issuable upon the vesting of Common Stock granted to some of our employees and consultants. |
| (2) | Arik Maimon is our Chief Executive Officer. Consists of (i) 2,026,109 shares of Common Stock, (ii) 30,000 stock options, exercisable until September 12, 2023 with an exercise price of $6 per share and (iii) 55,000 stock options, exercisable until March 29, 2025 with an exercise price of $11.48 per share Mr. Maimon’s address is 19 W. Flagler St, Suite 902, Miami, Florida 33130. |
| (3) | Michael De Prado is our President and Chief Operating Officer. Consists of (i) 953,787 shares of Common Stock and (ii) 44,000 stock options, exercisable until March 29, 2025 with an exercise price of $11.48 per share. Mr. De Prado’s address is 19 W. Flagler St, Suite 902, Miami, Florida 33130. |
| (4) | Adiv Baruch is our director. Consists of 29,167 shares of Common Stock. Mr. Baruch’s address is 19 W. Flagler St, Suite 902, Miami, Florida 33130. |
| (5) | Ran Daniel is our Chief Financial Officer. Consists of 25,000 stock options, exercisable until April 6, 2024 with an exercise price of $4.18 per share. Mr. Daniel’s address is 19 W. Flagler St, Suite 902, Miami, Florida 33130. |
| (6) | Richard Berman is our director. Applicable percentages based on 12,500 shares of Common Stock outstanding before the offering and 15,000 shares upon exercise of stock options. |
| (7) | Pursuant to a Schedule 13G filed by Dinar with the SEC on March 5, 2020, Dinar is the beneficial owner of the shares reported therein, and Yochanon Bruk (also known as Jonathan Brook) is the sole manager of Dinar and exercises voting and investment power over the shares of Common Stock. As a result Dinar and Yochanon Bruk may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of the shares reported therein. |
| (8) | Pursuant to a Schedule 13G filed by CIMA with the SEC on January 10, 2020, CIMA is the beneficial owner of the shares disclosed therein. Juan M. Gomez is the CEO. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On occasion we may engage in certain related party transactions. All prior related party transactions were approved by a majority of the disinterested directors. Upon the consummation of offering, our policy is that all related party transactions will be reviewed and approved by the Audit Committee of our Board prior to our entering into any related party transactions.
Other than compensation arrangements for our directors and executive officers, which are described elsewhere in this prospectus, below we describe transactions since January 1, 2018, to which we were a party or will be a party, in which (i) the amounts involved exceeded or will exceed $120,000; and (ii) any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, the foregoing persons, had or will have a direct or indirect material interest
From February 28, 2019 thru March 3, 2020, the Company received a total investment of $2,500,000 from Dinar pursuant to a convertible promissory note. Dinar fully converted the note in exchange for 878,739 shares. Dinar received 2,500,000 additional shares on August 21, 2020 pursuant to which their anti-dilution rights expired.
On December 31, 2019, the Company entered into a series of integrated transactions to license the Platforms from CIMA, through CIMA’s wholly owned subsidiaries. See the section entitled “Business – Recent Developments – License Agreement with CIMA” for more information.
Pursuant to the Side Letter Agreement, dated December 31, 2019, it was agreed by and among Dinar, CIMA, Arik Maimon and Michael De Prado that the Company will borrow up to $462,000 from Dinar at an annual interest rate of nine percent (the “Second Dinar Note”). As of the date of this prospectus, the Company borrowed $355,000 under the Second Dinar Note.
On December 15, 2020, the Company entered into a consulting agreement with Juan Martin Gomez, who is currently the chief executive officer and a 25% shareholder of CIMA (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Martin will have access to the Company’s facilities once a week and provide consulting services to the Company, including support for marketing and corporate structuring, for a term of one year, which term may be extended upon satisfactory performance of his duties. In exchange for his consulting services, the Company will pay Mr. Martin a monthly fee of $5,000.
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On August 17, 2020, at the Shareholders Meeting, the shareholders voted to approve the adoption of the Amended and Restated Articles to provide for a reclassification of all Series B Preferred Stock into Common Stock on a one-to-one basis (not giving effect to the contemplated 2-for-1 reverse stock split). In connection with this meeting, Mr. Maimon received 1,825,598 shares of Common Stock of the Company, and Mr. De Prado received 804,128 shares of Common Stock of the Company in connection with the conversion of Preferred B shares. Pursuant to the Voting Agreement, CIMA and Dinar were each granted a proxy by Messrs. Maimon and De Prado, to vote, in the aggregate, 25% of the voting power of the Series B Preferred Shares until such Series B Preferred Shares are converted into shares of the Common Stock. After such conversion, CIMA and Dinar would no longer be entitled to such voting proxy rights but would be entitled to receive shares of Common Stock from the Company to maintain their 25% interest in the Company pursuant to their agreements with the Company dated December 31, 2019, until after the conversion of the Series B Preferred Stock. Accordingly, each of Dinar and CIMA received 2.5 million shares. In addition, the Company issued 2,500,000 of Common Stock to each of Dinar and CIMA upon automatic exercise of the Warrants As a result, the Purchase Agreement, Pledge Agreement, and the respective notes, warrants and Voting agreements are no longer in effect.
On July 24, 2020, the Compensation Committee approved the amendments to the employment agreements with each of Mr. Maimon and Mr. De Prado. The New Employment Agreements shall supersede the terms of the Pre-existing Employment Agreements. See the section entitled “Executive Compensation” for more information.
Statement of Policy
All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.
To the best of our knowledge, during the past three fiscal years, other than as set forth above and herein, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds $120,000, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our Common Stock, or any member of the immediate family of any of the foregoing persons, has an interest (other than compensation to our officers and directors in the ordinary course of business).
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General
Our Amended and Restated Articles authorizes the issuance of up to 410,000,000 shares, of which 360,000,000 shall be shares of Common Stock, $0.001 par value per share, and 50,000,000 shall be shares of Preferred Stock, $0.001 par value per share. As of the date of this prospectus, we have 13,237,958 shares of Common Stock issued and outstanding and 0 shares of Series B preferred stock issued and outstanding. As described elsewhere in this prospectus, this summary takes into account an anticipated 2-for-1 reverse stock split to occur immediately prior to the offering.
Common Stock
Holders of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board out of funds legally available for dividend payments. All outstanding, shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be issued upon completion of this offering will be fully paid and nonassessable. The holders of Common Stock have no preferences or rights of cumulative voting, conversion, or pre-emptive or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of Common Stock will be entitled to share ratably in any of our assets remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.
Preferred Stock
Our Amended and Restated Articles authorizes the issuance of 50,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by the Board. In 2015, we designated 10,000,000 shares of preferred stock as Series B preferred stock. They were converted into 5,000,000 shares of Common Stock. Accordingly, as of the date of this prospectus, there are 40,000,000 shares of blank check preferred stock available for future designation. Accordingly, the Board is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, redemption, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. We may issue some or all of the preferred stock to effect a business transaction. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control.
Series B Preferred Stock
On August 21, 2020, in connection with the Shareholders Meeting, the Company filed with the Secretary of State of the State of Florida the Amended and Restated Articles to, among other things, cause all outstanding shares of Series B Preferred Stock to be converted into shares of the Common Stock.
The converted shares are subject to a 12 -month lock-up whereby the holders of such converted shares may not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of their converted shares for 12 months from the date of filing the Amended and Restated Articles with the Florida Secretary of State. Thereafter, each holder of the converted shares will be limited to selling up to 10% of the converted shares received by him in any one month period.
Warrants
The warrants issued in this offering entitle the registered holder to purchase share of Common Stock at a price equal to $ per share (100% of the assumed offering price), subject to adjustment as discussed below, immediately following the issuance of such warrant and terminating at 5:00 p.m., New York City time, five years after the closing of this offering.
The exercise price and number of shares of Common Stock issuable upon exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend or recapitalization, reorganization, merger or consolidation. However, the Warrants will not be adjusted for issuances of Common Stock at prices below its exercise price.
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The Warrants are exercisable at any time after their original issuance and at any time up to the date that is five years after their original issuance. The Warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of Warrants being exercised. Under the terms of the Warrant Agreement, we must use our best efforts to maintain the effectiveness of the registration statement and current prospectus relating to common shares issuable upon exercise of the Warrants until the expiration of the Warrants. If we fail to maintain the effectiveness of the registration statement and current prospectus relating to the common shares issuable upon exercise of the Warrants, the holders of the Warrants shall have the right to exercise the Warrants solely via a cashless exercise feature provided for in the Warrants, until such time as there is an effective registration statement and current prospectus.
A holder may not exercise any portion of a Warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own more than 4.99% of the outstanding common shares after exercise, as such percentage ownership is determined in accordance with the terms of the Warrant, except that upon prior notice from the holder to us, the holder may waive such limitation up to a percentage not in excess of 9.99%.
The exercise price per whole share of Common Share purchasable upon exercise of the Warrants is $7.80 which is 100% of assumed public offering price of the Units. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common shares and also upon any distributions of assets, including cash, stock or other property to our shareholders.
No fractional shares of Common Stock will be issued upon exercise of the Warrants. As to any fraction of a share which the holder would otherwise be entitled to purchase upon such exercise, the Company will round up or down, as applicable, to the nearest whole share.
In the event of a fundamental transaction, as described in the Warrants and generally including any reorganization, recapitalization or reclassification of our common shares, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding Common Stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding Common Stock, the holders of the Warrants will be entitled to receive the kind and amount of securities, cash or other property that the holders would have received had they exercised the Warrants immediately prior to such fundamental transaction.
The Warrant holders do not have the rights or privileges of holders of Common Stock or any voting rights until they exercise their Warrants and receive shares of Common Stock. After the issuance of Common Stock upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Florida Anti-Takeover Law and Provisions of our Amended and Restated Articles of Incorporation and Bylaws
Florida Anti-Takeover Law
As a Florida corporation, we are subject to certain anti-takeover provisions that apply to public corporations under Florida law.
Pursuant to Section 607.0901 of the Florida Business Corporation Act, or the FBCA, a publicly held Florida corporation may not engage in a broad range of business combinations or other extraordinary corporate transactions with an interested shareholder without the approval of the holders of two-thirds of the voting shares of the corporation (excluding shares held by the interested shareholder), unless:
| ● | The transaction is approved by a majority of disinterested directors before the shareholder becomes an interested shareholder; |
| ● | The interested shareholder has owned at least 80% of the corporation’s outstanding voting shares for at least five years preceding the announcement date of any such business combination; |
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| ● | The interested shareholder is the beneficial owner of at least 90% of the outstanding voting shares of the corporation, exclusive of shares acquired directly from the corporation in a transaction not approved by a majority of the disinterested directors; or |
| ● | The consideration paid to the holders of the corporation’s voting stock is at least equal to certain fair price criteria. |
An interested shareholder is defined as a person who, together with affiliates and associates, beneficially owns more than 10% of a corporation’s outstanding voting shares. We have not made an election in our Amended and Restated Articles to opt out of Section 607.0901.
In addition, we are subject to Section 607.0902 of the FBCA which prohibits the voting of shares in a publicly held Florida corporation that are acquired in a control share acquisition unless (i) the Board of Directors approved such acquisition prior to its consummation or (ii) after such acquisition, in lieu of prior approval by the Board of Directors, the holders of a majority of the corporation’s voting shares, exclusive of shares owned by officers of the corporation, employee directors or the acquiring party, approve the granting of voting rights as to the shares acquired in the control share acquisition. A control share acquisition is defined as an acquisition that immediately thereafter entitles the acquiring party to 20% or more of the total voting power in an election of directors.
Amended and Restated Articles and Bylaws
Our Amended and Restated Articles and Amended and Restated Bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or tender offers or delaying or preventing a change of control of our company. These provisions are as follows:
| ● | they provide that special meetings of shareholders may be called by the Board, on the call of its Board or the person or persons authorized to do so by the Amended and Restated Bylaws, or at the request in writing by shareholders of record owning at least 25% of the issued and outstanding voting shares of Common Stock; and |
| ● | they do not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority shareholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority shareholders to effect changes in the Board. |
Limitations of Liability for Officers and Directors
Pursuant to the Florida Statutes, our Amended and Restated Articles exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a director receives an improper personal benefit. This exclusion of liability does not limit any right which a director may have to be indemnified and does not affect any director’s liability under federal or applicable state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in connection with any claim against a director if he acted in good faith and in a manner he believed to be in our best interests.
Indemnification of Officers and Directors
Our certificate of incorporation also contains provisions to indemnify the directors, officers, employees or other agents to the fullest extent permitted by the Florida corporate law. These provisions may have the practical effect in certain cases of eliminating the ability of shareholders to collect monetary damages from directors. We are also a party to indemnification agreements with each of our directors. We believe that these provisions will assist us in attracting or retaining qualified individuals to serve as our directors.
Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our Common Stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock in the public market after the restrictions lapse could adversely affect the prevailing market price for our Common Stock as well as our ability to raise equity capital in the future.
After giving effect to the closing of this offering (and giving effect to the anticipated 2-for-1 reverse stock split), 14,007,188 shares of Common Stock will be outstanding assuming an initial public offering price of $7.80 per unit (excluding the exercise of any Warrants and the exercise of the underwriters’ over-allotment option). All of the shares sold in this offering will be freely tradable unless held by an affiliate of ours. Of the remaining 13,237,958 shares of Common Stock outstanding after this offering that were not sold in this offering, approximately 12,103,989 shares of Common Stock will be restricted as a result of securities laws or lock-up agreements (see “Lock-up Agreements” below) and approximately 1,903,199 shares of Common Stock will be freely tradable.
Rule 144
In general, under Rule 144 as currently in effect, any person who is not an affiliate of ours and has held their shares for at least six months, as measured by SEC rule, including the holding period of any prior owner other than one of our affiliates, may sell shares without restriction, provided current public information about us is available. In addition, under Rule 144, any person who is not an affiliate of ours and has held their shares for at least one year, as measured by SEC rule, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available. A person who is an affiliate of ours and who has beneficially owned restricted securities for at least six months, as measured by SEC rule, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a number of restricted shares within any three-month period that does not exceed the greater of:
| ● | 1% of the number of shares of our Common Stock then outstanding, which will equal approximately 140,072 shares immediately after this offering; and |
| ● | the average weekly trading volume of our Common Stock on Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales of restricted shares under Rule 144 held by our affiliates are also subject to requirements regarding the manner of sale, notice and the availability of current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our Common Stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement. Notwithstanding the availability of Rule 144, the holders of approximately 12,173,989 of our restricted shares have entered into lock-up agreements as described below and their restricted shares will become eligible for sale at the expiration of the restrictions set forth in those agreements.
Lock-up Agreements
Our executive officers, directors and other certain stockholders, holding an aggregate of approximately 12,103,989 shares of our capital stock and securities convertible into or exchangeable for our capital stock, have agreed that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of Maxim Group LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for shares of our capital stock. Maxim Group LLC may, in its sole discretion, release any of the securities subject to these lock-up agreements at any time.
In addition, on August 21, 2020, in connection with the Special Shareholders Meeting, the Company filed with the Secretary of State of the State of Florida the Amended and Restated Articles to, among other things, cause all outstanding shares of Series B Preferred Stock to be converted into shares of the Common Stock. The converted shares are subject to a 12 -month lock-up whereby the holders of such converted shares may not offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of their converted shares for 12 months from the date of filing the Amended and Restated Articles with the Florida Secretary of State. Thereafter, each holder of the converted shares will be limited to selling up to 10% of the converted shares received by him in any one month period.
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Maxim Group LLC (“Maxim”) is acting as sole book-runner and as representative of the underwriters (the “Representative”). Subject to the terms and conditions of an underwriting agreement between us and the Representative, we have agreed to sell to each underwriter named below, and each underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discounts set forth on the cover page of this prospectus, the number of units listed next to its name in the following table:
| Name of Underwriter | Number of Units | |||
| Maxim Group LLC | ||||
| Total | ||||
The underwriting agreement provides that the obligation of the underwriters to purchase all of the units being offered to the public is subject to specific conditions, including the absence of any material adverse change in our business or in the financial markets and the receipt of certain legal opinions, certificates and letters from us, our counsel and the independent auditors. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. Subject to the terms of the underwriting agreement, the underwriters will purchase all of the units being offered to the public, other than those covered by the over-allotment option described below, if any of these units are purchased.
The underwriters are offering the units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable no later than 45 calendar days after the date of the underwriting agreement, to purchase, based on the assumed offering price, up to an additional 115,384 shares of Common Stock and/or up to an additional 115,384 Warrants, in each case, at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option only to cover over-allotments, if any, made in connection with this offering and may exercise this option to purchase additional shares and/or Warrants. To the extent the option is exercised and the conditions of the underwriting agreement are satisfied, we will be obligated to sell to the underwriters, and the underwriters will be obligated to purchase, these additional shares of Common Stock and/or Warrants.
Discounts and Commissions
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the Representative of the over-allotment option.
| Per Unit | Total (No Exercise) |
Total (Full Exercise) |
|||||||
| Public offering price | $ | $ | $ | ||||||
| Underwriting discounts and commissions (8%) | |||||||||
| Proceeds, before expenses, to us | $ | $ | $ |
The underwriters propose to offer the Units offered by us to the public at the public offering price per Unit set forth on the cover of this prospectus. In addition, the underwriters may offer some of the units to other securities dealers at such price less a concession of $___ per unit. After the initial offering, the public offering price and concession to dealers may be changed.
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We have agreed to pay the underwriters a cash fee equal to eight percent (8%) of the aggregate gross proceeds from the sale of the securities offered hereby.
We have agreed to reimburse Maxim for its out of pocket accountable expenses, including Maxim’s legal fees, for up to $100,000 in connection with the offering. We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately , all of which are payable by us.
Representative’s Warrants
We have agreed to issue to the Representative (or its permitted assignees) Warrants to purchase up to a total 8% of the units sold in the offering (including 8% of any shares of Common Stock purchased upon exercise of the over-allotment option). The Representative’s warrant will have a term of three years from the effective date of this prospectus and an exercise price per share equal to 125% of the public offering price per share price. Pursuant to FINRA Rule 5110(g), the Representative’s warrant and any shares issued upon exercise of the Representative’s warrant shall not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of this offering, except the transfer of any security: (i) by operation of law or by reason of our reorganization; (ii) to any FINRA member firm participating in the offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction set forth above for the remainder of the time period; (iii) if the aggregate amount of our securities held by the underwriter or related persons does not exceed 1% of the securities being offered; (iv) that is beneficially owned on a pro rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund and the participating members in the aggregate do not own more than 10% of the equity in the fund; or (v) the exercise or conversion of any security, if all securities remain subject to the lock-up restriction set forth above for the remainder of the time period. The Representative’s warrant will provide for cashless exercise. The Representative’s warrants will contain provisions for one demand registration of the sale of the underlying shares of Common Stock at our expense, an additional demand registration at the Warrant holders’ expense, and unlimited “piggyback” registration rights for a period of three years after the effective date of this prospectus at our expense.
Determination of Offering Price
The offering price has been negotiated between the representatives of the underwriter and us. In determining the offering price of the units, the following factors were considered:
| ● | prevailing market conditions; |
| ● | our historical performance and capital structure; |
| ● | estimates of our business potential and earnings prospects; |
| ● | an overall assessment of our management; and |
| ● | the consideration of these factors in relation to market valuation of companies in related businesses. |
Our Common Stock is currently trading on the OTCQB under the symbol “CUEN.” On December 15, 2020, the closing price of our Common Stock was $3.90 ($7.80 giving effect to the anticipated 2-for-1 reverse stock split). We have applied to have our Common Stock listed on the Nasdaq under the symbol “CUEN” and our Warrants under the symbol “CUENW”.
Lock-Up Agreements
We and each of our officers, directors and 3% or more holders of our outstanding Common Stock as of the effective date of this prospectus (and all holders of securities exercisable for or convertible into shares of Common Stock) have agreed to enter into customary “lock-up” agreements in favor of Maxim pursuant to which such persons and entities have agreed, for a period of six months from the effective date of this prospectus, that they shall neither offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any securities of the Company without Maxim’s prior written consent, including the issuance of shares of Common Stock upon the exercise of currently outstanding options approved by Maxim.
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Maxim may in its sole discretion and at any time without notice release some or all of the shares subject to lock-up agreements prior to the expiration of the lock-up period. When determining whether or not to release shares from the lock-up agreements, the representative will consider, among other factors, the security holder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time.
Right of First Refusal
We have granted the Representative a right of first refusal, for a period of 12 months from the commencement of sales of this offering, to act as lead managing underwriter and book runner or minimally as a co-lead manager and co-book runner and/or co-lead placement agent with at least 15% of the economics for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) of the Company, or any successor to or any subsidiary of the Company.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make for these liabilities.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
We have agreed to issue to Maxim, warrants to purchase up to 20,237 common stock as compensation for services rendered by Maxim in connection with a private placement for which Maxim acted as agent. The warrants will have an exercise price of $8.00 per share.
The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. Maxim (or permitted assignees under the Rule) may not sell, transfer, assign, pledge or hypothecate the warrants, nor will they engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Equity for a period of six months from the effective date of the registration statement of which this prospectus forms a part, except to any FINRA member participating in the offering and their bona fide officers or partners.
Price Stabilization, Short Positions, and Penalty Bids
In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our securities. Specifically, the underwriters may over-allot in connection with this offering by selling more securities than are set forth on the cover page of this prospectus. This creates a short position in our securities for its own account. The short position may be either a covered short position or a naked short position. In a covered short position, the number of securities over-allotted by the underwriters is not greater than the number of securities that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than the number of shares Common Stock in the over-allotment option. To close out a short position, the underwriters may elect to exercise all or part of the over-allotment option. The underwriters may also elect to stabilize the price of our securities or reduce any short position by bidding for, and purchasing, securities in the open market.
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The underwriters may also impose a penalty bid. This occurs when a particular underwriter or dealer repays selling concessions allowed to it for distributing a security in this offering because the underwriter repurchases that security in stabilizing or short covering transactions.
Finally, the underwriters may bid for, and purchase, securities in market making transactions, including “passive” market making transactions as described below.
These activities may stabilize or maintain the market price of our securities at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriters are not required to engage in these activities, and may discontinue any of these activities at any time without notice.
In connection with this offering, the underwriters and selling group members, if any, or their affiliates may engage in passive market making transactions in our Common Stock immediately prior to the commencement of sales in this offering, in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 generally provides that:
| ● | a passive market maker may not effect transactions or display bids for our securities in excess of the highest independent bid price by persons who are not passive market makers; | |
| ● | net purchases by a passive market maker on each day are generally limited to 30% of the passive market maker’s average daily trading volume in our securities during a specified two-month prior period or 200 shares, whichever is greater, and must be discontinued when that limit is reached; and | |
| ● | passive market making bids must be identified as such. |
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Electronic Distribution
A prospectus in electronic format may be made available on a website maintained by the representatives of the underwriters and may also be made available on a website maintained by other underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations. In connection with the offering, the underwriters or syndicate members may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
The underwriters have informed us that they do not expect to confirm sales of shares offered by this prospectus to accounts over which they exercise discretionary authority.
Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter and should not be relied upon by investors.
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to Prospective Investors in Canada
The Common Stock and Warrants may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the Common Stock or Warrants must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to Prospective Investors in Israel
This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968, or the Securities Law, and has not been filed with or approved by the Israel Securities Authority. In Israel, this prospectus is being distributed only to, and is directed only at, and any offer of the Common Stock and Warrants hereunder is directed only at, (i) a limited number of persons in accordance with the Securities Law and (ii) investors listed in the first addendum (the “Addendum”) to the Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case, purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors are required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.
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The December 31, 2019 and 2018 financial statements of our company appearing in this prospectus have been included herein in reliance upon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of Halperin Ilanit, CPA, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of Halperin Ilanit, CPA as experts in accounting and auditing.
The validity of the shares of Common Stock offered hereby will be passed upon by AM Law. The validity of the units and Warrants offered hereby will be passed upon by Ellenoff Grossman & Schole LLP, New York, New York. Loeb & Loeb LLP, New York, New York is representing the underwriters in this offering.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the securities we are offering by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information about us and our securities, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are materially complete but may not include a description of all aspects of such contracts, agreements or other documents, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.
Upon completion of this offering, we will be subject to the information requirements of the Exchange Act and will file annual, quarterly and current event reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov.
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CUENTAS
INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
F-1
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands except share and per share data)
| September 30, 2020 | December 31, 2019 | |||||||
| Unaudited | Audited | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | 343 | 16 | ||||||
| Marketable securities | 2 | 1 | ||||||
| Trade account receivables | 2 | - | ||||||
| Related parties | 56 | 54 | ||||||
| Other current assets | 2 | 94 | ||||||
| Total current assets | 405 | 165 | ||||||
| Property and Equipment, net | 5 | 5 | ||||||
| Intangible assets | 7,650 | 9,000 | ||||||
| Total assets | 8,060 | 9,170 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | 2,044 | 1,525 | ||||||
| Other accounts liabilities | 700 | 741 | ||||||
| Deferred revenue | 611 | 537 | ||||||
| Notes and Loan payable (note 4) | 514 | 109 | ||||||
| Convertible Note | - | 250 | ||||||
| Related parties’ payables | 12 | 10 | ||||||
| Loans from related parties | 355 | - | ||||||
| Derivative liability | - | 3 | ||||||
| Stock based liabilities | 15 | 742 | ||||||
| Total current liabilities | 4,251 | 3,917 | ||||||
| LONG TERM LIABILITY: | ||||||||
| EIDL Loan | 89 | - | ||||||
| Total long-term liabilities | 89 | - | ||||||
| TOTAL LIABILITIES | 4,340 | 3,917 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series B preferred stock, $0.001 par value, designated 10,000,000; 0 issued and outstanding as of September 30, 2020 and 10,000,000 issued and outstanding as of December 31, 2019 | 0 | 10 | ||||||
| Common stock, authorized 360,000,000 shares, $0.001 par value; 26,475,916 and 4,639,139 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 26 | 5 | ||||||
| Additional paid in capital | 28,237 | 25,246 | ||||||
| Accumulated deficit | (24,543 | ) | (19,390 | ) | ||||
| Total Cuestas Inc. stockholders’ equity | 3,720 | 5,871 | ||||||
| Non-controlling interest in subsidiaries | - | (618 | ) | |||||
| Total stockholders’ equity | 3,720 | 5,253 | ||||||
| Total liabilities and stockholders’ equity | 8,060 | 9,170 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-2
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(U.S. dollars in thousands except share and per share data)
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUE | 385 | 811 | 134 | 247 | ||||||||||||
| COST OF REVENUE | 620 | 617 | 237 | 150 | ||||||||||||
| GROSS PROFIT (LOSS) | (235 | ) | 194 | (103 | ) | 97 | ||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Amortization of Intangible Assets | 1,350 | - | 450 | - | ||||||||||||
| General and administrative | 3,333 | 1,663 | 533 | 663 | ||||||||||||
| TOTAL OPERATING EXPENSES | 4,683 | 1,663 | 983 | 663 | ||||||||||||
| OPERATING LOSS | (4,918 | ) | (1,469 | ) | (1,086 | ) | (566 | ) | ||||||||
| OTHER INCOME (LOSS) | ||||||||||||||||
| Other income (expense) | 97 | 2,523 | 16 | (16 | ) | |||||||||||
| Interest expense | (24 | ) | (71 | ) | (17 | ) | (2 | ) | ||||||||
| Gain on derivative liability | 3 | 30 | - | 5 | ||||||||||||
| Gain (loss) from Change in fair value of stock-based liabilities | 307 | (133 | ) | (52 | ) | (113 | ) | |||||||||
| TOTAL OTHER INCOME (LOSS) | 383 | 2,349 | (53 | ) | (126 | ) | ||||||||||
| NET INCOME (LOSS) BEFORE CONTROLLING INTEREST | (4,535 | ) | 880 | (1,139 | ) | (692 | ) | |||||||||
| NET LOSS ATTRIBUTILE TO NON-CONTROLLING INTEREST | (618 | ) | (27 | ) | (615 | ) | (- | ) | ||||||||
| NET INCOME (LOSS) ATTRIBUTILE TO CUENTAS INC. | (5,153 | ) | 853 | (1,754 | ) | (692 | ) | |||||||||
| Net income (loss) per basic share | (0.60 | ) | 0.41 | (0.12 | ) | (0.31 | ) | |||||||||
| Net income (loss) per diluted share | (0.60 | ) | 0.34 | (0.12 | ) | (0.31 | ) | |||||||||
| Weighted average number of basic common shares outstanding | 8,535,767 | 2,098,997 | 14,125,811 | 2,221,645 | ||||||||||||
| Weighted average number of diluted common shares outstanding | 8,535,767 | 2,527,327 | 14,125,811 | 2,221,645 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-3
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in thousands)
| Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income(loss) before non-controlling interest | (4,535 | ) | 880 | |||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock based compensation and shares issued for services | 1,285 | 300 | ||||||
| Imputed interest | - | 67 | ||||||
| Loss on fair value of marketable securities | (1 | ) | 69 | |||||
| Interest on loans and debt amortization expenses | (10 | ) | (2 | ) | ||||
| Gain on derivative fair value adjustment | (3 | ) | (30 | ) | ||||
| Gain from change in on fair value of stock-based liabilities | (307 | ) | 133 | |||||
| Depreciation and amortization expense | 1,350 | 1 | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts receivable | (2 | ) | 18 | |||||
| Other receivables | 92 | 32 | ||||||
| Accounts payable | 533 | (230 | ) | |||||
| Other Accounts payable | 152 | 277 | ||||||
| Related parties, net | - | (2,485 | ) | |||||
| Deferred revenue | 74 | (98 | ) | |||||
| Net Cash Used by Operating Activities | (1,372 | ) | (1,068 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Related party, net | - | (610 | ) | |||||
| Proceeds from short term loans | 505 | - | ||||||
| Proceeds from Loans from Related parties | 355 | - | ||||||
| Repayments of loan, convertible notes and redeemable shares | - | (15 | ) | |||||
| Proceeds from issuance of Convertible notes | - | |||||||
| Proceeds from loans from a Government Agency | 89 | - | ||||||
| Proceeds from issuance of common stock, net of issuance expense | 750 | 1,604 | ||||||
| Net Cash Provided by Financing Activities | 1,699 | 979 | ||||||
| Net Increase (Decrease) in Cash | 327 | (89 | ) | |||||
| Cash at Beginning of Period | 16 | 154 | ||||||
| Cash at End of Period | 343 | 65 | ||||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Common stock issued for conversion of convertible note principal | 250 | - | ||||||
| Common stock issued for settlement of stock-based liabilities and accrued salaries | 442 | 464 | ||||||
| Liability to redeem common stock subscribed | - | 80 | ||||||
| Common stock issued for settlement of common stock subscribed | - | 100 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 1 – GENERAL
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. 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 (“GRP”). Additionally, The Company has an agreement with Interactive Communications International, Inc. (“InComm”) a leading processor of GPR debit cards, to market and distribute a line of GPR cards targeted towards the Latin American market. The Cuentas Fintech Card stores products purchased in the Virtual Market Place where Tier-1 retailers, gaming currencies, amazon cash, and wireless telecom prepaid minutes “top ups”. Additionally, well-known brand name restaurants in the marketplace automatically discount purchases at POS when the customer pays the bill with the Cuentas Card.
On December 31, 2019, the Company entered into a series of integrated transactions to license the Platforms from 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. Under the License Agreement Cima Group received a 1-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 1,757,478 shares of Common Stock of the Company. Upon the conversion of the Series B Preferred shares into common stock, CIMA received an additional 5 million shares pursuant to their anti-dilution warrant agreement.
The acquired intangible assets that consisted of perpetual software license had an estimated fair value of $9,000. The Company will amortize the intangible assets on a straight-line basis over their expected useful life of 60 months. Identifiable intangible assets were recorded as follows:
| Asset | Amount | Life (months) | ||||||
| Intangible Assets | $ | 9,000 | 60 | |||||
| Total | $ | 9,000 | 60 | |||||
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, | ||||
| 2020 | $ | 1,800 | ||
| 2021 | 1,800 | |||
| 2022 | 1,800 | |||
| 2023 | 1,800 | |||
| 2024 | 1,800 | |||
| Total | $ | 9,000 | ||
Amortization expense was $1,350 and $0 for the periods ended September 30, 2020 and 2019, respectively. Amortization expense for each period is included in operating expenses.
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 to be paid on June 30, 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.
F-5
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
Amendments to Articles of Incorporation or Bylaws;
On August 21, 2020, in connection with the Special Meeting (as defined below), the Company filed with the Secretary of State of the State of Florida the Company’s Amended and Restated Articles of Incorporation (the “Amended and Restated Articles”) to, among other things, cause all outstanding shares of Series B Preferred Stock, par value $0.001 per share (the “Preferred Stock”) to be converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) on a one-to-one basis. Additionally, the Company amended and restated its bylaws (the “Amended and Restated Bylaws”) to improve and enhance the Company’s corporate governance guidelines, to simplify the Bylaws, and to provide the Company with the flexibility necessary to carry out its business plans.
Submission of Matters to a Vote of Security Holders
On August 17, 2020 a Special Meeting of the Shareholders of Cuentas was held (the “Special Meeting”). At the Special Meeting, the Company’s shareholders approved the following two proposals:
First Proposal: The adoption of the Amended and Restated Articles in order to, effective as of the date the Amended and Restated Articles are filed with the Secretary of State of the State of Florida, cause all outstanding shares of Preferred B Stock to be converted into shares of Common Stock on a one-to-one basis (the “Articles Proposal”). The affirmative vote of a majority of each of the Common Stock holders and Preferred Stock holders, voting as a separate group was needed to pass the Articles Proposal.
Second Proposal: The adoption of the Amended and Restated Bylaws of the Company in order to improve and enhance the Company’s corporate governance structure, to simplify the Bylaws and to provide the Company with the flexibility necessary to carry out its business plan (the “Bylaws Proposal”). The affirmative vote of a majority of the shares of Common Stock and Preferred Stock entitled to vote, voting as a single class, was required to pass the Bylaws Proposal.
Economic Injury Disaster Loan
On May 16, 2020, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the SBA under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal amount of the EIDL Loan is $83, with proceeds to be used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue only on funds actually advanced. Installment payments, including principal and interest, are due monthly beginning May 16, 2021 (twelve months from the date of the SBA Note (defined below)) in the amount of $83. The balance of principal and interest is payable thirty years from the date of the SBA Note. In connection therewith, the Company received a $10 advance, which does not have to be repaid. In connection therewith, the Company executed (i) a note for the benefit of the SBA (the “SBA Note”), which contains customary events of default and (ii) a Security Agreement, granting the SBA a security interest in all tangible and intangible personal property of Maimon and Maimon, which also contains customary events of default (the “SBA Security Agreement”).
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.
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of September 30, 2020, the Company had approximately $343 in cash and cash equivalents, approximately $3,846 in negative working capital and an accumulated deficit of approximately $24,543. 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.
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 nine-months ended September 30, 2020. However, these results are not necessarily indicative of results for any other interim period or for the year ended December 31, 2020. 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, 2019, filed with the SEC on March 30, 2020 (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, 2019.
Principles of Consolidation
The consolidated financial statements are prepared in accordance with US GAAP. The consolidated financial statements of the Company include the Company and its wholly-owned and majority-owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, certain revenues and expenses, and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. Estimates are used when accounting for intangible assets, going concern and stock-based compensation.
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 nine months ended September 30, 2020:
| Deferred Revenue | ||||
| Balance at December 31, 2019 | $ | 537 | ||
| Change in deferred revenue | 74 | |||
| Balance at September 30, 2020 | $ | 611 | ||
Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted not recognized”). Contracted not recognized revenue was $611 as of September 30, 2020, 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.
F-7
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
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.
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 September 30, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | 2 | - | - | 2 | ||||||||||||
| Total assets | 2 | - | - | 2 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | 15 | - | - | 15 | ||||||||||||
| Total liabilities | 15 | - | - | 15 | ||||||||||||
| Balance as of December 31, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | 1 | - | - | 1 | ||||||||||||
| Total assets | 1 | - | - | 1 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | 742 | - | - | 742 | ||||||||||||
| Short term derivative value | 3 | - | - | 3 | ||||||||||||
| Total liabilities | 745 | - | - | 745 | ||||||||||||
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.
F-8
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
Recent Accounting Standards announced
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments apply to reporting entities that are required to make disclosures about recurring or nonrecurring fair value measurements and should improve the cost, benefit, and effectiveness of the disclosures. ASU 2018-13 categorized the changes into those disclosures that were removed, those that were modified, and those that were added. The primary disclosures that were removed related to transfers between Level 1 and Level 2 investments, along with the policy for timing of transfers between levels. In addition, disclosing the valuation processes for Level 3 fair value measurements was removed. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company notes that this guidance will impact its disclosures beginning January 1, 2020.
In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. In November 2018, FASB issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”, which amends the scope and transition requirements of ASU 2016-13. Topic 326 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. Topic 326 will originally become effective for the Company beginning January 1, 2020, with early adoption permitted, on a modified retrospective approach. As a smaller reporting company, the effective date for the Company has been delayed until fiscal years beginning after December 15, 2022, in accordance with ASU 2019-10, although early adoption is still permitted. This standard is not expected to have a material impact to the Company’s consolidated financial statements after evaluation.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes, eliminates certain exceptions to the general principles in Topic 740 and clarifies certain aspects of the current guidance to improve consistent application among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021 and interim periods within annual periods beginning after December 15, 2022, though early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. This standard is not expected to have a material impact to the Company’s consolidated financial statements after evaluation.
NOTE 3 – STOCK OPTIONS
The following table summarizes all stock option activity for the nine months ended September 30, 2020:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2019 | 212,044 | $ | 12.79 | |||||
| Granted | 198,000 | 5.74 | ||||||
| Forfeited | 72,044 | 32.45 | ||||||
| Outstanding, September 30, 2020 | 338,000 | $ | 4.47 | |||||
The following table discloses information regarding outstanding and exercisable options at September 30, 2020:
| 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 | |||||||||||||||||
| $ | 5.74 | 198,000 | $ | 5.74 | 2.49 | 198,000 | $ | 5.74 | ||||||||||||||
| 3.00 | 90,000 | 3.00 | 0.95 | 60,000 | 3.00 | |||||||||||||||||
| 2.09 | 50,000 | 2.09 | 1.49 | 50,000 | 2.09 | |||||||||||||||||
| 338,000 | $ | 9.38 | 1.93 | 338,000 | $ | 4.61 | ||||||||||||||||
On March 30, 2020, the Company issued 198,000 options to its Chief Executive Officer and President of the Company. The options carry an exercise price of $5.74 per share. All the options were vested immediately. The Options are exercisable until March 30, 2022. The Company has estimated the fair value of such options at a value of $456 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
| Common stock price | 2.54 | |||
| Dividend yield | 0 | % | ||
| Risk-free interest rate | 1.89 | % | ||
| Expected term (years) | 3 | |||
| Expected volatility | 328 | % |
F-9
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 4 – SHORT TERM LOANS
On September 15, 2020, the Company issued a promissory note to Labrys Funds LP for $605 (the “Labrys Note”). The Labrys Note bears interest at a rate of 12% per annum, mature on September 14, 2021. The interest is paid monthly. Payment of principle starts after 3 months with ability to extend for up to 2 months and the loan principal become payable on maturity. The Labrys Note bears an original issue discount in the amount of $60, and the issuing expenses were $40, resulting with net proceeds of $505. The Company also issued 141,812 shares of its Common Stock pursuant to the Labrys Note. Out of those, 33,000 shares of Common Stock were issued in consideration of Commitment fee and the balance are subject to return to the Company once the Labrys Note will be paid in full if there were no defaults.
NOTE 5 – STOCKHOLDERS’ EQUITY
Common Stock
The following summarizes the Common Stock activity for the three months ended September 30, 2020:
| Summary of common stock activity for the nine months ended September 30, 2020 | Outstanding shares | |||
| Balance, December 31, 2019 | 4,639,139 | |||
| Shares issued for Common Stock | 80,000 | |||
| Shares issued due to conversion of Convertible Promissory Note | 1,257,478 | |||
| Settlement of stock-based liabilities | 66,334 | |||
| Shares issued to a lender | 141,812 | |||
| Shares issued for services | 90,000 | |||
| Shares issued to employees | 58,334 | |||
| Shares issued due to conversion of 20,000,000 Series B preferred stock, $0.001 par value shares | 20,000,000 | |||
| Shares issued due to conversion of Warrants | 142,819 | |||
| Balance, September 30, 2020 | 26,475,916 | |||
On January 3, 2020 Dinar Zuz provided an additional amount of $300 to the Company which was be provided in a form of the Optima Convertible Note pursuant to a securities purchase agreement between the Company and Optima, dated July 30, 2019. Additionally, on January 3, 2020, the Company issued 100,000 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $300.
On January 9, 2020, the Company issued 40,000 shares of its Common Stock pursuant to a service Agreement between the Company and a service provider, dated June 3, 2019. The fair market value of the shares at the issuance date was $240.
On January 14, 2020, the Company issued 66,334 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $459.
On January 14, 2020, the Company issued 58,334 shares of Common Stock to employees. All shares were issued pursuant to the Company’s Share and Options Incentive Enhancement Plan (2016). The Company has estimated the fair value of such shares at $332.
On February 10, 2019, the Company issued 10,000 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018.
On March 3, 2020, Dinar Zuz provided an additional amount of $450 to the Company which was be provided in a form of the Dinar Zuz Convertible Note pursuant to a securities purchase agreement between the Company and Dinar Zuz, dated July 30, 2019. The Company issued 1,157,478 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $700.
On April 2, 2020, the Company issued 70,000 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018.
F-10
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
On May 22, 2020, the Company issued 42,819 shares of its Common Stock pursuant to a cashless conversion of warrants to purchase up to 73,080 shares of its Common Stock at an exercise price equal to $3.25 per share.
On August 20, 2020, the Company issued 50,000 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $180.
On August 27, 2020, the Company converted all the outstanding shares of Series B Preferred Stock, par value $0.001 per share to 10,000,000 shares of the Company’s common stock, par value $0.001 per share.
On September 17, 2020, the Company issued 5,000,000 of its Common Stock par value $0.001 per share to each of Dinar Zuz and Cima Telecom Inc., Under a warrant dated December 31, 2019.
On September 17, 2020, the Company issued 141,812 shares of its Common Stock pursuant to promissory note, dated September 15, 2020. The fair market value of the shares at the issuance date was $390. Out of those, 33,000 shares of Common Stock were issued in consideration of Commitment fee and the balance are subject to return to the Company once the promissory note will be paid in full.
On September 30, 2020, the Company issued 100,000 of its Common Stock par value $0.001 per share to a private investor in consecration of cancellation of warrants to purchase up to 99,334 shares of its Common Stock at an exercise price equal to $3.25 per share.
NOTE 6 – RELATED PARTY TRANSACTIONS
On July 1, 2020 and Pursuant to section 1 (e) of the Side Letter Agreement, dated December 31, 2019, it was agreed by and among Dinar Zuz, Cima, Arik Maimom and Michael De Prado that the Company will borrow up to $462 from Dinar Zuz LLC under the second Dinar Zuz Note. As of September 30, 2020, the Company borrowed $355,000 under the second Dinar Note.
On July 24, 2020, the Compensation Committee of the Board of Directors of the Company approved the “Amended and Restated” employment agreements with each of Arik Maimon, the Company’s Chief Executive Officer (“Maimon”), and Michael De Prado, the Company’s President (“De Prado,” and together with Maimon, the “Executives,” each an “Executive”), the “New Employment Agreements”. The New Employment Agreements shall supersede the terms of the Pre-existing Employment Agreements. Pursuant to the terms of the New Employment Agreements, among other things:
| (1) | De Prado will receive the following compensation: (1) (a) a base salary of $265 per annum; (b) a Funding Bonus equal to 0.5% of the amount of the funding that exceeds the Funding Threshold; (c) a change of control bonus, if applicable; (d) participation in the Company’s employee benefits plan; |
| (2) | Maimon will receive the following compensation: (a) a base salary of $295 per annum (b) a Funding Bonus equal to 0.5% of the amount of the funding that exceeds the Funding Threshold; (c) a change of control bonus, if applicable; (d) participation in the Company’s employee benefits plan; |
| (3) | For each Executive, the term of the Agreement shall end on the earlier of (i) the date that is four (4) months following the Effective Date or (ii) the date that the Company appoints a new president or chief operating officer but the Company can extend the Employment Term on a month to month basis with the approval of both Dinar and CIMA until a new president or chief operating officer is appointed. Upon expiration of the Employment Term (other than a termination by the Company for “Cause”), the Executive will entitled to a special board compensation package with annual compensation equal to the Annual Base Salary (pro-rated for any partial year of service), beginning on the Expiration or Termination Date and ending eighteen (18) months later, provided that such payments will cease if the Executive resigns as a member of the Board during such period. The Board Compensation Period may be extended from year to year for an additional 12 months (for up to 36 months in total) if two of three of the then-current chief executive officers of the Company, Dinar and CIMA agree to extend the period for an additional 12 months. The Executive’s right to receive the Special Board Compensation shall be subject to the Board’s determination that he has complied with his obligations under this Agreement. The Executive will remain on the Board until he resigns, is not re-elected or is removed from the Board in accordance with the Company’s practice for removal of directors. |
| (4) | Pursuant to the terms of the New Employment Agreements, the Executives are entitled to severance in the event of certain terminations of their employment. The Executives are entitled to participate in the Company’s employee benefit, pension and/or profit-sharing plans, and the Company will pay certain health and dental premiums on their behalf. |
| (5) | Each of the Executives are entitled to Travel and expense reimbursement; |
| (6) | The Executives have agreed to a one-year non-competition agreement following the termination of their employment. |
F-11
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
On August 25, 2020 and Pursuant to section 1 (e) of the Side Letter Agreement, dated December 31, 2019, it was agreed by and among Dinar, Cima, Arik Maimon and Michael De Prado that the Company will borrow up to $50 from Arik Maimon at an annual interest rate of nine percent (9.0%). On September 30, 2020, the Company fully repaid its loan to Arik Maimon.
Related party balances at September 30, 2020 and December 31, 2019 consisted of the following:
Due from related parties
| September 30, 2020 | December 31, 2019 | |||||||
| (dollars in thousands) | ||||||||
| (a) Next Cala 360 | 56 | 54 | ||||||
| Total Due from related parties | 56 | 54 | ||||||
Related party payables, net of discounts
| September 30, 2020 | December 31, 2019 | |||||||
| (dollars in thousands) | ||||||||
| (c) Due to Dinar Zuz LLC | $ | 355 | $ | - | ||||
| (d) Due to Cima Telecom Inc. | 413 | - | ||||||
| (b) Due to Next Communications, Inc. (current) | 12 | 10 | ||||||
| Total Due from related parties | $ | 780 | $ | 10 | ||||
| (a) | Next Cala 360, is a Florida corporation established and managed by the Company’s Chief Executive Officer. |
| (b) | Next Communication, Inc. is a corporation in which the Company’s Chief Executive Officer a controlling interest and serves as the Chief Executive Officer. See disclosure above regarding payments by the Company in connection with the bankruptcy of Next Communication, Inc. |
| (c) | Due to the April 6, 2020 180 days Loan Agreement with the Company to borrow up to $462 at an annual interest rate of nine percent (9.0%) (“the second “Dinar Zuz Note”). |
| (d) | Composed from annual fees in the amount of $300 for the maintenance and support services in accordance with the software maintenance agreement for the first (1st) calendar year from the Effective Date, reimbursement of legal fees in the amount of $65 and other software development services. |
F-12
CUENTAS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in U.S. dollar thousands, except share and per share data)
NOTE 7 – COMMITMENTS AND CONTINGENCIES
On February 12, 2018, the Company was served with a complaint from Viber Media, Inc. (“Viber”) for reimbursement of attorney’s fees and costs totalling $528 arising from a past litigation with Viber. The Company is vigorously defending their rights in this case as the Company believe this demand is premature as litigation is ongoing. On June 15, 2020, the claims against the Company and its subsidiary were dismissed.
On July 6, 2017, the Company received notice an existing legal claim against Accent InterMedia (“AIM”) had been amended to include claims against the Company. The claims brought against the Company include failure to comply with certain judgments for collection of funds by the plaintiff while having a controlling interest in AIM via its ownership of Transaction Processing Products (“TPP”). On April 17, 2019, the Company entered into a settlement agreement (the “SVS Settlement Agreement”) with Comdata, Inc. d/b/a Stored Value Solutions (“SVS”) whereby the Company will pay a total of $37 over 7 months, starting July 1, 2019. Only in the event that the Company defaults by failing to make timely payments, SVS may file in Kentucky for the judgment of $70. On February 13, 2020, the Company completed the payments in accordance with the SVS Settlement Agreement and the case was dismissed.
