The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Cuentas,
Inc. (the “Company”) invests in financial technology and currently derives its revenues from the sales of prepaid
and wholesale calling minutes. Additionally, the Company has an agreement with Incomm, a leading processor of general purpose
reloadable (“GPR”) debit cards, to market and distribute a line of GPR cards targeted towards the Latin American market.
The Company intends to launch the cards upon successful completion of appropriate financing and has yet to generate revenues from
this activity. In September 2018, the Company changed its name to Cuentas, Inc. to better represent its intended business activities.
Cuentas,
Inc. was incorporated under the laws of the State of Florida on September 21, 2005 to act as a holding company for its subsidiaries,
both current and future. Its subsidiaries are Meimoun and Mammon, LLC (100% owned), Next Cala, Inc (94% owned), NxtGn, Inc. (65%
owned), Next Mobile 360, Inc. (100% owned) and SDI Next Distribution, LLC (51% owned). Additionally, Next Cala, Inc. has
a 60% interest in NextGlocal, a subsidiary formed in May 2016. During the year ended December 31, 2016, the Company acquired a
business segment, Tel3, from an existing corporation. Tel3 was merged into Meimoun and Mammon, LLC effective January 1, 2017.
On October 23, 2017, the Company acquired 100% of the outstanding interests in Limecom, Inc.
Meimoun
and Mammon, LLC (“M&M”) was formed under the laws of the State of Florida on May 21, 2001 as a real estate investment
company. During the year ended December 31, 2010, M&M began winding down real estate operations and engaged in telecommunications
services. M&M acquired telecom registrations, licenses and authorities to provide telecom services to the retail and wholesale
markets including sales of prepaid long distance telecom services and Mobile Virtual Network Operator (MVNO) services. The services
are sold under the brand name Next Mobile 360 and through the subsidiary of the same name.
Next
Cala, Inc, (“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 payment remittance services worldwide.
NxtGn,
Inc. (“NxtGn”) was formed under the laws of Florida on August 24, 2011 to develop a High Definition telepresence product
(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
May 27, 2016, Next Cala entered into a Joint Venture Agreement (the “Agreement”) with Glocal Payments Solutions, Inc
(“Glocal”) to form a joint venture, NextGlocal, in which Cala has a 60% controlling interest and Glocal has a 40%
interest. The Joint Venture sought to launch and activate up to 45,000 prepaid debit cards under the Cala brand by December 31,
2016 and 360,000 additional cards during the 2017 calendar year. Neither milestone was achieved. Either party may terminate the
agreement at December 31, 2016 if certain objectives are not met. The joint venture has not had activity since the year ended
December 31, 2016 but has not been formally dissolved.
On
July 22, 2016, the Company completed its acquisition of Transaction Processing Products, Inc. (“TPP”) which has a
64% interest in Accent InterMedia, LLC (“AIM”) and no other assets or liabilities. The Company disposed of TPP during
the year ended December 31, 2017.
On
August 10, 2016, M&M, a wholly owned subsidiary of the Company, closed the acquisition of Tel3 from a related party. Tel3
provides prepaid calling cards to consumers directly and operates in a complimentary space as M&M. Tel3 was originally acquired
by the Company’s CEO in a private transaction and sold to the Company for $10 cash.
On
October 23, 2017, the Company closed the acquisition of Limecom, Inc. (“Limecom”). Limecom is a global telecommunication
company, providing services to telecommunication providers from all over the world. Limecom operates a network built on internet
protocol (“IP”) switching equipment.
The
Company has a Market Partner Agreement with InsightPOS, LLC since September 17, 2016. InsightPOS is a “State of the Art”,
“Super Functional Point Of Sale” system that has a combination of tools that we believe makes the retail experience
quicker and better both for the shopper and for store management. The Company previously installed about 10 units including training
by InsightPOS. These units were withdrawn due to required programming development and improved network interconnections.
On
December 6, 2017, the Company completed its formation of SDI NEXT Distribution LLC in which it holds a 51% interest, previously
announced August 24, 2017 as a Letter of Intent with Fisk Holdings, LLC. As Managing Member of the newly formed LLC, the Company
will contribute a total of $500,000, to be paid per an agreed-upon schedule over a twelve-month period beginning December 2017.
Fisk Holdings, LLC will contribute 30,000 active Point of Sale locations for distribution of retail telecommunications and prepaid
financial products and services to include, but not be limited to: prepaid general purpose reloadable cards, prepaid gift cards,
prepaid money transfer, prepaid utility payments, and other prepaid products. There has been no activity in or cash contributions
to this entity since formation.