On December 20, 2017, a Complaint was filed by J. P. Carey Enterprises, Inc., alleging a claim for $473 related to the Franjose Yglesias-Bertheau filed lawsuit against PLKD listed above. Even though the Company made the agreed payment of $10 on January 2, 2017 and issued 12,002 shares as conversion of the $70 note as agreed in the settlement agreement, the Plaintiff alleges damages which the Company claims are without merit because they received full compensation as agreed. The Company is in the process of defending itself against these claims. On January 29, 2019, the Company was served with a complaint by J.P. Carey Enterprises, Inc., (“JP Carey”) which was filed in Fulton County, Georgia claiming similar issues as to the previous complaint, with the new claimed damages totaling $1,108. JP Carey and the Company filed a motion for a summary judgement. 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 June 29, 2020, the Business Court held a status conference to review the status of the case, the pending motions, and to set a case schedule. At the status conference, the Court indicated that it would review the pending cross-motions for summary judgment and the Company’s motion to strike JP Carey’s late-disclosed expert and contact the parties about setting an oral hearing on both motions at a later date. On October 1, 2020 the Superior Court judge entered a judgment in favor of Cuentas and denied JP Carey’s motion for summary judgment.
On September 28, 2018, the Company was notified of a complaint filed against it by a former supplier. The Company has not yet received formal service of the complaint and is awaiting such service at which time it can fully assess the complaint. The Company has not accrued any losses as of September 30, 2020 related to the complaint given the early nature of the process.
On November 7, 2018, the Company was served with a complaint by IDT Domestic Telecom, Inc. vs the Company and its subsidiary Limecom, Inc. for telecommunications services provided to the Subsidiary during 2018 in the amount of $50. The Company has no accrual as of September 30, 2020 related to the complaint given the early nature of the process. The Company intends to file a motion to dismiss the Company as a defendant since the Company has no contractual relationship with the plaintiff. 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.
On May 1, 2019, the Company received a Notice of Demand for Arbitration (the “Demand”) from Secure IP Telecom, Inc. (“Secure IP), who allegedly had a Reciprocal Carrier Services Agreement (RCS) exclusively with Limecom and not with Cuentas. The Demand originated from a Demand for Arbitration that Secure IP received from VoIP Capital International (“VoIP”) in March 2019, demanding $1,053 in damages allegedly caused by unpaid receivables that Limecom assigned to VoIP based on the RCS. On June 5, 2020, Secure IP Telecom, Inc. (“SecureIP”) filed a complaint against Limecom, Inc., (“Limecom”), Heritage Ventures Limited (“Heritage”), an unrelated third party and owner of Limecom, and the Compasny. 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 $1,053. Cuentas is contemplating filing a motion to dismiss the complaint and disputes that it received the alleged $1,053 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 January 24, 2020, the Company received a Corrected Notice of Hearing regarding Qualtel SA de CV, a Mexican Company vs Next Communications, Inc. for a “Plaintiff’s Motion for Order to Show Cause and/or for Contempt as to Non-Party, Cuentas, Inc.” The Company retained a counsel and will vigorously defend its position.
NOTE 8 – SUBSEQUENT EVENTS
On October 28, 2020 the Company has filed a registration statement (File No. 333-249690) with the Securities Exchange Commission for the offering, and the Company intends to file a further prospectus with respect to the offering. Maxim Group LLC will act as the lead underwriter for the offering.
F-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CUENTAS INC.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cuentas Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018 and the related consolidated statements of operations, comprehensive loss, stockholders’ deficit and cash flows for the years in the period ended December 31, 2019 and 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018 and the results of its operations and its cash flows for each of the years in the period ended December 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, as of December 31, 2019, the Company has incurred accumulated deficit of $19,390 thousand and negative operating cash flows. These factor among others, as discussed in Note 1 to the consolidated financial statements raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of’ these uncertainties.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Halperin Ilanit
Certified Public Accountants (Isr.)
Tel Aviv, Israel
March 30, 2020
We have served as the Company’s auditor since 2018
30 A’arba’a st. A’arba’a towers, Tel Aviv 6473926 | tel. +972-3-9335474 | fax. +972-3-9335466 | www.halperin-cpa.co.il
F-14
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands except share and per share data)
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | 16 | 154 | ||||||
| Marketable securities | 1 | 79 | ||||||
| Trade account receivables, net | - | 3,673 | ||||||
| Related parties | 54 | 36 | ||||||
| Other current assets | 94 | 91 | ||||||
| Total current assets | 165 | 4,033 | ||||||
| Property and Equipment, net (Note 4) | 5 | 13 | ||||||
| Intangible Assets (Note 2) | 9,000 | 1,924 | ||||||
| Total assets | 9,170 | 5,970 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Trade payable | 1,525 | 3,184 | ||||||
| Other accounts liabilities (Note 5) | 741 | 2,560 | ||||||
| Deferred revenue | 537 | 583 | ||||||
| Notes and Loan payable | 109 | 110 | ||||||
| Convertible notes payable (Note 7) | 250 | - | ||||||
| Derivative liability | 3 | - | ||||||
| Related parties’ payables (Note 6) | 10 | 4,919 | ||||||
| Stock based liabilities | 742 | 225 | ||||||
| Total current liabilities | 3,917 | 11,581 | ||||||
| Related party payables – Long term (Note 6) | - | 806 | ||||||
| Derivative liabilities – long term | - | 33 | ||||||
| TOTAL LIABILITIES | 3,917 | 12,420 | ||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) (Note 8) | ||||||||
| Common stock subscribed | - | 100 | ||||||
| Series B preferred stock, $0.001 par value, designated 10,000,000; 10,000,000 issued and outstanding as of December 31, 2019 and 2018, respectively | 10 | 10 | ||||||
| Common stock, authorized 360,000,000 shares, $0.001 par value; 4,639,139 and 1,588,942 issued and outstanding as of December 31, 2019 and December 31, 2018, respectively | 5 | 2 | ||||||
| Additional paid in capital | 25,246 | 12,160 | ||||||
| Accumulated deficit | (19,390 | ) | (18,070 | ) | ||||
| Total Cuestas Inc. stockholders’ equity (deficit) | 5,871 | (5,798 | ) | |||||
| Non-controlling interest in subsidiaries | (618 | ) | (652 | ) | ||||
| Total stockholders’ equity (deficit) | 5,253 | (6,450 | ) | |||||
| Total liabilities and stockholders’ equity (deficit) | 9,170 | 5,970 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-15
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands except share and per share data)
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| REVENUE | 967 | 74,650 | ||||||
| COST OF REVENUE | 808 | 74,177 | ||||||
| GROSS PROFIT | 159 | 473 | ||||||
| OPERATING EXPENSES | ||||||||
| General and administrative | 2,305 | 3,769 | ||||||
| Loss on disposal and impairment of assets | - | 1,917 | ||||||
| TOTAL OPERATING EXPENSES | 2,305 | 5,686 | ||||||
| OPERATING LOSS | (2,146 | ) | (5,213 | ) | ||||
| OTHER INCOME, NET | ||||||||
| Other income (expense), net | 2,482 | (331 | ) | |||||
| Interest expense | (1,092 | ) | (978 | ) | ||||
| Gain on derivative liability | 30 | 524 | ||||||
| Gain from Change in extinguishment of debt | - | 99 | ||||||
| Gain (loss) from Change in fair value of stock-based liabilities | (560 | ) | 2,314 | |||||
| TOTAL OTHER INCOME, NET | 860 | 1,628 | ||||||
| NET LOSS BEFORE CONTROLLING INTEREST | (1,286 | ) | (3,585 | ) | ||||
| NET INCOME (LOSS) ATTRIBUTILE TO NON-CONTROLLING INTEREST | (34 | ) | 23 | |||||
| NET LOSS ATTRIBUTILE TO CUENTAS INC. | (1,320 | ) | (3,562 | ) | ||||
| Basic and Diluted net loss per share | (0.58 | ) | (2.90 | ) | ||||
| Weighted average number of basic and diluted common shares outstanding | 2,284,702 | 1,227,992 | ||||||
The accompanying notes are an integral part of these consolidated financial statements
F-16
CUENTAS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(U.S. dollars in thousands except share and per share data)
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss | $ | (1,286 | ) | $ | (3,585 | ) | ||
| Other comprehensive income | ||||||||
| Adoption of ASU 2016-01 | - | 300 | ||||||
| Total comprehensive loss | (1,286 | ) | (3,285 | ) | ||||
| Comprehensive income attributable to non-controlling interest | (34 | ) | 23 | |||||
| Comprehensive loss attributable to shareholders | $ | (1,320 | ) | $ | (3,262 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements
F-17
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(U.S. dollars in thousands, except share and per share data)
| Non-Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Preferred Stock | Common Stock | Common Stock to be Issued | Common Stock | Additional Paid-in | Accumulated | Other Comprehensive | Total Stockholders’ | Additional Paid-in | Accumulated | Total Non- Controlling | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Subscribed | Capital | Deficit | Loss | Deficit | Capital | Deficit | Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2018 | 10,000,000 | 10 | 1,588,942 | 2 | * | 100 | 12,160 | (18,070 | ) | - | (5,798 | ) | 43 | (695 | ) | (652 | ) | (6,450 | ) | |||||||||||||||||||||||||||||||||||||||||
| Committed shares issued | - | - | 34,000 | * | * | (100 | ) | 100 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | 409,831 | * | - | - | - | 989 | - | - | 989 | - | - | - | 989 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversion of debt | - | - | 2,090,811 | 2 | - | - | - | 11,016 | - | - | 11,018 | - | - | - | 11,018 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for cash** | - | - | 407,645 | 1 | - | 538 | - | - | 539 | - | - | - | 539 | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued due to the Rescission of the Limecom Acquisition | - | - | 107,910 | * | - | - | - | 376 | - | - | 376 | - | - | - | 376 | |||||||||||||||||||||||||||||||||||||||||||||
| Forgiveness of imputed interest on related party payable | - | - | - | - | - | - | - | 67 | - | - | 67 | - | - | 67 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income for year ending December 31, 2019 | $ | - | - | - | - | - | - | - | - | (1,320 | ) | - | (1,320 | ) | - | 34 | 34 | (1,286 | ) | |||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 10,000,000 | $ | 10 | 4,639,139 | 5 | $ | - | $ | - | $ | - | $ | 25,246 | $ | (19,390 | ) | $ | - | $ | 5,871 | 43 | $ | (661 | ) | (618 | ) | 5,253 | |||||||||||||||||||||||||||||||||
| * | less than $1. |
| ** | Issuance cost during the period were $10 |
F-18
CUENTAS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(U.S. dollars in thousands, except share and per share data)
| Non-Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Preferred Stock | Common Stock | Common Stock to be Issued | Common Stock | Additional Paid-in | Accumulated | Other Comprehensive | Total Stockholders’ | Additional Paid-in | Accumulated | Total Non- Controlling | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Subscribed | Capital | Deficit | Loss | Deficit | Capital | Deficit | Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2017 | 10,000,000 | 10 | 1,140,398 | 1 | - | - | 400 | 9,555 | (14,208 | ) | (300 | ) | (4,542 | ) | 42 | (672 | ) | (630 | ) | (5,172 | ) | |||||||||||||||||||||||||||||||||||||||
| Committed shares issued | - | - | 39,070 | * | - | - | (400 | ) | 400 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-01 | - | - | - | - | - | - | - | - | (300 | ) | 300 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | - | - | 13,333 | * | - | - | - | 60 | - | - | 60 | - | - | - | 60 | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversion of debt | - | - | 4,167 | * | - | - | - | 37 | - | - | 37 | - | - | - | 37 | |||||||||||||||||||||||||||||||||||||||||||||
| Extinguish of liability upon shares issuance | - | - | 206,811 | - | - | - | - | 893 | - | - | 893 | - | - | - | 893 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of issuance cost ** | - | - | 185,163 | 1 | - | 534 | - | - | 535 | - | - | - | 535 | |||||||||||||||||||||||||||||||||||||||||||||||
| Warrants and Stock options compensation | - | - | - | - | - | - | - | 444 | - | - | 444 | - | - | - | 444 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock subscribed | - | - | - | - | - | - | 100 | - | - | - | 100 | - | - | - | 100 | |||||||||||||||||||||||||||||||||||||||||||||
| Forgiveness of imputed interest on related party payable | - | - | - | - | - | - | - | 237 | - | - | 237 | 1 | - | 1 | 238 | |||||||||||||||||||||||||||||||||||||||||||||
| Net income for year ending December 31, 2018 | - | - | - | - | - | - | - | - | (3,562 | ) | - | (3,562 | ) | - | (23 | ) | (23 | ) | (3,585 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2018 | 10,000,000 | $ | 10 | 1,588,942 | $ | 2 | - | $ | - | $ | 100 | $ | 12,160 | $ | (18,070 | ) | $ | - | $ | (5,798 | ) | $ | 43 | $ | (695 | ) | $ | (652 | ) | (6,450 | ) | |||||||||||||||||||||||||||||
| * | less than $1. |
| ** | Issuance cost during the period were $18 |
The accompanying notes are an integral part of these consolidated financial statements
F-19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands, except share and per share data)
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (1,286 | ) | $ | (3,585 | ) | ||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock based compensation and Shares issued for services | 487 | 943 | ||||||
| Imputed interest | 67 | 237 | ||||||
| Available for sale securities | 78 | 171 | ||||||
| Gain from extinguishment of short-term loans | - | (99 | ) | |||||
| Interest expense and Debt discount amortization | 1,017 | 72 | ||||||
| Excess loss on derivative liability | (30 | ) | (514 | ) | ||||
| License fee amortization | - | 35 | ||||||
| Loss due to Settlement | - | 84 | ||||||
| Loss on disposal and impairment of assets | - | 1,917 | ||||||
| Gain on fair value measurement of stock-based liabilities | 560 | (2,314 | ) | |||||
| Depreciation expense | 1 | 2 | ||||||
| Amortization of intangible assets | - | 428 | ||||||
| Changes in Operating Assets and Liabilities: | ||||||||
| Accounts receivable | 18 | 3,960 | ||||||
| Other receivables | (24 | ) | 142 | |||||
| Accounts payable | (217 | ) | (2,384 | ) | ||||
| Related party, net | (2,356 | ) | 84 | |||||
| Other accounts payables | 416 | 407 | ||||||
| Deferred revenue | (46 | ) | (103 | ) | ||||
| Other long-term liabilities | - | - | ||||||
| Net Cash Used by Operating Activities | (1,315 | ) | (517 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of equipment | - | (9 | ) | |||||
| Net Cash Provided by Investing Activities | - | (9 | ) | |||||
| Cash Flows from Financing Activities: | ||||||||
| Repayments of loans payable | - | (36 | ) | |||||
| Proceeds from (Repayments of) convertible notes | 250 | (12 | ) | |||||
| Related parties, net | (664 | ) | - | |||||
| Proceeds from common stock subscriptions | - | 100 | ||||||
| Proceeds from issuance of shares, net of issuance cost | 1,591 | 535 | ||||||
| Net Cash Provided by Financing Activities | 1,177 | 587 | ||||||
| Net Increase (Decrease) in Cash | (138 | ) | 61 | |||||
| Cash at Beginning of Period | 154 | 93 | ||||||
| Cash at End of Period | 16 | $ | 154 | |||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | - | $ | 37 | ||||
| Cash paid for income taxes | $ | $ | - | |||||
| Supplemental disclosure of non-cash financing activities | ||||||||
| Common stock issued for conversion of convertible note principal | $ | - | $ | 27 | ||||
| Common Stock issued for conversion of convertible note issued against Other Assets | $ | 9,000 | - | |||||
| Common stock issued for conversion of convertible accrued interest | $ | - | $ | 195 | ||||
| Common stock issued for settlement of stock-based liabilities | $ | 735 | $ | 893 | ||||
| Common stock issued for settlement of common stock subscribed | $ | 100 | $ | 400 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in 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 (100% owned) (“M&M”), Next Cala, Inc (94% owned) (“Cala”), NxtGn, Inc. (65% owned) (“NxtGn”) and Cuentas Mobile LLC (formerly Next Mobile 360, LLC. - 100% owned). Additionally, Next Cala, Inc. had a 60% interest in NextGlocal Inc. (“Next Glocal”), a subsidiary formed in May 2016 and which was dissolved on September 27, 2019. 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. On October 23, 2017, the Company acquired 100% of the outstanding shares in Limecom, Inc, (“Limecom” and such acquisition, the “Limecom Acquisition”) from Heritage Ventures Limited (“Heritage”). On January 30, 2019, the Company exercised a right to rescind the Acquisition, principally in an effort to reduce the Company’s continuing debt obligations associated with the Acquisition.
M&M was formed under the laws of the State of Florida on May 21, 2001 as a real estate investment company. During the year ended December 31, 2010, M&M began winding down real estate operations and commenced the business of providing telecommunications services. M&M acquired telecom registrations, licenses and authorities to provide telecom services to the retail and wholesale markets including sales of prepaid long-distance telecom services and Mobile Virtual Network Operator (known as MVNO) services. The services are sold under the brand name Cuentas Mobile and through the subsidiary of the same name.
Next Cala was formed under the laws of Florida on July 10, 2009 for the purpose of offering prepaid and reloadable debit cards to the retail market. Cala serves consumers in the underbanked and unbanked populations through Incomm, a leading provider of third-party gift cards, general purpose reloadable (known as GPR) debit cards and payment remittance services worldwide.
NxtGn was formed under the laws of Florida on August 24, 2011 to develop a high definition telepresence product (known as AVYDA) which allows users to connect with celebrities, public figures, healthcare and education applications via a mobile phone, tablet or personal computer. NxtGn has entered into a joint venture with telephony platform industry leader Telarix, Inc. to develop and market the AVYDA Powered by Telarix™ HD telepresence platform. The AVYDA Powered by Telarix™ product is marketed throughout the world by the Telarix sales force.
On December 6, 2017, the Company completed the formation of SDI NEXT Distribution LLC (“SDI NEXT”), in which the Company owns 51% a membership interest. The remainder of the membership interests of SDI are owned by Fisk Holdings, LLC (“Fisk”), a non-related party of the Company. The Company acts as the Managing Member of SDI NEXT. Under SDI NEXT’s Operating Agreement, the Company will contribute a total of $500 to SDI Next. Fisk will contribute 30,000 active point of sale locations for distribution of retail telecommunications and prepaid financial products and services to include, but not be limited to: prepaid general-purpose reloadable cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products.
F-21
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
On October 23, 2017, the Company, completed the acquisition 100% of the outstanding shares of Limecom, Inc. (“Limecom”). Limecom is a global telecommunication company, providing services to telecommunication providers from all over the world. Limecom operates a network built on internet protocol (“IP”) switching equipment. It was organized as a Florida limited liability company on November 21, 2014 and was known as Limecom LLC. On September 29, 2015, Limecom converted into a Florida corporation. The Limecom Acquisition was completed for total consideration of $3,927,000 which included an issuance of 172,683 shares of the Company’s common stock per value $0.001 (the “Common Stock”), which were valued at $1,295,000 as of the acquisition date.
Pursuant to the Share Purchase Agreement, dated September 19, 2017 (the “Limecom Purchase Agreement”), the Company had rights to rescind the Limecom Acquisition. On January 29, 2019, the Company and Heritage entered into an amendment to the Limecom Purchase Agreement (the “Amendment”) under which the parties agreed to extend the right of the Company to rescind the Limecome Acquisition at its discretion, and in connection therewith to return the shares of Limecom to Heritage in consideration for the following:
(a) The 138,147 shares of Common Stock previously issued to Heritage and its stockholders will not be returned to the Company, and the remaining 34,537 shares Common Stock owed to Heritage will not be issued to Heritage. Instead, it was agreed that the Company will issue an additional 90,000 shares of Common Stock as directed by Heritage. The Company also agreed to issue 20,740 shares of the Company’s restricted Common Stock to several Limecom employees in exchange for salaries due to them.
(b) The $1,807,000 payment due by the Company under the Limecom Purchase Agreement will be cancelled.
(c) The Employment Agreement with Orlando Taddeo as International CEO of Limecom will be terminated.
(d) Heritage and Limecom agreed that the intercompany loans in the amount of $231,000 will be cancelled.
On January 30, 2019, the Company rescinded the acquisition of Limecom, Inc. Therefore, and in accordance with ASC Topic 360, the Company recorded in 2018 an asset impairment charges of $1,917 which is included in the consolidated statements of operations within loss on disposal and impairment of assets; $1,334 of the total impairment charge related to Goodwill and the remaining $583 related to intangible assets
Pro forma results
The following are unaudited pro forma financial information for the year ended December 31, 2018 and presents the condensed consolidated statements of operations of the Company due to the rescission of the Limecome Acquisition as described above, as if the Limecom Acquisition had not occurred. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s condensed consolidated statements of operations that would have been reported had the Limecom Acquisitions not been completed as of the beginning of the period presented and should not be taken as indicative of the Company’s future condensed consolidated statements of operations.
| Year Ended | ||||
| December 31, | ||||
| 2018 (In thousands) | ||||
| Revenues | $ | 1,088 | ||
| Net Income before controlling Interest | 334 | |||
| Net Income | 353 | |||
| Basic net income earnings per common share (in U.S Dollars) | 0.30 | |||
| Diluted net income earnings per common share (in U.S Dollars) | $ | 0.27 | ||
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of December 31, 2019, the Company had approximately $16 in cash and cash equivalents, approximately $3,752 in negative working capital, and an accumulated deficit of approximately $19,390. 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.
F-22
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
REVERSE SPLIT
The Company completed a reverse stock split of its common stock, by filing articles of amendment to its Articles of Incorporation (the “Articles of Amendment”) with the Secretary of State of Florida to effect the Reverse Stock Split on August 8, 2018. As a result of the reverse stock split, the following changes have occurred (i) every three hundred shares of common stock have been combined into one share of common stock; (ii) the number of shares of common stock underlying each common stock option, common stock warrant or any other convertible instrument of the Company have been proportionately decreased on a 300-for-1 basis, and the exercise price of each such outstanding stock option, common warrant or any other convertible instrument of the Company have been proportionately increased on a 300-for-1 basis. Accordingly, all option numbers, share numbers, warrant numbers, share prices, warrant prices, exercise prices and losses per share have been adjusted within these consolidated financial statements, on a retroactive basis, to reflect this 300-for-1 reverse stock split. No fractional shares were issued as a result of the reverse stock split. In lieu of issuing fractional shares, each holder of common stock who would otherwise have been entitled to a fraction of a share was entitled to receive one full share for the fraction of a share to which he or she was entitled.
NOTE 2 – Cima Telecom Inc.
On December 31, 2019, the Company entered into a series of integrated transactions to license the Platforms from 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.
License Agreement
Contemporaneously with the Transaction Closing, on December 31, 2019 (the “Effective Date”) the Company entered into the License Agreement. Pursuant to the License Agreement, the Company has an exclusive, non-transferable, non-sublicensable, royalty-free license to access and use the Knetik and Auris technology platforms (collectively, the “Licensed Technology”) in the form provided to the Company via the Hosting Services (as defined in the License Agreement) and solely within the FINTECH space for the Company’s business purposes. Under the License Agreement Cima Group received a 1-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 1,757,478 shares of Common Stock of the Company.
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 to be paid on June 30, 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.
Voting Agreement
Contemporaneously with the Transaction Closing, on December 31, 2019, the Company entered into that certain voting agreement and proxy (the “Voting Agreement”), by and among the Company, Arik Maimon, the Company’s Chief Executive Officer, Michael De Prado, the Company’s President, Dinar, and CIMA. Pursuant to the Voting Agreement, each of CIMA, Dinar and Mr. De Prado shall have the right to designate one director to the Company’s Board of Directors and Mr. Maimon will have the right to designate two directors to the Board as promptly as practicable after the Transaction Closing. At each meeting of the Company’s stockholders at which the election of directors is to be considered, each of CIMA, Dinar, Mr. Maimon and Mr. De Prado shall have the right to designate one nominee for election at such meeting. Additionally, the Company has granted CIMA board observer rights whereby CIMA shall have the right to invite one representative to attend all meetings of the Board in a non-voting observer capacity. The size of the Board and appointee rights are subject to change in the event that the Company’s shares of Common Stock become listed on the Nasdaq Capital Market (or if there is any other similar transaction which ultimately involves the listing of the Company’s capital stock, whether Common Stock or any other class or series of capital stock of the Company, on any exchange affiliated with or similar to Nasdaq). Furthermore, pursuant to the Voting Agreement, each of Mr. Maimon and Mr. De Prado appointed each of CIMA and Dinar as their proxy and attorney-in-fact, with full with full power of substitution and resubstitution, to vote or act by written consent with respect to the shares of Voting Stock (as defined in the Voting Agreement) representing each individual’s pro rata percentage of the CIMA Proxy Stock and Dinar Proxy Stock (as defined in the Voting Agreement), as may be recalculated from time to time subject to the terms and conditions of the Voting Agreement, until the CIMA Warrant is exercised and until the Dinar Warrant is exercised, respectively.
F-23
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Note and Warrant Purchase Agreement
Contemporaneously with the Transaction Closing, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) by and between the Company and CIMA, pursuant to which the Company made and sold to (i) CIMA a 3% convertible promissory note (the “Convertible Promissory Note”) in the principal amount of $9,000 and (ii) (a) CIMA a warrant (the “CIMA Warrant”) , to purchase from the Company an aggregate of duly authorized, validly issued, fully paid and nonassessable shares (the “Shares”) of common stock of the Company, par value $0.001 per share (the “Common Stock”), equal to twenty-five percent (25%) of shares of Common Stock or any other equity issued upon the conversion of the Series B preferred stock. The Purchase Agreement contained customary representations, warranties, covenants, and conditions, including indemnification. Among other conditions to closing, the Company has agreed to take all necessary steps to amend and restate its Articles of Incorporation (the “A&R Articles”) and to amend and restate its Bylaws (the “A&R Bylaws”) and properly file and effect such A&R Articles and A&R Bylaws with the Secretary of State of the State of Florida and the U.S. Securities and Exchange Commission, each as necessary, no later than June 30, 2020.
Convertible Promissory Note
Contemporaneously with the Transaction Closing, the Company made and sold to CIMA a convertible promissory note (the “CIMA Convertible Promissory Note”) in accordance with the Purchase Agreement. Pursuant to the Convertible Promissory Note, at any time on or before twelve (12) months after the date of the CIMA Convertible Promissory Note, CIMA may elect in its sole and absolute discretion to convert all unpaid principal and accrued and unpaid interest under the CIMA Convertible Promissory Note into 25% of the issued and outstanding Common Stock of the Company calculated on a fully diluted basis as of the conversion date, assuming the conversion, exercise, and exchange of all equity and debt securities of the Company which are convertible into, or exercisable or exchangeable for, Common Stock of the Company, but not including the Warrants. On December 31, 2019, CIMA exercised its option to convert the Convertible Promissory Note into 1,757,478 shares of Common Stock of the Company, which constitutes 25% of the issued and outstanding shares of Common Stock of the Company calculated on a fully diluted basis as of the same date.
Warrants
Contemporaneously with the Transaction Closing, the Company made and sold a warrant to each of (a) CIMA (the “CIMA Warrant”) and (b) Dinar (the “Dinar Warrant,” and together with the CIMA Warrant, the “Warrants”), each in accordance with the Purchase Agreement. Pursuant to the Warrants, upon exercise, each of CIMA and Dinar shall be entitled to purchase from the Company, in the aggregate, an amount of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock equal to twenty-five percent (25%) of total outstanding shares of the Company on a fully-diluted basis (taking into account any warrants, options, debt convertible into shares or other rights underlying shares of the Company) as of the conversion date; provided, however, that each Warrant shall increase to include 25% of any additional shares (or warrants, options, debt convertible into shares or other rights underlying shares of the Company) of the Company only to the extent such shares are issued in breach of the Voting Agreement (as defined below). Pursuant to their terms, the Warrants are exercisable, in whole and not in part during the term commencing on December 31, 2019 and ending on the earlier of (a) thirty (30) days following the date on which the Company amends and restates its Articles of Incorporation, which is amendment and restatement is filed with and accepted by the Secretary of State of the State of Florida or (b) upon a Change of Control, as defined in the Warrants.
Asset Pledge Agreement
Contemporaneously with the Transaction Closing, the Company entered into an Asset Pledge Agreement with CIMA (the “Pledge Agreement”). Pursuant to the Pledge Agreement, the Company unconditionally and irrevocably pledged all of its rights, title and interest in and to the Licensed Technology and any rights and assets granted pursuant to the License Agreement to CIMA as a guarantee for the full and punctual fulfillment of its obligations under certain provisions of the Voting Agreement, and the issuance of the securities under the CIMA Convertible Promissory Note and the CIMA Warrant.
F-24
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Side Letter Agreement
Contemporaneously with the Transaction Closing, the Company entered into a side letter agreement (the “Side Letter Agreement”), dated December 31, 2019, by and among the Company, Arik Maimon, Michael De Prado, Dinar and CIMA. Pursuant to the Side Letter Agreement, for as long as the License Agreement is in effect, the Convertible Promissory Note is outstanding and unpaid, or CIMA is a shareholder of the Company and owns at least 5% of the Company’s Common Stock, in addition to any other vote or approval required under the Company’s Articles of Incorporation, Bylaws, or any other agreement, each as amended from time to time, the Company has agreed not to take certain actions without certain approval thresholds of the directors appointed by CIMA, Dinar, Mr. Maimon and Mr. De Prado. These negative covenants restrict, among other things, the Company’s ability to incur additional debt, alter certain employment agreements currently in place, enter into any consolidation, combination, recapitalization or reorganization transactions, and issue additional capital stock. Additionally, pursuant to the Side Letter Agreement, upon conversion of the Convertible Promissory Note by CIMA, Cuentas shall have the primary right of first refusal, and each of Dinar, Mr. De Prado and Mr. Maimon have a secondary right of first refusal, to purchase any shares of Common Stock which CIMA intends to sell to the bona fide third party purchaser on the same terms and conditions as CIMA would have sold such shares of the Company’s Common Stock to any third party purchaser. Further, CIMA has a co-sale right to participate in a sale of shares of the Company’s Common Stock, in the event that Mr. De Prado, Mr. Maimon or any other director or officer of the Company holding greater than 1% of the Company’s Common Stock (on a fully diluted basis) proposes to sell any of his, her or its shares of Common Stock. In addition, CIMA and/or Dinar have been granted certain information rights, subject to their continued ownership of the CIMA Convertible Promissory Note or of 5% or more shares of the Company’s issued and outstanding Common Stock. Furthermore, pursuant to the Side Letter Agreement, upon a successful up-listing of the Company’s shares on the Nasdaq Capital Markets and once the market capitalization of the Company is greater than $50 million for a period of 10 consecutive trading days, Mr. Maimon and Mr. De Prado will have a right to earn a special bonus in the amount of $250 each.
Interactive Communications International, Inc. (“InComm”)
On July 23, 2019, the Company entered into a five (5) year Processing Services Agreement (“PSA”) with Incomm, a leading payments technology company, to power and expand the Company’s GPR card network. Incomm distributes Gift and GPR Cards to over 210,000 U.S. retailers and has long standing partnerships with over 1,000 of the most recognized brands that are eligible for Cuentas’ Discount Purchase Platform. Through its 94% owned subsidiary,
Under the PSA, Incomm will provide processing services, Data Storage Services, Account Servicing, Reporting, Output and Hot Carding services to the Company. Processing Services will consist mainly of Authorization and Transaction Processing Services whereas InComm will process authorizations for transactions made with or on a Prepaid Product, and any payments or adjustments made to a Prepaid Product. InComm will also process Company’s Data and post entries in accordance with the Specifications. Data Storage Services will consist mainly of storage of the Company’s Data in a format that is accessible online by Company through APIs designated by InComm, subject to additional API and data sharing terms and conditions. Incomm will also provide Web/API services for Prepaid Cuentas GPR applications and transactions.
In consideration for Incomm’s services the company will pay an initial Program Setup & Implementation Fees in the amount of $500, which of $300will be paid at the earlier of the Launch Date or three (3) months after contract execution, then $50,000 each at the beginning of the second, third, fourth and fifth anniversary of the agreement. In addition, the Company will pay a minimum monthly fee of $30 starting on the fourth month of the first year following the launch of the Cuentas GPR card, $50 during the second year following the launch of the Cuentas GPR card and $75 thereafter. The Company will as also pay 0.25% of all funds added to the Cuentas GPR cards, excluding Vanilla Direct Reload Network and an API Services fee of $0.005 per transaction. The Company may pay other fees as agreed between the Company and Incomm.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“‘US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As applicable to the consolidated financial statements, the most significant estimates and assumptions relate to allowances for impairment of intangible assets, fair value of stock-based compensation and fair value calculations related to embedded derivative features of outstanding convertible notes payable and Going Concern.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
F-25
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Functional currency
The functional currency of the company and its subsidiaries is U.S dollar.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Cash and cash equivalents
The Company considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents. The Company held no cash equivalents as of December 31, 2019 or 2018. As of December 31, 2019, and 2018, the Company did not hold cash with any one financial institution in excess of the FDIC insured limit of $250.
Marketable securities
The Company accounts for investments in marketable securities in accordance with ASC Topic 320-10, “Investments - Debt and Equity Securities” (“ASC Topic 320-10”). Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reassesses such determination at each balance sheet date. The investments in marketable securities covered by ASC Topic 320-10 that were held by the Company during the reported periods were designated by management as trading securities. Trading securities are stated at market value. The changes in market value are charged to financing income or expenses. During the year ended December 31, 2017, the Company acquired 50,000 shares of common stock of Green Spirit Industries, a publicly held company, as a referral fee. The total value of the common shares was recorded as other income using the price of the common stock as quoted on Nasdaq on the date received resulting in other income of $550. Trading losses for the years 2019 and 2018 amounted to approximately $78 and $171 respectively.
Allowance for doubtful accounts
The allowance for doubtful accounts is determined with respect to amounts the Company has determined to be doubtful of collection. In determining the allowance for doubtful accounts, the Company considers, among other things, its past experience with customers, the length of time that the balance is post due, the customer’s current ability to pay and available information about the credit risk on such customers. There was an allowance for doubtful accounts of $20 as of December 31, 2019 and 2018.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Maintenance and repair costs are expensed as they are incurred while renewals and improvements which extend the useful life of an asset are capitalized. At the time of retirement or disposal of property and equipment, the cost and related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in the consolidated results of operations.
Impairment of Long-Lived Assets
In accordance with ASC Topic 360, formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of its asset based on estimates of its undiscounted future cash flows. If these estimated future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the difference between the asset’s estimated fair value and its carrying value. As a result, during the year ended December 31, 2018, the Company recorded asset impairment charges of $1,917 which is included in the consolidated statements of operations within loss on disposal and impairment of assets; $1,334 of the total impairment charge related to Goodwill and the remaining $583 related to intangible assets. The Company did not record impairment losses during the year ended December 31, 2019.
Derivative Liabilities 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.
F-26
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Fair value of certain of the Company’s financial instruments including cash, accounts receivable, account payable, accrued expenses, notes payables, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.
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.
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 records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates. The debt discount for the convertible instruments is recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction to the carrying amount of the convertible instrument equal to the fair value of the conversion features. The debt discount will be accreted by recording additional non-cash gains and losses related to the change in fair values of derivative liabilities over the life of the convertible notes.
A summary of the changes in derivative liabilities balance for the year ended December 31, 2019 is as follows:
| Fair Value of Embedded Derivative Liabilities: | ||||
| Balance, December 31, 2017 | $ | 574 | ||
| Change in fair value | (514 | ) | ||
| Reclassification due to conversion | (27 | ) | ||
| Balance, December 31, 2018 | 33 | |||
| Change in fair value | (30 | ) | ||
| Change due to conversion | - | |||
| Balance, December 31, 2019 | $ | 3 | ||
The value of the embedded derivative liabilities for the convertible notes payable and outstanding option awards was determined using the Black-Scholes option pricing model based on the following assumptions:
| December 31, 2019 | December 31, 2018 | |||||||
| Common stock price | 5.7 | 3.00 | ||||||
| Expected volatility | 220 | % | 233 | % | ||||
| Expected term | 0.25 years | .1.25 years | ||||||
| Risk free rate | 1.55 | % | 2.56 | % | ||||
| Forfeiture rate | 0 | % | 0 | % | ||||
| Expected dividend yield | 0 | % | 0 | % | ||||
F-27
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
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 December 31, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | 1 | - | - | 1 | ||||||||||||
| Total assets | 1 | - | - | 1 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | 742 | - | - | 742 | ||||||||||||
| Short term derivative value | 3 | - | - | 3 | ||||||||||||
| Total liabilities | 745 | - | - | 745 | ||||||||||||
| Balance as of December 31, 2018 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | 79 | - | - | 79 | ||||||||||||
| Total assets | 79 | - | - | 79 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Stock based liabilities | 225 | - | - | 225 | ||||||||||||
| Long term derivative value | 33 | - | - | 33 | ||||||||||||
| Total liabilities | 258 | - | - | 258 | ||||||||||||
Non-Controlling Interest
The Company reports the non-controlling interest in its majority owned subsidiaries in the consolidated balance sheets within the stockholders’ deficit section, separately from the Company’s stockholders’ deficit. Non-controlling interest represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.
Revenue recognition
The Company follows paragraph 605-10-S99 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. The Company primarily generates revenues through the brokering of sales of minutes from one telecommunications carrier to another through Limecom and to a lesser extent the sales of prepaid calling minutes to consumers through its Tel3 division. While the Company collects payment for such minutes in advance, revenue is recognized upon delivery to and consumption of minutes by the consumer. Minutes are forfeited buy the consumer after 12 consecutive months of non-use at which point the Company recognizes revenue from the forfeiture of prepaid minutes.
Business Segments
The Company operates in a single business segment in telecommunications.
Income Taxes
Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Use of net operating loss carry forwards for income tax purposes may be limited by Internal Revenue Code section 382 if a change of ownership occurs.
F-28
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Net Loss Per Basic and Diluted Common Share
Basic 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.
At December 31, 2018, potentially dilutive securities consisted of 95,443 shares which the Company is obligated to issue and 162,044 options to purchase of common stock at prices ranging from $3 to $54 per share. Of these potentially dilutive securities, only 95,443 shares which the Company is obligated to issue and 90,000 options to purchase of common stock at price of $3 per share are included in the computation of diluted earnings per share because the effect of including the remaining instruments would be anti-dilutive. Additionally, the Company had common stock subscriptions totaling $100 representing an additional 33,334 common shares. The effects of these notes, common shares subscribed and common shares committed have been excluded as the conversion would be anti-dilutive due to the net loss incurred in the year ended December 31, 2018.
At December 31, 2019, potentially dilutive securities consisted of 264,251 shares which the Company is obligated to issue and 212,044 options to purchase of common stock at prices ranging from $2.09 to $54 per share. Of these potentially dilutive securities, only 264,251 shares which the Company is obligated to issue and 140,000 options to purchase of common stock at price of $2.675 per share are included in the computation of diluted earnings per share. Additionally, the Company had A Convertible note totaling $250,000 representing an additional 83,334 common shares included in the computation of diluted earnings per share because the effect of including the remaining instruments would be anti-dilutive. The effects of these notes, common shares subscribed and common shares committed have been excluded as the conversion would be anti-dilutive due to the net loss incurred in the year ended December 31, 2019.
Advertising Costs
The Company’s policy regarding advertising is to expense advertising when incurred. The Company incurred $25 and $46 of advertising costs during the years ended December 31, 2019 and 2018, respectively.
Stock-Based Compensation
The Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors (including employee stock options under the Company’s stock plans) based on estimated fair values.
ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s statement of operations.
The Company recognizes compensation expenses for the value of non-employee awards based on the straight-line method over the requisite service period of each award, net of estimated forfeitures.
The Company estimates the fair value of stock options granted as equity awards using a Black-Scholes options pricing model. The option-pricing model requires a number of assumptions, of which the most significant are share price, expected volatility and the expected option term (the time from the grant date until the options are exercised or expire). Expected volatility is estimated based on volatility of similar companies in the technology sector. The Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from governmental zero-coupon bonds with an equivalent term. The expected option term is calculated for options granted to employees and directors using the “simplified” method. Grants to non-employees are based on the contractual term. Changes in the determination of each of the inputs can affect the fair value of the options granted and the results of operations of the Company.
Related Parties
The registrant follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
F-29
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Pursuant to Section 850-10-20 the Related parties include (a) affiliates of the registrant; (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the registrant; (e) management of the registrant; (f) other parties with which the registrant may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Recently Issued Accounting Standards
On February 14, 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this Update affect any entity that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments in this Update are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.
In June 2018, the FASB issued Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted ASU 2018-07 effective January 1, 2019, and the adoption of this standard did not have a material impact on the Company’s consolidated financial
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this Update related to separating components of a contract affect the amendments in Update 2016-02, which are not yet effective but can be early adopted. For entities that have not adopted Topic 842 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update related to separating components of a contract are the same as the effective date and transition requirements in Update 2016-02. For entities that have adopted Topic 842 before the issuance of this Update, the transition and effective date of the amendments related to separating components of a contract in this Update are as follows: 1. The practical expedient may be elected either in the first reporting period following the issuance of this Update or at the original effective date of Topic 842 for that entity. 2. The practical expedient may be applied either retrospectively or prospectively. All entities, including early adopters, that elect the practical expedient related to separating components of a contract in this Update must apply the expedient, by class of underlying asset, to all existing lease transactions that qualify for the expedient at the date elected.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments apply to reporting entities that are required to make disclosures about recurring or nonrecurring fair value measurements and should improve the cost, benefit, and effectiveness of the disclosures. ASU 2018-13 categorized the changes into those disclosures that were removed, those that were modified, and those that were added. The primary disclosures that were removed related to transfers between Level 1 and Level 2 investments, along with the policy for timing of transfers between levels. In addition, disclosing the valuation processes for Level 3 fair value measurements was removed. The amendments are effective for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company notes that this guidance will impact its disclosures beginning January 1, 2020.
F-30
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2020, and interim periods within annual periods beginning after December 15, 2021. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In November 2018, the FASB issued ASU 2018-18 “Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606”. The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) adds unit-of-account guidance in ASC 808 to align with guidance in ASC 606, and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The Company is currently evaluating this guidance to determine the impact it may have on its 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 4 – PROPERTY AND EQUIPRMNET, NET
Property and equipment, net, consisted of the following:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Office Equipment | $ | 9 | $ | 17 | ||||
| Less—accumulated depreciation | (4 | ) | (4 | ) | ||||
| $ | 5 | $ | 13 | |||||
Depreciation expenses were $1 and $2 in the years ended December 31, 2019 and 2018, respectively.
NOTE 5 – OTHER ACCOUNTS LIABILITIES
| December 31, 2019 | December 31, 2018 | |||||||
| Settlements payable | $ | - | $ | 1,029 | ||||
| Accrued expenses and other liabilities | 201 | 564 | ||||||
| Accrued salaries and wages | 540 | 967 | ||||||
| Total | $ | 741 | $ | 2,560 | ||||
F-31
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 6 – RELATED PARTY TRANSACTIONS
The Company has had extensive dealings with related parties including those in which our Chief Executive Officer holds a significant ownership interest as well as an executive position during the years ended December 31, 2019 and 2018. Due to our operational losses, the Company has relied to a large extent on funding received from Next Communications, Inc., an organization in which our Chief Executive Officer and Chairman holds a controlling equity interest and holds an executive position. During the first calendar quarter of 2017, Next Communications, Inc. filed for bankruptcy protection. As a result, the related party payable is being handled by a court appointed trustee as an asset of Next Communications, Inc. and the Company may need to begin repaying the amounts due on a more fixed schedule On January 29, 2019, the United States Bankruptcy Court Southern District of Florida, Miami Division, approved a plan of reorganization for Next Communications, Inc. whereby the Company would pay $600,000 to a specific creditor in consideration for the forgiveness of the balance of the related party payable balance. On March 5, 2019, Cuentas paid $60,000 to the trust account of the specific creditor and on May 10, 2019, the Company paid $550,000 to the trust account of the specific creditor per the order and satisfied its obligation under the Approved Plan of the Reorganization for Next Communications, Inc., that was approved by the United States Bankruptcy Court Southern District of Florida, Miami Division, on January 29, 2019.
Related parties balances at December 31, 2019 and December 31, 2018 consisted of the following:
Due from related parties
| December 31, 2019 | December 31, 2018 | |||||||
| (dollars in thousands) | ||||||||
| (a) Glocal Payments Solutions Inc. (d/b/a Glocal Card Services) | - | 36 | ||||||
| (f) Next Cala 360 | 54 | - | ||||||
| Total Due from related parties | 54 | 36 | ||||||
Related party payables, net of discounts
| December 31, 2019 | December 31, 2018 | |||||||
| (dollars in thousands) | ||||||||
| (b) Due to Next Communications, Inc. (current) | $ | 10 | $ | 2,972 | ||||
| (c) Due to Asiya Communications SAPI de C.V. (current) | - | 26 | ||||||
| (d) Michael De Prado (current) | - | 100 | ||||||
| (e) Orlando Taddeo | - | 2,613 | ||||||
| (f) Next Cala 360 (current) | - | 14 | ||||||
| Total Due from related parties | $ | 10 | $ | 5,725 | ||||
| (a) | Glocal Payments Solutions Inc. (d/b/a Glocal Card Services) is the Company’s partner in the NextGlocal Inc. Next Glocal Inc. was dissolved on September 27, 2019. |
| (b) | Next Communication, Inc. is a corporation in which the Company’s Chief Executive Officer a controlling interest and serves as the Chief Executive Officer. See disclosure above regarding payments by the Company in connection with the bankruptcy of Next Communication, Inc.. |
| (c) | Asiya Communications SAPI de C.V.is a telecommunications company organized under the laws of Mexico, in which the Company’s Chief Executive Officer holds a substantial interest and is involved in active management. |
| (d) | Michael De Prado is the Company’s President. On February 28, 2019, the Company issued 66,402 shares of its Common Stock in settlement of this debt. |
| (e) | Represents the amount due to Orlando Taddeo from the Limecom Acquisition. |
| (f) | Next Cala 360, is a Florida corporation established and managed by the Company’s Chief Executive Officer. |
During the twelve months period ended December 31, 2019, the Company recorded interest expense of $67, using an interest rate equal to that on the outstanding convertible notes payable as imputed interest on the related party payable due to Next Communications. During the year ended December 31, 2018, the Company recorded interest expense of $237 using an interest rate equal to that on the outstanding convertible notes as imputed interest on the related party payable due to Next Communications. The interest was immediately forgiven by the related party and recorded to additional paid in capital.
F-32
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
Trade Accounts Receivable, Related Parties
The Company had no outstanding accounts receivable from any related parties as of December 31, 2019. The Company had outstanding accounts receivable of $3,006 from related parties as of December 31, 2018 of which $2,989 was due from Rubelite- C (which is a related to one the Company’s shareholders of the Company and a former owner of Limecom), $8 was due from Next Cala 360 and $39 was due from Asiya Communications SAPI de C.V. The accounts receivable was recorded as a result of the sale of wholesale telecommunications minutes to these entities.
Revenues (Related Parties)
The Company made sales to and generated revenues from related parties of $0 and $49,667 during the years ended December 31, 2019 and 2018, respectively, as itemized below:
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Next Communications, Inc. | - | 14,310 | ||||||
| VTX Corporation (a) | - | 11,890 | ||||||
| Airtime Sp.z.o.o. | - | 5,095 | ||||||
| Asiya Communications SAPI de C.V. | - | 15,383 | ||||||
| RUBELITE - C (a) | - | 2,989 | ||||||
| Total | - | 49,667 | ||||||
| (a) | Corporations that are owned by one of the Company’s shareholders and a former owner of Limecom |
Costs of Revenues (Related Parties)
The Company made purchases from related parties totaling $0 and $59,217 during the years ended December 31, 2019 and 2018, respectively, as itemized below:
| For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Next Communications, Inc. | - | 14,310 | ||||||
| VTX Corporation | - | 24,017 | ||||||
| Airtime Sp.z.o.o. | - | 5,529 | ||||||
| Asiya Communications SAPI de C.V. | - | 15,361 | ||||||
| Total | - | 59,217 | ||||||
Employment Agreement
On December 27, 2019, the Compensation Committee of the Board of the Company approved the amendments to the employment agreements with each of Arik Maimon and Michael De Prado. The New Employment Agreements shall supersede the terms of the Pre-existing Employment Agreements. Pursuant to the terms of the New Employment Agreements, among other things:
| (1) | Michael De Prado will receive the following compensation: (1) (a) a base salary of $265 per annum which will increase by a minimum $15 or 5% on the 12 month anniversary of his employment agreement; (b) Restricted Stock Units; (c) a minimum grant of 100,000 stock options per year, with the exercise price valued based on the Company’s stock price at the date of exercise, pursuant to the terms and conditions of the Company’s Stock Option Incentive Plan; (d) an $8,000 automobile expense allowance per year; (e) participation in the Company’s employee benefits plan; (f) participation in the Company’s Performance Bonus Plan, if and when in effect. |
| (2) | Arik Maimon will receive the following compensation: (a) a base salary of $295per annum which will increase by a minimum $15or 5% on the 12 month anniversary of his employment agreement; (b) Restricted Stock Units; (c) a minimum grant of 100,000 stock options per year, with share price valued at the date of exercise, pursuant to the terms and conditions of the Company’s Stock Option Incentive Plan; (d) An $10 automobile expense allowance per year; (e) participation in the Company’s employee benefits plan; (f) participation in the Company’s Performance Bonus Plan, if and when in effect. |
| (3) | Each of De Prado and Maimon will be employed for an initial term of five years which will automatically renew for successive one-year period unless either party terminates the New Employment Agreements with 90 days’ prior notice. |
F-33
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
| (4) | Upon the successful up-listing of the Company’s shares of common stock, par value $0.001 per share, to the Nasdaq Stock Market (“Nasdaq”), each executive would be entitled to receive a $250 bonus; |
| (5) | De Prado will be granted of 88,000 stock options and Maimon will be granted 110,000 stock options with the right to exercise the options to purchase the equivalent of a minimum of 4% and 5% of the Company’s issued and outstanding shares of Common Stock as of July 1, 2019, respectively; |
| (6) | Pursuant to the terms of the New Employment Agreements, the Executives are entitled to severance in the event of certain terminations of his employment. The Executives are entitled to participate in the Company’s employee benefit, pension and/or profit-sharing plans, and the Company will pay certain health and dental premiums on their behalf. |
| (7) | Each of the Executives are entitled to Travel and expense reimbursement; |
| (8) | The Executives have agreed to a one-year non-competition agreement following the termination of their employment. |
NOTE 7 – STOCK OPTIONS
The following table summarizes all stock option activity for the year ended December 31, 2019:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2018 | 162,044 | $ | 16.09 | |||||
| Granted | 50,000 | 2.09 | ||||||
| Forfeited | - | - | ||||||
| Outstanding, December 31, 2019 | 212,044 | $ | 12.79 | |||||
The following table discloses information regarding outstanding and exercisable options at December 31, 2019:
| 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 | |||||||||||||||||
| $ | 54.00 | 25,000 | $ | 54.00 | 0.25 | 25,000 | $ | 54.00 | ||||||||||||||
| 21.00 | 47,044 | 21.00 | 1.49 | 47,044 | 21.00 | |||||||||||||||||
| 3.00 | 90,000 | 3.00 | 4.71 | 60,000 | 3.00 | |||||||||||||||||
| 2.09 | 50,000 | 2.09 | 2.24 | 50,000 | 2.09 | |||||||||||||||||
| 212,044 | $ | 12.79 | 1.39 | 182,044 | $ | 14.40 | ||||||||||||||||
The following table summarizes all stock option activity for the year ended December 31, 2018:
| Shares | Weighted- Average Exercise Price Per Share | |||||||
| Outstanding, December 31, 2017 | 105,378 | $ | 39.27 | |||||
| Granted | 90,000 | 3.00 | ||||||
| Forfeited | (33,334 | ) | 54.00 | |||||
| Outstanding, December 31, 2018 | 162,044 | $ | 16.09 | |||||
F-34
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
The following table discloses information regarding outstanding and exercisable options at December 31, 2018:
| 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 | |||||||||||||||||
| $ | 54.00 | 25,000 | $ | 54.00 | 1.25 | 25,000 | $ | 54.00 | ||||||||||||||
| 21.00 | 47,044 | 21.00 | 1.49 | 47,044 | 21.00 | |||||||||||||||||
| 3.00 | 90,000 | 3.00 | 4.71 | 30,000 | 3.00 | |||||||||||||||||
| 162,044 | $ | 16.09 | 2.73 | 102,044 | $ | 23.79 | ||||||||||||||||
On March 21, 2019, the Company issued 50,000 options to its Chief Financial Office. The options carry an exercise price of $2.09 per share. All the options were vested immediately. The Options are exercisable until March 20, 2024. The Company has estimated the fair value of such options at a value of $103 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
| Common stock price | 2.09 | |||
| Dividend yield | 0 | % | ||
| Risk-free interest rate | 2.18 | % | ||
| Expected term (years) | 5 | |||
| Expected volatility | 281 | % |
On September 13, 2018, the Company issued 60,000 options to its President and Chief Executive Office. The options carry an exercise price of $3 per share. A third of the options vested immediately with the remaining vesting over the course of two years. The Options are exercisable until September 12, 2023. The Company has estimated the fair value of such options at a value of $302 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
| Common stock price | 5.05 | |||
| Dividend yield | 0 | % | ||
| Risk-free interest rate | 2.87 | % | ||
| Expected term (years) | 5 | |||
| Expected volatility | 374.26 | % |
On September 13, 2018, the Company issued 30,000 options to its member of the Board. The options carry an exercise price of $3 per share. Third of the options vested immediately with the remaining vesting over the course of two years. The Options are exercisable until September 12, 2023. The Company has estimated the fair value of such options at a value of $151 at the date of issuance using the Black-Scholes option pricing model using the following assumptions:
| Common stock price | 5.05 | |||
| Dividend yield | 0 | % | ||
| Risk-free interest rate | 2.87 | % | ||
| Expected term (years) | 5 | |||
| Expected volatility | 374.26 | % |
During the year ended December 31, 2019, the Company recorded an option-based compensation expense of $218, leaving an unrecognized expense associated with these grants of $120 as of December 31, 2019.
During the year ended December 31, 2018, the Company recorded an option-based compensation expense of $218, leaving an unrecognized expense associated with these grants of $235 as of December 31, 2018.
F-35
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 8 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has 10,000,000 shares of Preferred Stock designated as Series B issued and outstanding. The Series B Preferred Stock is not convertible into Common Stock at any time and is not entitled to dividends of any kind or liquidation, dissolution rights of any kind. The holders of Series B Preferred Stock shall be entitled to 1,000 votes for each share of Series B Stock that is held when voting together with holders of the Common Stock.
Common Stock
Effective November 20, 2015 the Company amended its Articles of Incorporation to decrease the common shares authorized from 9,500,000,000 to 360,000,000 with a par value of $0.001.
Common Stock Activity During the Year Ended December 31, 2019
The following summarizes the Common Stock activity for the year ended December 31, 2019:
| Summary of Common Stock activity for the year ended December 31, 2019 | Outstanding shares | |||
| Balance, December 31, 2018 | 1,588,942 | |||
| Shares issued for Common Stock subscriptions | 441,645 | |||
| Shares issued due to conversion of Convertible Promissory Note | 2,090,811 | |||
| Shares issued for services | 100,334 | |||
| Shares issued due to the rescission of Limecom acquisition | 107,910 | |||
| Shares issued as settlement of debt | 309,497 | |||
| Balance, December 31, 2019 | 4,639,139 | |||
On January 31, 2019, the Company issued 16,667 shares of Common Stock pursuant to a securities purchase agreement dated September 21, 2018 (the “Subscription Date”). The fair market value of the shares at the Subscription Date was $50,000.
On January 31, 2019, the Company received $50 under a private placement of equity and issued 16,667 shares of its Common Stock and warrants to purchase up to 16,667 shares of its Common Stock at an exercise price equal to $3.25 per share under a private placement of securities which closed on December 13, 2018.
On January 31, 2019, the Company issued 17,333 shares of Common Stock pursuant to a securities purchase agreement. The fair market value of the shares at the Subscription Date was $50.
On January 31, 2019, the Company issued 107,910 shares of Common Stock to Heritage and its officers under the Amendment to rescind the Company’s option to sell the stock in Limecom back to Heritage.
On February 12, 2019, the Company issued warrants to purchase up to 35,834 shares of its Common Stock at an exercise price equal to $3.25 per share under the October 25, 2018 private placement.
On February 28, 2018, the Company issued 309,497 shares of Common Stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $464.
On February 28, 2019, the Company signed a binding term sheet (the “Optima Term Sheet”) with Optima Fixed Income LLC (“Optima”) for a total investment of $2,500over one year and received $500on the same date. Under the Optima Term Sheet, it was agreed that the initial invested amount would be $500in consideration for 166,667 shares of Common Stock of the Company. These shares will be issued in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act. It was also agreed that Optima may purchase a convertible note in the amount principle of $2,000, which may be funded on a quarterly basis (the “Optima Convertible Note”). The term of the Optima Convertible Note is three years and it is convertible at a price per share that is equal to 75% of the public share price at date of conversion, but in any case, not less than $3.00 per share. Optima will additionally be granted a proxy to vote with the Company’s Series B Preferred shares, par value $0.001 per share (the “Preferred Stock”) held by the Company’s Chief Executive Officer and President. In any case, the total investment in the Company shall be not be less than 25% of the outstanding shares at the first anniversary of the Optima Term Sheet.
F-36
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
On May 11, 2019, Optima made an additional deposit of $550.
On May 28, 2019 Optima made an additional deposit of $200. On July 30, 2019 Optima assigned its rights under the Optima Term Sheet to Dinar Zuz LLC (“Dinar Zuz”). On the same date, the Company and Dinar Zuz executed a subscription agreement with the same terms as reflected in the Optima Term Sheet, as amended. Under the subscription agreement, Dinar Zuz made an additional deposit of $250and agreed to provide an additional amount of $1,000 to the Company, which will be provided in a form of a convertible note at the following dates:
| Date | Amount | |||
| 10/26/2019 | $ | 500 | ||
| 01/26/2020 | $ | 500 | ||
On August 12, 2019, the Company issued Dinar Zuz 500,000 shares of its Common Stock pursuant to a securities purchase agreement dated July 30, 2019.
On July 18, 2019, the Company issued 65,978 shares of its Common Stock pursuant to a securities purchase agreement dated October 25, 2018.
On September 11, 2019, the Company issued 25,000 shares of its Common Stock pursuant to a service agreement dated May 16, 2019. The fair market value of the shares at the issuance date was $49.
On September 11, 2019, the Company issued 10,000 shares of its Common Stock pursuant to a service agreement dated April 17, 2019. The fair market value of the shares at the issuance date was $20.
On September 18, 2019, the Company issued 61,226 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018.
On September 24, 2019, the Company issued 62,248 shares of its Common Stock in gross consideration of $62and net consideration of $54 pursuant to a securities purchase agreement dated September 23, 2019.
On October 1, 2019, the Company issued 34,859 shares of its Common Stock in gross consideration of $34 and net consideration of $32 pursuant to a securities purchase agreement dated September 27, 2019 between the Company and a private investor.
On October 23, 2019, Dinar Zuz provided an additional amount of $250 to the Company in form of a convertible note pursuant to a securities purchase agreement which the Company and Optima entered on July 30, 2019.
On November 5, 2019 our Compensation Committee approved an issuance 200,000 Shares of Common Stock of the Company for certain employees of the Company at January 1, 2020 pursuant to the Company’s Share and Options Incentive Enhancement Plan (2016) (the “2016 Incentive Plan). The shares will have 3 years vesting period which third will be vested at January 1, 2020, third will be vested on December 31, 2021 and the third will be vested on December 31, 2022. The Company has estimated the fair value of such shares at $1,140.
On December 31, 2019, the Company issued 65,334 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $372.
On December 31, 2019 and pursuant to the CIMA Convertible Promissory Note, CIMA exercised its option to convert the Convertible Promissory Note into 1,757,478 shares of Common Stock of the Company.
F-37
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 9 – CUSTOMER CONCENTRATION
The Company did not have any one customer account for more than 10% of its revenues during the year ended December 31, 2019.As of December 31, 2018, three separate customers accounted for approximately 56% of the Company’s total accounts receivable.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
On February 12, 2018, the Company was served with a complaint from Viber Media, Inc. (“Viber”) for reimbursement of attorney’s fees and costs totaling $528 arising from a past litigation with Viber. The Company is vigorously defending their rights in this case as we believe this demand is premature as litigation is ongoing. The Company has no accrual related to this complaint as of December 31, 2018 given the premature nature of the motion.
On July 6, 2017, the Company received notice an existing legal claim against Accent InterMedia (“AIM”) had been amended to include claims against the Company. The claims brought against the Company include failure to comply with certain judgments for collection of funds by the plaintiff while having a controlling interest in AIM via its ownership of Transaction Processing Products (“TPP”). On April 17, 2019, the Company entered into a settlement agreement (the “SVS Settlement Agreement”) with Comdata, Inc. d/b/a Stored Value Solutions (“SVS”) whereby the Company will pay a total of $37 over 7 months, starting July 1, 2019. Only in the event that the Company defaults by failing to make timely payments, SVS may file in Kentucky for the judgment of $70. As of December 31, 2019, the Company paid $25 the stipulated amount in accordance with the SVS Settlement Agreement (See note 12).
On December 20, 2017, a Complaint was filed by J. P. Carey Enterprises, Inc., alleging a claim for $473 related to the Franjose Yglesias-Bertheau filed lawsuit against PLKD listed above. Even though the Company made the agreed payment of $10 on January 2, 2017 and issued 12,002 shares as conversion of the $70 note as agreed in the settlement agreement, the Plaintiff alleges damages which the Company claims are without merit because they received full compensation as agreed. The Company is in the process of defending itself against these claims. On January 29, 2019, the Company was served with a complaint by J.P. Carey Enterprises, Inc., (“JP Carey”) which was filed in Fulton County, Georgia claiming similar issues as to the previous complaint, with the new claimed damages totaling $1,108. The Company has hired an attorney and feels these claims are frivolous and is defending the situation vigorously.
On September 28, 2018, the Company was notified of a complaint filed against it by a former supplier. The Company has not yet received formal service of the complaint and is awaiting such service at which time it can fully assess the complaint. The Company has not accrued any losses as of December 31, 2018 related to the complaint given the early nature of the process.
On November 7, 2018, the Company was served with a complaint by IDT Domestic Telecom, Inc. vs the Company and its subsidiary Limecom, Inc. for telecommunications services provided to the Subsidiary during 2018 in the amount of $50. The Company has no accrual as of December 31, 2019 related to the complaint given the early nature of the process. The Company intends to file a motion to dismiss the Company as a defendant since the Company has no contractual relationship with the plaintiff.
On May 1, 2019, the Company received a Notice of Demand for Arbitration (the “Demand”) from Secure IP Telecom, Inc. (“Secure IP), who allegedly had a Reciprocal Carrier Services Agreement (RCS) exclusively with Limecom and not with Cuentas. The Demand originated from a Demand for Arbitration that Secure IP received from VoIP Capital International (“VoIP”) in March 2019, demanding $1,053 in damages allegedly caused by unpaid receivables that Limecom assigned to VoIP based on the RCS. The Company will vigorously defend its position to be removed as a named party in this action due to the fact that Cuentas rescinded the Limecom acquisition on January 30, 2019.
The Company executed a lease for office space effective November 1, 2019. The lease requires monthly rental payments of $6.
F-38
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
NOTE 11 – INCOME TAXES
Effective December 22, 2017 a new tax bill was signed into law that reduced the federal income tax rate for corporations from 35% to 21%. The new bill reduced the blended tax rate for the Company from 39.50% to 26.50%. Under ASC 740, the effects of new tax legislation are recognized in the period which includes the enactment date. As a result, the deferred tax assets and liabilities existing on the enactment date must be revalued to reflect the rate at which these deferred balances will reverse. The corresponding adjustment would generally affect the Income Tax Expense (Benefit) shown on the financial statements. However, since the company has a full valuation allowance applied against all of its deferred tax asset, there is no impact to the Income Tax Expense for the year ending December 31, 2019.
IRC Section 382 potentially limits the utilization of NOLs and tax credits when there is a greater than 50% change of ownership. The Company has not performed an analysis under IRC 382 related to changes in ownership, which could place certain limits on the company’s ability to fully utilize its NOLs and tax credits. The Company’s has added a note to its financial statements to disclose that there may be some limitations and that an analysis has not been performed. In the interim, the Company has placed a full valuation allowance on its NOLs and other deferred tax items.
We recognized income tax benefits of $0 during the years ended December 31, 2019 and 2018. When it is more likely than not that a tax asset will not be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.
The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended December 2019 or 2018 applicable under FASB ASC 740. We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open.
Reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to income of the Company and the actual tax expense as reported in the Statement of Operations, is as follows:
| Year ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Loss before taxes, as reported in the consolidated statements of operations | $ | 1,286 | $ | 3,585 | ||||
| Federal and State statutory rate | 26.5 | % | 26.5 | % | ||||
| Theoretical tax benefit on the above amount at federal statutory tax rate | 341 | 950 | ||||||
| Losses and other items for which a valuation allowance was provided or benefit from loss carry forward | (341 | ) | (950 | ) | ||||
| Actual tax income (expense) | - | - | ||||||
| 2019 | 2018 | |||||||
| U.S. dollars in thousands | ||||||||
| Deferred tax assets: | ||||||||
| Net operating loss carry-forward | $ | 1,830 | $ | 2,015 | ||||
| Adjustments | (163 | ) | (578 | ) | ||||
| Valuation allowance | (1,667 | ) | (1,437 | ) | ||||
| $ | - | $ | - | |||||
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management has determined, based on its recurring net losses, lack of a commercially viable product and limitations under current tax rules, that a full valuation allowance is appropriate.
F-39
CUENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share data)
| U.S. dollars in thousands | ||||
| Valuation allowance, December 31, 2018 | $ | 1,437 | ||
| Increase due to the recession of the acquisition of Limecom | 192 | |||
| Increase | 38 | |||
| Valuation allowance, December 31, 2019 | $ | 1,667 | ||
The net federal operating loss carry forward will begin expire in 2039. This carry forward may be limited upon the consummation of a business combination under IRC Section 382.
NOTE 12 – SUBSEQUENT EVENTS
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.
On January 3, 2020 Dinar Zuz provided an additional amount of $300 to the Company which was be provided in a form of the Optima Convertible Note pursuant to a securities purchase agreement between the Company and Optima, dated July 30, 2019. Additionally, on January 3, 2020, the Company issued 100,000 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $300.
On January 9, 2020, the Company issued 40,000 shares of its Common Stock pursuant to a service Agreement between the Company and a service provider, dated June 3, 2019. The fair market value of the shares at the issuance date was $240.
On January 14, 2020, the Company issued 66,334 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The fair market value of the shares was $459.
On January 14, 2020, the Company issued 58,334 shares of Common Stock to employees. All shares were issued pursuant to the Company’s Share and Options Incentive Enhancement Plan (2016). The Company has estimated the fair value of such shares at $332.
On January 24, 2020, the Company received a Corrected Notice of Hearing regarding Qualtel SA de CV, a Mexican Company vs Next Communications, Inc. for a “Plaintiff’s Motion for Order to Show Cause and/or for Contempt as to Non-Party, Cuentas, Inc.” The Company retained a counsel and will vigorously defend its position.
On February 7, 2020 Dinar Zuz provided an additional amount of $450 to the Company which was be provided in a form of the Dinar Zuz Convertible Note pursuant to a securities purchase agreement between the Company and Dinar Zuz, dated July 30, 2019.
On February 13, 2020, the Company completed the payments in accordance with the SVS Settlement Agreement and the case was dismissed.
On February 10, 2019, the Company issued 10,000 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018.
On March 3, 2020 the Company issued 1,157,478 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $700.
F-40
You should rely only on the information contained in this prospectus. No dealer, salesperson or other person is authorized to give information that is not contained in this prospectus. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of these securities.
Through and including , 2020 (the 25th day after the commencement of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus.
$6,000,000
769,231 Units
PROSPECTUS
, 2020
Book-Running Manager
Maxim Group LLC
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses in connection with this registration statement. All of such expenses are estimates, other than the filing fees payable to the Securities and Exchange Commission and to FINRA.
| Amount to be paid | ||||
| SEC registration fee | $ | 1,580.86 | ||
| FINRA filing fee | $ | 2,673.50 | ||
| The Nasdaq Capital Market initial listing fee | $ | 5,000.00 | ||
| Transfer agent and registrar fees | $ | 2,000.00 | ||
| Accounting fees and expenses | $ | 10,000.00 | ||
| Legal fees and expenses | $ | 840,000.00 | ||
| Printing and engraving expenses | $ | 15,000.00 | ||
| Total | $ | 876,254.36 | ||
Item 14. Indemnification of Directors and Officers
Our Articles of Incorporation and Bylaws both provide for the indemnification of our officers and directors to the fullest extent permitted by the Florida law.
Item 15. Recent Sales of Unregistered Securities
All share and per share information in this section reflects a proposed reverse stock split of the authorized and outstanding common stock at an anticipated ratio of 2-for-1 to occur immediately following the effective date but prior to the closing of the offering.
On January 9, 2018, the Company issued 5,742 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 12, 2018, the Company issued 1,000 shares of its Common Stock to a note holder in connection with outstanding convertible note payable and convertible accrued interest on convertible notes payable in accordance with a settlement agreement. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On February 7, 2018, the Company issued 19,048 shares of its Common Stock pursuant to a common stock subscription. The fair market value of the shares at the subscription date was $400,000. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 11, 2018, the Company issued 1,084 shares of its Common Stock to a note holder in connection with outstanding convertible note payable and convertible accrued interest on convertible notes payable in accordance with a settlement agreement. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 27, 2018, the Company issued 6,667 shares of its Common Stock to a consultant, pursuant to a consulting agreement dated September 18, 2018, in consideration for consulting services. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
II-1
On September 27, 2018, the Company issued 30,501 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
During 2018, the Company entered into various securities purchase agreement to issue 73,335 shares of Common Stock in consideration of $440,000. One of the purchasers is the Company’s President and CEO who purchased 8,334 shares. Another purchaser is a current shareholder which controlled by the former owner of Limecom (a fully subsidiary of the Company), who purchased 8,334 shares. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On October 25, 2018, the Company received $108,000 under a private placement of securities closed on October 25, 2018 and issued 17,917 shares of its Common Stock. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On November 20, 2018 and November 28, 2018, the Company received $100,000 under a private placement of securities closed on December 13, 2018 and issued 18,334 shares of its Common Stock and warrants to purchase up to 18,334 shares of its Common Stock at an exercise price equal to $6.50 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
During December, 2018, the Company received $248,000 under a private placement of and issued 41,334 shares of its Common Stock and warrants to purchase up to 41,334 shares of its Common Stock at an exercise price equal to $6.50 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On December 13, 2018, the Company issued 15,001 shares of its Common Stock for the consideration of $90,000 which it received of under the Securities Purchase Agreement which it entered on September 21st, 2018. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On December 28, 2018, the Company issued 67,164 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 31, 2019, the Company issued 8,334 shares of its Common Stock pursuant to a Common Stock subscription. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 31, 2019, the Company received $50,000 under a private placement of and issued 8,334 shares of its Common Stock and warrants to purchase up to 8,334 shares of its Common Stock at an exercise price equal to $6.50 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 31, 2019, the Company issued 8,667 shares of its Common Stock pursuant to a Common Stock subscription. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 31, 2019, the Company issued 53,955 shares of Common Stock to Heritage and its officers under the Amendment to rescind the Company’s option to sell the stock in Limecom back to Heritage. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On February 12, 2019, the Company issued warrants to purchase up to 17,917 shares of its Common Stock at an exercise price equal to $6.50 per share required by the anti-dilution provisions under the October 25, 2018 private placement. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On February 28, 2018, the Company issued 154,749 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
II-2
On February 28, 2019, The Company signed the Optima Term Sheet for a total investment of $2,500,000 over one year and received the first deposit of $500,000 on the same date. Under the Optima Term Sheet, it was agreed that the initial invested amount of $500,000 will in consideration for 83,334 shares of Common Stock of the Company. It was also agreed that Optima may purchase the Optima Convertible Note in the amount of $2,000,000, which may be funded on a quarterly basis. The term of the Optima Convertible Note shall be three years and it may be converted at a price per share equal to 75% of the public per share price on the date of conversion, but in any case, not less than $6 per share. Optima will additionally get a proxy to vote with the Controlling Shareholders of the Company’s par value $0.001 per Series B Preferred share (the “Preferred Stock”) held by the Company’s Chief Executive Officer and President. The total investment in the Company shall be not be less than 25% of the outstanding shares at the first anniversary of the Optima Term Sheet. On May 10, 2019, the Company signed the First Amendment to the Optima Term Sheet with Optima Where Optima will make an additional deposit of $550,000 to the Company and that additional deposit will be provided to the Company in the form of a Convertible Note as discussed above. It was also agreed that Optima will provide an additional amount of $1,450,000 to the Company which will be provided in a form of a Convertible Note pursuant to the following schedule:
| Date | Amount | |||
| 05/28/2019 | $ | 200,000 | ||
| 08/28/2019 | $ | 500,000 | ||
| 11/28/2019 | $ | 500,000 | ||
| 02/28/2020 | $ | 250,000 | ||
All the other terms and conditions of the Optima Term Sheet, will remain in full force and effect. On May 11, 2019 the Company received a second deposit of $550,000 and on May 28, 2019 the Company received a third deposit of $200,000.
On July 18, 2019, the Company issued 32,989 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On July 30, 2019, Optima assigned its rights under the Optima Term Sheet to Dinar Zuz. On the same date, the Company and Dinar Zuz executed the Dinar Subscription Agreement with the same terms as reflected in the Optima Term Sheet and its First Amendment. Under the Dinar Subscription Agreement, Dinar Zuz made an additional deposit of $250,000 and agreed to provide an additional amount of $1,000,000 to the Company which will be provided in a form of a Convertible Note pursuant to the following schedule:
| Date | Amount | |||
| 10/26/2019 | $ | 500,000 | ||
| 01/26/2020 | $ | 500,000 | ||
On August 12, 2019, the Company issued 83,333 shares of its Common Stock to Dinar Zuz pursuant to a securities purchase agreement entered into between the Company and Dinar Zuz on July 30, 2019. Additionally, the Company issued 166,667 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $1,000,000. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 11, 2019, the Company issued 12,500 shares of its Common Stock pursuant to a service Agreement between the Company and a service provider, dated May 16, 2019. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 11, 2019, the Company issued 5,000 shares of its Common Stock pursuant to a service agreement dated April 17, 2019 between the Company and a service provider. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 18, 2019, the Company issued 30,613 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
II-3
On September 24, 2019, the Company issued 31,124 shares of its Common Stock in gross consideration of $62,000 and net consideration of $54,000 pursuant to a securities purchase agreement between the Company and a private investor, dated September 23, 2019. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On October 1, 2019, the Company issued 17,430 shares of its Common Stock in gross consideration of $34,000 and net consideration of $32,000 pursuant to a securities purchase agreement dated September 27, 2019 between the Company and a private investor. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On October 23, 2019, Dinar Zuz provided an additional amount of $250,000 to the Company which was be provided in a form of the Optima Convertible Note pursuant to a securities purchase agreement between the Company and Optima, dated July 30, 2019.
On November 5, 2019, our Compensation Committee approved an issuance 100,000 shares of Common Stock of the Company for certain employees of the Company at January 1, 2020 pursuant to the Company’s Share and Options Incentive Enhancement Plan (2016) (the “2016 Incentive Plan). The shares will have 3 years vesting period which third will be vested at January 1, 2020, third will be vested on December 31, 2021 and the third will be vested on December 31, 2022. On January 14, 2020, the Company issued 29,167 shares of Common Stock to employees. All shares were issued pursuant to the Company’s Share and Options Incentive Enhancement Plan (2016). The Company has estimated the fair value of such shares at $332,000. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On December 31, 2019, the Company issued 32,667 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On December 31, 2019 and pursuant to the CIMA Convertible Promissory Note, CIMA exercised its option to convert the Convertible Promissory Note into 878,739 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 January 3, 2020, Dinar Zuz provided an additional amount of $300,000 to the Company which was be provided in a form of the Dinar Zuz Convertible Note pursuant to a securities purchase agreement between the Company and Dinar Zuz, dated July 30, 2019. Additionally, on January 3, 2020, the Company issued 50,000 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $300,000. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 9, 2020, the Company issued 20,000 shares of its Common Stock pursuant to a service Agreement between the Company and a service provider, dated June 3, 2019. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On January 14, 2020, the Company issued 62,334 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On February 10, 2020, the Company issued 5,000 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On March 3, 2020 Dinar Zuz provided an additional amount of $450,000 to the Company which was be provided in a form of the Dinar Zuz Convertible Note pursuant to a securities purchase agreement between the Company and Dinar Zuz, dated July 30, 2019. Additionally, on March 3, 2020 the Company issued 878,739 shares of its Common Stock to Dinar Zuz LLC, as a result of a conversion of the Dinar Convertible Note in the amount of $700,000. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
II-4
On April 2, 2020, the Company issued 35,000 shares of its Common Stock pursuant to a securities purchase agreement between the Company and a private investor, dated October 25, 2018. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On May 22, 2020, the Company issued 21,410 shares of its Common Stock pursuant to a cashless conversion of warrants to purchase up to 36,540 shares of its Common Stock at an exercise price equal to $6.50 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On August 20, 2020, the Company issued 25,000 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On August 27, 2020, the Company converted all the outstanding shares of Series B Preferred Stock, par value $0.001 per share to 5,000,000 shares of the Company’s Common Stock, par value $0.001 per share in connection with the Company’s Amended and Restated Articles of Incorporation which was adopted on August 17, 2020 to cause all outstanding shares of Series B Preferred Stock, par value $0.001 per share to be converted into shares of the Company’s Common Stock, par value $0.001 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On August 20, 2020, the Company issued 25,000 shares of its Common Stock pursuant to a settlement of stock-based liabilities. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 17, 2020, the Company issued 2,500,000 of its Common Stock par value $0.001 per share to each of Dinar Zuz and CIMA Telecom Inc., Under a warrant dated December 31, 2019. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
On September 17, 2020, the Company issued 70,906 shares of its Common Stock pursuant to promissory note, dated September 15, 2020. The fair market value of the shares at the issuance date was $350,000. Out of those, 16,500 shares of Common Stock were issued in consideration of Commitment fee and the balance are subject to return to the Company once the promissory note will be paid in full. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
Under the Labrys Note, the Company issued a self-amortization promissory note of the Company to Labrys in a sum of $605,000, consisting of $544,500.00 plus an original issue discount in the amount of $60,500 at an interest rate of 12% per annum convertible into shares of Common Stock, as well as 70,906 shares of Common Stock as Commitment Shares in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated by the SEC. In the event of a default, as defined in the Labrys Note, Labrys has 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 September 30, 2020, the Company issued 50,000 of its Common Stock to a private investor in consecration of cancellation of warrants to purchase up to 49,667 shares of its Common Stock at an exercise price equal to $6.50 per share. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.
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Item 16. Exhibits and Financial Statement Schedules
| * | Previously filed. |
| ** | Filed herewith. |
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Item 17. Undertakings
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
| i. | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement. |
| iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
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(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(5) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(6) The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§ 230.424 of this chapter); |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 17th day of December, 2020.
| CUENTAS INC. | |||
| By: | /s/ Arik Maimon | ||
| Name: | Arik Maimon | ||
| Title: | Chief Executive Officer | ||
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Arik Maimon | Chief Executive Officer and Director | December 17, 2020 | ||
| Arik Maimon | (Principal Executive Officer) | |||
| /s/ Ran Daniel | Chief Financial Officer | December 17, 2020 | ||
| Ran Daniel | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Michael De Prado | President and Director | December 17, 2020 | ||
| Michael De Prado | ||||
| * | Director | December 17, 2020 | ||
| Adiv Baruch | ||||
| * | Director | December 17, 2020 | ||
| Richard J. Berman | ||||
| * | Director | December 17, 2020 | ||
| Yochanon Bruk |
| *By: | /s/ Arik Maimon | ||
| Arik Maimon, Attorney-in-fact |
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Exhibit 1.1
CUENTAS, INC.
UNDERWRITING AGREEMENT
, 2020
MAXIM
GROUP LLC
405 Lexington Avenue
New York, NY 10174
As
Representative of the Underwriters
named on Schedule I hereto
Ladies and Gentlemen:
The undersigned, Cuentas, Inc., a Florida corporation (the “Company”), hereby confirms its agreement (this “Agreement”) to issue and sell to the underwriter or underwriters, as the case may be, named in Schedule I hereto (each, an “Underwriter” and, collectively, the “Underwriters;”), for whom Maxim Group LLC is acting as representative (in such capacity, the “Representative”), an aggregate of _____________ units (the “Firm Units” or “Units”) of the Company’s securities, and, at the election of the Representative, up to an additional __________ Option Shares (as defined herein and collectively with the shares of Common Stock underlying the Firm Units, the “Shares”), and/or up to an additional ___________ Option Warrants (as defined herein and collectively with warrants underlying the Firm Units, the “Warrants”). Each Unit consists of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and one Warrant. Each Warrant entitles the holder to purchase one share of Common Stock (as more fully described in Section 2 hereof). The Units, the Shares, the Warrants and the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) are hereinafter referred to collectively as the “Securities.” The offering and sale of the Securities contemplated by this Agreement is referred to herein as the “Offering.”
Units will not be issued or certificated. The shares of Common Stock and Warrants that comprise the Units are immediately separable and will be issued separately.
1. Securities; Over-Allotment Option.
(a) Purchase of Firm Units. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell, severally and not jointly, to the several Underwriters, an aggregate of _________ Firm Units at a purchase price per Firm Unit of $_____ , which represents an 8% discount to the public offering price per Firm Unit.
(b) The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Units set forth opposite their respective names on Schedule I attached hereto and made a part hereof.
(c) Payment and Delivery. Delivery and payment for the Firm Units shall be made at 10:00 a.m., New York time, on the second Business Day following the effective date (the “Effective Date”) of the Registration Statement (as hereinafter defined) (or the third Business Day following the Effective Date, if the Registration Statement is declared effective after 4:30 p.m. New York time) or at such earlier time as shall be agreed upon by the Representative and the Company at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Units is called the “Closing Date.” The closing of the payment of the purchase price for, and delivery of certificates representing, the Firm Units is referred to herein as the “Closing.” Payment for the Firm Units shall be made on the Closing Date by wire transfer in Federal (same day) funds upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Firm Units (or through the full fast transfer facilities of the Depository Trust Company (the “DTC”)) for the account of the Underwriters. The Firm Units shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least one Business Day prior to the Closing Date. The Company will permit the Representative to examine and package the Firm Units for delivery, at least one Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Units except upon tender of payment by the Representative for all the Firm Units.
(d) Over-allotment Option. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Units, the Representative on behalf of the Underwriters are hereby granted an option (the “Over-Allotment Option”) to purchase up to an additional _________ shares of Common Stock (the “Option Shares”) and/or up to an additional __________ Warrants (the “Option Warrants”), in each case, solely to cover over-allotments. The purchase price to be paid for the Option Shares subject to the Over-Allotment Option will be equal to $________ per Option Share, the purchase price to be paid for the Option Warrants subject to the Over-Allotment Option will be equal to $________ per Option Warrant.
(e) Exercise of Option. The Over-allotment Option granted pursuant to Section 1(d) hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares and/or the Option Warrants within 45 days after the Closing Date. The Underwriters will not be under any obligation to purchase any of such Option Shares and/or Option Warrants prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of written notice to the Company from the Representative, setting forth the number of Option Shares and/or Option Warrants to be purchased and the date and time for delivery of and payment for such Option Shares and/or Option Warrant, which will not be later than three Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of the Representative or at such other place as shall be agreed upon by the Company and the Representative. If such delivery and payment for all of the Option Shares and/or Option Warrants does not occur on the Closing Date, the date and time of the closing for such Option Shares and/or Option Warrants will be as set forth in the notice (hereinafter the “Option Closing Date”). Upon exercise of the Over-Allotment Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Option Shares and/or Option Warrants specified in such notice. If any Option Shares and/or Option Warrants are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares and/or Option Warrants (subject to such adjustments to eliminate fractional shares as the Representative may determine) that bears the same proportion to the number of Firm Units to be purchased as set forth on Schedule I opposite the name of such Underwriter bears to the total number of Firm Units.
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(f) Payment and Delivery of Option Shares and/or Option Warrants. Payment for Option Shares and/or Option Warrants shall be made on the Option Closing Date by wire transfer in Federal (same day) funds by deposit of the price for the Option Shares and/or Option Warrants being purchased to the Company upon delivery to the Underwriters of certificates (in form and substance satisfactory to the Underwriters) representing such Option Shares and/or Option Warrants (or through the full fast transfer facilities of DTC) for the account of the Underwriters. The certificates representing the Option Shares and/or Option Warrants to be delivered will be in such denominations and registered in such names as the Representative requests not less than one Business Day prior to the Closing Date or the Option Closing Date, as the case may be, and will be made available to the Representative for inspection, checking and packaging at the aforesaid office of the Company’s transfer agent or correspondent not less than one Business Day prior to the Closing Date or the Option Closing Date, as the case may be.
(g) Representative’s Warrants. The Company hereby agrees to issue to the Representative (and/or its designees) on the Closing Date, Warrants to purchase ______ shares of Common Stock (the “Closing Representative’s Warrants”) and, on each Option Closing Date, Warrants to purchase a number of shares of Common Stock up to an aggregate of 8% of the number of shares of Common Stock issued to investors at such Option Closing Date (the “Option Representative’s Warrants” and, together with the Closing Representative’s Warrants, the “Representative’s Warrants”). The Representative’s Warrants shall be exercisable, in whole or in part, commencing 180 days from the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price of $____ per shares of Common Stock, which is equal to one hundred and twenty five percent (125%) of the Offering price of a Share. The Representative’s Warrants and the shares of Common Stock issuable upon exercise of the Representative’s Warrants are hereinafter referred to collectively as the “Representative’s Securities.” The form of the Representative’s Warrant is attached hereto as Annex II hereto.
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2. Representations and Warranties of the Company. The Company represents, warrants and covenants to, and agrees with, each of the Underwriters that, as of the date hereof and as of the Closing Date:
(a) The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (Registration No. 333-249690), and amendments thereto, and related preliminary prospectuses for the registration under the Securities Act of 1933, as amended (the “Securities Act”), of the Securities which registration statement, as so amended (including post-effective amendments, if any), has been declared effective by the Commission and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the prospectus, financial statements, schedules, exhibits and other information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is hereinafter referred to as the “Registration Statement.” If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act registering additional Securities (a “Rule 462(b) Registration Statement”), then, unless otherwise specified, any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which, if filed, becomes effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission. All of the Securities have been registered under the Securities Act pursuant to the Registration Statement or, if any Rule 462(b) Registration Statement is filed, will be duly registered under the Securities Act with the filing of such Rule 462(b) Registration Statement. The Company has responded to all requests of the Commission for additional or supplemental information. Based on communications from the Commission, no stop order suspending the effectiveness of either the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, to the Company’s knowledge, threatened by the Commission. The Company, if required by the Securities Act and the rules and regulations of the Commission (the “Rules and Regulations”), proposes to file the Prospectus with the Commission pursuant to Rule 424(b) under the Securities Act (“Rule 424(b)”). The prospectus, in the form in which it is to be filed with the Commission pursuant to Rule 424(b), or, if the prospectus is not to be filed with the Commission pursuant to Rule 424(b), the prospectus in the form included as part of the Registration Statement at the time the Registration Statement became effective, is hereinafter referred to as the “Prospectus,” except that if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the Offering which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b)), the term “Prospectus” shall also refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use. Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission pursuant to Rule 424 under the Securities Act is hereafter called a “Preliminary Prospectus.” Any reference herein to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the exhibits incorporated by reference therein pursuant to the Rules and Regulations on or before the Effective Date of the Registration Statement, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be. Any reference herein to the terms “amend”, “amendment” or “supplement” with respect to the Registration Statement, any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include: (i) the filing of any document under the Securities Exchange Act of 1934, as amended, and together with the Rules and Regulations promulgated thereunder (the “Exchange Act”) after the Effective Date, the date of such Preliminary Prospectus or the date of the Prospectus, as the case may be, which is incorporated therein by reference, and (ii) any such document so filed that is incorporated by reference. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing, shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). The Prospectus delivered to the Underwriters for use in connection with the Offering was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T promulgated by the Commission.
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(b) At the time of the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b), when any supplement to or amendment of the Prospectus is filed with the Commission, when any document filed under the Exchange Act was or is filed, at all other subsequent times until the completion of the public offer and sale of the Securities, and at the Closing Date, if any, the Registration Statement and the Prospectus and any amendments thereof and supplements or exhibits thereto complied or will comply in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations, and did not and will not, as of the date of such amendment or supplement, contain an untrue statement of a material fact and did not and will not, as of the date of such amendment or supplement, omit to state any material fact required to be stated therein or necessary in order to make the statements therein: (i) in the case of the Registration Statement, not misleading, and (ii) in the case of the Prospectus, in light of the circumstances under which they were made as of its date, not misleading. When any Preliminary Prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Securities or any amendment thereto or pursuant to Rule 424(a) under the Securities Act) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the Rules and Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representative specifically for use therein. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of: the statements set forth in the “Underwriting” section of the Prospectus only insofar as such statements relate to the names and corresponding share amounts set forth in the table of Underwriters, the amount of selling concession and re-allowance or to over-allotment and related activities that may be undertaken by the Underwriters and the paragraph relating to stabilization by the Underwriters (the “Underwriters’ Information”).
(c) Neither: (i) any Issuer-Represented General Free Writing Prospectus(es) (as defined below) issued at or prior to the Applicable Time (as defined below) and the Statutory Prospectus (as defined below), all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free Writing Prospectus(es) (as defined below) when considered together with the General Disclosure Package, includes or included as of the Applicable Time any untrue statement of a material fact or omits or omitted as of the Applicable Time to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Statutory Prospectus included in the Registration Statement, the General Disclosure Package or any Issuer-Represented Limited-Use Free Writing Prospectus (as defined below) in conformity with the Underwriters’ Information.
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(d) Each Issuer-Represented Free Writing Prospectus, as of its issue date and at all subsequent times until the Closing Date or until any earlier date that the Company notified or notifies the Representative as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the then-current Registration Statement, Statutory Prospectus or Prospectus. If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the then-current Registration Statement, Statutory Prospectus or Prospectus relating to the Securities or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or will notify promptly the Representative so that any use of such Issuer-Represented Free Writing Prospectus may cease until it is promptly amended or supplemented by the Company, at its own expense, to eliminate or correct such conflict, untrue statement or omission.
(e) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus or the Prospectus or other materials permitted by the Securities Act to be distributed by the Company. Unless the Company obtains the prior consent of the Representative, the Company has not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Securities Act, required to be filed with the Commission; provided that the prior written consent of the Representative shall be deemed to have been given in respect of any free writing prospectus referenced on Schedule II attached hereto. The Company has complied and will comply with the requirements of Rules 164 and 433 under the Securities Act applicable to any Issuer-Represented Free Writing Prospectus as of its issue date and at all subsequent times through the Closing Date, including timely filing with the Commission where required, legending and record keeping. To the extent an electronic road show is used, the Company has satisfied and will satisfy the conditions in Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show.
(f) The Representative agrees that, unless it obtains the prior written consent of the Company, it will not make any offer relating to the Securities that would constitute an Issuer-Represented Free Writing Prospectus or that would otherwise (without taking into account any approval, authorization, use or reference thereto by the Company) constitute a “free writing prospectus” required to be filed by the Company with the Commission or retained by the Company under Rule 433 of the Securities Act; provided that the prior written consent of the Company hereto shall be deemed to have been given in respect of any Issuer-Represented General Free Writing Prospectuses referenced on Schedule II attached hereto.
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(g) As used in this Agreement, the terms set forth below shall have the following meanings:
(i) “Applicable Time” means December __, 2020, ______/p.m. a.m. (Eastern time) on the date of this Agreement.
(ii) “Statutory Prospectus” as of any time means the prospectus that is included in the Registration Statement immediately prior to that time. For purposes of this definition, information contained in a form of prospectus that is deemed retroactively to be a part of the Registration Statement pursuant to Rule 430A or 430B shall be considered to be included in the Statutory Prospectus as of the actual time that form of prospectus is filed with the Commission pursuant to Rule 424(b) under the Securities Act.
(iii) “Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, relating to the Securities that (A) is required to be filed with the Commission by the Company, or (B) is exempt from filing pursuant to Rule 433(d)(5)(i) under the Securities Act because it contains a description of the Securities or of the Offering that does not reflect the final terms or pursuant to Rule 433(d)(8)(ii) because it is a “bona fide electronic road show,” as defined in Rule 433 under the Securities Act, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) under the Securities Act.
(iv) “Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being specified in Schedule II to this Agreement.
(v) “Issuer-Represented Limited-Use Free Writing Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic road show,” as defined in Rule 433 under the Securities Act, that is made available without restriction pursuant to Rule 433(d)(8)(ii), even though not required to be filed with the Commission.
(h) Halperin Ilanit, CPA, (the “Auditor”), whose reports relating to the Company are included in the Registration Statement, the General Disclosure Package and the Prospectus is an independent registered public accounting firm as required by the Securities Act, the Exchange Act and the Rules and Regulations and the Public Company Accounting Oversight Board (the “PCAOB”). To the Company’s knowledge, the Auditor is not in violation of the auditor independence requirements of the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”). The Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the General Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
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(i) Subsequent to the respective dates as of which information is presented in the Registration Statement, the General Disclosure Package and the Prospectus, and except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus: (i) the Company has not declared, paid or made any dividends or other distributions of any kind on or in respect of its capital stock, and (ii) there has been no material adverse change (or, to the knowledge of the Company, any development which could reasonably be expected to result in a material adverse change in the future), whether or not arising from transactions in the ordinary course of business, in or affecting: (A) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company or any of its Subsidiaries (as hereinafter defined); (B) the long-term debt or capital stock of the Company or any of its Subsidiaries; or (C) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Warrant Agreement (as hereinafter defined), the Warrants, the Representative’s Warrants, the Registration Statement, the General Disclosure Package and the Prospectus (a “Material Adverse Change”). Since the date of the latest balance sheet presented in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has not incurred or undertaken any liabilities or obligations, whether direct or indirect, liquidated or contingent, matured or unmatured, or entered into any transactions, including any acquisition or disposition of any business or asset, which are material to the Company, except for liabilities, obligations and transactions which are disclosed in the Registration Statement, the General Disclosure Package and the Prospectus.
(j) As of the dates set forth in the Registration Statement, the General Disclosure Package and the Prospectus, the Company has an authorized capitalization as set forth in the Registration Statement, the General Disclosure Package and the Prospectus under the heading “Capitalization;” all of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with all applicable federal and to the knowledge of the Company, all state securities laws and none of those shares was issued in violation of any preemptive rights, rights of first refusal or other similar rights to the extent any such rights were not waived; the Securities have been duly authorized and, when issued and delivered against payment therefore as provided in this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of the Securities is not subject to any preemptive rights, rights of first refusal or other similar rights that have not heretofore been waived (with copies of such waivers provided to the Underwriters); and no holder of any Securities or any shares of Common Stock is or will be subject to personal liability by reason of being such a holder. The Securities conform to the descriptions thereof contained in the Registration Statement, the General Disclosure Package and the Prospectus. When issued, the Warrants will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment of the respective exercise prices therefor, the number and type of securities of the Company called for thereby in accordance with the terms thereof and such Warrants are enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. The Warrant Shares have been duly authorized and reserved for issuance and when issued in accordance with the terms of the Warrants, will be duly and validly issued, fully paid and non-assessable; will not have been issued in violation of or be subject to any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company; and the holders thereof will not be subject to personal liability by reason of being such holders;
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(k) Except as described in the Registration Statement, the General Disclosure Package and the Prospectus, (A) there are no outstanding rights (contractual or otherwise), warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of, any shares of capital stock of or other equity interest in the Company or any of its Subsidiaries and (B) there are no contracts, agreements or understandings between the Company and/or any of its Subsidiaries and any person granting such person the right to require the Company to file a registration statement under the Securities Act or otherwise register any securities of the Company owned or to be owned by such person and any such rights so disclosed have been waived by the holders thereof in connection with this Agreement and the transactions contemplated hereby including the Offering;
(l) The shares of Common Stock underlying the Representative’s Warrants have been duly authorized and reserved for issuance, conform to the description thereof in the Registration Statement, the General Disclosure Package and the Prospectus and have been validly reserved for issuance and will, upon exercise of the Representative’s Warrants and payment of the exercise price thereof, be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of or be subject to preemptive or similar rights to subscribe for or purchase securities of the Company and the holders thereof will not be subject to personal liability by reason of being such holders.
(m) The subsidiaries of the Company (the “Subsidiaries”), together with their respective jurisdictions of incorporation are listed on Schedule IV hereto. Each of the Subsidiaries is wholly-owned by the Company and no person or entity has any right to acquire any equity interest in any of the Subsidiaries. Except for the Subsidiaries, the Company does not own any equity interest in any other corporation, limited liability company or other entity.
(n) The Company and each of its Subsidiaries has been duly incorporated, organized or formed and validly exists as a corporation or limited liability company in good standing under the laws of the state of its incorporation, organization or formation. The Company and each of its Subsidiaries has all requisite power and authority to carry on its business as it is currently being conducted and as described in the Registration Statement, the General Disclosure Package and the Prospectus, and to own, lease and operate its properties. The Company and each of its Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation, partnership or limited liability company in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except, in each case, for those failures to be so qualified or in good standing which (individually and in the aggregate) would not reasonably be expected to have a material adverse effect on: (i) the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company and its Subsidiaries; (ii) the long-term debt or capital stock of the Company; or (iii) the Offering or consummation of any of the other transactions contemplated by this Agreement, the Registration Statement, the General Disclosure Package and the Prospectus (any such effect being a “Material Adverse Effect”).
9
(o) Neither the Company nor any of its Subsidiaries is: (i) in violation of its certificate or bylaws, operating agreement or other organizational documents, (ii) in default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject; and no event has occurred which, with notice or lapse of time or both, would constitute a default under or result in the creation or imposition of any lien, security interest, charge or other encumbrance (a “Lien”) upon any of its property or assets pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject, or (iii) in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, foreign or domestic, except, in the case of subsections (ii) and (iii) above, for such violations or defaults which (individually or in the aggregate) would not reasonably be expected to have a Material Adverse Effect.