The
Company, through its affiliate, Next Communications, Inc., has the right to sell STI Mobile, Next Cala and any Next products to
8,800 locations that were serviced by a prepaid distribution network. The Company will offer the InsightPOS system to clients
of this distribution network as well via direct sales through its own sales force and affiliates. When a system is installed,
NGH receives 50% of the gross profits received by InsightPOS after retailer commissions are paid.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The
accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”) for reporting of interim financial information. Pursuant to such
rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been condensed or omitted. Accordingly, these statements
do not include all the disclosures normally required by accounting principles generally accepted in the United States for annual
financial statements and should be read in conjunction with the consolidated financial statements for the year ended December
31, 2017 and notes thereto and other pertinent information contained in our annual report on form 10-K as filed with the Securities
and Exchange Commission. The unaudited condensed consolidated statements of operations and cash flows for the periods ended June
30, 2018 are not necessarily indicative of the consolidated results of operations or cash flows to be expected for any future
period or for the year ending December 31, 2018.
The
accompanying unaudited condensed consolidated financial statements have been prepared by management and in the opinion of management,
the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated
financial position and results of operations as of the dates and for the periods presented.
Basis
of Presentation
This
summary of accounting policies for the Company is presented to assist in understanding the Company’s financial statements.
The Company uses the accrual basis of accounting and accounting principles generally accepted in the United States of America
(“GAAP” accounting) which have been consistently applied in the preparation of the unaudited consolidated financial
statements.
Principles
of Consolidation
The
consolidated financial statements are prepared in accordance with US GAAP. The consolidated financial statements of the Company
include the Company and its wholly-owned and majority-owned subsidiaries. All inter-company balances and transactions have been
eliminated.
Use
of Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
certain revenues and expenses, and disclosure of contingent assets and liabilities as of the date of the financial statements.
Actual results could differ from those estimates. Estimates are used when accounting for allowances for bad debts, stock based
compensation, collectability of loans receivable, potential impairment losses of intangible assets and goodwill, and fair value
calculations related to embedded derivative features of outstanding convertible notes payable and other financial instruments.
Cash
For
purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents to the extent the funds are not being held for investment purposes. The Company held
no cash equivalents as of June 30, 2018 or December 31, 2017. The Company did not hold cash with any one financial institution
in excess of the FDIC insured limit of $250,000.
Revenue
recognition
The
Company follows ASC 606 of the FASB Accounting Standards Codification for revenue recognition. Adoption of ASC 606 did not have
a significant impact on the Company’s financial statements. The Company recognizes revenue upon transfer of control of promised
products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products
or services. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently
remitted to governmental authorities. The Company primarily generates revenues through the sale of prepaid calling minutes to
consumers through its Tel3 division and the sale of wholesale telecom minutes through its Limecom subsidiary. While the Company
collects payment for prepaid consumer minutes in advance, revenue is recognized upon delivery to and consumption of minutes by
the consumer or upon the forfeiture of minutes with forfeitures occurring after 12 consecutive months of non-use.
Consumer
Prepaid Minutes Revenues
The
Company recognizes revenues from the sale of prepaid telecommunications minutes directly to consumers at the retail level. While
the Company collects payment for prepaid consumer minutes in advance, revenue is recognized upon delivery to and consumption of
minutes by the consumer or upon the forfeiture of minutes with forfeitures occurring after 12 consecutive months of non-use. Generally,
consumers will prepay a fixed dollar amount then consume the prepayment upon making telephone calls on the Company’s telecommunications
network. Revenues from direct to consumer retail sales were $385,802 and $493,458 and $797,025 and $994,049 during the three and
six months ended June 30, 2018 and 2017, respectively.
Wholesale
Telecommunications Revenues
The
Company recognizes revenues from the brokering of sales of minutes from one telecommunications carrier to another. The Company
receives an order for a defined number of minutes to a defined geographic region at which point it sources those minutes and purchases
them with an immediate resale to the customer. Revenues from wholesale telecommunications minutes were $20,499,288 and $0 and
$40,086,285 and $0 during the three and six months ended June 30, 2018 and 2017, respectively.