(p) The Company has entered into a warrant agreement (the “Warrant Agreement”) with Olde Monmouth Stock Transfer Co., Inc., as warrant agent, with respect to the Warrants substantially in the form filed as an exhibit to the Registration Statement. The Company has full right, power and authority to execute and deliver this Agreement, the Warrant Agreement, the Warrants, the Representative’s Warrants and all other agreements, documents, certificates and instruments required to be delivered pursuant to this Agreement, the Warrant Agreement, the Warrants and the Representative’s Warrants. The Company has duly and validly authorized this Agreement, the Warrant Agreement, the Warrants, the Representative’s Warrants and each of the transactions contemplated thereby. This Agreement and the Warrant Agreement have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company and are enforceable against the Company in accordance with their terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought..
(q) Reserved
(r) The execution, delivery, and performance by the Company of this Agreement, the Warrants, the Warrant Agreement, the Representative’s Warrants and all other agreements, documents, certificates and instruments required to be delivered pursuant to this Agreement, the Warrants, the Warrant Agreement, the Representative’s Warrants and consummation of the transactions contemplated hereby and thereby do not and will not: (i) conflict with, require consent under or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any Lien upon any property or assets of the Company or any of its Subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their respective properties, operations or assets may be bound or (ii) violate or conflict with any provision of the certificate of incorporation, by-laws, operating agreement or other organizational documents of the Company or any of its Subsidiaries, or (iii) violate or conflict with any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, domestic or foreign applicable to the Company or any of its Subsidiaries, or (iv) trigger a reset or repricing of any outstanding securities of the Company, except in the case of subsection (i) for any default, conflict or violation that would not have or reasonably be expected to have a Material Adverse Effect.
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(s) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company and each of its Subsidiaries have all material consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other legal or governmental agencies and bodies and all third parties, foreign and domestic (collectively, the “Consents”), to own, lease and operate their respective properties and conduct their respective businesses as they are now being conducted and as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, and each such Consent is valid and in full force and effect, except which (individually or in the aggregate), in each such case, would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has received notice of any investigation or proceedings which results in or, if decided adversely to the Company or any of its Subsidiaries could reasonably be expected to result in, the revocation of, or imposition of a materially burdensome restriction on, any Consent. No Consent contains a materially burdensome restriction not adequately disclosed in the Registration Statement, the General Disclosure Package and the Prospectus.
(t) The Company and each of its Subsidiaries is in compliance with all applicable material laws, rules, regulations, ordinances, directives, judgments, decrees and orders, foreign and domestic, except for any non-compliance the consequences of which would not have or reasonably be expected to have a Material Adverse Effect.).
(u) Intentionally omitted;
(v) The Company has filed with the Commission a Form 8-A (File Number 001-_______providing for the registration of the Common Stock and the Warrants (the “Form 8-A Registration Statement”). The Common Stock and the Warrants are registered pursuant to Section 12(b) under the Exchange Act. The Form 8-A Registration Statement was declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock or the Warrants under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
(w) The Common Stock, including the Shares and the Warrant Shares, and the Warrants have been approved for listing on the NASDAQ Capital Market (the “Exchange”), subject to notice of official issuance and the Company has taken no action designed to, or likely to have the effect of, delisting its Common Stock, including the Shares and the Warrant Shares, and the Warrants, from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing.
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(x) No consent of, with or from any judicial, regulatory or other legal or governmental agency or body or any third party, foreign or domestic is required for the execution, delivery and performance of this Agreement, the Warrants, the Warrant Agreement or the Representative’s Warrants or consummation of each of the transactions contemplated hereby and thereby, including the issuance, sale and delivery of the Securities to be issued, sold and delivered hereunder, except (i) such as may have previously been obtained (with copies of such consents provided to the Underwriters), (ii) the registration under the Securities Act of the Securities, which has become effective, (iii) such consents as may be required under state securities or blue sky laws or the by-laws and rules of the Nasdaq Capital Market, and (iii) the FINRA in connection with the purchase and distribution of the Securities by the Underwriters, each of which has been obtained and is in full force and effect.
(y) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no judicial, regulatory, arbitral or other legal or governmental proceeding or other litigation or arbitration, domestic or foreign, pending to which the Company or any of its Subsidiaries is a party or of which any property, operations or assets of the Company or any of its Subsidiaries is the subject which, individually or in the aggregate, if determined adversely to the Company or any of its Subsidiaries would reasonably be expected to have a Material Adverse Effect. To the Company’s knowledge, except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, no such proceeding, litigation or arbitration is threatened or contemplated and the defense of any such proceedings, litigation and arbitration against or involving the Company or any of its Subsidiaries would not reasonably be expected to have a Material Adverse Effect.
(z) The financial statements, including the notes thereto, and the supporting schedules included in the Registration Statement, the General Disclosure Package and the Prospectus comply in all material respects with the requirements of the Securities Act and the Exchange Act, and present fairly in all material respects the financial position as of the dates indicated and the cash flows and results of operations for the periods specified of the Company. Except as otherwise stated in the Registration Statement, the General Disclosure Package and the Prospectus, said financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved, except in the case of unaudited financials which are subject to normal year end adjustments and do not contain certain footnotes. The supporting schedules included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly in all material respects the information required to be stated therein. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement, the General Disclosure Package or the Prospectus. The other financial information included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly in all material respects the information included therein and have been prepared on a basis consistent with that of the financial statements that are included in the Registration Statement, the General Disclosure Package and the Prospectus and the books and records of the respective entities presented therein.
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(aa) There are no pro forma or as adjusted financial statements which are required to be included in the Registration Statement, the General Disclosure Package and the Prospectus in accordance with Regulation S-X which have not been included as so required. The pro forma and pro forma as adjusted financial information included in the Registration Statement, the General Disclosure Package and the Prospectus has been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Rules and Regulations and include all adjustments necessary to present fairly in accordance with GAAP the pro forma and as adjusted financial position of the respective entity or entities presented therein at the respective dates indicated and their cash flows and the results of operations for the respective periods specified. The assumptions used in preparing the pro forma and pro forma as adjusted financial information included in the Registration Statement, the General Disclosure Package and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein. The related pro forma and pro forma as adjusted adjustments give appropriate effect to those assumptions; and the pro forma and pro forma as adjusted financial information reflect the proper application of those adjustments to the corresponding historical financial statement amounts.
(bb) The statistical, industry-related and market-related data included in the Registration Statement, the General Disclosure Package and the Prospectus are based on or derived from sources which the Company reasonably and in good faith believes are reliable and accurate, and such data agree with the sources from which they are derived.
(cc) The Company has established and maintains disclosure controls and procedures over financial reporting (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) and such controls and procedures are designed to ensure that information relating to the Company required to be disclosed in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company has utilized such controls and procedures in preparing and evaluating the disclosures in the Registration Statement, in the General Disclosure Package and in the Prospectus.
(dd) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company’s board of directors has validly appointed an audit committee whose composition satisfies the requirements of the rules and regulations of the Nasdaq Stock Market and the board of directors and/or audit committee has adopted a charter that satisfies the requirements of the rules and regulations of the Nasdaq Stock Market. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, neither the board of directors nor the audit committee has been informed, nor is the Company aware, of: (i) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
(ee) Neither the Company nor any of its Affiliates (as defined in the Securities Act) has taken, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.
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(ff) Neither the Company nor any of its Affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act or the Rules and Regulations with the offer and sale of the Securities pursuant to the Registration Statement. Except as disclosed in the Registration Statement, the General Disclosure Package, and the Prospectus, neither the Company nor any of its Affiliates has sold or issued any securities during the six-month period preceding the date of the Prospectus, including but not limited to any sales pursuant to Rule 144A or Regulation D or Regulation S under the Securities Act.
(gg) To the knowledge of the Company, all information contained in the questionnaires completed by each of the Company’s officers and directors and 5% holders immediately prior to the Offering and provided to the Representative as well as the biographies of such officers and directors in the Registration Statement are true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the questionnaires completed by the directors and officers to become inaccurate and incorrect.
(hh) To the knowledge of the Company, no director or officer of the Company or any of its Subsidiaries is subject to any non-competition agreement or non-solicitation agreement with any current employer or prior employer which could materially affect his ability to be and act in his respective capacity of the Company.
(ii) The Company is not and, at all times up to and including consummation of the transactions contemplated by this Agreement, and after giving effect to application of the net proceeds of the Offering, will not be, subject to registration as an “investment company” under the Investment Company Act of 1940, as amended, and is not and will not be an entity “controlled” by an “investment company” within the meaning of such act.
(jj) No relationship, direct or indirect, exists between or among any of the Company or, to the knowledge of the Company, any Affiliate of the Company, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or, to the knowledge of the Company, any Affiliate of the Company, on the other hand, which is required by the Securities Act, the Exchange Act or the Rules and Regulations to be described in the Registration Statement or the Prospectus which is not so described as required. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members. The Company has not, in violation of Sarbanes-Oxley directly or indirectly extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company..
(kk) The Company is in material compliance with the rules and regulations promulgated by the Nasdaq Stock Market (to the extent applicable to the Company prior to the listing of the Common Stock and the Warrants on the Nasdaq Capital Market following the Closing) or any other governmental or self regulatory entity or agency, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect. Without limiting the generality of the foregoing: (i) all members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of the audit committee of the Company’s board of directors, meet the qualifications of independence as set forth under applicable laws, rules and regulations and (ii) the audit committee of the Company’s board of directors has at least one member who is an “audit committee financial expert” (as that term is defined under applicable laws, rules and regulations).
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(ll) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there are no contracts, agreements or understandings between the Company or any of its Subsidiaries and any Person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder’s fee, financial consulting fee or other like payment in connection with the transactions contemplated by this Agreement or any arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, shareholders, partners, employees or Affiliates that may affect the Underwriters’ compensation as determined by FINRA.
(mm) The Company and each of its Subsidiaries owns or leases all such properties (other than intellectual property, which is covered by Section 2(nn)) as are necessary to the conduct of its business as presently operated as described in the Registration Statement, the General Disclosure Package and the Prospectus. The Company and each of its Subsidiaries has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it, in each case free and clear of all Liens except such as are described in the Registration Statement, the General Disclosure Package and the Prospectus or such as do not (individually or in the aggregate) materially affect the business or prospects of the Company or any of its Subsidiaries. Any real property and buildings held under lease or sublease by the Company or any of its Subsidiaries are held by it under valid, subsisting and, to the Company’s knowledge, enforceable leases with such exceptions as are not material to, and do not materially interfere with, the use made and proposed to be made of such property and buildings by the Company or its Subsidiaries. Neither the Company nor any of its Subsidiaries has received any notice of any claim adverse to its ownership of any real or personal property or of any claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or any of its Subsidiaries.
(nn) The Company and each of its Subsidiaries: (i) owns, possesses, or has the adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures, “Intellectual Property”) necessary for the conduct of its businesses as being conducted and as described in the Registration Statement, the General Disclosure and Prospectus and (ii) has no knowledge that the conduct of its business conflicts or will conflict with the rights of others, and it has not received any notice of any claim of conflict with, any right of others. Except as set forth in the Registration Statement, the General Disclosure Package or the Prospectus, neither the Company nor any of its Subsidiaries has granted or assigned to any other Person any right to sell any of the products or services of the Company or its Subsidiaries. To the Company’s knowledge, there is no infringement by third parties of any such Intellectual Property; there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the rights of the Company or any of its Subsidiaries in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or any of its Subsidiaries infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim. Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, neither the Company nor any of its Subsidiaries has received any claim for royalties or other compensation from any Person, including any employee of the Company or any of its Subsidiaries who made inventive contributions to the technology or products of the Company or any of its Subsidiaries that are pending or unsettled, and except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus neither the Company nor any of its Subsidiaries has or will have any obligation to pay royalties or other compensation to any Person on account of inventive contributions.
15
(oo) The agreements and documents described in the Registration Statement, the General Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the applicable provisions of the Securities Act to be described in the Registration Statement, the General Disclosure Package or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company or any of its Subsidiaries is a party or by which any of their respective properties or businesses are or may be bound or affected and (i) that is referred to in the Registration Statement, the General Disclosure Package or the Prospectus or attached as an exhibit thereto, or (ii) is material to the business of the Company or any of its Subsidiaries, has been duly and validly executed by the Company or its Subsidiary, as applicable, is in full force and effect in all material respects and is enforceable against the Company or its Subsidiary in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the foreign, federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought, and none of such agreements or instruments has been assigned by the Company or any of its Subsidiaries, and neither the Company, any Subsidiary nor, to the Company’s knowledge, any other party is in breach or default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a breach or default thereunder, in any such case, which would result in a Material Adverse Effect.
(pp) The disclosures in the Registration Statement, the General Disclosure Package and the Prospectus concerning the effects of foreign, federal, state and local regulation on the Company’s business as currently contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.
16
(qq) Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. No deficiency assessment with respect to a proposed adjustment of the Company’s federal, state, local or foreign taxes is pending or, to the Company’s knowledge, threatened There is no tax lien, whether imposed by any federal, state, foreign or other taxing authority, outstanding against the assets, properties or business of the Company or any of its Subsidiaries, other than liens for taxes not yet delinquent, or being contested in good faith by appropriate proceedings and for which reserves in accordance with GAAP have been established in the Company’s books and records. The term “taxes” mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes.
(rr) No labor disturbance or dispute by or with the employees of the Company or any of its Subsidiaries which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, currently exists or, to the Company’s knowledge, is threatened. The Company and each of its Subsidiaries is in compliance in all material respects with the labor and employment laws and collective bargaining agreements and extension orders applicable to its employees.
(ss) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, and would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Effect, the Company and each of its Subsidiaries has at all times operated its business in material compliance with all Environmental Laws (as hereinafter defined), and no material expenditures are or will be required in order to comply therewith. Neither the Company nor any of its Subsidiaries has received any notice or communication that relates to or alleges any actual or potential violation or failure to comply with any Environmental Laws that would, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect. As used herein, the term “Environmental Laws” means all applicable laws and regulations, including any licensing, permits or reporting requirements, and any action by a federal state or local government entity pertaining to the protection of the environment, protection of public health, protection of worker health and safety, or the handling of hazardous materials, including without limitation, the Clean Air Act, 42 U.S.C. § 7401, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601, et seq., the Federal Water Pollution Control Act, 33 U.S.C. § 1321, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. § 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. § 690-1, et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601, et seq.
17
(tt) Reserved
(uu) The Company and each of its Subsidiaries maintains insurance in such amounts and covering such risks as the Company reasonably considers adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar businesses in similar industries, all of which insurance is in full force and effect, except where the failure to maintain such insurance could not reasonably be expected to have Material Adverse Effect. The Company reasonably believes that it and each of its Subsidiaries will be able to renew its existing insurance as and when such coverage expires or will be able to obtain replacement insurance adequate for the conduct of its respective business and the value of its respective properties at a cost that would not have a Material Adverse Effect. The Company currently maintains director and officer insurance coverage in an amount of $________________.
(vv) Except as would not result in a Material Adverse Effect, neither the Company nor any of its Subsidiaries has failed to file with the applicable regulatory authorities any filing, declaration, listing, registration, report or submission that is required to be so filed for the business operation of the Company or such Subsidiary as currently conducted. All such filings were in material compliance with applicable laws when filed and no deficiencies have been asserted in writing by any applicable regulatory authority with respect to any such filings, declarations, listings, registrations, reports or submissions. The Company and each of its Subsidiaries holds, and is in material compliance with, all material franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders (“Permits”) of any governmental or self-regulatory agency, authority or body required for the conduct of the business of the Company and each of its Subsidiaries as currently conducted, and all such Permits are in full force and effect, in each case except where the failure to hold, or comply with, any of them is not reasonably likely to result in a Material Adverse Effect.
(ww) Neither the Company nor any of its Subsidiaries nor, to the knowledge of the Company, any other person associated with or acting on behalf of the Company or any of its Subsidiaries including, without limitation, any director, officer, agent or employee of the Company or its Subsidiaries, has, directly or indirectly, while acting on behalf of the Company or its Subsidiaries: (i) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful payment.
(xx) Neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent (25%) or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve
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(yy) The operations of the Company and each of its Subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial record keeping and reporting requirements and money laundering statutes of the United States and, to the Company’s knowledge, all other jurisdictions to which the Company and each of its Subsidiaries is subject, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(zz) Neither the Company nor any of its Subsidiaries, nor to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company or any of its Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the Offering, or lend, contribute or otherwise make available such proceeds to any joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
(aaa) Except as set forth in the Registration Statement, the General Disclosure Package and the Prospectus, no brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. To the Company’s knowledge, there are no other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA. The Company has not made any direct or indirect payments (in cash, securities or otherwise) to (i) any person, as a finder’s fee, investing fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who provided capital to the Company, (ii) any FINRA member, or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member participating in the Offering within the 12-month period prior to the date on which the Registration Statement was filed with the Commission (the “Filing Date”) or thereafter. To the Company’s knowledge, no (i) officer or director of the Company or its subsidiaries, (ii) owner of 5% or more of the Company’s unregistered securities or that of its subsidiaries or (iii) owner of any amount of the Company’s unregistered securities acquired within the 180-day period prior to the Filing Date, has any direct or indirect affiliation or association with any FINRA member participating in the Offering. The Company will advise the Underwriters and their respective counsel if it becomes aware that any officer, director or stockholder of the Company or its subsidiaries is or becomes an affiliate or associated person of a FINRA member participating in the Offering.
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(bbb) As used in this Agreement, references to matters being “material” with respect to the Company shall mean a material event, change, condition, status or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, prospects, operations or results of operations of the Company either individually or taken as a whole, as the context requires.
(ccc) As used in this Agreement, the term “knowledge of the Company” (or similar language) shall mean the knowledge of the executive officers and directors of the Company who are named in the Prospectus, with the assumption that such executive officers and directors shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as executive officers or directors of the Company).
(ddd) Any certificate signed by or on behalf of the Company and delivered to the Underwriters or to Loeb & Loeb LLP (“Underwriters’ Counsel”) shall be deemed to be a representation and warranty by the Company to each Underwriter listed on Schedule A hereto as to the matters covered thereby.
3. Offering. Upon authorization of the release of the Securities by the Representative, the Underwriters propose to offer the Securities for sale to the public upon the terms and conditions set forth in the Prospectus.
4. Covenants of the Company. The Company acknowledges, covenants and agrees with the Representative that:
(a) The Registration Statement and any amendments thereto have been declared effective, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and will provide evidence satisfactory to the Representative of such timely filing. The Company will file with the Commission all Issuer Free Writing Prospectuses in the time and manner required under Rules 433(d) or 163(b)(2), as the case may be.
(b) During the period beginning on the date hereof and ending on the later of the Closing Date or such date as, in the opinion of Underwriters’ Counsel, the Prospectus is no longer required by law to be delivered (or in lieu thereof the notice referred to in Rule 173(a) under the Securities Act is no longer required to be provided), in connection with sales by an underwriter or dealer (the “Prospectus Delivery Period”), prior to amending or supplementing the Registration Statement or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object within 24 hours of delivery thereof to the Representatives and Underwriters’ Counsel
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(c) After the date of this Agreement, the Company shall promptly advise the Representative in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any prospectus, the General Disclosure Package or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending its use or the use of any prospectus, the General Disclosure Package, the Prospectus or any Issuer-Represented Free Writing Prospectus, or of any proceedings to remove, suspend or terminate from listing the Common Stock and/or the Warrants from any securities exchange upon which they are listed for trading, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its reasonable efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 430B, as applicable, under the Securities Act and will use its reasonable best efforts to confirm that any filings made by the Company under Rule 424(b) or Rule 433 were received in a timely manner by the Commission (without reliance on Rule 424(b)(8) or Rule 164(b)).
(d) (i) During the Prospectus Delivery Period, the Company will comply in all material respects with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, and by the Exchange Act so far as necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof, the General Disclosure Package, the Registration Statement and the Prospectus. If during such period any event occurs as a result of which the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package ) would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which such statements were made, not misleading, or if during such period it is necessary or appropriate in the opinion of the Company or its counsel or the Representative or Underwriters’ Counsel to amend the Registration Statement or supplement the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package ) to comply with the Securities Act or to file under the Exchange Act any document which would be deemed to be incorporated by reference in the Prospectus in order to comply with the Securities Act or the Exchange Act, the Company will promptly notify the Representative and will amend the Registration Statement or supplement the Prospectus (or if the Prospectus is not yet available to prospective purchasers, the General Disclosure Package) or file such document (at the expense of the Company) so as to correct such statement or omission or effect such compliance.
(ii) If at any time following issuance of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, the Statutory Prospectus or the Prospectus or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has promptly notified or promptly will notify the Representative and has promptly amended or will promptly amend or supplement, at its own expense, such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
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(e) The Company will promptly deliver to the Underwriters and Underwriters’ Counsel a signed copy of the Registration Statement, as initially filed and all amendments thereto, including all consents and exhibits filed therewith, and will maintain in the Company’s files manually signed copies of such documents for at least five (5) years after the date of filing thereof. The Company will promptly deliver to each of the Underwriters such number of copies of any Preliminary Prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, and all documents which are exhibits to the Registration Statement and Prospectus or any amendment thereof or supplement thereto, as the Underwriters may reasonably request. Prior to 10:00 a.m., New York time, on the Business Day next succeeding the date of this Agreement and from time to time thereafter, the Company will furnish the Underwriters with copies of the Prospectus in New York City in such quantities as the Underwriters may reasonably request.
(f) The Company consents to the use and delivery of the Preliminary Prospectus by the Underwriters in accordance with Rule 430 and Section 5(b) of the Securities Act.
(g) If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall both file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the Securities Act by the earlier of: (i) 10:00 p.m., New York City time, on the date of this Agreement, and (ii) the time that confirmations are given or sent, as specified by Rule 462(b)(2).
(h) The Company will use its reasonable best efforts, in cooperation with the Representative, at or prior to the time of effectiveness of the Registration Statement, to qualify the Securities for offering and sale under the securities laws relating to the offering or sale of the Securities of such jurisdictions, domestic or foreign, as the Representative may reasonably designate and to maintain such qualification in effect for so long as required for the distribution thereof, except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction, to execute a general consent to service of process in any such jurisdiction, or to subject itself to taxation in any such jurisdiction if it is otherwise not so subject.
(i) During the 180 day period following the date of this Agreement (the “Company Lock-up Period”), the Company may not, without the prior written consent of the Representative, (i) offer, sell, issue, agree or contract to sell or issue or grant any option for the sale of any securities of the Company, except for (A) the issuance of securities under the Company’s 2016 Share and Options Incentive and Enhancement Plan, as described in the Registration Statement, and the Prospectus, (B) the issuance of shares of Common Stock upon any exercise of the Warrants, (C) the issuance of shares of Common Stock upon the exercise or conversion of securities that are issued and outstanding on the date of this Agreement and are described in the Registration Statement and the Prospectus, provided that such securities have not been amended since the date of this Agreement to increase the number of such securities or to decrease the exercise price or conversion price of such securities (other than in connection with stock splits, adjustments or combinations as set forth in such securities) or to extend the term of such securities or (D) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that such securities are issued as “restricted securities” (as defined in Rule 144) and carry no registration rights that require or permit the filing of any registration statement in connection therewith within 90 days following the Closing Date, and provided that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities, or (ii) file any registration statement relating to the offer or sale of any of the Company’s securities.
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(j) Schedule II hereto contains a complete and accurate list of the Company’s executive officers, directors and holders of 3% or more of the Company’s Common Stock (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in the form attached hereto as Annex I (the “Lock-Up Agreement”), prior to the execution of this Agreement.
(k) If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in a Lock-Up Agreement described in Section 4(j) hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by (i) a press release substantially in the form of Annex III hereto through a major news service or (ii) any other method that satisfies the obligations described in FINRA Rule 5131(d)(2) at least two business days before the effective date of the release or waiver.
(l) For a period of three years from the Closing Date, the Company shall retain Olde Monmouth Stock Transfer Co., Inc. as the Company’s transfer agent and registrar for the Common Stock and the Warrants and as the Company’s warrant agent for the Warrants or (i) a transfer and registrar agent for the Common Stock and (ii) warrant agent for the Warrants, in each case, reasonably acceptable to the Representative.
(m) Intentionally omitted.
(n) For a period of at least three (3) years from the Effective Date, the Company shall retain a nationally recognized PCAOB registered independent public accounting firm reasonably acceptable to the Representative. The Representative acknowledges that the Auditor is acceptable to the Representative.
(o) During the period of one (1) year from the Effective Date, the Company will make available to the Representative copies of all reports or other communications (financial or other) furnished to security holders or from time to time published or publicly disseminated by the Company, and will deliver to the Representative: (i) as soon as practicable after they are available, copies of any reports, financial statements and proxy or information statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed; and (ii) such additional information concerning the business and financial condition of the Company as the Representative may from time to time reasonably request in writing pursuant to a specific regulatory or liability issue or; provided, that any such item which is available on the EDGAR system (or successor thereto) need not be furnished in physical form.
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(p) Reserved.
(q) Intentionally Omitted
(r) The Company will apply the net proceeds from the sale of the Securities as set forth under the caption “Use of Proceeds” in the Prospectus.
(s) The Company will use its commercial best efforts to effect and maintain the listing of the Common Stock and the Warrants on the Nasdaq Stock Market, the NYSE, or the NYSE American, for at least three (3) years after the Closing Date.
(t) The Company, during the Prospectus Delivery Period, will file all documents required to be filed with the Commission pursuant to the Securities Act, the Exchange Act and the Rules and Regulations within the time periods required thereby.
(u) The Company will use its reasonable best efforts to do and perform all things required to be done or performed under this Agreement by the Company prior to the Closing Date, and to satisfy all conditions precedent to the delivery of the Securities.
(v) The Company will not take, and will use its reasonable best efforts to cause its Affiliates not to take, directly or indirectly, any action which constitutes or is designed to cause or result in, or which could reasonably be expected to constitute, cause or result in, the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.
(w) The Company shall cause to be prepared and delivered to the Representative, at its expense, within two (2) Business Days from the effective date of this Agreement, an Electronic Prospectus to be used by the Underwriters in connection with the Offering. As used herein, the term “Electronic Prospectus” means a form of prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to the Representative, that may be transmitted electronically by the other Underwriters to offerees and purchasers of the Securities for at least the period during which a Prospectus relating to the Securities is required to be delivered under the Securities Act; (ii) it shall disclose the same information as the paper prospectus and prospectus filed pursuant to EDGAR, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to the Representative, that will allow recipients thereof to store and have continuously ready access to the prospectus at any future time, without charge to such recipients (other than any fee charged for subscription to the Internet as a whole and for on-line time).
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(x) The Company represents and agrees that, unless it obtains the prior written consent of the Representative, and the Representative represents and agrees that, unless it obtains the prior written consent of the Company, it has not made and will not make any offer relating to the Securities that would constitute an “issuer free writing prospectus,” as defined in Rule 433 under the Securities Act, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405 under the Securities Act, required to be filed with the Commission; provided that the prior written consent of the parties hereto shall be deemed to have been given in respect of the free writing prospectuses included in Schedule II. Any such free writing prospectus consented to by the Company and the Representative is hereinafter referred to as a “Permitted Free Writing Prospectus.” Each of the Company and the Representative represents that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping.
(y) The Company hereby grants the Representative the right of first refusal for a period of twelve (12) months from the Effective Date to act as lead managing underwriter and book runner or lead placement agent, or minimally as a co-sole manager and book runner and/or co-lead placement agent with at least 15% of the economics, for any and all future public or private equity, equity-linked or debt (excluding commercial bank debt) offerings during such twelve (12) month period of the Company, or any successor or any Subsidiary of the Company. The Company shall provide written notice to the Representative with the terms of any such proposed offering and shall offer the Representative compensation no less favorable, as a proportion of the total offering amount, than that offered to the Representative in this Offering.
5. Payment of Expenses.
(a) Whether or not the transactions contemplated by this Agreement, the Registration Statement and the Prospectus are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of its obligations hereunder including the following:
(i) all filing fees and communication expenses related to the registration of the Securities to be sold in the Offering including all expenses in connection with the preparation, printing, formatting for EDGAR and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and any and all amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers;
(ii) all fees and expenses in connection with filings with FINRA;
(iii) all fees, disbursements and expenses of the Company’s counsel and accountants in connection with the registration of the Securities under the Securities Act and the Offering;
(iv) all fees and expenses in connection with listing the Common Stock and the Warrants on the Nasdaq Capital Market;
(v) the costs of all mailing and printing of the underwriting documents (including this Agreement, any blue sky surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney);
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(vi) all reasonable travel expenses of the Company’s officers and employees and any other expense of the Company incurred in connection with attending or hosting meetings with prospective purchasers of the Securities;
(vii) any stock transfer taxes payable upon the transfer of securities by the Company to the Underwriters and any other taxes incurred by the Company in connection with this Agreement or the Offering;
(viii) the costs associated with book building, prospectus tracking and compliance software and the cost of preparing certificates representing the Securities;
(ix) the cost and charges of any transfer agent or registrar for the Securities;
(x) any reasonable cost and expenses in conducting background checks of the Company’s officers and directors by a background search firm acceptable to the Representative;
(xi) fees of Underwriters’ Counsel;
(xii) the cost of preparing, printing and delivering certificates representing each of the Securities;
(xiii) all other costs, fees and expenses incident to the performance of the Company obligations hereunder which are not otherwise specifically provided for in this Section 5.
provided, however, that the maximum amount of fees, costs and expenses payable by the Company in respect of Maxim’s fees and expenses shall be $100,000
(b) Notwithstanding anything to the contrary in this Section 5, in the event that this Agreement is terminated by the Company, pursuant to Section 11(b) hereof, or subsequent to a Material Adverse Change, the Company will pay the out-of-pocket expenses actually incurred as allowed under FINRA Rule 5110 by the Underwriters through the date of such termination (including the fees and disbursements of Underwriters’ Counsel ).
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6. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Firm Units or the Option Shares and/or the Option Warrants, as the case may be, as provided herein shall be subject to: (i) the accuracy of the representations and warranties of the Company herein contained, as of the date hereof and as of the Closing Date, (ii) the absence from any certificates, opinions, written statements or letters furnished to the Representative or to Underwriters’ Counsel pursuant to this Section 6 of any misstatement or omission, (iii) the performance by the Company of its obligations hereunder, and (iv) each of the following additional conditions. For purposes of this Section 6, the terms “Closing Date” and “Closing” shall refer to the Closing Date for the Firm Units or the Option Shares and/or the Option Warrants, as the case may be, and each of the foregoing and following conditions must be satisfied as of each Closing.
(a) The Registration Statement shall have become effective and all necessary regulatory or listing approvals shall have been received not later than 5:30 p.m., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by the Representative. If the Company shall have elected to rely upon Rule 430A under the Securities Act, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with the terms hereof and a form of the Prospectus containing information relating to the description of the Securities and the method of distribution and similar matters shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period; and, at or prior to the Closing Date or the actual time of the Closing, no stop order suspending the effectiveness of the Registration Statement or any part thereof, or any amendment thereof, nor suspending or preventing the use of the General Disclosure Package, the Prospectus or any Issuer Free Writing Prospectus shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; any request of the Commission for additional information (to be included in the Registration Statement, the General Disclosure Package, the Prospectus, any Issuer Free Writing Prospectus or otherwise) shall have been complied with to the Representative’s satisfaction; and FINRA shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements.
(b) The Representative shall not have reasonably determined, and advised the Company, that the Registration Statement, the General Disclosure Package or the Prospectus, or any amendment thereof or supplement thereto, or any Issuer Free Writing Prospectus, contains an untrue statement of fact which, in the Representative’s reasonable opinion, is material, or omits to state a fact which, in the Representative’s reasonable opinion, is material and is required to be stated therein or necessary to make the statements therein not misleading; provided, however, that if in the Representative’s opinion such deficiency is curable Representative shall have given the Company reasonable notice of such deficiency and a reasonable chance to cure such deficiency.
(c) The Representative shall have received the written opinion and negative assurance letter of Ellenoff Grossman & Schole LLP, the securities counsel for the Company, dated as of the Closing Date and addressed to the Representativein a form to be agreed upon. The Representative shall have received the written opinion of AM LAW LLC, the Florida counsel to the Company dated as of the Closing Date and addressed to the Representativein a form to be agreed upon.
(d) The Representative shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated as of each Closing Date to the effect that: (i) the condition set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of the applicable Closing Date, the representations and warranties of the Company set forth in Sections 1 and 2 hereof are accurate, (iii) as of the applicable Closing Date, all agreements, conditions and obligations of the Company to be performed or complied with hereunder on or prior thereto have been duly performed or complied with, (iv) the Company has not sustained any material loss or interference with their respective businesses, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, (v) no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued and no proceedings therefor have been initiated or threatened by the Commission, (vi) there are no pro forma or as adjusted financial statements that are required to be included or incorporated by reference in the Registration Statement and the Prospectus pursuant to the Rules and Regulations which are not so included or incorporated by reference, and (vii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus there has not been any Material Adverse Change or any development involving a prospective Material Adverse Change, whether or not arising from transactions in the ordinary course of business.
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(e) On the date of this Agreement and on the Closing Date, the Representative shall have received a “cold comfort” letter from the Auditor as of the date of delivery and addressed to the Representative and in form and substance satisfactory to the Representative and Underwriters’ Counsel, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the Rules and Regulations, and stating, as of the date of delivery (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five (5) days prior to the date of such letter), the conclusions and findings of such firm with respect to the financial information and other matters relating to the Registration Statement and the Prospectus covered by such letter.
(f) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have been any change in the capital stock or long-term debt of the Company or any change or development involving a change, whether or not arising from transactions in the ordinary course of business, in the business, condition (financial or otherwise), results of operations, shareholders’ equity, properties or prospects of the Company including but not limited to the occurrence of any fire, flood, storm, explosion, accident, act of war or terrorism or other calamity, the effect of which, in any such case described above, is, in the sole judgment of the Representative, so material and adverse as to make it impracticable or inadvisable to proceed with the Offering on the terms and in the manner contemplated in the Prospectus (exclusive of any supplement).
(g) Prior to the execution and delivery of this Agreement, the Representative shall have received a lock-up agreement from each Lock-Up Party, duly executed by the applicable Lock-Up Party, in each case substantially in the form attached hereto as Annex I.
(h) As of the Closing Date, the Shares and the Warrant Shares shall be listed and admitted and authorized for trading on the Nasdaq Capital Market and satisfactory evidence of such action shall have been provided to the Representative. The Company shall have taken no action designed to, or likely to have the effect of terminating the registration of the Common Stock under the Exchange Act or delisting or suspending from trading the Common Stock from the Nasdaq Capital Market, nor has the Company received any information suggesting that the Commission or the Nasdaq Capital Market is contemplating terminating such registration of listing. The Shares, the Warrants and the Warrant Shares shall be DTC eligible.
(i) FINRA shall have confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(j) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date, prevent the issuance or sale of the Securities; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date, prevent the issuance or sale of the Securities or materially and adversely affect or potentially and adversely affect the business or operations of the Company.
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(k) The Company shall have furnished the Representative with a Certificate of Good Standing for the Company certified by the Secretary of State of Florida.
(l) The Company shall have furnished the Representative and Underwriters’ Counsel with such other certificates, opinions or other documents as they may have reasonably requested.
If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to the Representative or to Underwriters’ Counsel pursuant to this Section 6 shall not be reasonably satisfactory in form and substance to the Representative and to Underwriters’ Counsel, all obligations of the Underwriters hereunder may be cancelled by the Representative at, or at any time prior to, the consummation of the Closing. Notice of such cancellation shall be given to the Company in writing or by telephone. Any such telephone notice shall be confirmed promptly thereafter in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter, its officers, directors and employees, and each Person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to reasonable attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise(including in settlement of any litigation if such settlement is effected with the written consent of the Company), insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon (i) an untrue statement or alleged untrue statement of a material fact contained in (A) the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Rules and Regulations, the General Disclosure Package, the Prospectus, or any amendment or supplement thereto (including any documents filed under the Exchange Act and deemed to be incorporated by reference into the Prospectus), (B) any Issuer Free Writing Prospectus or in any other materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Securities, including any road show or investor presentations made to investors by the Company (whether in person or electronically) (collectively “Marketing Materials”) or (C) any filings or reports filed by the Company under the Exchange Act or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; or (ii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iii) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the General Disclosure Package, the Prospectus, or any such amendment or supplement, any Issuer Free Writing Prospectus or any other Marketing Materials, in reliance upon and in conformity with the Underwriters’ Information.
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(b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, and each other Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys’ fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, as originally filed or any amendment thereof, or any related Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with the Underwriters’ Information; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the aggregate underwriting discount applicable to the Securities to be purchased by such Underwriter hereunder. The parties agree that such information provided by or on behalf of any Underwriter through the Representative consists solely of the material referred to in the last sentence of Section 2(b) hereof.
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(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of any claims or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the claim or the commencement thereof (but the failure so to notify an indemnifying party shall not relieve the indemnifying party from any liability which it may have under this Section 7 to the extent that it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability that such indemnifying party may have otherwise than on account of the indemnity agreement hereunder). In case any such claim or action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate, at its own expense in the defense of such action, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party; provided however, that counsel to the indemnifying party shall not (except with the written consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, (iii) the indemnifying party does not diligently defend the action after assumption of the defense, or (iv) such indemnified party or parties shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party, or any of them, in conducting the defense of any such action or there may be legal defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties and shall be paid as incurred. No indemnifying party shall, without the prior written consent of the indemnified parties (which consent shall not be unreasonably delayed, withheld or denied), effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened claim, investigation, action or proceeding in respect of which indemnity or contribution may be or could have been sought by an indemnified party under this Section 7 or Section 8 hereof (whether or not the indemnified party is an actual or potential party thereto), unless (x) such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such claim, investigation, action or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or any failure to act, by or on behalf of the indemnified party, and (y) the indemnifying party confirms in writing its indemnification obligations hereunder with respect to such settlement, compromise or judgment.
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8. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 7 is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company, any contribution received by the Company from Persons, other than the Underwriters, who may also be liable for contribution, including Persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Underwriters from the Offering or, if such allocation is not permitted by applicable law, in such proportions as are appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the Offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bears to (y) the underwriting discount or commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of each of the Company and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any judicial, regulatory or other legal or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 8: (i) no Underwriter shall be required to contribute any amount in excess of the aggregate discounts and commissions applicable to the Securities underwritten by it and distributed to the public and (ii) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each Person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of the immediately preceding sentence. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise. The obligations of the Underwriters to contribute pursuant to this Section 8 are several in proportion to the respective number of Securities to be purchased by each of the Underwriters hereunder and not joint.
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9. Underwriter Default.
(a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Units hereunder, and if the securities with respect to which such default relates (the “Default Securities”) do not (after giving effect to arrangements, if any, made by the Representative pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Units, each non-defaulting Underwriter, acting severally and not jointly, agrees to purchase from the Company that number of Default Securities that bears the same proportion of the total number of Default Securities then being purchased as the number of Firm Units set forth opposite the name of such Underwriter on Schedule I hereto bears to the aggregate number of Firm Units set forth opposite the names of the non-defaulting Underwriters, subject, however, to such adjustments to eliminate fractional shares as the Representative in its sole discretion shall make.
(b) In the event that the aggregate number of Default Securities exceeds 10% of the number of Firm Units, the Representative may in its discretion arrange for themselves or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase the Default Securities on the terms contained herein. In the event that within 48 hours after such a default the Representative does not arrange for the purchase of the Default Securities as provided in this Section 9, this Agreement shall thereupon terminate, without liability on the part of the Company with respect thereto (except in each case as provided in Sections 5, 7, 8, 9 and 11(d)) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder.
(c) In the event that any Default Securities are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date for a period, not exceeding five (5) Business Days, in order to effect whatever changes may thereby be necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the reasonable opinion of Underwriters’ Counsel, may thereby be made necessary or advisable. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Units.
10. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Company and the Underwriters contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, including the agreements contained in Sections 5, 10, 14 and 15, the indemnity agreements contained in Section 7 and the contribution agreements contained in Section 8 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling Person thereof or by or on behalf of the Company, any of its officers and directors or any controlling Person thereof, and shall survive delivery of and payment for the Securities to and by the Underwriters. The representations contained in Section 2 hereof and the covenants and agreements contained in Sections 5, 7, 8, this Section 10 and Sections 12, 13, 14 and 15 hereof shall survive any termination of this Agreement, including termination pursuant to Section 9 or 11 hereof. The representations and covenants contained in Sections 2, 3 and 4 hereof shall survive termination of this Agreement if any Securities are purchased pursuant to this Agreement.
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11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective upon the later of: (i) receipt by the Representative and the Company of notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. Notwithstanding any termination of this Agreement, the provisions of this Section 11 and of Sections 5, 7, 8, 12, 13, 14 and 15, inclusive, shall remain in full force and effect at all times after the execution hereof. If this Agreement is terminated after any Securities have been purchased hereunder, the provisions of Sections 2, 3 and 4 hereof shall survive termination of this Agreement.
(b) The Representative shall have the right to terminate this Agreement at any time prior to the consummation of the Closing if: (i) any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representative will in the immediate future materially disrupt, the market for the Company’s securities or securities in general; or (ii) trading on the New York Stock Exchange or the Nasdaq Stock Market shall have been suspended or been made subject to material limitations, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange or the Nasdaq Stock Market or by order of the Commission, FINRA or any other governmental authority having jurisdiction; or (iii) a banking moratorium has been declared by any state or federal authority or if any material disruption in commercial banking or securities settlement or clearance services shall have occurred; (iv) any downgrading shall have occurred in the Company’s corporate credit rating or the rating accorded the Company’s debt securities by any “nationally recognized statistical rating organization” (as defined for purposes of Rule 436(g) under the Securities Act) or if any such organization shall have been publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company’s debt securities; or (v) (A) there shall have occurred any outbreak or escalation of hostilities or acts of terrorism involving the United States or there is a declaration of a national emergency or war by the United States or (B) there shall have been any other calamity or crisis or any change in political, financial or economic conditions if the effect of any such event in (A) or (B), in the judgment of the Representative, is so material and adverse that such event makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Units on the terms and in the manner contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be in writing.
(d) If this Agreement shall be terminated pursuant to any of the provisions hereof or if the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by the Representative, reimburse the Underwriters for those out-of-pocket expenses (including the reasonable fees and expenses of Underwriters’ Counsel), actually incurred by the Underwriters in connection herewith less the Advance previously paid.
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12. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing, and:
(a) if sent to the Representative or any Underwriter, shall be mailed, delivered, or faxed and confirmed in writing, to:
Maxim
Group LLC
405 Lexington Avenue
New York, New York 10174
Attention: Clifford A. Teller, Executive Managing Director of Investment Banking,
Fax: 212-895-3555
with a copy to Underwriters’ Counsel at:
Loeb
& Loeb LLP
345 Park Avenue
New York, New York 10154
Attention: Mitchell Nussbaum, Esq.
Fax: 212-407-4990
(b) if sent to the Company, shall be mailed, delivered, or faxed and confirmed in writing to the Company and its counsel at the addresses set forth in the Registration Statement.
13. Parties; Limitation of Relationship. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Company and the controlling Persons, directors, officers, employees and agents referred to in Sections 7 and 8 hereof, and their respective successors and assigns, and no other Person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and said controlling Persons and their respective successors, officers, directors, heirs and legal representative, and it is not for the benefit of any other Person. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of Securities from any of the Underwriters.
14. Submission of Jurisdiction; Governing Law;
This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The Company irrevocably (a) submits to the jurisdiction of any court of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Agreement, or any of the agreements or transactions contemplated by this Agreement, the Registration Statement and the Prospectus (each, a “Proceeding”), (b) agrees that all claims in respect of any Proceeding may be heard and determined in any such court, (c) waives, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (d) agrees not to commence any Proceeding other than in such courts, and (e) waives, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum. EACH OF THE COMPANY (ON BEHALF OF ITSELF AND, TO THE FULLEST EXTENT PERMITTED BY LAW, ON BEHALF OF ITS RESPECTIVE EQUITY HOLDERS AND CREDITORS) HEREBY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE REGISTRATION STATEMENT, AND THE PROSPECTUS.
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15. Entire Agreement. This Agreement, together with the exhibits, schedules and annexes attached hereto and as the same may be amended from time to time in accordance with the terms hereof, constitutes the entire agreement of the parties to this Agreement and supersedes all prior or contemporaneous written or oral agreements, understandings, promises and negotiations with respect to the subject matter hereof.
16. Severability. If any term or provision of this Agreement or the performance thereof shall be invalid or unenforceable to any extent, such invalidity or unenforceability shall not affect or render invalid or unenforceable any other provision of this Agreement and this Agreement shall be valid and enforced to the fullest extent permitted by law.
17. Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
18. Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
19. No Fiduciary Relationship. The Company hereby acknowledges that the Underwriters are acting solely as underwriters in connection with the offering of the Company’s Securities. The Company further acknowledge that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s length basis and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, shareholders, creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the offering of the Company’s Securities, either before or after the date hereof. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Company, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company hereby confirms its understanding and agreement to that effect. The Company hereby further confirms its understanding that no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the Offering contemplated hereby or the process leading thereto, including any negotiation related to the pricing of the Securities; and the Company has consulted its own legal and financial advisors to the extent it has deemed appropriate in connection with this Agreement and the Offering. The Company and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions, and that any opinions or views expressed by the Underwriters to the Company regarding such transactions, including but not limited to any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of any fiduciary or similar duty to the Company in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.
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20. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. Delivery of a signed counterpart of this Agreement by facsimile or other electronic transmission shall constitute valid and sufficient delivery thereof.
21. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.
22. Time is of the Essence. Time shall be of the essence of this Agreement. As used herein, the term “Business Day” shall mean any day other than a Saturday, Sunday or any day on which the major stock exchanges in New York, New York are not open for business.
[Signature Pages Follow]
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If the foregoing correctly sets forth your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us.
| Very truly yours, | ||
| CUENTAS, INC. | ||
| By: | ||
| Name: Arik Maimon | ||
| Title: Chief Executive Officer | ||
Accepted
by the Representative, acting for themselves and as
Representative of the Underwriters named on Schedule I attached hereto,
as of the date first written above:
| MAXIM GROUP LLC | ||
| By: | ||
| Name: Clifford A. Teller | ||
| Title: Executive Managing Director, | ||
| Investment Banking | ||
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SCHEDULE I
| Name of Underwriter | Number of Firm Units Being Purchased |
| Maxim Group LLC | |
| .Total |
SCHEDULE II
Lock-Up Parties
Arik Maimon
Michael DePrado
Adiv Baruch
Ran Daniel
Richard J Berman
Yochanon Bruk
Dinar Zuz LLC
CIMA Telecom Inc
Huseyin Kizanlik
SCHEDULE III
Free Writing Prospectus
SCHEDULE IV
Subsidiaries
Meimoun and Mammon, LLC, a __________ limited liability company
Cuentas Mobile LLC, a _______________limited liability company
ANNEX I
Form of Lock-Up Agreement
________, 2020
Maxim
Group LLC
405 Lexington Avenue
New York, NY 10174
Ladies and Gentlemen:
The undersigned understands that Maxim Group LLC (the “Representative”) proposes to enter into an Underwriting Agreement (the “Underwriting Agreement “) with Cuentas, Inc., a Florida corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock, par value $0.001 per share (the “Common Stock”), and warrants to purchase common stock of the Company (collectively with the Common Stock referred to as, the “Securities”).
To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date of the Underwriting Agreement and ending ninety(90) days after such date (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall be required or shall be voluntarily made in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities (i) as a bona fide gift, by will or intestacy, (ii) by operation of law, such as pursuant to a qualified domestic order or as required by a divorce settlement, or (iii) to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; or (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock-Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) any such transfer shall not involve a disposition for value, (ii) each transferee shall sign and deliver to the Representative a lock-up agreement substantially in the form of this lock-up agreement and (ii) no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Lock-Up Securities except in compliance with this lock-up agreement.
If the undersigned is an officer or director of the Company, (i) the undersigned agrees that the foregoing restrictions shall be equally applicable to any Securities that the undersigned may purchase in the Public Offering; (ii) the Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and (iii) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press releaseThe provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.
No provision in this lock-up agreement shall be deemed to restrict or prohibit the exercise, exchange or conversion by the undersigned of any securities exercisable or exchangeable for or convertible into shares of Common Stock, as applicable; provided that the undersigned does not transfer the shares of Common Stock acquired on such exercise, exchange or conversion during the Lock-Up Period, unless otherwise permitted pursuant to the terms of this lock-up agreement. In addition, no provision herein shall be deemed to restrict or prohibit the entry into or modification of a so-called “10b5-1” plan at any time (other than the entry into or modification of such a plan in such a manner as to cause the sale of any Lock-Up Securities within the Lock-Up Period) or a sale of 100% of the Company’s outstanding shares of Common Stock.
The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.
The undersigned understands that, if the Underwriting Agreement is not executed by January 15, 2021, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Securities to be sold thereunder, then this lock-up agreement shall be void and of no further force or effect.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Representative.
| Very truly yours, | ||
| (Name - Please Print) | ||
| (Signature) | ||
| (Name of Signatory, in the case of entities - Please Print) | ||
| (Title of Signatory, in the case of entities - Please Print) | ||
| Address: | ||
ANNEX II
Form of Representative’s Warrant
[Intentionally
Omitted]
ANNEX III
FORM OF PRESS RELEASE
Cuentas, Inc.
__________, 202_
Cuentas, Inc. (the “Company”) announced today that Maxim Group LLC, the sole book-running manager in the Company’s recent public sale of _____ Units consisting of shares of Common Stock and Warrants, are [waiving][releasing] a lock-up restriction with respect to ____ shares of the Company’s [common stock] held by [certain officers or directors] [an officer or director] of the Company. The [waiver][release] will take effect on ____, 2020, and the [shares] may be sold on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
[to be attached]
Exhibit 4.1
ANNEX IV
Form of Representative’s Warrant
COMMON STOCK PURCHASE WARRANT
CUENTAS, INC.
| Warrant Shares: [ ] | Original Issuance Date: _______ [ ], 2020 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, Maxim Partners LLC or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on ______ [ ], 2025 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Cuentas, Inc., a Florida corporation (the “Company”), up to [ ] shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
Section 1. Definitions. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Underwriting Agreement (the “Agreement”), dated November [ ], 2020 by and between the Company and Maxim Group, LLC, as representative of the several Underwriters.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed e-mail attachment of the Notice of Exercise in the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $[ ] (which is 125% of the offering price per unit in the offering contemplated by the Agreement) (the “Exercise Price”).
c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering the Warrant Shares, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day;
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
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If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 2(c).
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the Common Stock is traded on OTCQB or OTCQX, the volume weighted average sales price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if the Common Stock is traded on OTCQB or OTCQX , the volume weighted average sales price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
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d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder, or (B) if there is no effective registration statement and the Warrant is exercised via cashless exercise at a time when such Warrant Shares would be eligible for resale under Rule 144 by a non-affiliate of the Company, such Warrant Shares are delivered to Holder’s broker, and the Company receives a statement from Holder’s broker that it has received instructions to sell the Warrant Shares or that it would take responsibility that the sales of the Warrant Shares will only be made if the Warrant Shares are eligible to be sold under Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, provided that the Holder has then delivered the aggregate Exercise Price to the Company, if applicable, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise provided that the Holder has then delivered the aggregate Exercise Price to the Company, if applicable (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to use commercially reasonable efforts to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise upon written notice to the Company.
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iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round down to the next whole share.
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v. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vi. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, without the prior consent of the Company, which may be granted or denied in the Company’s sole discretion, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, non-exercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination and shall have no liability for exercises of this Warrant that are not in compliance with the Beneficial Ownership Limitation (other than to the extent that information on the number of outstanding shares of Common Stock of the Company is provided by the Company and relied upon by the Holder). In addition, a determination by the Holder as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the total number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written request of a Holder, the Company shall within one Trading Day confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. Any increase in ownership of Common Stock in excess of the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) in order to correct this paragraph (or any portion hereof), if necessary, which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other common equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
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b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise, other than cash (including, without limitation, any distribution of stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) and other than dividends or distributions subject to Section 3(a) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off, merger, or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(d) pursuant to written agreements prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein. For the avoidance of doubt, if, at any time while this Warrant is outstanding, a Fundamental Transaction occurs, pursuant to the terms of this Section 3(d), the Holder shall not be entitled to receive more than one of (i) the consideration receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction, or (ii) the assumption by the Successor Entity of all of the obligations of the Company under this Warrant and the option to receive a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant.
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e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
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Section 4. Transfer of Warrant.
a) Transferability. Pursuant to FINRA Rule 5110(e)(1) and the Agreement, neither this Warrant nor any Warrant Shares issued upon exercise of this Warrant shall be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the securities by any person for a period of one hundred eighty (180) days immediately following the date of effectiveness or commencement of sales of the offering pursuant to which this Warrant is being issued, except the transfer of any security:
(i) by operation of law or by reason of reorganization of the Company;
(ii) to any FINRA member firm participating in the offering and the officers and partners thereof, if all securities so transferred remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period;
(iii) if the aggregate amount of securities of the Company held by the Holder or related person do not exceed 1% of the securities being offered;
(iv) that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or
(v) the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction in this Section 4(a) for the remainder of the time period.
Subject to the foregoing restrictions, compliance with any applicable securities laws, and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Original Issuance Date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
d) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant or Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
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Section 5. Registration Rights.
a) Demand Registration.
i. Grant of Right. The Company, upon written demand (“Initial Demand Notice”) of the Holder(s) of at least 51% of the Warrant Shares (“Majority Holders”), agrees to register on two occasions only (each, a “Demand Registration”) under the Securities Act all or any portion of the Warrant Shares requested by the Majority Holders in the Initial Demand Notice (the “Registrable Securities”). On such occasion, the Company will file a registration statement covering the Registrable Securities within 60 days after receipt of the Initial Demand Notice and to have such registration statement declared effective as soon as possible thereafter. A demand for registration may be made at any time during which the Majority Holders hold any of the Warrant Shares. Notwithstanding the foregoing, the Company shall not be required to effect a registration pursuant to this Section 5 (a): (A) with respect to securities that are not Registrable Securities; (B) during any Scheduled Black-Out Period; (C) if the aggregate offering price of the Registrable Securities to be offered is less than $250,000, unless the Registrable Securities to be offered constitute all of the then-outstanding Registrable Securities; or (D) within 180 days after the effective date of a prior registration in respect of the WarrantCommon Shares, including a Demand Registration (or, in the event that Holders were prevented from including any Registrable Securities requested to be included in a Piggyback Registration pursuant to Section 5(b), within 90 days after the effective date of such prior registration in respect of the WarrantCommon Shares) or (E) if the Warrant Shares may be sold without restriction, including in accordance with Rule 144. For purposes of this Agreement, a “Scheduled Black-Out Period” shall means the periods from and including the day that is ten days prior to the last day of a fiscal quarter of the Company to and including the day that is two days after the day on which the Company publicly releases its earnings for such fiscal quarter. The Initial Demand Notice shall specify the number of shares of Registrable Securities proposed to be sold and the intended method(s) of distribution thereof. The Company will notify all holders of the Warrant Shares of the demand within ten days from the date of the receipt of any such Initial Demand Notice. Each holder of the Warrant Shares who wishes to include all or a portion of such holder’s Warrant Shares in the Demand Registration (each such holder including shares of Registrable Securities in such registration, a “Demanding Holder”) shall so notify the Company within 15 days after the receipt by the holder of the notice from the Company. Upon any such request, the Demanding Holders shall be entitled to have their Warrant Shares included in the Demand Registration. The term of the Demand Registration shall not be more than three-years from the Effective Date.
ii. Effective Registration. A registration will not count as a Demand Registration until the registration statement filed with the Commission with respect to such Demand Registration has been declared effective and the Company has complied with all of its obligations under this Warrant with respect thereto.
iii. Terms. In connection with the first Demand Registration, the Company shall bear all Company fees and expenses attendant to registering the Registrable Securities, including the reasonable expenses of one legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In connection with the second Demand Registration, the Holders shall bear all fees and expenses attendant to registering the Registrable Securities including the reasonable expenses of the Company’s legal counsel. The Company agrees to qualify or register the Registrable Securities in such states as are reasonably requested by the Majority Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a state in which such registration would cause (i) the Company to be obligated to qualify to do business in such state, or would subject the Company to taxation as a foreign corporation doing business in such jurisdiction or (ii) the principal shareholders of the Company to be obligated to escrow their shares of WarrantCommon Shares of the Company. The Company shall cause any registration statement filed pursuant to the demand rights granted under Section 5(a)(iii) to remain effective until all Registrable Securities are sold.
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iv. Notwithstanding the foregoing, if the Board of Directors of the Company determines in its good faith judgment that the filing of a registration statement in connection with a Demand Registration (i) would be seriously detrimental to the Company in that such registration would interfere with a material corporate transaction or (ii) would require the disclosure of material non-public information concerning the Company that at the time is not, in the good faith judgment of the Board of Directors, in the best interests of the Company to disclose and is not, in the opinion of the Company’s counsel, otherwise required to be disclosed, then the Company shall have the right to defer such filing for the period during which such registration would be seriously detrimental under clause (i) or would require such disclosure under clause (ii); provided, however, that (x) the Company may not defer such filing for a period of more than 90 days after receipt of any demand by the Holders and (y) the Company shall not exercise its right to defer a Demand Registration more than once in any 12-month period. The Company shall give written notice of its determination to the Holders to defer the filing and of the fact that the purpose for such deferral no longer exists, in each case, promptly after the occurrence thereof.
b) Piggy-Back Registration.
i. Piggy-Back Rights. If at any time during the three year period after the Effective Date, the Registration Statement is no longer effective, the Company proposes to file a registration statement under the Securities Act with respect to an offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities, by the Company for its own account or for shareholders of the Company for their account (or by the Company and by shareholders of the Company including, without limitation, pursuant to Section 5(a)), other than a registration statement (i) filed in connection with any employee share option or other benefit plan, (ii) for an exchange offer or offering of securities solely to the Company’s existing shareholders, or (iii) for a dividend reinvestment plan, then the Company shall (x) give written notice of such proposed filing to the holders of Registrable Securities as soon as practicable but in no event less than ten days before the anticipated filing date, which notice shall describe the amount and type of securities to be included in such offering, the intended method(s) of distribution, and the name of the proposed managing underwriter or underwriters, if any, of the offering, and (y) offer to the holders of Registrable Securities in such notice the opportunity to register the sale of such number of Warrant Shares held by such holder (the “Piggy-Back Registrable Securities”), as such holders may request in writing within five days following receipt of such notice (a “Piggy-Back Registration”). The Company shall cause such Piggy-Back Registrable Securities to be included in such registration and shall use its commercially reasonable efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Piggy-Back Registrable Securities requested to be included in a Piggy-Back Registration on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Piggy-Back Registrable Securities in accordance with the intended method(s) of distribution thereof. All holders of Piggy-Back Registrable Securities proposing to distribute their securities through a Piggy-Back Registration that involves an underwriter or underwriters shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such Piggy-Back Registration. Notwithstanding the foregoing, the Company shall not be required to effect a registration pursuant to this Section 5(b) if the Warrant Shares may be sold without restriction, including in accordance with Rule 144.
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ii. Reduction of Offering. If the managing underwriter or underwriters for a Piggy-Back Registration that is to be an underwritten offering advises the Company and the holders of Registrable Securities in writing that the dollar amount or number of shares of Common Stock which the Company desires to sell, taken together with Common Stock, if any, as to which registration has been requested pursuant to written contractual arrangements with persons other than the holders of Piggy-Back Registrable Securities hereunder, the Piggy-Back Registrable Securities as to which registration has been requested under this Section 5(b), and the Common Stock, if any, as to which registration has been requested pursuant to the written contractual piggy-back registration rights of other shareholders of the Company, exceeds the maximum dollar amount or maximum number of shares that can be sold in such offering without adversely affecting the proposed offering price, the timing, the distribution method, or the probability of success of such offering (such maximum dollar amount or maximum number of shares, as applicable, the “Maximum Number of Shares”), then the Company shall include in any such registration:
(x) If the registration is undertaken for the Company’s account: (A) first, the Common Stock or other securities that the Company desires to sell that can be sold without exceeding the Maximum Number of Shares; and (B) second, subject to the requirements of registration rights granted by the Company prior to the date hereof, to the extent that the Maximum Number of Shares has not been reached under the foregoing clause (A), up to the amount of shares of Common Stock or other securities that can be sold without exceeding the Maximum Number of Shares, on a pro rata basis, from (i) Piggy-Back Registrable Securities as to which registration has been requested and (ii) the Common Stock or other securities for the account of other persons that the Company is obligated to register pursuant to written contractual piggy-back registration rights with such persons;
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iii. Withdrawal. Any holder of Piggy-Back Registrable Securities may elect to withdraw such holder’s request for inclusion of such Piggy-Back Registrable Securities in any Piggy-Back Registration by giving written notice to the Company of such request to withdraw prior to the effectiveness of the registration statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may withdraw a registration statement at any time prior to the effectiveness of the registration statement. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by the holders of Piggy-Back Registrable Securities in connection with such Piggy-Back Registration as provided in Section 5(b)(iv).
iv. Terms. The Company shall bear all Company fees and expenses attendant to registering the Piggy-Back Registrable Securities, including the expenses of one legal counsel selected by the Holders to represent them in connection with the sale of the Piggy-Back Registrable Securities but the Holders shall pay any and all underwriting commissions related to the Piggy-Back Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Piggy-Back Registrable Securities with not less than fifteen days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each applicable registration statement filed (during the period in which the Warrant is exercisable) by the Company until such time as all of the Piggy-Back Registrable Securities have been registered and sold. The Holders of the Piggy-Back Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice, within ten days of the receipt of the Company’s notice of its intention to file a registration statement. The Company shall cause any registration statement filed pursuant to the above “piggyback” rights to remain effective for at least nine (9) months from the date that the Holders of the Piggy-Back Registrable Securities are first given the opportunity to sell all of such securities.
c) General Terms. These additional terms shall relate to registration under Section 5(b) above:
i. Indemnification.
(w) The Company shall, to the fullest extent permitted by applicable law, indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against litigation, commenced or threatened, or any claim whatsoever whether arising out of any action between the underwriter and the Company or between the underwriter and any third party or otherwise) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement; provided, however, that, with respect to any Holder of Registrable Securities, this indemnity shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in the registration statement (or any amendment thereto), or any preliminary prospectus or the prospectus (or any amendment or supplement thereto).
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(x) The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement(or any amendment thereto), or any preliminary prospectus or the prospectus (or any amendment or supplement thereto).
(y) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve the indemnifying party from any liability it may have under this Agreement, except to the extent that the indemnifying party is prejudiced thereby. If it so elects, after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it; provided, however, that the indemnified party shall be entitled to participate in (but not control) the defense of such action with counsel chosen by it, the reasonable fees and expenses of which shall be paid by such indemnified party, unless a conflict would arise if one counsel were to represent both the indemnified party and the indemnifying party, in which case the reasonable fees and expenses of counsel to the indemnified party shall be paid by the indemnifying party or parties. In no event shall the indemnifying party or parties be liable for a settlement of an action with respect to which they have assumed the defense if such settlement is effected without the written consent of such indemnifying party, or for the reasonable fees and expenses of more than one counsel for (i) the Company, its officers, directors and controlling persons as a group, and (ii) the selling Holders and their controlling persons as a group, in each case, in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances; provided, however, that if, in the reasonable judgment of an indemnified party, a conflict of interest may exist between such indemnified party and the Company or any other of such indemnified parties with respect to such claim, the indemnifying party shall be obligated to pay the reasonable fees and expenses of such additional counsel.
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(z) If the indemnification provided for in or pursuant to Section 5(b)(i) is due in accordance with the terms hereof, but held by a court of competent jurisdiction to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified party on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, and by such party’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
ii. Documents Delivered to Holders. The Company shall furnish the initial Holder a signed counterpart, addressed to the initial Holder, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) if such registration statement is filed in connection of an underwritten public offering, a “cold comfort” letter dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities.
iii. Supplemental Prospectus. Each Holder agrees, that upon receipt of any notice from the Company of the happening of any event as a result of which the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, such Holder will immediately discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder’s receipt of the copies of a supplemental or amended prospectus, and, if so desired by the Company, such Holder shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of such destruction) all copies, other than permanent file copies then in such Holder’s possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. Immediately after discovering of such an event which causes the prospectus included in the registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, the Company shall prepare and file, as soon as practicable, a supplement or amendment to the prospectus so that such registration statement does not include any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and distribute such supplement or amendment to each Holder.
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Section 6. Miscellaneous.
a) No Rights as Stockholder Until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting any rights of a Holder to receive Warrant Shares on a “cashless exercise” pursuant to Section 2(c) or to receive cash payments pursuant to Section 2(d)(i) and Section 2(d)(iv) herein, in no event shall the Company by required to net cash settle an exercise of this Warrant.
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and non-assessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
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Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Agreement.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Non-waiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant or the Agreement, if it is finally adjudicated (without possibility of appeal) that the Company willfully and knowingly failed to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Agreement.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to seek specific performance of its rights under this Warrant.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| CUENTAS, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
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NOTICE OF EXERCISE
TO: CUENTAS, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
______________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
______________________
______________________
______________________
[SIGNATURE OF HOLDER]
Name of Investing Entity:_________________________________________________________
Signature of Authorized Signatory of Investing Entity:__________________________________
Name of Authorized Signatory:____________________________________________________
Title of Authorized Signatory:_____________________________________________________
Date:_________________________________________________________________________
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EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply the required information. Do not use this form to exercise for Warrant Shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to:
| Name: | ||
| Address: | (Please Print) | |
| Phone Number: | ||
| Email Address: | (Please Print) | |
| Dated: ___________ __, _____ | ||
| Holder’s Signature: | ||
| Holder’s Address: |
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Warrant Exercise Log
|
Date |
Number of Warrant Shares Available to be Exercised |
Number of Warrant Shares Exercised |
Number of Warrant Shares Remaining to be Exercised |
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CUENTAS,
INC.
WARRANT DATED __________, 2020
WARRANT NO. [ ]
FORM OF ASSIGNMENT
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the above-captioned Warrant to purchase ____________ share of Company Common Stock and appoints ________________ attorney to transfer said right on the books of the Company with full power of substitution in the premises.
Dated: _______________, ____
_______________________________________
(Signature must conform in all respects to name of holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
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Exhibit 4.2
CUENTAS, INC.
and
OLDE MONMOUTH STOCK TRANSFER CO., INC., as
Warrant Agent
Warrant Agency Agreement
Dated as of _________2020
WARRANT AGENCY AGREEMENT
WARRANT AGENCY AGREEMENT, dated as of _________, 2020 (“Agreement”), between Cuentas, Inc., a corporation organized under the laws of the State of Florida (the “Company”), and Olde Monmouth Stock Transfer Co., Inc., a corporation organized under the laws of [ ] (the “Warrant Agent”).
W I T N E S S E T H
WHEREAS, pursuant to a registered offering by the Company of ___ Units (the “Offering”), with each Unit consisting of one share of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and one warrant (the “Warrants”) to purchase one share of Common Stock (the “Warrant Shares”) at a price of $[___ per share (or [__]% of the price of each share of common stock sold in the Offering); and
WHEREAS, the Company granted an over-allotment option to purchase up to an additional _______ shares of Common Stock sold and/or up to an additional ______________Warrants (the “Over-Allotment Option”) to the Underwriters; and
WHEREAS, upon the terms and subject to the conditions hereinafter set forth and pursuant to an effective registration statement on Form S-1, as amended (File No. 333-249690) (the “Registration Statement”), and the terms and conditions of the Warrant Certificate, the Company wishes to issue the Warrants in book entry form entitling the respective holders of the Warrants (the “Holders,” which term shall include a Holder’s transferees, successors and assigns and “Holder” shall include, if the Warrants are held in “street name,” a Participant (as defined below) or a designee appointed by such Participant); and
WHEREAS, the shares of Common Stock and Warrants to be issued in connection with the Offering shall be immediately separable and will be issued separately, but will be purchased together in the Offering; and
WHEREAS, the Company wishes the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, registration, transfer, exchange, exercise and replacement of the Warrants and, in the Warrant Agent’s capacity as the Company’s transfer agent, the delivery of the Warrant Shares (as defined below).
NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, all capitalized terms not herein defined shall have the meanings hereby indicated:
(a) “Affiliate” has the meaning ascribed to it in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
(b) “Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which the Nasdaq Stock Market is authorized or required by law or other governmental action to close.
(c) “Close of Business” on any given date means 5:00 p.m., New York City time, on such date; provided, however, that if such date is not a Business Day it means 5:00 p.m., New York City time, on the next succeeding Business Day.
(d) “Person” means an individual, corporation, association, partnership, limited liability company, joint venture, trust, unincorporated organization, government or political subdivision thereof or governmental agency or other entity.
(e) “Warrant Certificate” means a certificate in substantially the form attached as Exhibit 1 hereto, representing such number of Warrant Shares as is indicated therein, provided that any reference to the delivery of a Warrant Certificate in this Agreement shall include delivery of a Definitive Certificate or a Global Warrant (each as defined below).
All other capitalized terms used but not otherwise defined herein shall have the meaning ascribed to such terms in the Warrant Certificate.
Section 2. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the terms and conditions hereof, and the Warrant Agent hereby accepts such appointment.
Section 3. Global Warrants.
(a) The Warrants shall be registered securities and shall be evidenced by a global warrant (the “Global Warrants”), in the form of the Warrant Certificate, which shall be deposited with the Warrant Agent and registered in the name of Cede & Co., a nominee of The Depository Trust Company (the “Depositary”), or as otherwise directed by the Depositary. Ownership of beneficial interests in the Warrants shall be shown on, and the transfer of such ownership shall be effected through, records maintained by (i) the Depositary or its nominee for each Global Warrant or (ii) institutions that have accounts with the Depositary (such institution, with respect to a Warrant in its account, a “Participant”).
(b) If the Depositary subsequently ceases to make its book-entry settlement system available for the Warrants, the Company may instruct the Warrant Agent regarding other arrangements for book-entry settlement. In the event that the Warrants are not eligible for, or it is no longer necessary to have the Warrants available in, book-entry form, the Warrant Agent shall provide written instructions to the Depositary to deliver to the Warrant Agent for cancellation each Global Warrant, and the Company shall instruct the Warrant Agent to deliver to each Holder a Warrant Certificate.
(c) A Holder has the right to elect at any time or from time to time a Warrant Exchange (as defined below) pursuant to a Warrant Certificate Request Notice (as defined below). Upon written notice by a Holder to the Company and the Warrant Agent for the exchange of some or all of such Holder’s interest in the Global Warrants for a separate certificate in the form attached hereto as Exhibit 1 (such separate certificate, a “Definitive Certificate”) evidencing the same number of Warrants, which request shall be in the form attached hereto as Exhibit 2 (a “Warrant Certificate Request Notice” and the date of delivery of such Warrant Certificate Request Notice by the Holder, the “Warrant Certificate Request Notice Date” and the surrender by the Holder to the Warrant Agent of its beneficial interest in a number of Global Warrants for the same number of Warrants evidenced by a Warrant Certificate, a “Warrant Exchange”), the Company and the Warrant Agent shall promptly effect the Warrant Exchange and the Company shall promptly issue and deliver to the Holder a Definitive Certificate for such number of Warrants in the name set forth in the Warrant Certificate Request Notice. Such Definitive Certificate shall be dated the original issue date of the Warrants, shall be manually executed by an authorized signatory of the Company, shall be in the form attached hereto as Exhibit 1 and shall be reasonably acceptable in all respects to such Holder. In connection with a Warrant Exchange, the Company agrees to deliver the Definitive Certificate to the Holder within ten (10) Business Days of the Warrant Certificate Request Notice pursuant to the delivery instructions in the Warrant Certificate Request Notice (“Warrant Certificate Delivery Date”). If the Company fails for any reason to deliver to the Holder the Definitive Certificate subject to the Warrant Certificate Request Notice by the Warrant Certificate Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares evidenced by such Definitive Certificate (based on the VWAP (as defined in the Warrants) of the Common Stock on the Warrant Certificate Request Notice Date), $10 per Business Day for each Business Day after such Warrant Certificate Delivery Date until such Definitive Certificate is delivered or, prior to delivery of such Warrant Certificate, the Holder rescinds such Warrant Exchange. The Company covenants and agrees that, upon the date of delivery of the Warrant Certificate Request Notice, the Holder shall be deemed to be the holder of the Definitive Certificate and, notwithstanding anything to the contrary set forth herein, the Definitive Certificate shall be deemed for all purposes to contain all of the terms and conditions of the Warrants evidenced by such Warrant Certificate and the terms of this Agreement, other than Sections 3(c), 3(d) and 9 herein, shall not apply to the Warrants evidenced by the Definitive Certificate. Notwithstanding anything herein to the contrary, the Company shall act as warrant agent with respect to any Definitive Certificate requested and issued pursuant to this section. Notwithstanding anything to the contrary contained in this Agreement, in the event of inconsistency between any provision in this Agreement and any provision in a Definitive Certificate, as it may from time to time be amended, the terms of such Definitive Certificate shall control.
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(d) A Holder of a Definitive Certificate (pursuant to a Warrant Exchange or otherwise) has the right to elect at any time or from time to time a Global Warrants Exchange (as defined below) pursuant to a Global Warrants Request Notice (as defined below). Upon written notice by a Holder to the Company for the exchange of some or all of such Holder’s Warrants evidenced by a Definitive Certificate for a beneficial interest in Global Warrants held in book-entry form through the Depositary evidencing the same number of Warrants, which request shall be in the form attached hereto as Exhibit 3 (a “Global Warrants Request Notice” and the date of delivery of such Global Warrants Request Notice by the Holder, the “Global Warrants Request Notice Date” and the surrender upon delivery by the Holder of the Warrants evidenced by Definitive Certificates for the same number of Warrants evidenced by a beneficial interest in Global Warrants held in book-entry form through the Depositary, a “Global Warrants Exchange”), the Company shall promptly effect the Global Warrants Exchange and shall promptly direct the Warrant Agent to issue and deliver to the Holder Global Warrants for such number of Warrants in the Global Warrants Request Notice, which beneficial interest in such Global Warrants shall be delivered by the Depositary’s Deposit or Withdrawal at Custodian system to the Holder pursuant to the instructions in the Global Warrants Request Notice. In connection with a Global Warrants Exchange, the Company shall direct the Warrant Agent to deliver the beneficial interest in such Global Warrants to the Holder within ten (10) Business Days of the Global Warrants Request Notice pursuant to the delivery instructions in the Global Warrant Request Notice (“Global Warrants Delivery Date”). If the Company fails for any reason to deliver to the Holder Global Warrants subject to the Global Warrants Request Notice by the Global Warrants Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares evidenced by such Global Warrants (based on the VWAP (as defined in the Warrants) of the Common Stock on the Global Warrants Request Notice Date), $10 per Business Day for each Business Day after such Global Warrants Delivery Date until such Global Warrants are delivered or, prior to delivery of such Global Warrants, the Holder rescinds such Global Warrants Exchange. The Company covenants and agrees that, upon the date of delivery of the Global Warrants Request Notice, the Holder shall be deemed to be the beneficial holder of such Global Warrants.
Section 4. Form of Warrant Certificates. The Warrant Certificate, together with the form of election to purchase Common Stock (“Notice of Exercise”) and the form of assignment to be printed on the reverse thereof, shall be in the form of Exhibit 1 hereto.
Section 5. Countersignature and Registration. The Global Warrant shall be executed on behalf of the Company by its Chief Executive Officer, Chief Financial Officer or Vice President, by facsimile signature. The Global Warrant shall be countersigned by the Warrant Agent by facsimile signature and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Global Warrant shall cease to be such officer of the Company before countersignature by the Warrant Agent and issuance and delivery by the Company, such Global Warrant, nevertheless, may be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Global Warrant had not ceased to be such officer of the Company; and any Global Warrant may be signed on behalf of the Company by any person who, at the actual date of the execution of such Global Warrant, shall be a proper officer of the Company to sign such Global Warrant, although at the date of the execution of this Warrant Agreement any such person was not such an officer.
The Warrant Agent will keep or cause to be kept, at one of its offices, or at the office of one of its agents, books for registration and transfer of the Global Warrants issued hereunder. Such books shall show the names and addresses of the respective Holders of the Global Warrant, the number of warrants evidenced on the face of each of such Global Warrant and the date of each of such Global Warrant. The Warrant Agent will create a special account for the issuance of Global Warrants. The Company will keep or cause to be kept at one of its offices, books for the registration and transfer of any Definitive Certificates issued hereunder and the Warrant Agent shall not have any obligation to keep books and records with respect to any Definitive Warrants. Such Company books shall show the names and addresses of the respective Holders of the Definitive Certificates, the number of warrants evidenced on the face of each such Definitive Certificate and the date of each such Definitive Certificate.
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Section 6. Transfer, Split Up, Combination and Exchange of Warrant Certificates; Mutilated, Destroyed, Lost or Stolen Warrant Certificates. With respect to the Global Warrant, subject to the provisions of the Warrant Certificate and the last sentence of this first paragraph of Section 6 and subject to applicable law, rules or regulations, or any “stop transfer” instructions the Company may give to the Warrant Agent, at any time after the closing date of the Offering, and at or prior to the Close of Business on the Termination Date (as such term is defined in the Warrant Certificate), any Global Warrant or Global Warrants may be transferred, split up, combined or exchanged for another Global Warrant or Global Warrants, entitling the Holder to purchase a like number of shares of Common Stock as the Global Warrant or Global Warrants surrendered then entitled such Holder to purchase. Any Holder desiring to transfer, split up, combine or exchange any Global Warrant shall make such request in writing delivered to the Warrant Agent, and shall surrender the Global Warrant to be transferred, split up, combined or exchanged at the principal office of the Warrant Agent. Any requested transfer of Warrants, whether in book-entry form or certificate form, shall be accompanied by reasonable evidence of authority of the party making such request that may be required by the Warrant Agent. Thereupon the Warrant Agent shall, subject to the last sentence of this first paragraph of Section 6, countersign and deliver to the Person entitled thereto a Global Warrant or Global Warrants, as the case may be, as so requested. The Company may require payment from the Holder of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Global Warrants. The Company shall compensate the Warrant Agent per the fee schedule mutually agreed upon by the parties hereto and provided separately on the date hereof.
Upon receipt by the Warrant Agent of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of a Warrant Certificate, which evidence shall include an affidavit of loss, or in the case of mutilated certificates, the certificate or portion thereof remaining, and, in case of loss, theft or destruction, of indemnity in customary form and amount (but, with respect to any Definitive Certificates, shall not include the posting of any bond by the Holder), and satisfaction of any other reasonable requirements established by Section 8-405 of the Uniform Commercial Code as in effect in the State of Florida, and reimbursement to the Company and the Warrant Agent of all reasonable expenses incidental thereto, and upon surrender to the Warrant Agent and cancellation of the Warrant Certificate if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor to the Warrant Agent for delivery to the Holder in lieu of the Warrant Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Warrants; Exercise Price; Termination Date.
(a) The Warrants shall be exercisable commencing on the Initial Exercise Date. The Warrants shall cease to be exercisable and shall terminate and become void as set forth in the Warrant Certificate. Subject to the foregoing and to Section 7(b) below, the Holder of a Warrant may exercise the Warrant in whole or in part upon surrender of the Warrant Certificate, if required, with the executed Notice of Exercise and payment of the Exercise Price, which may be made, at the option of the Holder, by wire transfer or by certified or official bank check in United States dollars, to the Warrant Agent at the principal office of the Warrant Agent or to the office of one of its agents as may be designated by the Warrant Agent from time to time. In the case of the Holder of a Global Warrant, the Holder shall deliver the executed Notice of Exercise and the payment of the Exercise Price as described herein. Notwithstanding any other provision in this Agreement, a holder whose interest in a Global Warrant is a beneficial interest in a Global Warrant held in book-entry form through the Depositary (or another established clearing corporation performing similar functions), shall effect exercises by delivering to the Depositary (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by the Depositary (or such other clearing corporation, as applicable). The Company acknowledges that the bank accounts maintained by the Warrant Agent in connection with the services provided under this Agreement will be in its name and that the Warrant Agent may receive investment earnings in connection with the investment at Warrant Agent risk and for its benefit of funds held in those accounts from time to time. Neither the Company nor the Holders will receive interest on any deposits or Exercise Price. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. The Company hereby acknowledges and agrees that, with respect to a holder whose interest in a Global Warrant is a beneficial interest in a Global Warrant held in book-entry form through the Depositary (or another established clearing corporation performing similar functions), upon delivery of irrevocable instructions to such holder’s Participant to exercise such warrants, that solely for purposes of Regulation SHO that such holder shall be deemed to have exercised such warrants.
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(b) Upon receipt of a Notice of Exercise for a Cashless Exercise at a time when Cashless Exercise is available under the Warrants, the Company will promptly calculate and transmit to the Warrant Agent the number of Warrant Shares issuable in connection with such Cashless Exercise and deliver a copy of the Notice of Exercise to the Warrant Agent, which shall issue such number of Warrant Shares in connection with such Cashless Exercise.
(c) Upon the exercise of the Warrant Certificate pursuant to the terms of Section 2 of the Warrant Certificate, the Warrant Agent shall cause the Warrant Shares underlying such Warrant Certificate or Global Warrant to be delivered to or upon the order of the Holder of such Warrant Certificate or Global Warrant, registered in such name or names as may be designated by such Holder, no later than the Warrant Share Delivery Date (as such term is defined in the Warrant Certificate). If the Company is then a participant in the DWAC system of the Depositary and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) the Warrant is being exercised via Cashless Exercise, then the certificates for Warrant Shares shall be transmitted by the Warrant Agent to the Holder by crediting the account of the Holder’s broker with the Depositary through its DWAC system. For the avoidance of doubt, if the Company becomes obligated to pay any amounts to any Holders pursuant to Section 2(d)(i) or 2(d)(iv) of the Warrant Certificate, such obligation shall be solely that of the Company and not that of the Warrant Agent. Notwithstanding anything else to the contrary in this Agreement, except in the case of a Cashless Exercise, if any Holder fails to duly deliver payment to the Warrant Agent of an amount equal to the aggregate Exercise Price of the Warrant Shares to be purchased upon exercise of such Holder’s Warrant as set forth in Section 7(a) hereof by the Warrant Share Delivery Date, the Warrant Agent will not obligated to deliver such Warrant Shares (via DWAC or otherwise) until following receipt of such payment, and the applicable Warrant Share Delivery Date shall be deemed extended by one day for each day (or part thereof) until such payment is delivered to the Warrant Agent.
(d) The Warrant Agent shall deposit all funds received by it in payment of the Exercise Price for all Warrants in the account of the Company maintained with the Warrant Agent for such purpose (or to such other account as directed by the Company in writing) and shall advise the Company via email at the end of each day on which notices of exercise are received or funds for the exercise of any Warrant are received of the amount so deposited to its account.
Section 8. Cancellation and Destruction of Warrant Certificates. All Warrant Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Warrant Agent for cancellation or in canceled form, or, if surrendered to the Warrant Agent, shall be canceled by it, and no Warrant Certificate shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Warrant Agent for cancellation and retirement, and the Warrant Agent shall so cancel and retire, any other Warrant Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Warrant Agent shall deliver all canceled Warrant Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Warrant Certificates, and in such case shall deliver a certificate of destruction thereof to the Company, subject to any applicable law, rule or regulation requiring the Warrant Agent to retain such canceled certificates.
Section 9. Certain Representations; Reservation and Availability of Shares of Common Stock or Cash.
(a) This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery hereof by the Warrant Agent, constitutes a valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms, and the Warrants have been duly authorized, executed and issued by the Company and, assuming due authentication thereof by the Warrant Agent pursuant hereto and payment therefor by the Holders as provided in the Registration Statement, constitute valid and legally binding obligations of the Company enforceable against the Company in accordance with their terms and entitled to the benefits hereof; in each case except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors’ rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law).
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(b) As of the date hereof, the authorized capital stock of the Company consists of (i) three hundred sixty million (360,000,000) shares of Common Stock, of which approximately [ ] shares of Common Stock are issued and outstanding as of the date of this Agreement, and [ ] shares of Common Stock are reserved for issuance upon exercise of the Warrants (. Except as disclosed in the Registration Statement, there are no other outstanding obligations, warrants, options or other rights to subscribe for or purchase from the Company any class of capital stock of the Company.
(c) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Common Stock or its authorized and issued shares of Common Stock held in its treasury, free from preemptive rights, the number of shares of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants.
(d) The Warrant Agent will create a special account for the issuance of Common Stock upon the exercise of Warrants.
(e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the original issuance or delivery of the Warrant Certificates or certificates evidencing Common Stock upon exercise of the Warrants. The Company shall not, however, be required to pay any tax or governmental charge which may be payable in respect of any transfer involved in the transfer or delivery of Warrant Certificates or the issuance or delivery of certificates for Common Stock in a name other than that of the Holder of the Warrant Certificate evidencing Warrants surrendered for exercise or to issue or deliver any certificate for shares of Common Stock upon the exercise of any Warrants until any such tax or governmental charge shall have been paid (any such tax or governmental charge being payable by the Holder of such Warrant Certificate at the time of surrender) or until it has been established to the Company’s reasonable satisfaction that no such tax or governmental charge is due.
Section 10. Common Stock Record Date. Each Person in whose name any certificate for shares of Common Stock is issued (or to whose broker’s account is credited shares of Common Stock through the DWAC system) upon the exercise of Warrants shall for all purposes be deemed to have become the holder of record for the Common Stock represented thereby on, and such certificate shall be dated, the date on which submission of the Notice of Exercise was made, provided that the Warrant Certificate evidencing such Warrant is duly surrendered (but only if required herein) and payment of the Exercise Price (and any applicable transfer taxes) is received on or prior to the Warrant Share Delivery Date; provided, however, that if the date of submission of the Notice of Exercise is a date upon which the Common Stock transfer books of the Company are closed, such Person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding day on which the Common Stock transfer books of the Company are open.
Section 11. Adjustment of Exercise Price, Number of Shares of Common Stock or Number of the Company Warrants. The Exercise Price, the number of shares covered by each Warrant and the number of Warrants outstanding are subject to adjustment from time to time as provided in Section 3 of the Warrant Certificate. In the event that at any time, as a result of an adjustment made pursuant to Section 3 of the Warrant Certificate, the Holder of any Warrant thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares contained in Section 3 of the Warrant Certificate and the provisions of Sections 7, 11 and 12 of this Agreement with respect to the shares of Common Stock shall apply on like terms to any such other shares. All Warrants originally issued by the Company subsequent to any adjustment made to the Exercise Price pursuant to the Warrant Certificate shall evidence the right to purchase, at the adjusted Exercise Price, the number of shares of Common Stock purchasable from time to time hereunder upon exercise of the Warrants, all subject to further adjustment as provided herein.
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Section 12. Certification of Adjusted Exercise Price or Number of Shares of Common Stock. Whenever the Exercise Price or the number of shares of Common Stock issuable upon the exercise of each Warrant is adjusted as provided in Section 11 or 13, the Company shall (a) promptly prepare a certificate setting forth the Exercise Price of each Warrant as so adjusted, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Warrant Agent and with each transfer agent for the Common Stock a copy of such certificate and (c) instruct the Warrant Agent to send a brief summary thereof to each Holder of a Warrant Certificate.
Section 13. Fractional Shares of Common Stock.
(a) The Company shall not issue fractions of Warrants or distribute Warrant Certificates which evidence fractional Warrants. Whenever any fractional Warrant would otherwise be required to be issued or distributed, the actual issuance or distribution shall reflect a rounding of such fraction to the nearest whole Warrant (rounded down).
(b) The Company shall not issue fractions of shares of Common Stock upon exercise of Warrants or distribute stock certificates which evidence fractional shares of Common Stock. Whenever any fraction of a share of Common Stock would otherwise be required to be issued or distributed, the actual issuance or distribution in respect thereof shall be made in accordance with Section 2(d)(v) of the Warrant Certificate.
Section 14. Conditions of the Warrant Agent’s Obligations. The Warrant Agent accepts its obligations herein set forth upon the terms and conditions hereof, including the following to all of which the Company agrees and to all of which the rights hereunder of the Holders from time to time of the Warrant Certificates shall be subject:
| (a) | Compensation and Indemnification. The Company agrees promptly to pay the Warrant Agent the compensation detailed on Exhibit 4 hereto for all services rendered by the Warrant Agent and to reimburse the Warrant Agent for reasonable out-of-pocket expenses (including reasonable counsel fees) incurred without gross negligence or willful misconduct finally adjudicated to have been directly caused by the Warrant Agent in connection with the services rendered hereunder by the Warrant Agent. The Company also agrees to indemnify the Warrant Agent for, and to hold it harmless against, any loss, liability or expense incurred without gross negligence, or willful misconduct on the part of the Warrant Agent, finally adjudicated to have been directly caused by Warrant Agent hereunder, including the reasonable costs and expenses of defending against any claim of such liability. The Warrant Agent shall be under no obligation to institute or defend any action, suit, or legal proceeding in connection herewith or to take any other action likely to involve the Warrant Agent in expense, unless first indemnified to the Warrant Agent’s satisfaction. The indemnities provided by this paragraph shall survive the resignation or discharge of the Warrant Agent or the termination of this Agreement. Anything in this Agreement to the contrary notwithstanding, in no event shall the Warrant Agent be liable under or in connection with the Agreement for indirect, special, incidental, punitive or consequential losses or damages of any kind whatsoever, including but not limited to lost profits, whether or not foreseeable, even if the Warrant Agent has been advised of the possibility thereof and regardless of the form of action in which such damages are sought, and the Warrant Agent’s aggregate liability to the Company, or any of the Company’s representatives or agents, under this Section 14(a) or under any other term or provision of this Agreement, whether in contract, tort, or otherwise, is expressly limited to, and shall not exceed in any circumstances, one (1) year’s fees received by the Warrant Agent as fees and charges under this Agreement, but not including reimbursable expenses previously reimbursed to the Warrant Agent by the Company hereunder. |
| (b) | Agent for the Company. In acting under this Warrant Agreement and in connection with the Warrant Certificates, the Warrant Agent is acting solely as agent of the Company and does not assume any obligations or relationship of agency or trust for or with any of the Holders of Warrant Certificates or beneficial owners of Warrants. |
| (c) | Counsel. The Warrant Agent may consult with counsel satisfactory to it, which may include counsel for the Company, and the written advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the advice of such counsel. |
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| (d) | Documents. The Warrant Agent shall be protected and shall incur no liability for or in respect of any action taken or omitted by it in reliance upon any Warrant Certificate, notice, direction, consent, certificate, affidavit, statement or other paper or document reasonably believed by it to be genuine and to have been presented or signed by the proper parties. |
| (e) | Certain Transactions. The Warrant Agent, and its officers, directors and employees, may become the owner of, or acquire any interest in, Warrants, with the same rights that it or they would have if it were not the Warrant Agent hereunder, and, to the extent permitted by applicable law, it or they may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of Holders of Warrant Securities or other obligations of the Company as freely as if it were not the Warrant Agent hereunder. Nothing in this Warrant Agreement shall be deemed to prevent the Warrant Agent from acting as trustee under any indenture to which the Company is a party. |
| (f) | No Liability for Interest. Unless otherwise agreed with the Company, the Warrant Agent shall have no liability for interest on any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Warrant Certificates. |
| (g) | No Liability for Invalidity. The Warrant Agent shall have no liability with respect to any invalidity of this Agreement or the Warrant Certificates (except as to the Warrant Agent’s countersignature thereon). |
| (h) | No Responsibility for Representations. The Warrant Agent shall not be responsible for any of the recitals or representations herein or in the Warrant Certificate (except as to the Warrant Agent’s countersignature thereon), all of which are made solely by the Company. |
| (i) | No Implied Obligations. The Warrant Agent shall be obligated to perform only such duties as are herein and in the Warrant Certificates specifically set forth and no implied duties or obligations shall be read into this Agreement or the Warrant Certificates against the Warrant Agent. The Warrant Agent shall not be under any obligation to take any action hereunder which may tend to involve it in any expense or liability, the payment of which within a reasonable time is not, in its reasonable opinion, assured to it. The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any of the Warrant Certificates authenticated by the Warrant Agent and delivered by it to the Company pursuant to this Agreement or for the application by the Company of the proceeds of the Warrant Certificate. The Warrant Agent shall have no duty or responsibility in case of any default by the Company in the performance of its covenants or agreements contained herein or in the Warrant Certificates or in the case of the receipt of any written demand from a Holder of a Warrant Certificate with respect to such default, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law. |
Section 15. Purchase or Consolidation or Change of Name of Warrant Agent. Any corporation into which the Warrant Agent or any successor Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent or any successor Warrant Agent shall be party, or any corporation succeeding to the corporate trust business of the Warrant Agent or any successor Warrant Agent, shall be the successor to the Warrant Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 17. In case at the time such successor Warrant Agent shall succeed to the agency created by this Agreement any of the Warrant Certificates shall have been countersigned but not delivered, any such successor Warrant Agent may adopt the countersignature of the predecessor Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement.
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In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in this Agreement.
Section 16. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company, by its acceptance hereof, shall be bound:
(a) The Warrant Agent may consult with legal counsel reasonably acceptable to the Company (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by the Chief Executive Officer, Chief Financial Officer or Vice President of the Company; and such certificate shall be full authentication to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate.
(c) Subject to the limitation set forth in Section 14, the Warrant Agent shall be liable hereunder only for its own gross negligence or willful misconduct, or for a breach by it of this Agreement.
(d) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant Certificate (except its countersignature thereof) by the Company or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant Certificate; nor shall it be responsible for the adjustment of the Exercise Price or the making of any change in the number of shares of Common Stock required under the provisions of Section 11 or 13 or responsible for the manner, method or amount of any such change or the ascertaining of the existence of facts that would require any such adjustment or change (except with respect to the exercise of Warrants evidenced by the Warrant Certificates after actual notice of any adjustment of the Exercise Price); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant Certificate or as to whether any shares of Common Stock will, when issued, be duly authorized, validly issued, fully paid and nonassessable.
(f) Each party hereto agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the other party hereto for the carrying out or performing by any party of the provisions of this Agreement.
(g) The Warrant Agent is hereby authorized to accept instructions with respect to the performance of its duties hereunder from the Chief Executive Officer, Chief Financial Officer or Vice President of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable and shall be indemnified and held harmless for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer, provided Warrant Agent carries out such instructions without gross negligence or willful misconduct.
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(h) The Warrant Agent and any shareholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity.
(i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorney or agents, and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorney or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof.
Section 17. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement upon 30 days’ notice in writing sent to the Company and to each transfer agent of the Common Stock, and to the Holders of the Warrant Certificates. The Company may remove the Warrant Agent or any successor Warrant Agent upon 30 days’ notice in writing, sent to the Warrant Agent or successor Warrant Agent, as the case may be, and to each transfer agent of the Common Stock, and to the Holders of the Warrant Certificates. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the Holder of a Warrant Certificate (who shall, with such notice, submit his Warrant Certificate for inspection by the Company), then the Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new Warrant Agent, provided that, for purposes of this Agreement, the Company shall be deemed to be the Warrant Agent until a new warrant agent is appointed. Any successor Warrant Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of a state thereof, in good standing, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Warrant Agent a combined capital and surplus of at least $50,000,000. After appointment, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the predecessor Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Warrant Agent and each transfer agent of the Common Stock, and mail a notice thereof in writing to the Holders of the Warrant Certificates. However, failure to give any notice provided for in this Section 17, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be.
Section 18. Issuance of New Warrant Certificates. Notwithstanding any of the provisions of this Agreement or of the Warrants to the contrary, the Company may, at its option, issue new Warrant Certificates evidencing Warrants in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price per share and the number or kind or class of shares of stock or other securities or property purchasable under the several Warrant Certificates made in accordance with the provisions of this Agreement.
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Section 19. Notices. Notices or demands authorized by this Agreement to be given or made (i) by the Warrant Agent or by the Holder of any Warrant Certificate to or on the Company, (ii) subject to the provisions of Section 17, by the Company or by the Holder of any Warrant Certificate to or on the Warrant Agent or (iii) by the Company or the Warrant Agent to the Holder of any Warrant Certificate shall be deemed given (a) on the date delivered, if delivered personally, (b) on the first Business Day following the deposit thereof with Federal Express or another recognized overnight courier, if sent by Federal Express or another recognized overnight courier, (c) on the fourth Business Day following the mailing thereof with postage prepaid, if mailed by registered or certified mail (return receipt requested), and (d) the date of transmission, if such notice or communication is delivered via facsimile or email attachment at or prior to 5:30 p.m. (New York City time) on a Business Day and (e) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile or email attachment on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, in each case to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
| (a) | If to the Company, to: |
Cuentas, Inc.
19 W. Flagler Street, Suite 902
Miami, FL 33130
Attention:
Email:
| (b) | If to the Warrant Agent, to: |
Olde Monmouth Stock Transfer Co., Inc
200 Memorial Parkway
Atlantic Highlands, NJ 07716
Attention:
Email:
For any notice delivered by email to be deemed given or made, such notice must be followed by notice sent by overnight courier service to be delivered on the next business day following such email, unless the recipient of such email has acknowledged via return email receipt of such email.
(c) If to the Holder of any Warrant Certificate to the address of such Holder as shown on the registry books of the Company. Any notice required to be delivered by the Company to the Holder of any Warrant may be given by the Warrant Agent on behalf of the Company. Notwithstanding any other provision of this Agreement, where this Agreement provides for notice of any event to a Holder of any Warrant, such notice shall be sufficiently given if given to the Depositary (or its designee) pursuant to the procedures of the Depositary or its designee.
Section 20. Supplements and Amendments.
(a) The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Holders of Global Warrants in order to add to the covenants and agreements of the Company for the benefit of the Holders of the Global Warrants or to surrender any rights or power reserved to or conferred upon the Company in this Agreement, provided that such addition or surrender shall not adversely affect the interests of the Holders of the Global Warrants or Warrant Certificates in any material respect.
(b) In addition to the foregoing, with the consent of Holders of Warrants entitled, upon exercise thereof, to receive not less than a majority of the shares of Common Stock issuable thereunder, the Company and the Warrant Agent may modify this Agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Warrant Agreement or modifying in any manner the rights of the Holders of the Global Warrants; provided, however, that no modification of the terms (including but not limited to the adjustments described in Section 11) upon which the Warrants are exercisable or the rights of holders of Warrants to receive liquidated damages or other payments in cash from the Company or reducing the percentage required for consent to modification of this Agreement may be made without the consent of the Holder of each outstanding Warrant Certificate affected thereby; provided further, however, that no amendment hereunder shall affect any terms of any Warrant Certificate issued in a Warrant Exchange. As a condition precedent to the Warrant Agent’s execution of any amendment, the Company shall deliver to the Warrant Agent a certificate from a duly authorized officer of the Company that states that the proposed amendment complies with the terms of this Section 20.