Significant
Judgments
The
Company’s contracts with consumers and telecommunications wholesalers can include promises to transfer multiple products
and services. Determining whether multiple products and services are considered distinct performance obligations that should be
accounted for separately versus together may require significant judgment. The Company’s retail products are sold with
a limited right of return and the Company may provide other credits or incentives, which are accounted for as variable consideration
when estimating the amount of revenue to recognize.
Deferred
Revenue
Deferred
revenue is comprised mainly of unearned revenue related to prepayments from retail consumers for telecommunications minutes. The
following table represents the changes in deferred revenue for the six months ended June 30, 2018:
|
|
Deferred Revenue
|
|
Balance at December 31, 2017
|
|
$
|
685,905
|
|
Deferred revenue
|
|
|
723,294
|
|
Recognition of deferred revenue
|
|
|
(797,025
|
)
|
Balance at June 30, 2018
|
|
$
|
612,174
|
|
Revenue
allocated to remaining performance obligations represent contracted revenue that has not yet been recognized (“contracted
not recognized”). Contracted not recognized revenue was $612,174 as of June 30, 2018, of which the Company expects to recognize
100% of the revenue over the next 12 months.
Assets
Recognized from the Costs to Obtain a Contract with a Customer
The
Company has elected to immediately expense contract acquisition costs that would be amortized in one year or less. The Company
recognizes an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected
to be longer than one year. There were no capitalized contract acquisition costs as of June 30, 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.
Goodwill
and Intangible Assets
Goodwill
represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired
in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are
tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated
useful lives to their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment
of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year. The Company determines the fair
value of each subsidiary the goodwill relates to and compares the fair value to the carrying amount of the subsidiary. To the
extent the carrying amount of the subsidiary exceeds the fair value of it, an impairment loss is recorded.
Amortization
of intangible assets for each of the next five years and thereafter is expected to be as follows:
Year ended December 31,
|
|
|
|
2018
|
|
$
|
214,286
|
|
2019
|
|
|
428,571
|
|
2020
|
|
|
428,571
|
|
2021
|
|
|
428,571
|
|
2022
|
|
|
428,571
|
|
Thereafter
|
|
|
792,902
|
|
Total
|
|
$
|
2,721,472
|
|
Amortization
expense was $107,143 and $214,285 and $0 and $0 for the three and six months ended June 30, 2018 and 2017, respectively. Amortization
expense for each period is included in cost of revenue.
Impairment
of Long-Lived Assets
In
accordance with ASC Topic 360, formerly SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,
the
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of these assets may not be fully recoverable. The assessment of possible impairment is based on the Company’s ability to
recover the carrying value of its asset based on estimates of its undiscounted future cash flows. If these estimated future cash
flows are less than the carrying value of the asset, an impairment charge is recognized for the difference between the asset’s
estimated fair value and its carrying value. There were no impairment losses recorded to long-lived assets during the three or
six months ended June 30, 2018 or 2017.
Non-Controlling
Interest
The
Company reports the non-controlling interest in its majority owned subsidiaries in the consolidated balance sheets within the
stockholders’ deficit section, separately from the Company’s stockholders’ deficit. Non-controlling interest
represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned
subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the
earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share
of losses even if that attribution results in a deficit non-controlling interest balance.
Derivative
and Fair Value of Financial Instruments
Fair
value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity
instruments and measurement of their fair value for accounting purposes. In assessing the convertible debt instruments, management
determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion
feature requiring measurement. If the instrument is not considered conventional convertible debt under ASC 470, the Company will
continue its evaluation process of these instruments as derivative financial instruments under ASC 815.
Once
determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease
in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.
Fair
value of certain of the Company’s financial instruments including cash, accounts receivable, 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.
Except
as discussed in
Note 5 – Derivative Liabilities
the Company did not identify any other assets or liabilities that
are required to be presented on the consolidated balance sheet at fair value in accordance with ASC 825-10 as of June 30, 2018
or December 31, 2017.
Income
Taxes
Income
taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Use
of net operating loss carry forwards for income tax purposes may be limited by Internal Revenue Code section 382 if a change of
ownership occurs.
Basic
Income (Loss) Per Share
Basic
income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted
average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net
income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted
weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive
debt or equity.