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Section 21. Successors. All covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder.
Section 22. Benefits of this Agreement. Nothing in this Agreement shall be construed to give any Person other than the Company, the Holders of Warrant Certificates and the Warrant Agent any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the Holders of the Warrant Certificates.
Section 23. Governing Law. This Agreement and each Warrant Certificate and Global Warrant issued hereunder shall be governed by, and construed in accordance with, the laws of the State of New York , without giving effect to the conflicts of law principles thereof.
Section 24. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
Section 25. Captions. The captions of the sections of this Agreement have been inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
Section 26. Information. The Company agrees to promptly provide to the Holders of the Warrants any information it provides to the holders of the Common Stock, except to the extent any such information is publicly available on the EDGAR system (or any successor thereof) of the Securities and Exchange Commission.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.
| CUENTAS, INC. | |||
| By: | |||
| Name: | |||
| Title: | |||
| OLDE MONMOUTH STOCK TRANSFER CO., INC. | |||
| By: | |||
| Name: | |||
| Title: | |||
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Exhibit 1
Form of Warrant Certificate
Exhibit 2
Form of Warrant Certificate Request Notice
WARRANT CERTIFICATE REQUEST NOTICE
To: Olde Monmouth Stock Transfer Co., Inc. as Warrant Agent for Cuentas, Inc. (the “Company”)
The undersigned Holder of Common Stock Purchase Warrants (“Warrants”) in the form of Global Warrants issued by the Company hereby elects to receive a Warrant Certificate evidencing the Warrants held by the Holder as specified below:
| 1. | Name of Holder of Warrants in form of Global Warrants: _____________________________ |
| 2. | Name of Holder in Warrant Certificate (if different from name of Holder of Warrants in form of Global Warrants): ________________________________ |
| 3. | Number of Warrants in name of Holder in form of Global Warrants: ___________________ |
| 4. | Number of Warrants for which Warrant Certificate shall be issued: __________________ |
| 5. | Number of Warrants in name of Holder in form of Global Warrants after issuance of Warrant Certificate, if any: ___________ |
| 6. | Warrant Certificate shall be delivered to the following address: |
______________________________
______________________________
______________________________
______________________________
The undersigned hereby acknowledges and agrees that, in connection with this Warrant Exchange and the issuance of the Warrant Certificate, the Holder is deemed to have surrendered the number of Warrants in form of Global Warrants in the name of the Holder equal to the number of Warrants evidenced by the Warrant Certificate.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ____________________________________________________
Signature of Authorized Signatory of Investing Entity: ______________________________
Name of Authorized Signatory: ________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: _______________________________________________________________
Exhibit 3
Form of Global Warrant Request Notice
GLOBAL WARRANT REQUEST NOTICE
To: Olde Monmouth Stock Transfer Co., Inc, as Warrant Agent for Cuentas, Inc. (the “Company”)
The undersigned Holder of Common Stock Purchase Warrants (“Warrants”) in the form of Warrants Certificates issued by the Company hereby elects to receive a Global Warrant evidencing the Warrants held by the Holder as specified below:
| 1. | Name of Holder of Warrants in form of Warrant Certificates: _____________________________ |
| 2. | Name of Holder in Global Warrant (if different from name of Holder of Warrants in form of Warrant Certificates): ________________________________ |
| 3. | Number of Warrants in name of Holder in form of Warrant Certificates: ___________________ |
| 4. | Number of Warrants for which Global Warrant shall be issued: __________________ |
| 5. | Number of Warrants in name of Holder in form of Warrant Certificates after issuance of Global Warrant, if any: ___________ |
| 6. | Global Warrant shall be delivered to the following address: |
______________________________
______________________________
______________________________
______________________________
The undersigned hereby acknowledges and agrees that, in connection with this Global Warrant Exchange and the issuance of the Global Warrant, the Holder is deemed to have surrendered the number of Warrants in form of Warrant Certificates in the name of the Holder equal to the number of Warrants evidenced by the Global Warrant.
[SIGNATURE OF HOLDER]
Name of Investing Entity: ____________________________________________________
Signature of Authorized Signatory of Investing Entity: ______________________________
Name of Authorized Signatory: ________________________________________________
Title of Authorized Signatory: _________________________________________________
Date: _______________________________________________________________
Exhibit 4
Warrant Agent Fee Schedule
Exhibit 4.3
COMMON STOCK PURCHASE WARRANT
CUENTAS, INC.
| Warrant Shares: [_______] | Initial Exercise Date: ______, 2020 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ or its assigns (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m. (New York City time) on [_____], 20251 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Cuentas, Inc., a company incorporated under the laws of the State of Florida (the “Company”), up to [___] shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b). This Warrant shall initially be issued and maintained in the form of a security held in book-entry form and the Depository Trust Company or its nominee (“DTC”) shall initially be the sole registered holder of this Warrant, subject to a Holder’s right to elect to receive a Warrant in certificated form pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
Section 1. Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
1 Insert the date that is the 5th year anniversary of the Initial Exercise Date; provided, however, that, if such date is not a Trading Day, insert the immediately following Trading Day.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Registration Statement” means the Company’s registration statement on Form S-1, as amended (File No. 333-249690).
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, OTCQB or OTCQX (or any successors to any of the foregoing).
“Transfer Agent” means Olde Monmouth Stock Transfer Co., Inc., the current transfer agent of the Company, with a mailing address of 200 Memorial Parkway, Atlantic Highlands, NJ 07716 and a facsimile number of [_______________], and any successor transfer agent of the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported on the Pink Open Market (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
“Warrant Agency Agreement” means that certain warrant agency agreement, dated on or about the Initial Exercise Date, between the Company and the Warrant Agent.
“Warrant Agent” means the Transfer Agent and any successor warrant agent of the Company.
“Warrants” means this Warrant and other Common Stock purchase warrants issued by the Company pursuant to the Registration Statement.
Section 2. Exercise.
a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (the “Notice of Exercise”). Within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date on which the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
Notwithstanding the foregoing in this Section 2(a), a holder whose interest in this Warrant is a beneficial interest in certificate(s) representing this Warrant held in book-entry form through DTC (or another established clearing corporation performing similar functions), shall effect exercises made pursuant to this Section 2(a) by delivering to DTC (or such other clearing corporation, as applicable) the appropriate instruction form for exercise, complying with the procedures to effect exercise that are required by DTC (or such other clearing corporation, as applicable), subject to a Holder’s right to elect to receive a Definitive Warrant pursuant to the terms of the Warrant Agency Agreement, in which case this sentence shall not apply.
b) Exercise Price. The exercise price per share of Common Stock under this Warrant shall be $[_____]2, subject to adjustment hereunder (the “Exercise Price”).
2 Insert [__]% of the price of each share of common stock sold in the Offering.
c) Cashless Exercise. If at the time of exercise hereof there is no effective registration statement registering, or the prospectus contained therein is not available for the issuance of the Warrant Shares to the Holder, then this Warrant may also be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing ((A-B)(X)) by (A), where:
(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening of “regular trading hours” (as defined in Rule 600(b)(68) of Regulation NMS promulgated under the federal securities laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within two (2) hours thereafter (including until two (2) hours after the close of “regular trading hours” on a Trading Day) pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and delivered pursuant to Section 2(a) hereof after the close of “regular trading hours” on such Trading Day;
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the registered characteristics of the Warrants being exercised. The Company agrees not to take any position contrary to this Section 2(c).
d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earliest of (i) two (2) Trading Days after the delivery to the Company of the Notice of Exercise, provided that the Holder has then delivered the aggregate Exercise Price to the Company, if applicable, (ii) one (1) Trading Day after delivery of the aggregate Exercise Price to the Company and (iii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise provided that the Holder has then delivered the aggregate Exercise Price to the Company, if applicable (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price (other than in the case of a cashless exercise) is received within the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.
ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise upon written notice to the Company.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination and shall have no liability for exercises of this Warrant that are not in compliance with the Beneficial Ownership Limitation (other than to the extent that information on the number of outstanding shares of Common Stock of the Company is provided by the Company and relied upon by the Holder). In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within one Trading Day confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% (or, upon election by a Holder prior to the issuance of any Warrants, 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
Section 3. Certain Adjustments.
a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
c) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) other than dividends or distributions subject to Section 3(a) (a "Distribution"), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
d) Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.
e) Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
f) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer of Warrant.
a) Transferability. This Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date on which the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
b) New Warrants. If this Warrant is not held in global form through DTC (or any successor depositary, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register. The Warrant Agent (or, in the event a Holder elects to receive a Definitive Certificate (as defined in the Warrant Agency Agreement), the Company) shall register this Warrant, upon records to be maintained by the Warrant Agent (or, in the event a Holder elects to receive a Definitive Certificate, the Company) for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company and the Warrant Agent may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
Section 5. Miscellaneous.
a) No Rights as Stockholder Until Exercise; No Settlement in Cash. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3. Without limiting any rights of a Holder to receive Warrant Shares on a “cashless exercise” pursuant to Section 2(c) or to receive cash payments pursuant to Section 2(d)(i) and Section 2(d)(iv) herein, in no event shall the Company be required to net cash settle an exercise of this Warrant.
b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
d) Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Exercise, shall be in writing and delivered personally, or e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at 19 W. Flagler Street, Suite 902, Miami, FL 33130, Attention: Arik Maimon, email address: [ ], or such other facsimile number, email address or address as the Company may specify for such purposes by notice to the Holders. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile or e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, e-mail address or address of such Holder appearing on the books of the Company. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or via e-mail at the e-mail address set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number or via e-mail at the e-mail address set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K.
i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company, on the one hand, and the Holder or the beneficial owner of this Warrant, on the other hand.
m) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
o) Warrant Agency Agreement. If this Warrant is held in global form through DTC (or any successor depositary), this Warrant is issued subject to the Warrant Agency Agreement. To the extent any provision of this Warrant conflicts with the express provisions of the Warrant Agency Agreement, the provisions of this Warrant shall govern and be controlling.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
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CUENTAS, INC.
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By:__________________________________________ Name: Title: |
NOTICE OF EXERCISE
To: CUENTAS, INC.
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] [if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
_______________________________
_______________________________
_______________________________
[SIGNATURE OF HOLDER]
Name of Investing Entity: ________________________________________________________________________
Signature of Authorized Signatory of Investing Entity: _________________________________________________
Name of Authorized Signatory: ___________________________________________________________________
Title of Authorized Signatory: ____________________________________________________________________
Date: ________________________________________________________________________________________
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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Name: |
______________________________________ |
| (Please Print) | |
| Address: | ______________________________________ |
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Phone Number:
Email Address: |
(Please Print)
______________________________________
______________________________________ |
| Dated: _______________ __, ______ | |
| Holder’s Signature:____________________ | |
| Holder’s Address:____________________ |
Exhibit 5.1
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Ellenoff Grossman & Schole LLP 1345 Avenue of the Americas New York, New York 10105 Tel: 212-370-1300 Fax: 212-370-7889 |
December 16, 2020
Cuentas Inc.
19 W. Flagler Street, Suite 902
Miami, FL 33130
| Re: | Registration Statement on Form S-1 |
Ladies and Gentlemen:
We have acted as counsel to Cuentas Inc., a Florida corporation (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission (the “Commission”) of a Registration Statement on Form S-1 (the “Registration Statement”), pursuant to which the Company is registering under the Securities Act of 1933, as amended, the following securities (after the planned one-for-two reverse stock split described in the Registration Statement (the “Assumed Reverse Split”)): (i) 769,230 units (each a “Unit”), each consisting of one share of common stock (each a “Unit Share”) and a warrant to purchase one share of common stock (each a “Public Warrant” and each share of common stock issuable upon exercise of a Public Warrant, a “Public Warrant Share”); (ii) 115,384 shares of common stock and/or warrants to purchase one share of common stock (as applicable, each an “Over-Allotment Share” or “Over-Allotment Warrant” and each share of common stock issuable upon exercise of an Over-Allotment Warrant, an “Over-Allotment Warrant Share”); and (iii) 70,770 warrants to purchase one share of common stock (each a “Representative Warrant” and each share of common stock issuable upon exercise of an Representative Warrant, an “Representative Warrant Share”) to be issued to Maxim Group LLC (the “Representative”) pursuant to an underwriting agreement to be entered into by and between the Company and the Representative (the “Underwriting Agreement”). The Units, Unit Shares, Public Warrant, Public Warrant Shares, Over-Allotment Shares, Over-Allotment Warrants, Over-Allotment Warrant Shares, Representative Warrant and Representative Warrant Shares are collectively referred to as the “Securities;” the Public Warrant Shares, Over-Allotment Warrant Shares and Representative Warrant Shares are collectively referred to as the “Warrant Shares;” and the Public Warrants, Over-Allotment Warrants and Representative Warrants are collectively referred to as the “Warrants”.
In connection with this opinion, we have examined instruments, documents, certificates and records which we have deemed relevant and necessary for the basis of our opinion hereinafter expressed including (1) the Registration Statement, including the exhibits thereto, (2) the Company’s Articles of Incorporation, as amended to date, (3) the Company’s Bylaws, (4) certain resolutions of the Board of Directors of the Company and (5) such other documents, corporate records, and instruments as we have deemed necessary for purposes of rendering the opinions set forth herein. As to certain factual matters, we have relied upon certificates of the officers of the Company and have not sought to independently verify such matters. In such examination, we have assumed (a) the authenticity of original documents and the genuineness of all signatures; (b) the conformity to the originals of all documents submitted to us as copies; (c) the truth, accuracy, and completeness of the information, representations and warranties contained in the records, documents, instruments and certificates we have reviewed; (d) the Registration Statement, and any amendments thereto (including post-effective amendments), will have become effective under the Act; (e) the Assumed Reverse Split has been effectuated; (f) the Warrants have been exercised in accordance with their respective terms (including the payment of the exercise price specified therein); and (g) all Securities will be issued and sold in compliance with applicable Federal and state securities laws and in the manner stated in the Registration Statement.
Based upon and subject to the foregoing, we are of the opinion that (i) Units. When the Registration Statement becomes effective under the Securities Act, and when the Offering is completed as contemplated by the Registration Statement, the Units will be legally binding obligations of the Company, enforceable in accordance with their terms, except: (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally and by general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law); (b) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; and (d) that we express no opinion as to whether a state court outside of the State of New York or a federal court of the United States would give effect to the choice of New York law provided for in the warrant agreement and (ii) Warrants. The Warrants, when executed and delivered by the Company in accordance with and in the manner described in the Registration Statement and the Underwriting Agreement, will be legally binding obligations of the Company enforceable in accordance with their terms, except: (a) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally and by general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law); (b) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; (c) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought; (d) we express no opinion as to whether a state court outside of the State of New York or a federal court of the United States would give effect to the choice of New York law provided for in the Warrants; and (e) we have assumed the Exercise Price (as defined in the Warrants) will not be adjusted to an amount below the par value per share of the Common Stock.
We express no opinion as to the laws of any jurisdiction, other than the laws of the State of New York and the Federal laws of the United States.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the SEC thereunder. This opinion is expressed as of the date hereof, and we disclaim any undertaking to advise you of any subsequent changes in the facts stated or assumed herein or of any subsequent changes in applicable law.
Very truly yours,
/s/ Ellenoff Grossman & Schole LLP
Exhibit 5.2
Brandy C. Abreu, Esq.
Gary M. Muphree, Esq.
December 16, 2020
Cuentas Inc.
19 W. Flagler Street, Suite 902
Miami, FL 33130
| Re: | Registration Statement on Form S-1 |
Ladies and Gentlemen:
We have acted as counsel to Cuentas Inc., a Florida corporation (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission (the “Commission”) of a Registration Statement on Form S-1 (the “Registration Statement”), pursuant to which the Company is registering under the Securities Act of 1933, as amended, the following securities (after the assumed one-for-two reverse stock split described in the Registration Statement (the “Assumed Reverse Split”)): (i) 769,230 units (each a “Unit”), each consisting of one share of common stock (each a “Unit Share”) and a warrant to purchase one share of common stock ( each a “Public Warrant” and each share of common stock issuable upon exercise of a Public Warrant, a “Public Warrant Share”) and (ii) 115,384 shares of common stock and/or warrants to purchase one share of common stock (as applicable, each an “Over-Allotment Share” or “OverAllotment Warrant” and each share of common stock issuable upon exercise of an Over-Allotment Warrant, an “Over-Allotment Warrant Share”) to be issued to Maxim Group LLC (the “Representative”) pursuant to an underwriting agreement to be entered into by and between the Company and the Representative (the “Underwriting Agreement”). The Units, Unit Shares, Public Warrant, Public Warrant Shares, Over-Allotment Shares, Over-Allotment Warrants and OverAllotment Warrant Shares are collectively referred to as the “Securities;” the Public Warrant Shares and Over-Allotment Warrant Shares are collectively referred to as the “Warrant Shares;” and the Public Warrants, Over-Allotment Warrants and Representative Warrants are collectively referred to as the “Warrants”.
In connection with this opinion, we have examined instruments, documents, certificates and records which we have deemed relevant and necessary for the basis of our opinion hereinafter expressed including (1) the Registration Statement, including the exhibits thereto, (2) the Company’s Articles of Incorporation, as amended to date, (3) the Company’s Bylaws, (4) certain resolutions of the Board of Directors of the Company and (5) such other documents, corporate records, and instruments as we have deemed necessary for purposes of rendering the opinions set forth herein. As to certain factual matters, we have relied upon certificates of the officers of the Company and have not sought to independently verify such matters. In such examination, we have assumed (a) the authenticity of original documents and the genuineness of all signatures; (b) the conformity to the originals of all documents submitted to us as copies; (c) the truth, accuracy, and completeness of the information, representations and warranties contained in the records, documents, instruments and certificates we have reviewed; (d) the Registration Statement1 and any amendments thereto (including post-effective amendments), will have become effective under the Act; (e) the Assumed Reverse Split has been effectuated; (f) the Warrants have been exercised in accordance with their respective terms (including the payment of the exercise price specified therein); and (g) all Securities will be issued and sold in compliance with applicable Federal and state securities laws and in the manner stated in the Registration Statement.
Based upon and subject to the foregoing, we are of the opinion that: (i) the Unit Shares and Over-Allotment Shares have been duly authorized for issuance and, when issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and nonassessable; and (ii) the Warrant Shares and Over-Allotment Warrant Shares, when issued and sold by the Company and delivered by the Company upon valid exercise thereof and against receipt of the exercise price therefor, in accordance with and in the manner described in the Registration Statement and the applicable Warrants, will be validly issued, fully paid and nonassessable.
We express no opinion as to the laws of any jurisdiction, other than the laws of the State of Florida and the Federal laws of the United States.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the SEC thereunder. This opinion is expressed as of the date hereof, and we disclaim any undertaking to advise you of any subsequent changes in the facts stated or assumed herein or of any subsequent changes in applicable law.
| Very truly yours, | |
| /s/ AM Law |
Exhibit 10.3
PROCESSING SERVICES AGREEMENT
This Processing Services Agreement (“Agreement”), effective July 23, 2019 (the “Effective Date”), is entered into by and between Cuentas, Inc., a Florida corporation (“Company”) and Interactive Communications International, Inc., a Florida corporation (“InComm”) (each of Company and InComm, a “Party” and collectively, the “Parties”).
WHEREAS, Company is engaged in the business of offering Program Management Services in connection with certain stored value cards and other prepaid access products (the “Prepaid Products”, as defined below);
WHEREAS, Sutton Bank (“Issuing Bank”), an Ohio chartered bank with a principal business address of 1 South Main Street, Attica, Ohio 44807, is a principal member in good standing with the Card Associations that is authorized to issue the Prepaid Products;
WHEREAS, InComm is engaged in the business of offering Processing Services in connection with stored value cards and other prepaid access products;
WHEREAS, Company wishes to engage InComm to provide, and InComm desires to provide, InComm’s Processing Services in connection with Company’s Program Management Services for thePrepaid Products;
NOW, THEREFORE, in consideration of the mutual covenants and promises of the Parties and other good and valuable consideration, the sufficiency and receipt of which is hereby acknowledged, the Parties agree as follows intending to be legally bound:
| 1. | Definitions. Except as otherwise specifically indicated, the following terms shall have the following meanings in this Agreement (with such meanings to be equally applicable to both the singular and plural forms of the terms defined): |
1.1. “Affiliate” means, with respect to a party, any person, firm, corporation, partnership (including, without limitation, general partnerships, limited partnerships, and limited liability partnerships), limited liability company, or other entity that now or in the future, directly Controls, is Controlled with or by or is under common Control with such party.
1.2. “Applicable Law” means (A) the bylaws, operating rules, regulations or requirements of any Payment Network, and (B) any and all foreign, federal, state or local laws, treaties, rules, regulations, regulatory guidance, directives, policies, orders or determinations of (or agreements with), and mandatory written direction from (or agreements with), any foreign, federal, state or local government agency or other regulatory authority, including, without limitation, the Bank Secrecy Act and the regulations promulgated thereunder, any and all sanctions or regulations enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, and all federal or state statutes or regulations relating to prepaid access, stored value, gift cards, money transmission, unclaimed property, unfair or deceptive trade practices or acts, privacy or data security, as each of the foregoing may be amended and in effect from time to time.
1.3. “Bank Account” has the meaning set forth in Section 6.3.
1.4. “Business Day” means any day (other than a Saturday, Sunday or legal holiday) on which federally-insured financial institutions are permitted to be open in New York, New York.
1.5. “Claim” has the meaning set forth in Section 10.1.
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1.6. “Company Payments” has the meaning set forth in Section 6.1.
1.7. “Company Technologies” includes the Program Management Services and, as used or provided by Company in connection with the Program Management Services, (i) the processes, methods, machines, manufactures, technology, software or other technologies and all other materials used or provided solely by Company pursuant to this Agreement; (ii) all improvements, modifications or upgrades to any of the foregoing; (iii) any such intellectual property developed, invented, patented, or registered by Company prior to or during the Term of this Agreement.
1.8. “Confidential Information” has the meaning set forth in Section 9.1.
1.9. “Control” means the possession, direct or indirect, of the power to vote fifty percent (50%) or more of the securities that have ordinary voting power for the election of directors of any entity, or to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or by contract or otherwise.
1.10. “Customization” has the meaning set forth in Section 2.4.
1.11. “Data” means all customer information, data, instructions, records or documents relating to any Prepaid Product, other than as produced or provided by InComm including Output.
1.12. “Excused Downtime” has the meaning set forth in Exhibit C – Service Levels.
1.13. “Improvements” has the meaning set forth in Section 2.5.
1.14. “Indemnified Party” has the meaning set forth in Section 10.3.
1.15. “Indemnifying Party” has the meaning set forth in Section 10.3.
1.16. “Initial Term” has the meaning set forth in Section 12.1.
1.17. “Issuing Bank Agreement” has the meaning set forth in Section 3.1.
1.18. “Launch Date” means the date that the first Prepaid Product is activated following the availability of the Processing Services in a production environment and after written acceptance by both parties.
1.19. “Output” has the meaning set forth in Exhibit B.
1.20. “Payment Network” means a card association or payment network, including the National Automated Clearinghouse Association, which is utilized by any Party or Issuing Bank in connection with the performance of its obligations hereunder.
1.21. “Prepaid Product” means the stored value cards and other prepaid access products issued by Issuing Bank and for which Company provides its Program Management Services, pursuant to an Issuing Bank Agreement.
1.22. “Prepaid Product Data” means any information relating to the issuance or use of a Prepaid Product, including account numbers, transaction data and cardholder information.
1.23. “Processing Services” means those data processing and related services provided by InComm in connection with stored value cards and other prepaid access products.
1.24. “Processing Services Documentation” means InComm’s standard servicing and operating instructions and requirements for use of the Processing Services, made available to Company and as amended by InComm from time to time.
1.25. “Program Management Services” means the development, marketing, servicing and/or supporting of stored value cards and other prepaid access products provided by Company.
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1.26. “Reviewed Party” has the meaning set forth in Section 4.3.
1.27. “Reviewing Party” has the meaning set forth in Section 4.3.
1.28. “Regulatory Authority” means any Payment Network, any state banking department, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Consumer Financial Protection Bureau, and any other governmental agency, including any foreign governmental agency, having jurisdiction over any of the services to be provided hereunder, Company, InComm or any of their respective Affiliates.
1.29. “Renewal Term” has the meaning set forth in Section 12.1.
1.30. “Settlement Reserve Account” has the meaning set forth in Exhibit B.
1.31. “Specifications” has the meaning set forth in Section 3.1.
1.32. “Successor Bank” has the meaning set forth in Section 3.1.
1.33. “Term” has the meaning set forth in Section 12.1.
| 2. | Processing Services. |
2.1. Services. The purpose of this Agreement is to set forth the rights and obligations of the Parties with respect to InComm’s provision of the Processing Services as described in Exhibit B and subject to the service levels set forth in Exhibit C, provided that InComm’s obligations to timely perform the Processing Services is expressly subject to the timely performance of obligations and responsibilities by Company and Issuing Bank, but only to the extent that the failure to so perform affects InComm’s ability to timely perform, or its cost to perform, the Processing Services. Company and Issuing Bank are responsible for all other aspects of the Prepaid Products (including production, marketing, sale and distribution) and all related Data. Company acknowledges and agrees that, in performing the Processing Services, InComm will not be considered a “provider of prepaid access” or a “seller of prepaid access,” as applicable, as those terms are defined under 31 C.F.R. parts 1010 and 1022, and that neither Company nor Issuing Bank will designate, identify, imply or otherwise treat InComm as such.
2.2. Territory. Each Party acknowledges and agrees that the Processing Services shall only be utilized in connection with Prepaid Products issued within the fifty United States, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
2.3. Designated Representatives. Within ten (10) Business Days immediately following the Effective Date, each Party shall designate one of its employees as such Party’s designated representative, who will serve as the single point of contact for such Party with respect to the subject matter hereof and will have day–to–day authority for undertaking to ensure the Party fulfills its obligations hereunder in a timely manner, including the authority to commit such Party’s resources.
2.4. Customization. In the event Company wishes InComm to provide customized enhancements to the Processing Services, and such customized enhancements are not, as determined by InComm, enhancements InComm has contemplated developing pursuant to an information technology development plan (each such work, a “Customization”), the Parties agree to negotiate in good faith the terms and conditions of such Customization, including (i) scope of work and (ii) total estimated cost of the Customization, as evidenced in writing prior to the commencement of any Customization by InComm. Company shall be responsible, at a rate of $REDACTED/hour, for all costs and expenses associated with the Customization unless otherwise provided in writing by the Parties. Any Customization performed by InComm pursuant to this Section 2.4 shall not under any circumstances be considered an improvement, modification, or upgrade subject to assignment or conveyance to Company.
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2.5. IP Rights and Improvements. The Parties acknowledge and agree that (a) notwithstanding anything to the contrary in this Agreement, InComm owns all right, title and interest, including all intellectual property rights, in and to the Processing Services and any improvements, modifications, upgrades or enhancements thereto, including Customizations (collectively, “Improvements”), and (b) no rights, title, or interest in or to the Processing Services or Improvements, or any of InComm’s intellectual property rights to the Processing Services or Improvements, shall be assigned, conveyed, or transferred to Company in connection with Company’s payment for work performed by InComm under this Agreement. To the extent Company contributes, in whole or in part, to any Improvement of the Processing Services, Company hereby assigns to InComm all right, title and interest in and to such Improvement. Further, Company agrees that (i) it will not seek, and that it will require its employees, agents and representatives (including third-party contractors) not to seek patent, copyright, trademark, registered design, or other protection for any rights in and to the Improvement; and (ii) it will do and will require its employees, agents and representatives (including third-party contractors) to do all things and execute all documents as InComm may reasonably require to vest in InComm or its nominees any protection for the Improvement that InComm deems appropriate.
2.6. New Services. If InComm offers any new services or products generally to its customers and Company requests to use such new service or product, InComm may, in its sole discretion, agree to provide such service or product at InComm’s then-current fees or such other fees as InComm and Company may mutually agree.
2.7. Suspension of Processing Services. The Parties acknowledge and agree that, notwithstanding anything herein to the contrary, InComm may, in its sole reasonable discretion, suspend the Processing Services in the event of any actual or suspected fraud or criminal activity relating to the Prepaid Products. InComm will remove such suspension and resume the Processing Services after the actual or suspected fraud or criminal activity is corrected and sufficient actions are taken to prevent such activity from reoccurring to InComm’s reasonable satisfaction.
2.8. Communications. InComm shall instruct Company regarding the means for communicating data between InComm, Company, Issuing Bank or other necessary third parties designated by Company or Issuing Bank. Company shall implement and maintain all necessary communication equipment, including equipment specified by InComm, in good operating condition at Company’s own expense.
2.9. Changes. InComm continually reviews and modifies its Processing Services to improve service, functionality and to comply with Applicable Laws. InComm reserves the right to make changes in the Processing Services, including to operating procedures, type of equipment or software utilized or required, processing priorities, programs, procedures, or the location of InComm’s service center. InComm will notify Company with at least sixty (60) days advance notice of any changes to the Processing Services that would have a material impact on Company’s use of the Processing Services and that will require Company and InComm to undertake additional development work to conform to the changed service, unless such changes are required by Applicable Law or due to a critical emergency that presents an immediate material risk to InComm or the Processing Services, in which case InComm will make commercially reasonable efforts to provide Company with as much prior notice as possible or permitted under Applicable Law.
2.10. Change Requests. Upon Company’s written request for any change to the Processing Services, including a change to any Specifications or the integration of new Company services with the Processing Services, the Parties agree to negotiate in good faith the terms for such change, including any new or changed pricing, in a mutually agreed upon statement of work. Except as set forth in such statement of work, Company will be solely responsible and liable for ensuring that any such requested change does not violate Applicable Law.
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2.11. Professional Services. If Company requires or requests any professional services not otherwise provided as part of the Processing Services (including project management, consulting for professional or technical support, systems programming and/or analysis, training or deconversion assistance), the Parties may contract for such professional services on a time and materials basis at the professional services rate set forth in Exhibit D and subject to any reimbursement of Company-approved travel, lodging or out-of-pocket expenses incurred by InComm in performing the professional services.
| 3. | Company Obligations. |
3.1. Issuing Bank Agreement. Upon the execution of this Agreement, Company shall promptly submit to InComm a copy of its duly executed agreement with Issuing Bank demonstrating Company’s authority to provide the Program Management Services for Issuing Bank’s Prepaid Products (“Issuing Bank Agreement”). If, during the Term, Issuing Bank ceases to issue Programs Cards under the Issuing Bank Agreement and Company engages a successor bank (“Successor Bank”) to issue Prepaid Products, InComm will have no obligation to provide the Processing Services until (a) Company submits to InComm a duly executed Issuing Bank Agreement with such Successor Bank (as Issuing Bank) and (b) InComm provides to Company its written approval of Company’s continued arrangement with Successor Bank (as Issuing Bank).
3.2. Integration and Use. Company will integrate and use the Processing Services in accordance with the Processing Services Documentation and any other processing parameters, features and options as the Parties may mutually agree (collectively, the “Specifications”), Applicable Law and its Issuing Bank Agreement. Company will make commercially reasonable efforts to ensure that Issuing Bank does not utilize the Processing Services in violation of Applicable Law or the terms and conditions for any Prepaid Product. Company and InComm agree to cooperate to mitigate the risk of fraud or other misuse of the Processing Services. Each Party will promptly inform the other if it becomes aware that Issuing Bank or any user of a Prepaid Product is engaging in any fraudulent, unlawful, deceptive or abusive activity, except as restricted or prohibited by Applicable Law. Company will ensure that its employees and representatives are trained to comply with Company’s obligations under this Agreement, including the Specifications.
3.3. Exclusivity. During the Term, (a) InComm shall be the sole and exclusive provider to Company of the Processing Services; (b) Company will not perform or provide, and will ensure that its Affiliates do not perform or provide, any of the Processing Services for itself, nor engage any third-party to provide any of the Processing Services, in connection with the Prepaid Products; and (c) Company agrees to use InComm as its exclusive source for all other existing and future processing requirements of Company and its Affiliates with respect to its Prepaid Products business, provided, however, that with respect to subsection (c), InComm may in its sole discretion determine to accept or refuse to provide any additional processing services and that If InComm refuses to provide such additional processing services upon written notice to Company, Company may source such additional processing services from other parties and in such case Company is not permitted to use InComm’s APIs and/or load/reload network. For clarity, subsection (c) is not intended to limit or otherwise affect InComm’s obligations with respect to the Processing Services under this Agreement.
3.4. Inquiries and Disputes. (a) InComm shall be responsible for addressing all disputes and inquiries related to the Processing Services. Company shall timely notify InComm of such disputes and inquiries, and any other issues concerning the Processing Services, via their InComm designated representative. (b) Company shall (i) be responsible for addressing all disputes and inquiries related to the Program Management Services and (ii) address, or ensure that Issuing Bank addresses, all inquiries (including cardholder inquiries) related to the Prepaid Products.
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3.5. Reporting Costs; Data Sharing Costs. Company shall be responsible for its own costs relating to Company-specific reporting required by Issuing Bank or any Payment Network, regulatory agency or other third party. Company will pay InComm the data-sharing fees, as may be reasonably set by InComm, associated with furnishing Data or other information to any third party as instructed by Company, or to any regulatory agency with jurisdiction over Company, Issuing Bank or the Prepaid Products.
| 4. | Compliance. |
4.1. Applicable Law. The Parties agree to perform their obligations under this Agreement in accordance with Applicable Law. As between the Parties, (a) Company is responsible for, and will ensure compliance with Applicable Law of, all aspects of the Prepaid Products (other than the Processing Services) including: (i) the Program Management Services, (ii) the design, production, marketing, sale and distribution of the Prepaid Products and related services, features, functionality, terms, conditions, disclosures, fees and marketing materials; and (iii) any particular actions, disclosures, formulas, calculations and procedures required for compliance with Applicable Law (whether to be performed by InComm or Company); and (b) InComm will ensure that the Processing Services comply with Applicable Law as a third party provider of data processing services. InComm will not be responsible for any violation by Company or Issuing Bank of any Applicable Law applicable to the Prepaid Products.
4.2. Books and Records. Each Party shall maintain complete and accurate books of account and records, in accordance with generally accepted accounting principles in the United States, of all financial transactions arising in connection with its obligations pursuant to this Agreement for a period of not less than that legally required for such records from the date last recorded or created, but in no event less than three (3) years following the end of the Term. In addition to and notwithstanding the foregoing, to the extent a Party has sole possession or control of any records required to be maintained by the other Party pursuant to Applicable Law, the Party with possession or control shall maintain, or cause to be maintained, as applicable, such records in such form and for such time periods as required by Applicable Law, and shall make such records available to the other Party upon request. The Parties further agree to work together in good faith to reconcile any accounting discrepancies. Each Party shall at all times (i) cooperate with respect to, and promptly respond to, all reasonable requests communicated to it by the other Party in connection with the subject matter hereof, and (ii) provide reasonable access to all information and documents related to the subject matter hereof which may be in the control or possession of such Party and which the other Party requires in order to comply with Applicable Law.
4.3. Audits. During the Term and for a period of one year thereafter, each Party (the “Reviewing Party”) may, at its own expense, inspect, or have a third party designated by the Reviewing Party inspect, the books and records of the other Party (the “Reviewed Party”) that are directly related to the obligations of the Reviewed Party hereunder, provided that any such inspection shall occur upon no less than ten (10) Business Days prior written notice and at a mutually agreed upon date and time during the Reviewed Party’s normal business hours, and no more frequently than once during any calendar year unless (i) otherwise required by Applicable Law or any Regulatory Authority, or (ii) the Reviewing Party has a reasonable belief that the Reviewed Party is not acting in compliance with the terms of this Agreement or Applicable Law. The Reviewed Party shall furnish to the Reviewing Party or its designee all such information concerning transactions and the Reviewed Party’s performance of its obligations hereunder as the Reviewing Party may reasonably request.
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| 5. | Risk of Loss. As between the parties, Company shall be responsible for: |
(a) All risk and liability associated with the Prepaid Products (other than as a direct result of a material breach by InComm of its obligations under this Agreement), including transactions made with any Prepaid Product and any and all risk of loss to any tangible item (i) provided by InComm for Company (including statements and embossed cards) upon delivery of such items to the U.S. Postal Service or such other courier as Company may select, and (ii) provided by Company to InComm until actual receipt of such items by InComm (it being expressly understood that the U.S. Postal Service and any courier selected by Company are the agents of Company and not InComm);
(b) Ensuring the accuracy, completeness or authenticity of any Data furnished in connection with the Prepaid Products, and for any losses arising from any inaccuracies, incompleteness or non-authenticity relating to such Data, including in connection with the transmission of such Data (1) from Company, Issuing Bank or another third party to InComm or (2) from InComm to any third party as instructed by Company or Issuing Bank, provided that in such case InComm reserves the right to require such third-party to enter into an agreement with InComm; and
(c) any losses arising from any fraudulent activity in connection with a Prepaid Product.
For the avoidance of doubt, InComm is not responsible for, and has no obligation to verify, the accuracy, completeness or authenticity of any Data furnished to InComm. Without limiting the foregoing, if InComm determines that any Data may be inaccurate, incomplete and non-authentic, InComm may (but is not required to) notify Company and require Company to resubmit such Data.
Without limiting any of the foregoing, each Party will make commercially reasonable efforts to promptly notify the other Party in the event that such Party’s fraud monitoring operations detect repetitive suspicious activity directly affecting a Prepaid Product transaction processed through the Processing Services.
| 6. | Fees and Payments. |
6.1. Processing Fees. Company shall pay InComm the Processing Fees set forth in Exhibit D and other amounts due or payable to InComm under the Agreement (collectively, “Company Payments”). Except as otherwise provided in Exhibit D, for each Contract Year after Contract Year 1, InComm may increase the Processing Fees, such increase not to exceed 3%, upon thirty (30) days written notice prior to the end of such Contract Year. The Processing Fees are exclusive of charges for materials, work, hardware, software or travel not otherwise set forth in Exhibit D or any statement of work, which must be approved by Company. Travel time, if required, is subject to InComm’s standard professional services rate.
6.2. Third-Party Fees. Company is solely responsible for, and shall reimburse InComm (when passed-through to Company at cost and without markup) for, any third-party fees outside the control of InComm and necessary for InComm’s provision of the Processing Services. Such third-party fees may include (i) Payment Network fees, including surcharges, interchange, assessments, switch fees and network fees, and semi-annual mandates; (ii) postage, supplies, courier, data transmission and telecommunication expenses; and (c) any increase to such fees, as the relevant third-party may require from time to time in its sole discretion. InComm will make commercially reasonable efforts to provide reasonable estimates of such third-party fees, not more frequently than annually, provided, however, that InComm makes no representation or warranty as to the accuracy of such estimates and, notwithstanding InComm’s estimation of third-party fees, Company is required to pay all invoiced third-party fees in accordance with this Section 6.2.
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6.3. Method of Payment. Company shall provide InComm with the demand deposit account number and routing transit number for a bank account (“Bank Account”) from which InComm may withdraw Company Payments at any time seven(7) days after Company’s receipt of InComm’s monthly invoice. Company agrees (a) to sign an ACH authorization form to allow InComm to make such withdrawals from the Bank Account and (b) not to revoke such authorization until all Company Payments are paid in full to InComm. Company will ensure there are sufficient funds in the Bank Account to satisfy Company Payments each month and InComm may immediately suspend providing the Processing Services without notice and without incurring any liability to Company until there are sufficient funds in the Bank Account to pay any outstanding Company Payments due to InComm.
6.4. Invoices. InComm shall invoice Company following the end of each calendar month for all Processing Fees incurred in the previous month, as well as any other Company Payments owed to InComm, including any one-time fees. If Company fails to pay, or InComm is unable to withdraw from the Bank Account, the Company Payments in full within fourteen (14) days following the date of such invoice, the unpaid amount of any such Company Payments shall bear interest at the rate equal to the lesser of (a) 12% per annum, or (b) the maximum rate permitted by applicable law, from the date on which payment was due until the date on which InComm receives the outstanding payment. Without limiting any of its other rights or remedies, InComm may take any or all of the following measures if any of Company’s undisputed payment obligations becomes ninety (90) days past due:
| 6.4.1. | Notify the Issuing Bank of Company’s delinquency; |
| 6.4.2. | Upon notice to Company, immediately initiate procedures to terminate the Processing Services, including suspending Company’s access to InComm’s systems (including APIs); and |
| 6.4.3. | Modify the status of Company’s Program Management Services with respect to Company’s use of the Processing Services such that value loads will be declined. |
6.5. Taxes. Company shall be responsible for all taxes and similar charges imposed on it by any governmental authority assessed as a result of this Agreement. InComm shall be responsible for all taxes and similar charges imposed on it by any governmental authority assessed as a result of InComm’s provision of Processing Services.
6.6. Billing Disputes. If Company in good faith disputes any portion of any invoice, Company shall notify InComm within ten (10) days following the date of such invoice. Such notice shall include written documentation identifying and substantiating the disputed amount; provided that Company remits payment equal to the amount due on the invoice less such disputed amount. Without limiting the foregoing, if a Party fails to notify the other Party of a payment dispute, whether for a billing or invoicing error or any other unresolved payment issue between the Parties, within one hundred eighty (180) days following the date of the applicable invoice or when the payment issue should have been reasonably detected (as applicable), then such Party shall have waived its right to dispute that invoice or payment issue. Any disputed amounts resolved in favor of Company shall be credited to Company on the next invoice following resolution of the dispute. Any disputed amounts resolved in favor of InComm shall be due within thirty (30) days of InComm’s request for payment or added to the next monthly invoice.
| 7. | Reports. |
7.1. Each Party shall provide to the other Party reports relating to the performance of its obligations hereunder as may be mutually agreed upon in writing by the Parties from time to time. Each Party shall ensure that all reports provided by such Party are complete and accurate in all materials respects as of the date and time delivered. In the event that a Party discovers any inaccuracies or deficiencies in any report previously delivered to the other Party, the discovering Party shall promptly inform the other Party of such fact, and thereafter the Party responsible for producing the report shall promptly cure such inaccuracy or deficiency.
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| 8. | Representations, Warranties and Covenants. |
8.1. Company Representations, Warranties, and Covenants. Company hereby represents, warrants, and covenants to each other Party that:
(a) it is duly incorporated and validly existing and in good standing under the laws of the State of Florida;
(b) it is duly qualified and is properly licensed to do business, and is in good standing (i) in each jurisdiction in which the conduct of its business requires it to so qualify or be licensed, and (ii) with each Regulatory Authority having jurisdiction over it;
(c) it has, and shall at all times maintain, all necessary licenses, permits, approvals, and registrations from all Regulatory Authorities which are required to perform its obligations hereunder;
(d) the execution and delivery of this Agreement by Company and the performance of its obligations hereunder require no consent, approval, order or authorization of, or registration, declaration or filing with, or other action by, any governmental agency or authority, except for such consents, approvals, orders, authorizations, registrations, declarations or filings which Company has made or obtained;
(e) the performance of its obligations hereunder do not and will not violate any other agreement to which it is a party;
(f) it (i) has entered into a written Issuing Bank Agreement pursuant to which it is obligated or otherwise authorized to engage InComm to perform the Processing Services in connection with the Prepaid Products, (ii) is in compliance with such Issuing Bank Agreement; and (iii) shall immediately notify InComm in the event that such agreement is terminated or not renewed, either Company or Issuing Bank suspends or limits its performance under the Issuing Bank Agreement or provides notice of its intention not to renew the Issuing Bank Agreement, or such Issuing Bank Agreement is amended or otherwise modified in any way, or any action is taken by Company or Issuing Bank, which would impact the rights, obligations or liabilities of InComm;
(g) it is not authorized to itself issue any of the Prepaid Products, and that the Issuing Bank Agreement reflects Issuing Bank’s authority under Applicable Law to issue such Prepaid Products;
the Company Technologies do not infringe on any United States or other jurisdiction’s patent rights, copyrights, trademarks, trade dress, service marks, trade secret rights, or other proprietary rights of any third party;
(h) as of the Effective Date of this Agreement, there are no pending or, to the knowledge of Company, threatened, Claims or litigation against Company that would adversely impact Company’s ability to perform its obligations under this Agreement, including, but not limited to, any Claims or litigation contesting Company’s ownership or right to use any of the Company Technologies or its patents, copyrights, trademarks, service marks, or trade secrets in connection with the Company Technologies.
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8.2. InComm Representations, Warranties, and Covenants. InComm hereby represents, warrants, and covenants to the other Parties that:
(a) it is duly incorporated and validly existing and in good standing under the laws of the State of Florida;
(b) it is duly qualified and is properly licensed to do business, and is in good standing (i) in each jurisdiction in which the conduct of its business requires it to so qualify or be licensed, and (ii) with each Regulatory Authority having jurisdiction over it;
(c) it has, and shall at all times maintain, all necessary licenses, permits, approvals, and registrations from all Regulatory Authorities which are required to perform its obligations hereunder; and
(d) the execution and delivery of this Agreement by InComm and the performance of its obligations hereunder require no consent, approval, order or authorization of, or registration, declaration or filing with, or other action by, any governmental agency or authority, except for such consents, approvals, orders, authorizations, registrations, declarations or filings which InComm has made or obtained.
| 9. | Confidential Information. |
9.1. Definition. Each Party acknowledges that it may receive Confidential Information of another Party. For purposes of this Agreement, “Confidential Information” includes the terms of this Agreement, Prepaid Product Data, any customer information (including but not limited to nonpublic personally identifiable information), financial data and budgetary or proprietary business information, income or sales data or projections, customer lists, business operations, policies, procedures and techniques, advertising summary or tracking reports or other reports generated in accordance with this Agreement, schematics, ideas, techniques, know how, concepts, development tools and processes, computer printouts, computer programs, design drawings and manuals, and improvements, patents, copyrights, trade secrets or other intellectual property of any kind or nature, plans for future development and new product concepts, contemplated products, research, development, strategies, and any information which, from the relevant circumstances, should reasonably be assumed to be confidential and proprietary. The term “Confidential Information” shall not include information which, prior to delivery, was already in the recipient Party’s possession; is or becomes generally available to the public through lawful means, other than as the result of a disclosure by the recipient Party or its representatives; becomes available to a recipient Party without confidential or proprietary restriction by a third party who rightfully possesses the information without confidential or proprietary restrictions; or the recipient Party can demonstrate that it was independently developed by such recipient Party.
9.2. Use. Except as otherwise specifically provided in this Agreement, each Party covenants and agrees that it will not, publish, communicate, divulge, or disclose to any person, firm, or corporation any Confidential Information of any other Party, except as necessary in the performance of the terms of this Agreement. Each Party covenants and agrees that it will not use any Confidential Information of any other Party except as necessary to fulfill its obligations or exercise its rights under this Agreement, and only for such purposes and only for the time that it is necessary to do so, except to the extent it is otherwise permitted under this Agreement. Each Party will take commercially reasonable security precautions, at least as great as the precautions it takes to protect its own Confidential Information and as may be required by Applicable Law, with respect to the Confidential Information of each other Party which it receives and will disclose such Confidential Information only on a need to know basis and only to its subsidiary, agent or subcontractor who is obligated to treat such Confidential Information in a manner consistent with all the obligations of this Agreement. Liability for damages due to disclosure of the Confidential Information by any such third party shall be with the Party that disclosed the Confidential Information to the third party.
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9.3. Required Disclosures. In the event that the recipient of Confidential Information is requested or becomes legally compelled to disclose any Confidential Information of the other Party, it is agreed that such recipient Party will provide the disclosing Party with prompt written notice of such request(s) to enable the disclosing Party, at its sole cost and expense, to seek a protective order to protect and preserve the confidential nature of the Confidential Information. In such event, each Party agrees that it will furnish only that portion of the Confidential Information which is legally required and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded to that portion of the Confidential Information and other information which is being disclosed. Each Party shall immediately notify the other upon discovery of any loss or unauthorized disclosure of the Confidential Information of the other Party.
9.4. Return or Destruction. As requested by the furnishing Party during the Term, upon expiration or any termination of this Agreement, or completion of the obligations of the receiving Party, as applicable, the receiving Party shall (i) return or destroy, as the furnishing Party may direct, and in the manner reasonably directed by the furnishing Party, all material in any medium that contains, refers to, or relates to the furnishing Party’s Confidential Information, and (ii) retain no copies except one (1) copy solely for compliance with record retention requirements under Applicable Law; provided, however, that no Party will be obligated to erase Confidential Information contained in an archived computer system backup made in accordance with such Party’s security and/or disaster recovery procedures, provided that such archived copy will (i) eventually be erased or destroyed in the ordinary course of such Party’s data processing procedures and (ii) will remain fully subject to the obligations of confidentiality stated herein.
9.5. Misuse. In the event of any actual or suspected misuse, disclosure or loss of, or inability to account for, any Confidential Information of the furnishing Party, the receiving Party promptly shall: (i) notify (and in any event within three (3) Business Days) the furnishing Party upon becoming aware thereof; (ii) furnish to the other Parties full details of the unauthorized possession, use or knowledge, or attempt thereof, and use reasonable efforts to assist the other Party in investigating or preventing the reoccurrence of any unauthorized possession, use, or knowledge, or attempt thereof, of Confidential Information; (iii) take such actions as may be necessary or reasonably requested by the furnishing Party to minimize the violation; and (iv) cooperate in all reasonable respects with the furnishing Party to minimize the violation and any damage resulting therefrom.
9.6. Ownership of Confidential Information. As between the Parties, each Party’s Confidential Information shall remain the property of that Party. Nothing contained in this Agreement shall be construed as obligating a Party to disclose its Confidential Information to the other Party, or as granting to or conferring on a Party, expressly or impliedly, any rights or license to the Confidential Information of the other Party, and any such obligation or grant shall only be as provided by other provisions of this Agreement. For the avoidance of doubt, any Data furnished by Company will remain Company’s Confidential Information, and InComm will have no right to use such Data for any purposes except as required to perform its obligations under this Agreement or as otherwise permitted under this Section 9.
9.7. Disaster Recovery. InComm will establish a disaster recovery plan designed to reasonably minimize the risks associated with a disaster affecting InComm’s provision of the Processing Services under this Agreement. Such disaster recovery plan will include reasonable backup procedures designed to recover Company’s Data and maintain the continuity of the Processing Services. Company is responsible for establishing and maintaining its own disaster recovery plan relating to disasters affecting Company’s systems and facilities to enable InComm to maintain the continuity of the Processing Services.
9.8. Press Releases and Inquiries. All media releases, public announcements and public disclosures by a Party or Issuing Bank relating to this Agreement or the subject matter of this Agreement, including promotional or marketing material (but not including announcements intended solely for internal distribution or disclosures to the extent required to meet legal or regulatory requirements beyond the reasonable control of the disclosing party) shall be coordinated with and approved by both Parties prior to release. If a Party determines that disclosure is required to meet legal or regulatory requirements it shall promptly inform the other Party and coordinate such disclosure with the other Party. The disclosing Party shall limit disclosure to that which is necessary and shall give due consideration to comments the other Party and its counsel may provide regarding the nature of the disclosure. Company shall ensure that Issuing Bank complies with the foregoing requirements.
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9.9. Conflicts. To the extent that any provision in this Agreement conflicts with a provision of any other agreement between the Parties, the language most protective of Confidential Information shall take precedence as to the subject matter hereof.
| 10. | Indemnification. |
10.1. Company Indemnification. Company agrees to indemnify, defend and hold harmless InComm and its Affiliates, sureties, officers, directors, agents, employees, parents and subsidiaries, from and against any and all liability, damages, costs, expenses, including reasonable legal fees and expenses, for any third party claim or demand, including, without limitation, from Issuing Bank or user of a Prepaid Product or any fees or penalties assessed by any Regulatory Authority (“Claim”), arising out of or related to:
(a) Company’s breach of any representation, warranty, covenant or obligation under this Agreement;
(b) Company’s or Issuing Bank’s breach of any representation, warranty, covenant or obligation under the Issuing Bank Agreement or the terms and conditions applicable to any Prepaid Product;
(c) gross negligence, fraud or willful misconduct on the part of Company, Issuing Bank, or any of their officers, directors, employees, representatives or service providers, and their respective officers, directors and employees;
(d) any actions taken by InComm in accordance with or in good faith reliance upon information or instructions provided by Company or Issuing Bank;
(e) any actual or alleged infringement or misappropriation of any intellectual property rights of any third party by Company or Issuing Bank; or
(f) any act or omission of Issuing Bank.
The defense obligation of Company attaches if the Claim alleges any of the foregoing violations, breaches, acts or omissions.
10.2. InComm Indemnification. InComm agrees to indemnify, defend and hold harmless Company, its Affiliates, sureties, officers, directors, agents, employees, parents and subsidiaries, from and against any and all Claims arising out of or related to:
(a) InComm’s breach of any representation, warranty, covenant or obligation under this Agreement; or
(b) gross negligence, fraud or willful misconduct on the part of InComm, its officers, directors, employees, representatives or service providers, and their respective officers, directors and employees;
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The defense obligation of InComm attaches if the Claim alleges any of the foregoing violations, breaches, acts or omissions.
10.3. Indemnification Procedures. If any Claim is asserted against any Party (individually or collectively, the “Indemnified Party”) by any person who is not a Party to this Agreement in respect of which the Indemnified Party may be entitled to indemnification under the provisions of Sections 10.1 or 10.2 above, written notice of such Claim shall promptly be given to the Party (individually or collectively, the “Indemnifying Party”) from whom indemnification may be sought. The Indemnifying Party shall have the right, by notifying the Indemnified Party within ten (10) Business Days of its receipt of the notice of the Claim, to assume the entire control (subject to the right of the Indemnified Party to participate at the Indemnified Party’s expense and with counsel of the Indemnified Party’s choice) of the defense, compromise or settlement of the matter, including, at the Indemnifying Party’s expense, employment of counsel of the Indemnifying Party’s choice. The Indemnified Party must provide reasonable cooperation in the defense and the failure to do so will be deemed waiver by the Indemnified Party of any and all right to indemnification by the Indemnifying Party. The Indemnifying Party shall not compromise or settle a Claim against the Indemnified Party without the Indemnified Party's prior written consent, which shall not be unreasonably withheld or delayed; provided that the Indemnifying Party may, however, effect a compromise or settlement of an action without the Indemnified Party's consent if the following conditions are met: (i) there is no admission of guilt or liability by the Indemnified Party; (ii) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party; (iii) the compromise or settlement entered into between the parties to the matter shall expressly provide that the compromise or settlement entered into between the parties, and all discussions between and among the parties to the matter surrounding the compromise or settlement, shall be kept confidential; such compromise or settlement also shall stipulate that no press releases or other public statements may be made concerning such compromise or settlement without the prior written consent of the Indemnified Party; and (iv) the Indemnified Party is made aware of the proposed compromise or settlement as reasonably early as practicable, and the proposed compromise or settlement includes the claimant's or the plaintiff's unconditional release of the Indemnified Party from all liability in respect of the Claim.
| 11. | Limitation of Liability; Disclaimer of Warranties. |
11.1. Limitation of Liability. (A) NEITHER INCOMM NOR ANY OF ITS SUBSIDIARIES, PARENTS OR AFFILIATES SHALL BE LIABLE TO COMPANY OR ISSUING BANK, OR ANY OF THEIR SUBSIDIARIES, PARENTS OR AFFILIATES, WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE, FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, OR FOR LOST PROFITS (EVEN IF SUCH DAMAGES OR LOST PROFITS ARE FORESEEABLE, AND WHETHER OR NOT ANY PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOST PROFITS), ARISING FROM OR RELATING TO THIS AGREEMENT OR THE PROVISION OF THE PROCESSING SERVICES.
(B) THE CUMULATIVE LIABILITY OF INCOMM WITH RESPECT TO COMPANY OR ISSUING BANK SHALL NOT UNDER ANY CIRCUMSTANCES EXCEED THE PREVIOUS TWELVE (12) MONTHS REVENUE RECEIVED BY INCOMM UNDER THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, THE LIMITATION CONTAINED IN THIS SECTION 11.1(B) SHALL NOT APPLY TO ANY CLAIM THAT ARISES OUT OF INCOMM’S GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR FRAUD.
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11.2. Disclaimers. (A) THE PROCESSING SERVICES ARE PROVIDED ON AN “AS IS” AND “AS AVAILABLE” BASIS, AND EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, INCOMM MAKES NO REPRESENTATIONS OR WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, RELATING TO OR ARISING OUT OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
(B) As between the Parties, Company is solely responsible, and InComm disclaims all liability for (i) the collection of funds from Company or Issuing Bank’s customers or other person in connection with use of a Prepaid Product; (ii) any chargeback initiated through a Payment Network, including where funding of a Prepaid Product involved the use of a Payment Network-branded credit or debit card; (iii) any return entries or adjustment entries initiated through any funds transfer systems where the funding of a Prepaid Product involved an electronic funds transfer; (iv) any dishonored items where the funding of a Prepaid Product involved the use of a check or draft; (v) any transaction caused by a party other than InComm that results in an overdraft or negative balance on a Prepaid Product; (vi) determining the applicability of, and complying with, Applicable Law with respect to any Prepaid Product, including disclosures, fees, recognition of revenue and unclaimed property and escheatment; and (vii) any negative balance on any Prepaid Product due to Company’s failure to provide good funds.
| 12. | Term and Termination. |
12.1. Term. The term of this Agreement shall begin on the Effective Date and continue for a period of five (5) years (the “Initial Term”). This Agreement shall automatically renew for additional periods of one (1) year each (each, a “Renewal Term”) (the Initial Term, collectively with all Renewal Terms, the “Term”), unless (a) otherwise terminated as provided herein or (b) a Party provides the other Party with written notice of its intention to not renew the Agreement not less than ninety (90) days prior to the expiration of the Initial Term or Renewal Term then in effect.
12.2. Termination. A Party shall have the right to terminate the Agreement upon occurrence of one or more of the following events:
(a) Failure by the other Party to observe or perform, in any material respect, that Party’s obligations hereunder, so long as the failure is not due to the actions or failure to act of the terminating Party, but only if the failure continues for a period of thirty (30) Business Days after the non–performing Party received written notice from the terminating Party specifying the failure in the case of a failure not involving the payment of money;
(b) In the event any representation, warranty statement or certificate furnished to it by the other Party in connection with or arising out of the Agreement is materially adverse to the terminating Party and intentionally untrue as of the date made or delivered;
(c) The other Party: (i) voluntarily commences any proceeding or filing any petition seeking relief under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, liquidation or similar law; (ii) applies for or consents to the appointment of a receiver, trustee, custodian, sequestrator or similar official for such Party or for a substantial part of its property or assets, (iii) makes a general assignment for the benefit of creditors, or (iv) takes corporate action for the purpose of effecting any of the foregoing;
(d) The commencement of an involuntary proceeding or the filing of an involuntary proceeding or the filing of an involuntary petition in a court or competent jurisdiction seeking: (i) relief in respect for the other Party, or of a substantial part of its property or assets under Title 11 of the United States Code or any other federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar office for the other Party for a substantial part of its property or assets, or (iii) the winding up or liquidation, of the other Party, if such proceeding or petition shall continue un–dismissed for one hundred eighty (180) days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for one hundred (180) days; or
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(e) Upon any change to or enactment of any Applicable Law, or published change in the interpretation thereof by any Regulatory Authority, which would have a material adverse effect upon: (i) the subject matter hereof; (ii) such Party’s ability to perform its obligations hereunder; or (iii) such Party’s expected risks or benefits under this Agreement; provided that the Parties, after good faith discussions, cannot find a mutually agreeable solution within a reasonable amount of time.
12.3. InComm Termination Rights. In addition to its termination rights under Section 12.2, InComm shall have the right to terminate the Agreement upon occurrence of one or more of the following events:
(a) If InComm fails to receive payment from Company pursuant to the provisions of Section 6 of this Agreement and Company, within 20 business days after written notice, still has not made such payment to InComm, or immediately without notice if InComm fails to receive payment more than four times in any twelve-month period;
(b) Company’s or Issuing Bank’s violation of Applicable Law rendering InComm unable to substantially perform under the Agreement, provided that the Parties cannot find a legally workable solution to avoid violating Applicable Law within a reasonable amount of time;
(c) Upon direction from any Regulatory Authority for InComm to cease or materially limit its performance under this Agreement; or
(d) Upon the sale or other disposition by Company of 90% or more of Prepaid Product accounts for which InComm provides Processing Services.
12.4. Rights and Obligations upon Termination. The Parties’ rights to terminate this Agreement shall be in addition to, and not in lieu of, any other remedies they may have by virtue of (a) a breach or default with respect to this Agreement or (b) any other event which permits a termination. Furthermore, the termination or expiration of this Agreement shall not relieve the Parties of any obligations due at or before the time of such termination or expiration or prejudice any claim of any Party.
12.5. Deconversion. Upon the expiration or termination of this Agreement, InComm shall provide deconversion assistance to Company as Company may reasonably request, subject to a mutually agreeable timeline and other terms and conditions and provided that (a) Company has satisfied payment for all outstanding Company Payments due to InComm; (b) Company, and if applicable the replacement service provider, has executed InComm’s deconversion confidentiality agreement; and (c) Company has prepaid in full InComm’s deconversion fees based on InComm’s then-current professional services rate set forth in Exhibit D in order to accomplish the deconversion. Company is also responsible for reimbursing InComm for all reasonable costs that InComm may incur in providing deconversion assistance.
12.6. Payment Upon Termination. (a) If InComm terminates this Agreement pursuant to Section 12.2(a) or (b) or Section 12.3(a), (b) or (d), Company agrees that it will pay InComm, upon termination by InComm and prior to deconversion, an amount equal to the average monthly gross revenue to InComm under this Agreement (based on the 12 months immediately preceding the effective date of termination) multiplied by the lesser of 12 months or the number of months remaining in the then-current term. Company and InComm acknowledge and agree that such payment is a reasonable estimate of the actual damages which InComm would suffer if InComm were unable to provide the Processing Services for the remainder of the then-current term. In making such determination, the Parties have considered all relevant factors known to the Parties as of the Effective Date and have given special consideration to the particular circumstances which may attend each particular termination event including the allocation of risks associated therewith between the Parties, and that but for the full consideration of such factors neither Party would have entered into this Agreement. Notwithstanding the foregoing, nothing in this Section 12.6 shall limit InComm’s right to recover from Company any amounts for which Company is otherwise liable under this Agreement.
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12.7. Change in Law Affecting Prepaid Products. In the event of a change to or enactment of any Applicable Law, or published change in the interpretation thereof by any Regulatory Authority, with respect to a particular Prepaid Product, which would have a material adverse effect upon Company’s ability to perform its obligations hereunder with respect to such Prepaid Product or its expected risks or benefits under this Agreement with respect to such Prepaid Product, Company may terminate its use of the Processing Services solely with respect to the affected Prepaid Product without regard to Section 12.6, provided that (a) Company agrees to continue meeting any applicable monthly minimums described in Exhibit D for any remaining Prepaid Products that utilize the Processing Services, and (b) Company and Issuing Bank cease to offer the affected Prepaid Product in light of the events described in Section 12.2(e) that gives rise to Company’s rights under this Section 12.7.
| 13. | Miscellaneous. |
13.1. Subcontractors and Agents. Nothing herein shall be deemed to prevent or restrict InComm from subcontracting any of its duties or obligations hereunder, provided that InComm shall remain at all times liable for the performance of such duties or obligations as if InComm had performed such duties or obligations itself.
13.2. Assignment. Except as set forth in this Agreement, Company may not sell, transfer, convey or assign, by operation of law, change of control, or otherwise, this Agreement or its rights, interests or obligations hereunder, in whole or in part, except to an Affiliate, and no attempted sale, transfer, conveyance or assignment shall be effective, without the prior written consent of InComm. Any purported assignment in violation of this Section 13.2 shall be void and of no effect. Notwithstanding the foregoing, in the event InComm is acquired by, merged into, or sells substantially all of its assets to, any entity, this Agreement shall continue in full force and effect, and such successor entity shall assume the rights and obligations hereunder.
13.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without regard to that state's conflict of laws principles. Each Party agrees that service of process in any action or proceeding hereunder may be made upon such Party by certified mail, return receipt requested, to the address for notice set forth herein, as the same may be modified in accordance with the terms hereof.
13.4. Force Majeure. No Party shall be liable for any failure or delay on its part to perform, and shall be excused from performing any of its non–monetary obligations hereunder if such failure, delay or non–performance results in whole or in part from any cause beyond the absolute control of the party, including without limitation, any act of God, act of war, riot, actions of terrorists, earthquake, fire, explosion, natural disaster, flooding, embargo, sabotage, government law, ordinance, rule, regulation, government order or government actions. A Party desiring to rely upon any of the foregoing as an excuse for failure, default or delay in performance shall, when the cause arises, give to the other Party prompt notice in writing of the facts which constitute such cause; and, when the cause ceases to exist, give prompt notice thereof to the other Party. This Section 13.4 shall in no way limit the right of any Party to this Agreement to make any claim against third parties for any damages suffered due to said cause. If any performance under this Agreement is postponed or extended for longer than sixty (60) calendar days by any Party, the other Party may, by written notice, terminate this Agreement immediately.
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13.5. Insurance. Each Party shall obtain and maintain at all times during the Term, at its sole cost and expense, insurance coverage of the type and in the amounts appropriate to such Party’s obligations under this Agreement.
13.6. No Third Party Beneficiaries. Neither Issuing Bank nor any other third party is a third party beneficiary to this Agreement.
13.7. Independent Contractors. Each Party agrees that they are independent contractors to each other in performing their respective obligations hereunder. Nothing in this Agreement or in the working relationship being established and developed hereunder shall be deemed or is intended to be deemed, nor shall it cause, the Parties to be treated as partners, joint ventures, or otherwise as joint associates for profit.
13.8. Notices. All notices to be given hereunder shall be effective only when made in writing and actually delivered (by mail, overnight courier, special courier or email) to such Party at its address set forth in Exhibit A. Any Party may change its address for receipt of notice by written direction to the other Parties.
13.9. Further Assurances. Each Party agrees that it will do and that it will require its employees, agents and representatives (including third party contractors) to do all things and execute all documents as the other Party may reasonably require to effect the general purposes or any specific provision of this Agreement.
13.10. Entire Agreement. This Agreement (which includes any exhibits and attachments hereto) set forth the entire agreement and understanding between the Parties as to the subject matter hereof and supersedes all prior discussions, agreements and understandings of any kind, and every nature between them. This Agreement shall not be changed, modified or amended except in writing and signed by each Party; provided, however, that the Parties agree to immediately execute such amendments to this Agreement as are deemed necessary by InComm and its counsel to ensure compliance with Applicable Law.
13.11. Survival. All provisions of this Agreement which by their nature extend beyond the expiration or termination of this Agreement including, without limitation, Sections 2.5 (IP Rights and Improvements); 4.2 (Books and Records); 4.3 (Audits), 5 (Risk of Loss); 6 (Fees and Payments); 9 (Confidential Information); 10 (Indemnification); 11 (Limitation of Liability; Disclaimer of Warranties); 12.4 (Rights and Obligations upon Termination); 12.5 (Deconversion); 12.6 (Payment Upon Termination); and 13 (Miscellaneous), shall survive the termination or expiration of this Agreement.
13.12. Successors and Third Parties. Except as limited by Section 13.2, this Agreement and the rights and obligations hereunder shall bind, and inure to the benefit of the Parties and their successors and permitted assigns. Nothing in this Agreement, expressed or implied, is intended to confer upon any person, other than the Parties and their successors and permitted assigns, any of the rights hereunder.
13.13. Construction. Captions contained in this Agreement are for convenience only and do not constitute a limitation of the terms hereof. The singular includes the plural, and the plural includes the singular. All references to “herein,” “hereunder,” “hereinabove,” or like words shall refer to this Agreement as a whole and not to any particular section, subsection, or clause contained in this Agreement. The terms “include” and “including” are not limiting. Reference to any agreement or other contract includes any permitted modifications, supplements, amendments, and replacements.
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13.14. Severability; Waiver. If any provision of this Agreement (or any portion thereof) is determined to be invalid or unenforceable, the remaining provisions of this Agreement shall not be affected thereby and shall be binding upon the Parties and shall be enforceable, as though said invalid or unenforceable provision (or portion thereof) were not contained in this Agreement. The failure by any Party to insist upon strict performance of any of the provisions contained in this Agreement shall in no way constitute a waiver of its rights as set forth in this Agreement, at law or in equity, or a waiver of any other provisions or subsequent default by any other Party in the performance of or compliance with any of the terms and conditions set forth in this Agreement.
13.15. Headings. The headings, captions, headers, footers and version numbers contained in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement.
13.16. Drafting. Each Party: (i) acknowledges and agrees that they fully participated in the drafting of this Agreement and, in the event that any dispute arises with respect to the interpretation or construction of this Agreement, no presumption shall arise that any one Party drafted this Agreement; and (ii) represents and warrants to the other Parties that they have thoroughly reviewed this Agreement, understand and agree to undertake all of their obligations hereunder, and have obtained qualified independent legal advice with respect to the foregoing.
13.17. Expenses. Except as otherwise expressly provided in this Agreement, each Party shall be responsible for all costs and expenses it may incur in the performance of its obligations hereunder.
13.18. Counterparts. This Agreement may be executed and then delivered via facsimile transmission, via the sending of PDF or other copies thereof via email and in one or more counterparts, each of which shall be an original but all of which taken together shall constitute one and the same Agreement.
[SIGNATURES ON FOLLOWING PAGE]
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the Effective Date.
CUENTAS, INC. |
||
| By: | /s/ Arik Maimon 7-24-19 | |
| Name: | Arik Maimon | |
| Title: | CEO | |
| INTERACTIVE COMMUNICATIONS INTERNATIONAL, INC. | ||
| By: | /s/ Daniel Kahrs | |
| Name: | Dan Kahrs | |
| Title: | COO | |
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EXHIBIT A
Addresses for Notice Purposes
Company:
Cuentas, Inc.
19 W. Flagler St., Suite 902
Miami, FL 33130
Attn: Michael De Prado
With a copy to:
Ellenoff Grossman & Schole, LLP
150 E 42nd Street, Floor 11
New York, NY 10017
Attn: David Selengut, Esq.
InComm:
Interactive Communications International, Inc.
250 Williams Street
5th Floor, Suite 5-2002
Atlanta, Georgia 30303
Attn: Scott Meyerhoff, Chief Financial Officer
With a copy to:
Interactive Communications International, Inc. – Legal Department
250 Williams Street
5th Floor, Suite 5-2002
Atlanta, Georgia 30303
Attn: Nicole Ibbotson, SVP, Legal
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EXHIBIT B
Processing Services
InComm will implement, and Company will use, the Processing Services in accordance with the Specifications, and as further described below:
Description of Processing Services
The Processing Services will consist of the following:
Authorization and Transaction Processing Services
InComm will process authorizations for transactions made with or on a Prepaid Product, and any payments or adjustments made to a Prepaid Product.
InComm will process Company’s Data and post entries in accordance with the Specifications. Company authorizes InComm to create, process and post entries on Company’s behalf, including adjustments and corrections, in order to timely process data received from any Payment Network. InComm will promptly report to Company such adjustments or corrections.
Data Storage Services
InComm will store Company’s Data in a format that is accessible online by Company through APIs designated by InComm, subject to additional API and data sharing terms and conditions. Data will be stored in a cold environment for five (5) years or such longer period as required by Applicable Law, and upon request InComm will provide Company with such Data through a manual query at InComm’s then-current professional services rate set forth above, provided that InComm will not charge for any manual query for the first 100 hours of professional services in any twelve (12) month rolling period, if the manual query is in direct response to a government audit.
Account Servicing
InComm will provide the following account servicing services in connection with the Processing Services:
| ● | Assisting all parties involved in the sale, issuance, loading and acceptance of Prepaid Products; |
| ● | Providing chargeback monitoring and processing as requested by Company within Association and regulatory guidelines; |
| ● | Maintaining and updating Prepaid Product account information; |
| ● | Providing customer service with personnel capable of serving English speaking Prepaid Product users via phone, email or in writing with issues or problems related to Prepaid Products; |
| ● | Providing Web/API services for Prepaid Product user applications and viewing Prepaid Product transactions; |
| ● | Providing Prepaid Product users with a, 24-hours per day, 7 days per week mechanism for obtaining and /or hearing Prepaid Product information in English over the telephone, including through an interactive voice response (IVR) unit; |
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| ● | Managing returned mail including Prepaid Products or periodic statements due to undeliverable addresses or other reasons; |
| ● | Providing reasonable assistance, on an on-going basis, to Issuing Bank in resolving customer or vendor issues relating to Prepaid Products or the use, issuance, sale or reloading thereof; |
| ● | Providing and monitoring data communications between InComm and Company or vendors for reporting purposes and for consolidated transaction processing; |
| ● | Providing a mechanism for customer dispute resolution; |
| ● | Providing an interface to Company’s vendors for third-party servicing including card embossing, letter generation and statement generation; |
| ● | Providing training as reasonably necessary to enable Company personnel to successfully use the Processing Services; |
Reporting
InComm will provide to Company reporting and documentation of all Prepaid Product sales, settlement and portfolio transactions. In addition, InComm will:
| ● | Maintain, update and archive Prepaid Product account and transaction information, from which Issuing Bank may generate reports; |
Output
If the Processing Services include the preparation and delivery of any documents, reports, statements or other output (collectively, “Output”), InComm will prepare and deliver such Output as described in the Specifications or a statement of work.
Company is responsible for reviewing all Output to verify accuracy. If Company identifies any error in Output, it must notify InComm in writing of such error (a) for daily settlement Output, within five (5) business days from receiving the Output; and (b) for all other Output, within thirty (30) days from receiving the Output. Upon such written notice, InComm will make commercially reasonable efforts to (i) for errors directly caused by InComm, correct the error described in Company’s notice at InComm’s expense, and (ii) for all other errors, correct the error described in Company’s notice to the extent reasonably practicable and at Company’s expense.
Company acknowledges and agrees that InComm’s obligation to correct errors as described above is Company’s sole and exclusive remedy in the event of such errors.
Hot Carding
Upon notice from Company regarding a lost or stolen Prepaid Product (“Hot Card”), InComm will deactivate the Prepaid Product in accordance with InComm’s Hot Card procedures. InComm will not be liable (including for any indemnity obligation under the Agreement) to Company, Issuing Bank, a Prepaid Product customer, or any other third-party, for:
| ● | Any charges made to a Hot Card except for charges made between (a) when InComm should have deactivated the Hot Card in accordance with its Hot Card procedures and (b) when InComm actually deactivated the Hot Card; |
| ● | InComm’s failure to deactivate a Hot Card if due to the failure of Company, Issuing Bank, a Prepaid Product customer, or other third-party to provide the information required for InComm to deactivate the Hot Card (as set forth in InComm’s Hot Card procedures); or |
| ● | Deactivating a Hot Card based on false, inaccurate or incomplete information received by InComm. |
Except as expressly set forth above, as between the Parties, Company is solely responsible and liable for the deactivation of Hot Cards, including for any associated fees, customer communications, servicing, refunds and warning bulletin services.
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EXHIBIT C
Service Levels
InComm shall use commercially reasonable efforts to provide the Processing Services in accordance with the service levels set forth below. If any applicable services are not provided in accordance with the service levels, InComm shall promptly investigate the causes of the problem and initiate remedial action to correct the problem. InComm may schedule planned outages of the Processing Services from time to time in its reasonable discretion. Additionally, Company acknowledges InComm may initiate outages of the Processing Services in emergency situations.
In no event shall InComm be deemed to have failed to meet a service level in the event any such failure is due, in whole or in part, to: (i) Company’s delay in performing, or failure to perform, any of its obligations under this Agreement; (ii) a Force Majeure event; (iii) failure, interruption, outage or other problem with any software, hardware, system, network, facility or other matter not supplied by InComm pursuant to this Agreement; (iv) scheduled maintenance, provided such scheduled maintenance is performed between 12:00am EST and 6:00am EST and any downtime or outage resulting from such scheduled maintenance does not exceed a total of forty (40) hours during the applicable calendar year; (v) emergency maintenance, provided that Company is provided with twenty-four (24) hours prior written notice; or (vi) disabling, suspension or termination of the services pursuant to this Agreement. “Excused Downtime” as used in this Exhibit C shall mean (1) those scheduled and emergency maintenance times described in the foregoing subsections (iv) and (v); and (2) the time period for maintenance requested by Company to be performed outside of scheduled maintenance (as described in subsection (iv)) to implement a Company request for a change to the Processing Services pursuant to Section 2.10 of the Agreement.
InComm’s failure to achieve a system availability service level as set forth below during a given month shall be deemed a “Failed SLA.” For any given month in which InComm suffers any Failed SLA, such month shall be considered to be a “Failed Month.” In the event of three (3) consecutive Failed Months or five (5) Failed Months during any twelve (12) month period, Company may, at its option, either terminate the specific subject service(s) or terminate this Agreement in its entirety by giving written notice of termination to InComm in accordance with this Agreement, in which case the date of termination shall be as set forth in such notice. In connection with Failed SLAs, Company acknowledges and agrees that the foregoing termination right shall be Company’s exclusive remedies for such Failed SLAs.
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|
Name |
Metric | Minimum Service Level | Measurement Window |
| System Availability | |||
| Authorizations Availability | The number of Authorization Requests for which InComm provides an Authorization Response during the measurement window, plus the number of Authorization Requests for which InComm does not provide an Authorization Response because of Excused Downtime, divided by the number of Authorization Requests during the measurement Window expressed as a percentage | ≥ 99.90% | Monthly |
Secure Cardholder Website Availability (if Secure Cardholder Website processing services are provided) |
The number of minutes that the secure cardholder website is Available during the Measurement Window plus the number of minutes that the secure cardholder website is not available because of Excused Downtime divided by the number of minutes during the Measurement Window, expressed as a percentage. | ≥ 99.80% | Monthly |
Interactive Voice Response (IVR) Availability (if IVR processing services are provided) |
The number of minutes that the IVR is Available during the Measurement Window plus the number of minutes that the IVR is not Available because of Excused Downtime divided by the number of minutes during the Measurement Window, expressed as a percentage. | ≥ 99.80% | Monthly |
Customer Care Call Center Availability (if Customer Care Call Center services are provided) |
The number of minutes that the Customer Care Call Center, which is staffed 24x7, is Available during the Measurement Window plus the number of minutes that the Customer Care Call Center is not Available because of Excused Downtime divided by the number of minutes during the Measurement Window, expressed as a percentage. |
≥ 99.90% | Monthly |
| Reload Processing Availability | The number of minutes that Reload Processing is Available during the Measurement Window plus the number of minutes that Reload Processing is not Available because of Excused Downtime divided by the number of minutes during the Measurement Window, expressed as a percentage. | ≥ 98.00% | Monthly |
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| Reporting Services Availability | The number of minutes that system-wide Online File Reports are Available during the Measurement Window plus the number of minutes that Online File Reports are not Available because of Excused Downtime divided by the number of minutes during the Measurement Window, expressed as a percentage. | ≥ 99.80% | Monthly |
| Authorizations | |||
| Authorization Responsiveness | The number of Authorization Requests InComm receives and provides an Authorization Response to within eight (8) seconds of receipt during the Measurement Window plus the number of Authorization Requests for which InComm does not provide an Authorization Response within such timeframe because of Excused Downtime, divided by the number of Authorization Requests InComm receives during the Measurement Window, expressed as a percentage. | ≥ 99.90% | Monthly |
| API/Web Services | |||
| API/Web Services Responsiveness | The number of API/Web Services calls InComm receives and provides a Response to within eight (8) seconds or less of receipt during the Measurement Window plus the number of API/Web Services Calls for which InComm does not provide an response to within such timeframe because of Excused Downtime, divided by the number of API/Web Service Calls InComm receives during the Measurement Window, expressed as a percentage.
The calculation is based from the time the API/Web Service request reaches InComm to the time when InComm sends the response.
API/Web Services calls for statement viewing is excluded from this calculation as statement request times will vary due to the unknown quantity of data that will need to be transmitted. |
≥ 99.00% | Monthly |
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| Call Center | |||
| Live Agent Call Answer Time | The number of calls that the Customer Care Call Center answers in less than 120 seconds during the Measurement Window plus the number of calls that the Customer Care Call Center does not answer because of Excused Downtime divided by the number of calls during the Measurement Window, expressed as a percentage. | ≥ 85.0% | Monthly |
| Reporting | |||
| Daily Reports/Files | The number of days that critical daily reports/files are not available by 10:00 a.m. on the next Business Day during the Measurement Window less the number of days that the critical daily reports/files are not available because of Excused Downtime.
Critical Daily Reports/files will be defined as: Report 1 Report 2 Report 3 |
≥ 3 days missed | Monthly |
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EXHIBIT D
Fee Schedule
* “One-Time” fees are due and payable by Company as follows: (1) 50% due upon initiation of a Billable Item; and (2) the remaining 50% due upon completion of such Billable Item in accordance with applicable documentation and specifications. “Completion of such Billable Item” means the Billable Item is available for production use regardless of whether or not the Billable Item is actually used.
Implementation, Setup & Configuration
| |||
| Billable Item | Fee | Item Description | Frequency |
| Initial Program Setup & Implementation Fees | $REDACTED | Initial setup of prepaid program on InComm’s platforms. Includes one (1) program, one (1) product, one (1) BIN. Also includes establishment of the following: ● IVR Setup & Configuration ● Fraud Management Services ● Exceptions Processing Sanctions List Screening |
$REDACTED paid at the earlier of the Launch Date or three (3) months after contract execution, then $REDACTED each at the beginning of Years 2, 3, 4, 5 |
| Additional Prepaid Product Setup | $REDACTED per new product type | The configuration and deployment of an InComm standard prepaid product and service options as requested by Company | One-Time |
| Additional Prepaid Program | $REDACTED per new program | The configuration and deployment of a new prepaid program of an existing product type and service options as requested by Company | One-Time |
| Additional BIN Setup | $REDACTED per BIN | Each setup and installation of a BIN on the InComm processing system. | One-Time |
| IVR Setup & Configuration | Included in Initial Program Setup & Implementation Fee | For establishing an IVR including customized call flows and voice prompts. | One-Time |
| Fraud Management Services | Included in Initial Program Setup & Implementation Fee | For establishing InComm managed Fraud rules and on-behalf services as requested by client | One-Time |
| Exceptions Processing | Included in Initial Program Setup & Implementation Fee | For establishing InComm-managed Exception processing on-behalf services | One-Time |
| Sanctions List Screening | Included in Initial Program Setup & Implementation Fee | For establishing sanctions list screening on-behalf services | One-Time |
| Custom Programming | $REDACTED /hour | Hourly rate for systems design, development, QA and project management for non-standard product features | Hourly, as requested |
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Primary Prepaid Card Services & Fees
| |||
| Billable Item | Fee | Item Description | Frequency |
| Processing Fee | REDACTED % of all funds added to cards/accounts excluding Vanilla Direct Reload Network. | REDACTED fee of funds added for processing services
|
Monthly |
| Pass Through Fees | Billed at actual cost (pass through) + 10% markup | Pass Through Fees include any association/network fees, telecom fees and shipping/postage fees, and other third-party fees | Monthly |
Optional Card Design, Packaging and Fulfillment Services
| |||
| Billable Item | Fee | Item Description | Frequency |
| Card Design, Personalization and Fulfillment | Quote | Card personalization and fulfillment services as requested by Company | As needed |
| Transmission of Account Information to a Third-party | $REDACTED per account record | Each data file transmission sent to a card fulfillment company for personalization or fulfillment services. Fee waived if card personalization is performed by InComm |
As requested |
| Integration with new card vendor | $REDACTED | Per new integration with a Company specified card or personalization vendor. Vendor must be certified by card network, issuer and InComm. | One Time |
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Optional Program Management Services
| |||
| Billable Item | Fee | Item Description | Frequency |
| IVR | $REDACTED per call | The cost per call for the Interactive Voice Response (IVR) unit | Monthly |
| Customer Service Live Agent | $REDACTED per minute | The duration of time in minutes and rounded up to the nearest 6 second increment that a cardholder is interacting with a live agent. | Monthly |
| Transfer Connect Fee | $REDACTED per call transferred | Transfer Connect Fee applies each time a cardholder is transferred from InComm hosted IVR and/or InComm Live Agent to Company or third-party managed call center representative | Monthly |
| Servicing Email Messaging | $REDACTED per email sent | Fee for each email sent. | Monthly |
| Account Alerts SMS Text Messaging | $REDACTED per item | Fee for each SMS text sent to a mobile device. | Monthly |
| Chargebacks and Representments | $REDACTED per item | Each individual chargeback or cardholder dispute including representments, handled on Company’s behalf by InComm. Service will be provided based on instructions from Company and do not include any Visa, Mastercard, American Express, Discover or other third-party fees which will be passed-through and billed at cost. | Monthly |
Optional Web and Application Services
| |||
| Billable Item | Fee | Item Description | Frequency |
| Cardholder Website Hosting Fee | $REDACTED per month | Fee assessed when using InComm-Hosted cardholder website for card sales and/or cardholder self-service. Monthly fee is charged each month the website is in production. | Monthly |
| Partner Service Portal | $REDACTED for 10 user licenses | The licensing fee per user of the InComm Partner Service Portal application. The application provides remote access and functionality for define cardholder support functions through the Internet. | Annually |
| API Services | $REDACTED per transaction | The fee for each OLTP transaction and/or application to application interaction with the InComm system by the Company or authorized requestor. Company is responsible for any hardware, software, data line connectivity or other services required to support these services | Monthly |
| Batch File Processing | $REDACTED per record | The fee for each record processed or generated including headers and footers as part of the batch file. Maximum of 12 files per day, $5.00 file minimum | Monthly |
Risk Management and Fraud Services
| |||
| Billable Item | Fee | Item Description | Frequency |
| Transactional Fraud Servicing Fee | $REDACTED per account | Charged per financial and non-financial transaction reviewed by fraud engine. | Monthly |
| Secured Web ATO Monitoring | $REDACTED per login attempt | Collection of device data on login attempts to prevent fraudulent access to cardholder accounts. | Monthly |
| Action Account – Fraud Services Intervention | $REDACTED per actioned account | The review and assessment by InComm fraud analyst of individual transaction/account activity. Transactions are sorted for analysis based on parameters established by program protocol for each fraud tool chosen to be used. The fee is assessed for each transaction and not for each parameter reviewed | Monthly |
| Inbound/Outbound Fraud Live Analyst Support/Verification | $REDACTED per minute | The duration of time in minutes and rounded up to the nearest 6 second increment that a cardholder is interacting with a live fraud analyst as directed by program protocol. | Monthly |
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| Auto-Statused &Auto-email Accounts | $REDACTED per account statused and emailed | Automatic status change of an account based on Company-defined criteria in InComm Fraud tools. Includes email notification to cardholder | Monthly |
| Fraud Services Investigation | $REDACTED per hour | Gathering data, analyzing trends, researching information or any other action undertaken by InComm Fraud personnel as requested by the Company to support Fraud Services and law enforcement actions | Monthly |
| Risk Consultative Services | $REDACTED per hour | Providing consultative services as requested by the Company related to unique program requirements or requests, including but not limited to recurring calls and/or meetings to discuss ongoing risk concerns. | Monthly |
| Transaction Blocking | $REDACTED per transaction | Fee per transaction for requesting a transaction be blocked due to suspected fraud | Monthly |
| Program Specific Fraud Rules | $REDACTED per request | Fee for implementing changes to fraud rules as requested by the Company in less than 24 hours. | Per request |
| Sanction List Screening | Performing initial and on-going sanction list screening | ||
| Name Screening | $REDACTED per name, includes OFAC | Name screening only | Monthly |
| Name Screening - Premium List & PEP | $REDACTED per name | Name screening against premium list and politically exposed person (PEP) | Monthly |
| Name - Match Case | $REDACTED per case created | Monthly | |
| Warning Bulletin Notification | $REDACTED per account | Each placement of a card account on the appropriate card network Warning Bulletin. Service excludes network fees which will be passed-through and billed at cost | Monthly |
| Monthly Minimum Fees ** | |||
| Billable Item | Fee | Frequency | |
| Months 1 – 3 | $REDACTED | Monthly | |
| Months 4 – 12 | $REDACTED | Monthly | |
| Months 13- 24 | $REDACTED | Monthly | |
| Months 25 - onward | $REDACTED | Monthly | |
**Monthly Minimums start upon Month 4 after Launch Date. Monthly Minimums include all fees and services listed in Schedule D.
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Exhibit 10.20
WESTERN UNION NORTH AMERICA AGENCY AGREEMENT (ABMT Services)
This Agency Agreement (this “Agreement”) is entered into by Western Union Financial Services, Inc., a Colorado corporation (“Western Union” or “WUNA”) and the undersigned Agent.
Agent and WUNA agree as follows:
1 Definitions. Capitalized terms used herein shall have the meanings given to such terms as set forth in this Section 1 or as defined elsewhere in this Agreement or any Attachment hereto.
1.1 “Account” means a valid checking or savings account held with Agent.
1.2 “Account Holder” means an individual who holds an Account in their own name and is at least eighteen (18) years of age.
1.3 “Agent Website(s)” means one or more Agent-operated, secure Internet websites with appropriate internet banking functionality approved in advance by WUNA in writing, from which Account Holders may conduct Money Transfer Services.
1.4 Intentionally Left Blank.
1.5 “Channel” means Agent Website(s).
1.6 “Consumer” means any individual that is authorized to use the Money Transfer Services through any Channel.
1.7 “Designated Account” means an Account designated by an Account Holder for use with On-line Money Transfer transactions.
1.8 “Money Transfer” means a money transfer transmitted through the WUNA system.
1.9 “Money Transfer Services” means the receipt of funds by Agent for transmission and disbursement for a fee, as further described in Part A.
1.10 “Online Account Based Money Transfer Service” or “On-line Money Transfer” means a Money Transfer transaction initiated and/or paid through an Agent Website.
1.11 “On-line Receiver” means an Account Holder who (i) is authorized to use an Agent Website to receive Money Transfer transactions, and (ii) elects to receive funds as a result of a Money Transfer transaction into his or her Designated Account.
1.12 “On-line Sender” means an Account Holder who (i) is authorized to conduct On-line Money Transfer, and (ii) initiates an On-line Money Transfer using funds from their Designated Account.
1.13 “Qualifying Transaction” means a Money Transfer transaction where a Consumer has accessed the Money Transfer Services through an Agent Website and completed such transaction via the Agent Website. A Qualifying Transaction does not include partial or full chargebacks, cancellations, refunds, or otherwise incomplete transactions.
1.14 “Service Requirements” means the documents detailing the methods by which Agent will provide Money Transfer Services (through any Channel), including the Agency Reference Guide, Bank Secrecy Act Compliance Manual, the GBS Business Requirements, the GBS Developer Guide, the GBS Agent Integration Guide, the GBS User Test Cases operations manuals, user guides, customer forms, receipts, record retention schedules, rate schedules and applicable tariffs, policies, rules and regulations, all as may be amended from time to time by WUNA.
1.15 “Services” means the Money Transfer Services.
1.16 “Trust Account” means a bank account maintained by Agent for the purpose of depositing MT Trust Funds (as defined in Part A),. The Trust Account shall be maintained at a federally insured financial institution designated by Agent and shall meet the requirements specified by WUNA from time to time. Agent shall provide to WUNA all Trust Account activity and balance records and information as may be requested by WUNA from time to time. Agent shall provide WUNA with 14 days’ advance written notice prior to changing the Trust Account in any manner.
2 Services. WUNA appoints Agent as its delegate, authorized to offer the Services indicated on the signature page hereof in accordance with the terms and conditions of this Agreement and Agent shall comply with the terms, conditions and procedures set forth in the applicable Description of Service (attached as Part A) and with the Service Requirements. Current copies of the Service Requirements have been provided to Agent by WUNA and are available upon request from WUNA.
Main, Page 1 of 12
3 Money Transfer Service Channel. Agent shall provide the following Services through the following Channel:
Agent Website(s). (a) Agent shall offer the Money Transfer Service through the Agent Website(s) using web pages, scripts and instructions specified by WUNA or in conformance with WUNA requirements. Each Agent Website shall be identified on Attachment IB. Except as necessary for regularly scheduled maintenance, or as otherwise required or approved by WUNA, Agent shall offer the Services through the Agent Website(s) on a twenty-four hours per day basis for each day during the Term.
(b) Change of Agent Website(s). Agent shall not close an Agent Website through which the Money Transfer Service is offered without giving WUNA 90 days prior notice. Agent shall not offer the Money Transfer Services through an Agent Website that is not listed on Attachment IB without giving WUNA 90 days prior notice and without WUNA’s prior approval.
4 Advertising; Trademarks.
4.1 Advertising. Agent agrees to advertise and promote the Services so as to develop consumer interest and confidence in the Services and to enhance the goodwill associated therewith and with WUNA’s Trademarks. Agent shall (a) participate in WUNA’s promotional programs, (b) make prominent use of signs, brochures, displays, decals and other promotional materials provided by WUNA, and (c) comply with WUNA’s merchandising standards, as set forth in Part A, and/or the Service Requirements, as applicable.
4.2 Approval. Agent may promote any of the Services in its own advertising or promotional materials in any form of media, including radio, television, print or the Internet, subject to the prior written approval of WUNA. Requests for such approval shall be forwarded to: WUNA, Attention: Trademark Administrator, 7001 E. Belleview Avenue, Denver, Colorado 80237. WUNA may periodically inspect Agent’s advertising and promotional materials relating to the Services for compliance with this Agreement. If WUNA reasonably considers Agent’s promotion of the Services to be improper, misleading or otherwise contrary to Agent’s obligations under this Agreement, Agent shall promptly modify or replace the same, subject to WUNA’s prior written approval, or discontinue such promotion.
4.3 Trademarks. Agent is granted a nonexclusive, royalty-free right to use the trade names, trademarks, trade dress, symbols, logos and copyrighted material (collectively “Trademarks”) of WUNA specified by WUNA from time to time, and WUNA is granted the nonexclusive, royalty-free right to use Agent’s Trademarks, each for the limited purpose of advertising and promoting the Services, and subject in each case to the prior written approval of the party whose Trademarks are being used. Each party agrees that use of any other party’s Trademarks shall not confer any proprietary right thereto. Each party shall cease all use of the other party’s Trademarks immediately upon termination or suspension of this Agreement.
4.4 Press Releases. No party may issue any press release or other public notice relating to the subject matter of this Agreement without the prior written approval of the other party.
5. Confidentiality.
5.1 Agent acknowledges that all records and information regarding consumers that Agent may collect specifically relating to the Services (including but not limited to, information provided by consumers on input forms, Agent Website(s) or otherwise to initiate or receive a Services transaction) (“Consumer Information”) is the exclusive property of WUNA. For avoidance of doubt, any information collected by the Agent in its ordinary course of business and independent of the Services shall not be exclusive property of WUNA. Agent agrees that it shall only use the Consumer Information in its performance of the Services, and that Agent shall not use, sell, rent, exchange or otherwise disclose the Consumer Information to any party other than WUNA for any purpose whatsoever without the prior written consent of WUNA, except as may be required by Applicable Law. All Consumer Information shall be provided to WUNA upon its request. If WUNA shall consent to any collection, use or transfer of Consumer Information, then Agent warrants to WUNA that such collection, use and transfer shall be accomplished in full compliance with all applicable laws and regulations governing data protection and consumer privacy, and with the Service Requirements. In the event that Agent receives a request or demand to disclose any Consumer Information outside of the ordinary course of reporting Agent shall immediately notify WUNA and, if requested by WUNA, will fully cooperate with any effort to obtain a protective order or any other protective measures. Agent acknowledges that the Service Requirements set forth retention and destruction schedules and requirements for certain forms and/or documents (including electronic forms and documents) that contain Consumer Information and other confidential information. Agent shall comply with such obligations and shall promptly inform WUNA in the event of any non-compliance with such requirements.
5.2 Agent agrees that neither Agent nor its officers, principals, employees, contractors or agents shall use, sell, rent, exchange or otherwise disclose to any person or entity, other than WUNA, and other than for purposes of Agent’s performance under this Agreement, or as may be required by Applicable Law: (a) the Service Requirements; (b) security identifications, account numbers, agent numbers, and WUNA’s other security measures and/or procedures; (c) sales or transaction volumes, revenues, earnings, commission rates, terms, conditions or payments hereunder; (d) Consumer Information; or (e) any other confidential information with respect to WUNA, the Services, this Agreement, or the relationship between the parties.
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5.3 Agent shall cooperate with WUNA in implementing all procedures mandated by law in order to protect consumer privacy and/or consumer data, and any such reasonable policies and/or procedures implemented by WUNA.
5.4 WUNA agrees that it shall not sell, rent, exchange or otherwise disclose any financial information of Agent to any party other than as may be required by law or as may be voluntarily reported to a governmental or regulatory agency by WUNA, pursuant to its internal compliance policies or in connection with money transmission, sales of checks or anti-money laundering laws or regulations.
5.5 Agent shall install and use a reasonable change control process to ensure that access to Western Union’s confidential information and Consumer Information is controlled and recorded. Agent shall notify WUNA of any planned system configuration changes or other changes affecting the how such change will impact the security and protection of WUNA’s confidential information or Consumer Information.
5.6 Agent agrees that upon the request of WUNA all Confidential Information (electronic and paper) in Agent’s possession shall be promptly returned (including any copies, extracts, descriptions and summaries thereof) to WUNA or Agent shall certify in writing to WUNA that all Confidential Information has been destroyed.
6 Compliance with Laws.
6.1 Compliance with Laws. Agent shall comply (and shall cause its officers, principals and employees to comply) with all federal, state and local laws and regulations applicable to Agent’s business and to Agent’s provision of the Services, as may be amended from time to time (collectively “Applicable Law”), including but not limited to: (a) state and federal licensing laws and regulations; (b) the Bank Secrecy Act (31 U.S.C. § 5311 et. seq., and its implementing regulations, 31 C.F.R. Part 103); (c) the IRS’s cash reporting requirements (26 U.S.C. § 6050I) and related regulations; (d) state currency reporting requirements; (e) federal and state anti- money laundering laws, including all rules and regulations promulgated thereunder (e.g., 18 U.S.C. §§ 1956 and 1957); (f) all applicable state money transfer or sale of checks laws and regulations (including those laws and regulations referred to or set out in Schedule A, if any); (g) all applicable federal and state privacy laws and regulations; (h) the USA PATRIOT Act; (i) the National Automated Clearing House rules, regulations and guidelines, including but not limited to the International ACH Transaction Rule; (j) the Electronic Funds Transfer Act and Regulation E; (k) the Electronic Signatures in Global and National Commerce Act; (k) the Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 1073 and related regulations); (l) the Consumer Financial Protection Bureau Remittance Rules (77 FR §§ 6194, 40459 and 50243) and related regulations; and (m) all applicable federal and state laws regulating access for the disabled, including but not limited to the Americans with Disabilities Act.
6.2 Nondiscrimination/Affirmative Action. Agent hereby agrees that Agent will not discriminate against any employee or applicant for employment because of race, color, religion, sex, national origin, age disability, or veteran status. As a government contractor we are incorporating the following regulations into this Agreement, as applicable: 41 C.F.R. §§ 60-1.4, 60-300.5, 60-741.5 and 48 C.F.R. §§ 52.222-26, 52.222-35–52.222-37, 52.222-40, 52.222-54. The following language is also incorporated, as applicable: This contractor and subcontractor shall abide by the requirements of 41 CFR 60-300.5(a) and 41 CFR 60- 741.5(a). These regulations prohibit discrimination against qualified individuals on the basis of protected veteran status or disability, and require affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified protected veterans and individuals with disabilities.
7 Representations and Warranties.
7.1 Agent and its Employees. With regard to itself, and on behalf of its officers, principals and all other Agent employees and/or representatives with managerial oversight and/or responsibility for Agent locations offering the Services, Agent represents and warrants that: (a) all information disclosed to WUNA in connection with the application process to become a WUNA Agent (the “Agency Agreement Application”) is true, accurate, and complete; (b) none of them has been convicted of any felony that has not been disclosed to WUNA, in writing, prior to the Effective Date; (c) none of them has been charged with or convicted of (or pleaded guilty or no contest to) any criminal act constituting, involving or relating to: fraud; embezzlement; theft; money laundering; the financing of terrorism or terrorist organizations; the importation of undocumented aliens; receipt of stolen property; or the possession, use, manufacture or distribution of any narcotic or other controlled substance. This representation and warranty shall be deemed an ongoing representation and warranty from Agent. Agent shall provide notice to WUNA within forty-eight hours after becoming aware of the fact that any of the foregoing representations or warranties shall cease to be true at any time during the term of this Agreement.
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7.2 On-line Money Transfer. Agent represents and warrants, that it will ensure that (i) only Account Holders are permitted to conduct On-line Money Transfer transactions, (ii) all Account Holders are properly authenticated and verified to be a customer of Agent for whom Agent has on file a valid signature and identification information, (iii) it will obtain all necessary and proper authorizations to debit and/or credit Designated Accounts of On-line Senders and On-line Receivers, and (iv) Agent’s agreements and documents with Account Holders permit and contemplate the type(s) of services and electronic funds transfers as contemplated by this Agreement and as agreed to by the parties.
7.3 Customer Identification Program. Agent certifies, as of the Effective Date and on no less than an annual basis thereafter, that it (a) has implemented an AML/BSA program acceptable to WUNA, and (b) will perform Account Holder identification and authentication requirements on behalf of WUNA for On-line Money Transfer transactions.
7.4 Subagents. Agent represents and warrants that it shall not appoint any subagents hereunder and shall not offer the Services at or through any entity not a party to this Agreement or at or through any Agent Website not expressly included under this Agreement.
7.5 Ownership. Agent represents and warrants that it has disclosed to WUNA all ownership or other interests that Agent, its affiliates, and their respective officers, directors, and principals, as applicable, may have in any other WUNA delegate.
7.6 Authority. Agent and WUNA represent and warrant to each other that: (a) each has full power and authority to enter into this Agreement; (b) the execution, delivery and performance by each party of this Agreement will not constitute a default (or an event which, with notice or lapse of time or both, would cause a default) under any contract or agreement to which Agent or any of its affiliates are a party, or require consent or approval from any other party to any such contract; and (c) this Agreement constitutes a legal, valid and binding obligation of each party, enforceable against each party in accordance with the terms and conditions of this Agreement.
7.7 No Warranty. WUNA MAKES NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO ANY EQUIPMENT, SOFTWARE AND OTHER ITEMS PROVIDED UNDER THIS AGREEMENT, EXPRESS OR IMPLIED, AND SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE AND MERCHANTABILITY, AND ANY WARRANTY AGAINST INFRINGEMENT. ANY EQUIPMENT, SOFTWARE OR OTHER ITEMS PROVIDED UNDER THIS AGREEMENT BY WUNA ARE PROVIDED TO AGENT “AS IS” WITH ALL FAULTS.
8. Term and Termination.
8.1 Term. This Agreement shall be effective on the Effective Date and continue in force for a period of five years (the “Initial Term”), unless otherwise terminated as provided herein. This Agreement shall automatically renew for an additional term of five years (the “Renewal Term”), unless either party provides the other party with at least 12, but not more than 24, months prior written notice of termination. Upon expiration of the Initial Term and the Renewal Term, this Agreement shall continue in effect, subject to the right of either party to terminate this Agreement at any time thereafter by giving the other party at least 12 months prior written notice of termination.
8.2 Suspension and Termination. WUNA may take, or request that Agent take (as applicable) any one or more of the Remedial Actions (as defined below) if WUNA, reasonably determines: (i) that a material adverse change in the financial condition or business prospects of Agent, a principal of Agent or any guarantor of this Agreement, has occurred, or may occur, in the following twelve (12) months; (ii) that Agent’s continued performance under this Agreement is, or may become, impaired; (iii) there is excessive fraud occurring at Agent’s locations or with respect to On-line Money Transfer transactions; or (iii) Agent breaches any of the terms, conditions, representations or warranties set forth in this Agreement (including the provision of false or misleading information) or any other agreement between WUNA, or an affiliate of WUNA, and Agent or a principal of Agent.
8.3 Remedial Action. As used in this Agreement a “Remedial Action” is defined as: (a) Agent’s immediate wire transfer of the MT Trust Funds, MO Trust Funds and/or other amounts due and owing to WUNA; (b) the immediate suspension, or termination, of Agent’s ability to provide one or more of the Services at one or more Agent Location or Agent Website; (c) immediate termination of Part A or this Agreement; (d) exercise any legal and/or equitable remedies available to WUNA, for which WUNA shall be entitled to reimbursement of reasonable attorneys’ fees and expenses; (e) satisfaction of any amount owed by Agent to WUNA by offset against any funds that may be due or owing by WUNA (including its affiliates) to Agent; (f) securing, for the benefit of WUNA, a bond, irrevocable letter of credit or other similar instrument acceptable to WUNA; (g)assessing a late charge on the amounts due to WUNA by Agent, in the amount of the greater of: (i) $25.00 per day, or (ii) interest on the entire amount owed to WUNA at the rate of two percentage points (2%) above the prime rate of interest published in the Wall Street Journal (or any other financial publication designated by WUNA) in effect at that time, or the maximum interest rate allowed under applicable law, or (h) assessing a charge of $50.00 for each failure by Agent to make payment due to insufficient funds.
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8.4 Violation of Law. Notwithstanding any other provision of this Agreement to the contrary, WUNA may immediately terminate this Agreement with regard to any or all Agent Website(s), if WUNAreasonably determines that compliance with this Agreement would cause WUNA or any of its affiliates to violate or potentially violate any local, state or federal law or regulation or any court order.
9 Indemnification; Limitation of Liability.
9.1 Indemnification by Agent. Agent shall indemnify and hold WUNA, its affiliates, and their respective officers, directors, agents and employees, harmless from and against any claims, losses, causes of action, damages, liabilities or expenses (including reasonable attorneys’ fees and expenses) arising out of or resulting from:
(a) any violation of this Agreement; (b) Agent’s failure to comply with Applicable Law; (c) any failure to adhere to the Service Requirements (including any payments of Money Transfers to other than the intended recipients, in excess of the authorized amount, or resulting from any failure to mark the transaction as paid-out in the will call file); (d) any claim or dispute regarding Agent’s debit or credit of funds from a consumer’s Designated Account; (e) any negligence, recklessness or willful misconduct of Agent, its officers, directors, agents or employees, as applicable; (f) the loss, misuse, theft, burglary, forgery, robbery or other crime, destruction, disappearance and all other causes of loss with respect to the MT Trust Funds, including the receipt of counterfeit currency or checks; or (g) any claim or dispute related to fraud on an Account Holder’s Designated Account. The indemnification obligations set forth herein shall survive the termination of this Agreement.
9.2 Indemnification by WUNA. WUNA shall indemnify and hold Agent, its affiliates, and their respective officers, directors, agents, and employees, harmless from and against any third party claims, losses, causes of action, damages, liabilities or expenses (including reasonable attorneys’ fees and expenses) arising out of or resulting from any mishandling, delay, non-delivery or other errors or omissions concerning the Money Transfer Services caused by WUNA prior to transmission to Agent or after acceptance from Agent and not attributable to the acts or omissions of Agent, its officers, principals, or employees. The indemnification obligations set forth herein shall survive the termination of this Agreement.
9.3 Limitation of Liability. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT SHALL THE CUMULATIVE AGGREGATE LIABILITY OF WUNA UNDER THIS AGREEMENT EXCEED $500,000.00 IN DIRECT ACTUAL DAMAGES SUFFERED BY AGENT. IN NO EVENT SHALL WUNA, OR ITS AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS BE LIABLE UNDER ANY LEGAL OR EQUITABLE THEORY (INCLUDING, BUT NOT LIMITED TO TORT, CONTRACT, STRICT LIABILITY, AND WARRANTY) FOR PUNITIVE, EXEMPLARY, SPECIAL, INCIDENTAL, INDIRECT, CONSEQUENTIAL OR SIMILAR DAMAGES, INCLUDING LOST PROFITS, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE PARTIES AND REGARDLESS OF WHETHER OR NOT WUNA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
10 Financial Statements; Audit and Inspection; Agent Security Program.
10.1 Financial Statements. Upon prior request by WUNA from time to time, Agent shall provide to WUNA within fifteen (15) business days its current annual or interim financial statements, certified by Agent’s independent auditors, if available. Agent grants to WUNA, as well as to, Dun and Bradstreet, and consumer credit services, consumer reporting agencies and to state and federal government representatives permission and authorization to verify, receive, exchange and obtain business and/or personal credit and other information, including without limitation, criminal background checks, as part of WUNA’s ongoing evaluation of Agent.
10.2 Records. Agent shall maintain records with respect to the Services for such period as may be required by law or WUNA. Such records shall include copies of all transaction forms, receipts and all other records Agent may compile in connection with its performance of the Services, including any information related to Agent’s Account Holder identification and authentication processes and procedures, and/or any Customer Identification Program described in 31 C.F.R. 103.121. Agent shall provide copies of any such records to WUNA fifteen (15) days after WUNA’s reasonable request.
10.3 Audit. During the term of this Agreement, and for a period of one year thereafter, WUNA shall have the right upon reasonable request of at least 5 business days, to audit and inspect Agent’s books and records related to Agent’s performance of the Services and Agent’s compliance with this Agreement, the Service Requirements, and Applicable Law. Consumer Information is the property of WUNA and is subject to audit, review and collection by WUNA. Upon notice from WUNA of any deficiency, Agent shall correct such deficiency within a reasonable period of time, but no more than thirty (30) business days and shall pay WUNA the reasonable costs related to such audit.
10.4 Agent Security Program. (a) Agent shall establish, implement and maintain administrative, technical and physical safeguards designed for the purpose of: (i) ensuring the security of Western Union’s confidential information and Consumer Information; (ii) protecting against any anticipated threats or hazards to the security or integrity Western Union’s confidential information and Consumer Information; and (iii) protecting against unauthorized access to, or use, destruction or alteration of Western Union’s confidential information or Consumer Information (including, but not limited to, during the disposal of the such information).
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(b) Upon reasonable prior notice, Agent shall provide information about the measures it employs to safeguard WUNA’s confidential information and Consumer Information, and shall permit a security assessment. The parties will agree on enhancements to be implemented by Agent in order to address any insufficient security measures identified in such assessment or otherwise. Agent shall cooperate with WUNA to conduct security vulnerability (penetration) testing on Agent’s system, which may include testing by electronic methods.
(c) If WUNA’s confidential information or Consumer Information includes payment card data (credit and debit cards), then Agent will provide attestation of compliance to PCI Data Security Standards to WUNA upon request.
(d) Agent shall transmit WUNA’s confidential information or Consumer Information only by using a secure connection, and then only if the information is encrypted.
(e) Agent will implement measures to monitor and detect security incidents. Agent shall immediately notify WUNA of any actual or suspected unauthorized access to, use of, or unintended or malicious loss, destruction or alteration of WUNA Consumer information or other confidential information, through WUNA- specified reporting channels. Agent agrees to assist WUNA with all incident handling and forensic investigation in case of such an incident.
11 Insurance. Agent represents and warrants that Agent has sufficient assets or insurance to cover losses or liabilities arising from claims for workers’ compensation, bodily injury, property damage, theft, employee dishonesty, forgery, robbery, burglary, misplacement and similar occurrences, including loss, theft, or damage. Agent’s obligation to maintain insurance hereunder shall not relieve Agent of any of its other obligations hereunder, including its indemnity obligations in Section 9.1.
12 Assignment.
12.1 Any transfer or assignment of this Agreement or any rights hereunder by Agent, in whole or in part, by operation of law or otherwise, without WUNA’s prior written consent, is prohibited, constitutes a material breach of the Agreement and in WUNA’s sole discretion shall be voidable. In the event of such transfer or assignment, the party to whom the Agreement was transferred or assigned shall be bound to the terms and conditions of this Agreement to the same extent as if WUNA and such assignee or transferee, as the case may be, entered into an agreement identical to this Agreement. Furthermore, Agent shall indemnify and hold WUNA harmless from all liabilities, expenses, costs, fees and fines arising from, or in connection with, such transferee’s or assignee’s offering of the Services. For purposes of this Agreement, an assignment or transfer shall include, among other things: (a) a Change of Control of Agent or any person or entity that directly controls the Agent, or (b) the transfer or sale of any substantial part (25% or more in value) of the total assets of Agent. “Change of Control” means that: (i) the persons directly or indirectly owning the voting stock or interests shall cease to own, directly or indirectly, more than 25% of all such voting stock or interests (on a fully-diluted basis); and/or (ii) the persons directly or indirectly owning the voting stock or interests shall otherwise cease to have such ability, directly or indirectly, to elect the majority of the board of directors or other governing members. Under no circumstances shall any assignment or transfer of this Agreement by Agent release Agent from its obligations hereunder unless WUNA consents to such a release in writing.
12.2 Agent shall provide WUNA with written notice of Agent’s intent to liquidate, substantially change the basic nature of its business, or transfer or sell any substantial part (25% or more in value) of its total assets. Agent shall also notify WUNA of any judgment, writ, warrant of attachment, execution or levy against any substantial part (25% or more in value) of Agent’s total assets not later than three days after Agent obtains knowledge of any such judgment, writ, warrant of attachment, execution or levy.
12.3 In no event shall Agent sell, assign or otherwise transfer greater than 50% of the assets used in connection with Agent’s business operated through all, or substantially all, of the Agent Websites covered by this Agreement, unless: (a) WUNA gives its prior written consent to such sale, assignment or transfer and (b) the purchaser, assignee or transferee thereof assumes this Agreement and all of the provisions and obligations of the Agent hereunder. If Agent effects any such sale, assignment or transfer, Agent shall be responsible for all of the termination responsibilities set forth in Section 8A of Part A; Agent shall be responsible for the liquidated damages set forth in such Section, unless: (a) the transferee thereof assumes this Agreement and all of the provisions and obligations of the Agent hereunder, and (b) WUNA consents to the same in writing. In no event shall Agent be relieved of its liability to WUNA or any of its other obligations arising hereunder without WUNA’s prior written consent..
12.4 WUNA may assign or transfer this Agreement and its rights hereunder and may delegate its duties hereunder, in whole or in part, to any third party, whether in connection with a change in ownership or otherwise, without the consent of Agent.
12.5 Except as provided in the following sentence, this Agreement will inure to the benefit of WUNA, its successors and assigns. No assignee for the benefit of creditors, custodian, receiver, trustee in bankruptcy, debtor in possessions, sheriff, constable or any other officer of the court, or other person charged with taking custody of Agent’s assets or business, shall have any right to continue or to assume or to assign this Agreement.
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13 Notices.
13.1 Delivery. All notices hereunder shall be in writing and shall be deemed given when personally delivered, or when sent by facsimile transmission with receipt confirmed, one day after being sent by a reputable overnight courier, or three business days after being mailed by certified mail, return receipt requested, in each case directed: (a) if to Agent, to its address as shown on the face of its Application, to the attention of the representative or party signing this Agreement; (b) if to WUNA, to Western Union, One Belleview Station, 7001 E. Belleview Avenue, Denver, Colorado 80237, Attention: President, with a copy to the same address, Attention: General Counsel; or (c) to such other address for each party as is specified by such party in a notice given to the other party.
13.2 Additional Notice Events. In addition to the events requiring notice under Section 7.1 of this Agreement, Agent shall provide notice to WUNA within forty- eight hours in accordance with Section 13.1 of this Agreement upon the discovery of any of the following events involving or relating to itself, its officers, principals and all other Agent employees and/or representatives, whether or not a criminal offense: (a) fraud; (b) dishonest activities; (c) embezzlement; (d) acting without a license, registration, or authorization required under applicable law; (e) making of false statements or omissions in any communications with WUNA or a governmental agency; (f) larceny; (g) forgery; (h) holdups, thefts, including loss or theft of payment instruments, burglaries, or check kiting schemes; (i) destroying or altering information requested by WUNA or a governmental agency; or (j) operating in an unsafe or unsound manner or any other misconduct.
14 Other Provisions.
14.1 Waiver of Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING A CLAIM ARISING OUT OF, OR RELATING TO, THIS AGREEMENT.
14.2 Waiver of Service of Process. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT THE ADDRESS PROVIDED PURSUANT TO SECTION 13 AND TO ITS REGISTERED AGENT: Corporate Creations Network, Inc., 801 US Highway 1, North Palm Beach, FL 33408
14.3 Independent Contractors. The parties agree that they are acting hereunder as independent contractors and that nothing in this Agreement shall be construed to constitute either party as a partner, employee or agent of the other (except for the limited purpose of offering the Services as defined herein), and no employee or agent of either party shall be deemed to be the employee or agent of the other. Neither party shall have the authority to make any agreement or commitment, nor incur any liability on behalf of the other, nor be liable for any acts or omissions of the other, except as specifically provided herein.
14.4 This Agreement, including, all Parts, Schedules, Exhibits and Attachments hereto, the Agency Agreement Application, the Service Requirements, and all documents incorporated by reference herein, constitutes the entire and sole agreement between the parties with respect to the subject matter herein. This Agreement supersedes all prior understandings, arrangements or agreements, whether verbal or written, between the parties hereto with respect to the subject matter of this Agreement. Provisions of this Agreement that concern or relate to obligations and duties to be performed after the termination of this Agreement shall survive termination of this Agreement to the extent reasonably necessary to effectuate the intent and purpose of such provisions. Except as provided hereinabove, no modification, renewal, extension or waiver of any of the provisions of this Agreement shall be binding upon the parties unless made in writing and signed by the parties. Emails, including emails that bear an electronic “signature block” identifying the sender, shall not constitute signed writings for purposes of this Agreement. No failure of either party to require performance by the other of any provision hereof shall be construed to be a modification of this Agreement or a waiver of any succeeding breach. If any provision of this Agreement is determined to be invalid by a court of competent jurisdiction, such provision shall be deemed void and the remainder of this Agreement shall continue in full force and effect. Except as expressly set forth herein, nothing contained in this Agreement is intended to confer upon any person not a party hereto any rights, benefits or remedies of any kind or character whatsoever, and no such person shall be deemed a third-party beneficiary under this Agreement. In the event this Agreement references more than one person, corporation, partnership or entity as Agent, then it is expressly agreed that the liability of such persons or entities hereunder shall be both joint and several. This Agreement shall be construed and enforced in accordance with, and shall be governed by, the laws of the State of New York (without regard to any provisions concerning choice of law or conflict of laws which might result in the application of the law of another jurisdiction). In the event this Agreement is translated into a language other than English, it is done solely for convenience purposes, with only the signed English language version of this Agreement being valid and binding upon the parties.
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15. State Specific Requirements. This Section 15 applies to Agent with respect to its locations, if any, in the states listed below:
ARKANSAS, CALIFORNIA, HAWAII, IDAHO, INDIANA, KENTUCKY, MAINE, MARYLAND, MICHIGAN, MINNESOTA, NEBRASKA, NEW MEXICO, NEW YORK, NORTH CAROLINA, NORTH DAKOTA, OREGON, PENNSYLVANIA, SOUTH CAROLINA, TENNESSEE, TEXAS, VIRGINIA, WYOMING
Agent is under a duty to act only as authorized under this Agreement. Agent and WUNA are subject to supervision, regulation and disciplinary action, including but not limited to termination of the Agreement, by or at the direction of the Director or Commissioner (as defined below). Agent hereby consents to the Director’s inspection of the books and records of Agent, with or without prior written notice to WUNA or Agent. As used in this Section 15, “Director” or “Commissioner” means the following for each of the states listed below:
Arkansas – Arkansas Securities Commissioner
California – Commissioner of Business Oversight
Idaho – Director of the Idaho Department of Finance
Hawaii – Hawaii Commissioner of Financial Institutions
Indiana – Director of Indiana Department of Financial Institutions
Kentucky – Executive Director of the Kentucky Office of Financial Institutions
Maine – Director of Office of Consumer Credit Regulation within the Department of Professional and Financial Regulation
Maryland – Bank Commissioner of the Department of Licensing and Regulation
Michigan – Commissioner of the Office of Financial and Insurance Services
Minnesota – Commissioner of Commerce
Nebraska – Director of Banking and Finance
New Mexico – Director of the Financial Institutions Division of the Regulation and Licensing Department
New York – Superintendent of Banking of the State of New York
North Carolina – Commissioner of Banks of the State of North Carolina
North Dakota – Commissioner of the Department of Financial Institutions
Oregon – Director of the Department of Consumer and Business Services
Pennsylvania – Secretary of Banking
South Carolina – South Carolina Attorney General
Tennessee – Tennessee Commissioner of Financial Institutions
Texas – Texas Commissioner of Banking
Virginia -- Virginia Commissioner of Financial Institutions
Wyoming – State Banking Commissioner
ALASKA, ARKANSAS, CALIFORNIA, DISTRICT OF COLUMBIA, IDAHO, ILLINOIS, INDIANA, IOWA, KENTUCKY, MARYLAND, MICHIGAN, MINNESOTA, NEW JERSEY, NEW MEXICO, NORTH CAROLINA, PENNSYLVANIA, SOUTH CAROLINA, VERMONT, VIRGINIA, WASHINGTON, TEXAS
Agent will perform all Services in compliance with the Act (as defined below) and any rules, regulations or orders issued thereunder, as amended from time to time. As used in this Section 15, “the Act” means the following for each of the states listed below:
Alaska – Alaska Uniform Money Services Act, Chapter 55 of Title 6 of the Alaska Statutes
Arkansas – Arkansas Uniform Money Services Act, Arkansas Code, Title 23, Chapter 55
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California – Money Transmission Act of the California Financial Code and of any regulations or orders issued thereunder
District of Columbia – Money Transmissions Law, Chapter 10 of Title 26 of the District of Columbia Code
Idaho – Chapter 29 of Title 26 of the Idaho Code
Illinois – the laws of the State of Illinois and the United States, including without limitation, Illinois Transmitters of Money Act, 205 Illinois Compiled Statutes Section 657
Indiana – Indiana Code Section 28-8-4-1 through Section 28-8-4-53
Iowa – Iowa Uniform Money Services Act, Chapter 533C of the Iowa Code
Kentucky – Kentucky Revised Statutes Chapter 286
Maryland – Maryland Money Transmission Act, Md. Code Ann., Fin. Inst. Sections 12-401 to 12-431
Michigan – Michigan Money Transmission Services Act, Act 250 of 2006, Michigan Compiled Laws Section 487, specifically subsections 1033 and 1034, and any rules, regulations or orders issued thereunder
Minnesota – Minnesota Statutes Annotated Chapter 53B.21
New Jersey – New Jersey Money Transmitters Act, New Jersey Statutes, Title 17, Chapter 15C
New Mexico – Uniform Money Services Act
North Carolina – North Carolina Money Transmitters Act, N.C.G.S. §53-208.41 et seq
Pennsylvania – Money Transmitter Act
South Carolina – South Carolina Anti-Money Laundering Act, Title 35, Chapter 11
Vermont – Chapter 79, Title 8 of the Vermont Statutes
Virginia -- Chapter 19 of Title 6.2 of the Code of Virginia
Washington – Washington Uniform Money Services Act, Revised Code of Washington, Title 19, Chapter 19.230
Texas – All applicable state and federal laws rules and regulations pertaining to money transmission, including Chapter 151 of the Texas Finance Code, relevant provisions of the Bank Secrecy Act and USA PATRIOT Act, and Chapter 271 of the Texas Finance Code, and regulations of the State of Texas, including, but not limited to, the posting of the following notice to consumers as required under Title 7, Section 33.51(d)(1) of the Texas Administrative Code:
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“Complaints concerning money transmission activities of Company should be directed to:
For Western Union Branded Money Transfer Complaints:
Western Union Financial Services, Inc.
P.O. Box 6036
Englewood, CO 80112
For Customer Service, please call: 1-800-325-6000
For Orlandi Valuta Branded Money Transfer Complaints:
Western Union Financial Services, Inc.
P.O. Box 6036
Englewood, CO 80112
For Customer Service, please call: 1-800-515-5505
For Vigo Branded Money Transfer Complaints:
Western Union Financial Services, Inc.
P.O. Box 6036
Englewood, CO 80112
For Customer Service, please call: 800-777-8784
For Money Order Complaints:
Western Union Financial Services, Inc.
P.O. Box 7030
Englewood, Colorado 80155-7030
For Customer Services, please call: 1-800-999-9660
If, after contacting Company, you still have an unresolved complaint regarding the company’s money transmission activity, then please direct your complaint to:
Texas Department of Banking
2601 North Lamar Boulevard
Austin, Texas 78705
1-877-276-5554 (toll free)
www.dob.texas.gov”
CALIFORNIA
Agent shall make and keep accounts, correspondence, memoranda, papers, books and other records which the California Commissioner of Business Oversight by regulation or order requires, and Agent shall preserve such records for the time specified by such regulation or order.
HAWAII
Agent hereby certifies that it is in compliance, and shall comply, with the recordkeeping and reporting requirements under Title 31 United States Code Section 5311 et seq., 31 Code of Federal Regulations Part 1022, Section 210, and other federal and state laws pertaining to money laundering.
KENTUCKY
Pursuant to the laws of the State of Kentucky, WUNA hereby provides Agent with the following information: WUNA is required to comply with applicable federal and state law.
MAINE
Agent is prohibited from providing the Services to anyone under the age of 18 years.
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MICHIGAN
In the event WUNA’s license is suspended or revoked, the Commissioner shall notify WUNA and order WUNA to send a notice to its Agents directing them to cease providing money transmission services on behalf of WUNA, and the Agents shall immediately cease providing money transmission services as an Agent of WUNA. Agent shall not make any fraudulent or false statement or misrepresentation to a consumer or WUNA or to the Commissioner.
NEW YORK
Agent is prohibited from acting on behalf of the consumer as a courier for the transmission of money, and no Money Order sold may be retained by Agent or any subagent of WUNA. All Money Orders sold must be given by the Agent and any subagent of WUNA to the purchasers of the instruments for their own delivery to the beneficiary. Agent shall not sell any Money Order or money transmission instruments in New York State pursuant to this Agreement unless the name “Western Union Financial Services, Inc.” clearly appears on the face of the instrument.
NORTH CAROLINA
Company appoints Agent as its authorized delegate with authority to engage in money transmission on behalf of WUNA. Neither Company nor Agent may authorize subdelegates without the written consent of the Commissioner of Banks of the State of North Carolina (the “Commissioner”). Company and Agent are subject to supervision and regulation by the Commissioner. Company shall issue a certificate of authority for each Company Service offered at each location at which it conducts licensed activities in North Carolina through authorized delegates such as Agent. The certificate(s) shall be posted in public view at each location of Agent in North Carolina and shall state as follows: “Money transmission on behalf of Western Union Financial Services, Inc. is conducted at this location pursuant to the North Carolina Money Transmitters Act, N.C.G.S. §53-208.41 et seq.”
PENNSYLVANIA
Pursuant to Subsection 12(c) of the Pennsylvania Money Transmitter Act (Act 129), this Agreement shall contain the following provisions: (1) There is consent by the Agent and the person on whose behalf the Agent is acting; (2) The Agent is acting on behalf of the person employing the Agent’s service for the transmission of money; (3) The Agent is subject to the control of the person on whose behalf the Agent is acting, meaning that the licensee or exempted person takes complete financial responsibility for the money being transmitted from the moment an individual initiates the transmission of money until the intended recipient receives the transmitted money; (4) There is no risk of loss to the individual initiating the transaction if the Agent fails to remit the funds to the person on whose behalf the Agent is acting; (5) Receipt of funds by the agent is deemed receipt of funds by the person on whose behalf the agent is acting; (6) The Agent may not provide money transmission outside the scope of activity permissible under the written agreement between the Agent and the person on whose behalf the Agent is acting except to the extent that the Agent is licensed itself or operating as an Agent for another person; (7) Individuals doing business with the Agent are aware that the Agent is working on behalf of the person on whose behalf the Agent is acting.
TEXAS
Agent hereby certifies that it is familiar with and agrees to fully comply with all applicable state and federal laws, rules, and regulations pertaining to money transmission, including Chapter 151 of the Texas Finance Code and rules adopted thereunder, relevant provisions of the Bank Secrecy Act and the USA PATRIOT Act, and Chapter 271 of the Texas Finance Code. Agent agrees to prepare and maintain all records as required by Chapter 151 of the Texas Finance Code or any rule adopted thereunder or as reasonably requested by the Texas Commissioner of Banking. Agent acknowledges that Company, as a license holder under Chapter 151 of the Texas Finance Code, is subject to regulation by the Texas Commissioner of Banking and that, as part of that regulation, the Commissioner may suspend or revoke an authorized delegate designation or require Company to terminate an authorized delegate designation. Agent acknowledges receipt of the WUNA written policies and procedures applicable to Agent’s compliance with applicable state and federal laws. Agent acknowledges that it has been provided the website address through which Agent can access Chapter 151 of the Texas Finance Code and rules adopted pursuant to said chapter (www.dob.texas.gov) and the Bank Secrecy Act and the USA PATRIOT Act (www.msb.gov and www.fincen.gov), and Chapter 271 of the Texas Finance Code (www.dob.texas.gov).
The remainder of this column is intentionally left blank.
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The undersigned have executed the foregoing Agreement to be effective as of the date WUNA signs this Agreement (the “Effective Date”). BY SIGNING THIS AGREEMENT, AGENT AGREES TO THE PROVISIONS HEREIN AND ALL ATTACHMENTS HERETO FOR THE SERVICE TO BE PROVIDED BY AGENT.
AGENT: CUENTAS, INC.
| Signature: | /s/ Arik Maimon | |
| (Authorized Representative) | ||
| Name: | Arik Maimon | (Print) |
| Title: | CEO | |
| Date: | 10/21/2020 | |
SIGNER MUST INITIAL APPLICABLE LINES BELOW:
| AM | Western Union Money Transfer® Services (Part A) | |
| AM Agent Locations | ||
| AM On-line Money Transfer | ||
| ____ | Western Union Money Orders® (Part B) | |
| ____ | Western Union Convenience Pay® Services (Part C) |
FOR INTERNAL USE ONLY
WESTERN UNION FINANCIAL SERVICES, INC.
| Signature: | / Carlos A Calvo Chacon | |
| (Authorized Representative) | ||
| Name: | Carlos A Calvo Chacon | (Print) |
| Title: | Agent Database Administrator | |
Western Union Services to be Offered by Agent:
| CCC | Western Union Money Transfer Service (Part A) |
| CCC | On-line Money Transfer |
Effective Date: 12/08/2020
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PART A Description of
Services MONEY
TRANSFER
(ABMT MONEY TRANSFER SERVICES)
1A. Services.
1A.1 During the term of this Agreement, Agent shall offer the On-line Money Transfer Services, which will include WUNA’s Domestic Money Transfer services, International Money Transfer services, Mexico Money Transfer services, and such other funds transfer or funds disbursement services that WUNA may introduce, from time to time.
1A.2 Agent agrees that, during the term of this Agreement and for a period of 90 days thereafter, Agent shall not act as agent for, represent, offer or allow to be offered, through any Channel or otherwise, any other money transfer service or other service similar to any of the Money Transfer Services, including, without limitation, card or ATM based money transfer services except for Agent USA GPR Card to Agent USA GPR Card and Agent USA account to Agent USA account transfers already integrated into the Agent App and system. Agent represents and warrants that Agent is not obligated to offer any money transfer services, through any Channel or otherwise, that compete with the Money Transfer Services. Notwithstanding the preceding, Western Union hereby acknowledges that Agent may offer certain proprietary banking services to its bank customers that may be similar to the Services; however, Agent acknowledges and agrees that it will not act as agent for, represent or offer any other third-party provided service similar to any of the Services.
1A.3 Agent agrees that, if Agent breaches Section 1A.2 WUNA’s remedies at law will not be adequate, and in addition to the other remedies set forth herein, WUNA shall be entitled to specific performance, including appropriate injunctive relief.
2A. Procedures.
2A.1 WUNA shall provide Agent and Agent’s designated employees with reasonable training in the provision of the Money Transfer Services as WUNA deems necessary. WUNA shall furnish Agent with the materials necessary for Agent’s provision of the Money Transfer Services including any information necessary to create the screens, flows, receipts, processes and procedures for use with On-line Money Transfer. Agent shall not use any other forms or other such items in its provision of the Money Transfer Services, without the prior written approval of WUNA. Creation, establishment and integration of On-line Money Transfer Services into Agent’s Website(s) shall be determined upon mutual agreement of WUNA and Agent.
2A.2 For each Money Transfer sent through Agent (through any Channel), Agent shall collect the principal amount of the Money Transfer, the applicable Transaction Fee (as defined below) and any other WUNA service fees that may be applicable. Agent shall not impose any other fee, charge, requirement, or restriction of any kind upon the Money Transfer sender that is not required by WUNA or Applicable Law. With respect to On-line Money Transfer, Agent shall be solely responsible for properly debiting and crediting funds from and to Designated Accounts and resolving any disputes relating thereto, including but not limited to receiving all necessary authorizations, in form and manner, to debit and/or credit a Designated Account and any disputes related thereto, issues regarding the availability of funds in the Designated Account, issues regarding the timing of debits from or credits to a Designated Account, any debits from a Designated Account that are charged back, rejected, returned or withdrawn, any debits or credits to an account other than a Designated Account, and/or any claims of fraud concerning Designated Accounts and/or Account Holders. Agent shall be liable to WUNA for the principal amount of the Money Transfer, the applicable Transaction Fee and any other WUNA service fees that may be applicable, regardless of whether Agent ultimately receives payment therefor. As used herein, “Transaction Fee” means the fee paid by a person or entity for Western Union or its affiliates to complete the sending, processing or pay out of a money transfer or payment transaction, subject to the exclusions listed below. For purposes of calculating the Agent’s commission in Section 5A.1, the items listed below are not considered part of the Transaction Fee, whether (i) separately charged or included in the amount paid or (ii) incurred by WUNA, its affiliate, or another agent or partner, and will be deducted by WUNA prior to it determining the base compensation owed to Agent. The deductible items include: any costs associated with the form or method of funding or payout of a money transfer or payment; debit or credit card processing fees; any processing fees related to transfers to and from bank accounts and other accounts, including any form of wallet or prepaid/stored value cards; third-party processing costs applicable to the processing of a money transfer or payment transaction; additional services offered by WUNA (e.g., home delivery of funds, telephone notification, etc.); any taxes or governmental charges; or foreign exchange gains. WUNA will be entitled to the balance of all compensation and other revenues received for the Money Transfer Service. All fee calculations will be made by WUNA in accordance with the Service Requirements and will be settled in accordance with Section 5A.2.
2A.3 (a) With respect to On-line Receivers, Agent shall credit the Designated Account with good and available funds within one business day of the On-line Receiver’s election to receive pay out of a Money Transfer transaction into a Designated Account.
Part A, Page 1 of 4
(c) Agent shall not impose any fee, charge, requirement, or restriction of any kind upon a Money Transfer recipient that is not required by WUNA or Applicable Law.
2A.4 Agent shall not use the Money Transfer Services to send or receive a Money Transfer on behalf of Agent, or of any principal, officer, director or employee of Agent, or of any member of Agent’s family, as applicable. However, this paragraph shall not be construed to prohibit employees of Agent from sending or receiving Money Transfers in the ordinary course and in customary arm’s-length transactions.
2A.5 Agent agrees that WUNA may establish, from time to time and in WUNA’s sole discretion, both daily and single transaction limits relating to the number and principal amount of transactions that may be transacted through a Channel. WUNA reserves the right to temporarily suspend the Money Transfer Services through any Channel if Agent exceeds a daily Money Transfer limit established by WUNA.
2A.6 Agent shall not advertise, solicit, or negotiate any of the Services in any language other than English or Spanish, without the prior written approval of WUNA.
2A.7 Agent and WUNA shall each perform the obligations related to the development and implementation of the Global Banking Services Gateway, as set forth in Schedule 1 hereto.
3A. Trust Relationship; Liability for Loss.
3A.1 As of the Effective Date, WUNA appoints Agent as its delegate and trustee for the limited purposes of offering the Money Transfer Services for sale to Consumers through the applicable Channels, collecting MT Trust Funds in accordance with the provisions of this Agreement. Agent shall act in a fiduciary capacity and hold the MT Trust Funds in trust for the benefit of WUNA and shall maintain and account for the MT Trust Funds separate and apart from all other funds and monies of Agent. Agent agrees that, in the event Agent commingles MT Trust Funds with any other funds, such funds shall be impressed with a trust to the extent of the MT Trust Funds. Agent shall not acquire by operation of this Agreement, or otherwise, any right, title or interest of any kind in the MT Trust Funds. All MT Trust Funds remain the sole and exclusive property of WUNA. Agent’s financial records shall identify the MT Trust Funds as funds and other property held in trust for the benefit of WUNA.
3A.2 Anything to the contrary notwithstanding, Agent shall safeguard and protect all MT Trust Funds and MT Equipment, if applicable, in its capacity as a fiduciary or trustee entrusted with such cash, similar instruments or equipment for safekeeping. Agent shall be absolutely liable for any loss, theft, seizure, forfeiture or misappropriation of the same until such MT Trust Funds or MT Equipment are received by or are in the possession of WUNA. Agent shall be absolutely liable to WUNA for: (a) all MT Trust Funds and (b) the replacement value of all MT Equipment lost, stolen, destroyed, damaged, misappropriated, seized or forfeited while in Agent’s possession. Within 24 hours after unused MT Equipment provided hereunder have been lost, stolen, destroyed, damaged, misappropriated, seized or forfeited, Agent shall notify WUNA of the serial numbers of such or MT Equipment. However, such notice does not relieve Agent of its liability as provided herein. Agent agrees to pay all MT Trust Funds to WUNA upon demand, regardless of the presence or absence of negligence of Agent, WUNA or any other person or entity.
4A. Remittance of MT Trust Funds. Agent shall deposit all monies (including, without limitation, Money Transfer principal and fees) received by Agent in connection with the provision of the Money Transfer Services and/or the Stored Value Services (the “MT Trust Funds”) into the Trust Account no later than 10:00 a.m., local time at the place of deposit, on the business day following receipt thereof. WUNA will then initiate a draft (via Automated Clearing House or other electronic means) against the Trust Account for the total amount of all funds due WUNA hereunder. If Agent fails to comply with this Section 4A, WUNA may exercise any of the rights and/or remedies set forth in Section 8.3 of the Agreement. WUNA may amend or modify the provisions of this Section 4A, in the following instances: (a) immediately upon notice to Agent, if Agent (i) fails to remit amounts due to WUNA in accordance with this Section 4A, or (ii) breaches any material provision of the Agreement, or (b) upon 10 days prior notice to Agent; however, prior to the conclusion of this 10-day period, Agent may elect to terminate this Agreement by providing WUNA with 30 days’ notice during which time such changes shall not be in effect.
Part A, Page 2 of 4
5A. Payments.
5A.1 Compensation. For each Qualifying Transaction, WUNA will pay Agent the percentage outlined below of the Transaction Fee and the percentage outlined below of the foreign exchange gains. WUNA (and not Agent) will establish the rates by which the currency in which any Qualifying Transaction is sent is converted into the currency that the Qualifying Transaction is paid, and Western Union will calculate any applicable foreign exchange gain or loss. Foreign exchange losses, if any, will be shared in the same percentage as foreign exchange gains. WUNA will pay Agent for Qualifying Transactions as follows: Agent’s commission for each On-line Money Transfer sent or paid through an Agent Website will be REDACTED of the Transaction Fee (“Transaction Fee Commission”) and REDACTED of FX (“FX Share”). For all transactions originating outside the United States, Agent’s compensation will be paid in United States dollars in accordance with WUNA’s settlement and currency conversion arrangements with the originating international agent. If Agent has not achieved more than REDACTED Qualifying Transactions within 24 months of the Effective Date, the Transaction Fee Commission will be REDACTED and FX Share will be REDACTED. If Agent then achieves more than REDACTED Qualifying Transactions in any 12- month period, the Transaction Fee Commission will be REDACTED and the FX Share will be REDACTED.
5A.2 Calculation; Payment; Reports. Agent’s compensation shall be paid as follows: (a) Transaction Fee Commission will be paid monthly in the month following the calendar month in which it was earned, and (b) FX Share will be paid at the end of each calendar quarter in the month following the end of the calendar quarter in which it was earned. Money Transfer principal is not included in the calculation of Agent commissions. Except for the compensation to be paid to Agent as described in Section 5A.1 above, WUNA shall be entitled to the balance of all compensation and other revenues received for or in connection with the Services. WUNA shall pay such compensation to Agent by paper check or by credit (via Automated Clearing House or other electronic means), as determined by WUNA in its sole discretion. WUNA will supply supporting reports to indicate the basis for each Channel’s calculation and to summarize monthly or quarterly, as applicable, performance results
6A. Technology Rights.
6A.1 Title to all computer programs, computer software, microcode, firmware, application programming interfaces, other interfaces, Gateway, source code, including all updates, replacements and copies thereof, provided by WUNA to Agent (“MT Software”) shall remain in WUNA, and no title thereto is transferred to Agent hereby. During the term of this Agreement, Agent is hereby granted a royalty-free, terminable, non-transferable and non-exclusive license to use the MT Software for the sole purpose of providing the Money Transfer Services and for such other purposes as WUNA or its affiliates may specify in writing from time to time. Such license shall terminate upon termination of this Agreement. In order to protect WUNA’s trade secrets in the MT Software Agent shall install MT Software updates within ninety (90) days of distribution by WUNA. At Agent’s expense. Agent shall not reverse engineer, decompile, copy, modify, create derivative works of, transfer, sell, publish or disclose all or part of the MT Software. Agent agrees that the MT Software is proprietary and confidential information of WUNA. 6A.2 Any improvement(s) to the MT Software made or discovered during the Term shall belong exclusively to WUNA. To the extent that Agent contributes, in whole or in part, to any improvement(s) to the MT Software, Agent hereby assigns to WUNA all right, title and interest in and to such improvements. Further, Agent agrees that (a) it will not seek, and that it will require its employees, agents and representatives (including third party contractors) not to seek patent, copyright, trademark, registered design, or other protection for any rights in and to the improvement(s), and (b) it will do and will require its employees, agents and representatives (including third party contractors) to do, at WUNA’s expense, all things and execute all documents as WUNA may reasonably require to vest in WUNA or its nominees any protection for the improvement(s) that the other party deems appropriate.
Part A, Page 3 of 4
7A. Merchandising Standards; Marketing Requirements.
On-line Money Transfer. During the Term and subject to WUNA’s prior approval in each case, Agent shall (a) prominently and continuously advertise and promote the Money Transfer Services and WUNA’s marks on Agent’s consumer home page and no less than three (3) additional uniform resource locators (URLs) on Agent’s Internet web site; (b) communicate and advertise the Money Transfer Services to all Account Holders upon commencement of the offering of the Money Transfer Services and no less than two (2) times per calendar year thereafter.
8A. Termination Responsibilities; Liquidated Damages.
8A.1 Immediately upon expiration or termination of Part A or this Agreement, or upon the closure of Agent Website(s), with respect to that Agent Website(s), Agent shall: (a) stop presenting itself to the public as providing the Services; (b) make no use of WUNA’s intellectual property, Consumer Information or confidential information and return the same to WUNA; (c) refer all calls and consumers regarding the Services to the telephone numbers, locations and/or Internet web sites specified by WUNA and Agent shall not divert any such calls or consumers to a competitor of WUNA or disparage either WUNA or the Services; (d) at Agent’s sole cost and expense, return to WUNA all of the following: state licensing materials (if any), Consumer Information, information and materials of any type relating to WUNA’s security measures and procedures, and any other items that WUNA has provided to Agent; (e) at Agent’s sole cost and expense, remove and (at WUNA’s election) deliver to WUNA or dispose of all signs, displays and other materials containing WUNA’s name or logo (or will permit WUNA to do so at Agent’s sole cost and expense); (f) render a full accounting to WUNA for all Services transacted through Agent and all MT Trust Funds; and (g) pay to WUNA all MT Trust Funds and any other amounts due to WUNA in accordance with the terms of this Agreement. In addition, Agent will post a mutually agreeable notice of alternative locations where Money Transfer Services are available on Agent Website(s), for a period of 90 days following the termination of this Agreement. Upon any termination hereof, WUNA may notify its respective consumers of the termination and direct them to other service locations.
8A.2 If this Agreement is improperly terminated by Agent, or otherwise terminated due to a breach of this Agreement by Agent then, in addition to any other remedies provided herein or otherwise available to WUNA, Agent shall pay WUNA, as liquidated damages, upon demand, an amount equal to: the average monthly consumer fees collected by Agent for the Money Transfer Services provided by WUNA during the 90 days preceding either the date of first breach by Agent or the effective date of such termination (as may be elected by WUNA in its sole discretion), less the actual commissions and bonuses paid to Agent by WUNA during such 90 day period, multiplied by 12 months or the number of months (including any pro rata portion of a month) then-remaining in the Initial Term or the Renewal Term, whichever is less. Agent acknowledges and agrees that the amount calculated and the method of calculation specified above are reasonable, provide a reasonable estimate of WUNA’s probable damages in the event of such termination, and does not constitute a penalty.
9A. Discontinuation and Modification of Service Methods. If WUNA discontinues offering any Service through any particular Service Method (as defined below) or modifies any Service through any particular Service Method, which WUNA may do in its sole discretion, or any other optional service offered by WUNA, WUNA may terminate or amend this Agreement as it concerns such discontinued or modified Service Method. The effective date of such termination or amendment under this Section 9A shall be the date on which WUNA discontinues or modifies such Service Method; provided, however, that WUNA shall use commercially reasonable efforts to notify Agent at least 30 days prior to such termination or amendment. As used herein, “Service Method” means the following Money Transfer Services offered through any Channel: Quick Collect, Quick Cash, optional services of WUNA (including messaging, delivery, telephoning the receiver, etc.) and such other methods of providing the Money Transfer Services that WUNA may introduce from time to time.
| /s/ Arik Maimon | |
| Arik Maimon – CEO | |
| Cuentas, Inc. 10/21/2020 |
Part A, Page 4 of 4
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 30, 2020, with respect to the financial statements of Cuentas, Inc. contained in the Registration Statement on Form S-1 and Prospectus. We consent to the use of the aforementioned report in the Registration Statement on Form S-1 and Prospectus, and to the use of our name as it appears under the caption “Experts.”
/s/Halperin Ilanit
Certified Public Accountants (Isr.)
Tel Aviv, Israel
December 17, 2020
Exhibit 99.1
Consent to be Named as a Director Nominee
In connection with the filing by Cuentas Inc. of the Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a nominee to the board of directors of Cuentas Inc. in the Registration Statement and any and all amendments and supplements thereto. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
| Dated: December 17, 2020 | /s/ Jeff Lewis | |
| Jeff Lewis |
Exhibit 99.2
Consent to be Named as a Director Nominee
In connection with the filing by Cuentas Inc. of the Registration Statement on Form S-1 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Securities Act”), I hereby consent, pursuant to Rule 438 of the Securities Act, to being named as a nominee to the board of directors of Cuentas Inc. in the Registration Statement and any and all amendments and supplements thereto. I also consent to the filing of this consent as an exhibit to such Registration Statement and any amendments thereto.
| Dated: December 17, 2020 | /s/ David B. Schottenstein | |
| David B. Schottenstein |