At June 30, 2018, the Company had one outstanding
convertible note payable with conversion rights that are exercisable. The amount of outstanding principal on this convertible
note is $0 plus accrued interest of $5,326 for total convertible debt as of June 30, 2018 of $5,326 representing 1,472 new post-reverse
split dilutive common shares if converted at the applicable rates. Additionally, the Company has committed to issue a total of
107,889 post-reverse split shares of common stock for the settlement of a related party note payable and services which are not
yet issued or outstanding. The effects of this note and total common shares committed to be issued have been included in net income
per diluted share for the six months ended June 30, 2018. The effects of these notes have been excluded from net loss per diluted
share for the three months ended June 30, 2018 as the impacts would be antidilutive due to the Company recording a net loss for
the period.
At
June 30, 2017, the Company had eighteen outstanding convertible notes payable with conversion rights that are exercisable. The
amount of outstanding principal on these convertible notes total $1,162,328 plus accrued interest of $329,357 for total convertible
debts as of June 30, 2017 of $1,491,684 representing 256,130 post-reverse split new dilutive common shares if converted at the
applicable rates. The effects of these notes have been excluded in net loss per diluted share for the three and six months ended
June 30, 2017 as the effects would be anti-dilutive.
Dividends
The
Company has not adopted any policy regarding payment of dividends. No dividends have been paid during any of the periods shown.
As
discussed in the report on form 8K filed on May 18, 2016, the Company declared a special dividend on its outstanding common stock
of one share of Class D Redeemable Preferred Stock. Pursuant to the dividend, the special stock dividend will be distributed
to owners of the Company’s common stock as of the record date in a ratio of one share of Class D Redeemable Preferred Stock
for every 1 share of common stock owned as of the record date. The Company originally had set the record date as June 10,
2016 but was later modified to July 22, 2016. The Class D Preferred Stock must be redeemed within six (6) months (or as soon thereafter
as permitted by law) following final resolution of the Corporation’s affiliates lawsuit against ViberMedia, Inc. (Next Communications,
Inc. and Nxtgn, Inc. v. Viber Media, Inc.) which is, as of the date of this filing, pending in U.S. District Court for the Southern
District of New York or any successor or other lawsuit relating to the subject matter thereof in which the Corporation (or any
successor-in-interest) is named as a plaintiff (the “Lawsuit”). The Designation fixes the redemption price of each
share of Class D Preferred stock as the greater of par value or the amount obtained by dividing (a) 9.03 percent of the net proceeds
to the Corporation of the Lawsuit after payment of fees and expenses incurred in connection with such law suit and the resolution
of any creditor claims against Next Communications and all taxes on net income accrued or paid with respect to such amount,
by (b) the total number of shares of Class D Preferred stock issued and outstanding as of the Redemption Date, which amount shall
be rounded to the nearest whole cent.
The
Company has accrued common stock dividends payable of $30,000 as of June 30, 2018 and December 31, 2017 as the Class D Preferred
Stock has yet to be issued for the dividend.
Stock-Based
Compensation
The
Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance
of subtopic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”) and subtopic 718-20 for awards
classified as equity to employees.
Derivative
Liabilities
The
Company records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates.
An instrument determined to be a derivative liability is recorded at fair value with a debt discount being recorded up to the
face value of the related convertible note payable with any excess value being recognized as a day one loss on initial measurements
of derivative liabilities. The debt discount is amortized as interest expense over the life of the convertible notes. Changes
in value of the derivative liabilities that result from conversions of the underlying instrument to common stock are written off
to earnings.
Related
Parties
The
registrant follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and
disclosure of related party transactions.
Pursuant
to Section 850-10-20 the Related parties include (a) affiliates of the registrant; (b) entities for which investments in their
equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section
825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees,
such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of
the registrant; (e) management of the registrant; (f) other parties with which the registrant may deal if one party controls or
can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the
management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The
financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a) the nature of the relationship(s) involved; (b) description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other
information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar
amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and (d) amounts due from or to related parties as of
the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Accounts
Receivable
Accounts
receivable balances are established for amounts owed to the Company from its customers from the sales of services and products.
The Company closely monitors the collectability of outstanding accounts receivable and provides an allowance for doubtful accounts
based on estimated collections of outstanding amounts. The Company had an allowance for doubtful accounts of $20,000 and $20,000
as of June 30, 2018 and December 31, 2017, respectively.
Accounts
Receivable Factoring
Limecom
executed a factoring and security agreement with a financial institution on June 22, 2017, whereby it sells certain of its accounts
receivable in exchange for cash. These factoring transactions qualify for sales treatment in accordance with FASB ASC 860, Transfers
and Servicing. Upon purchase of the accounts receivable, the Company shall be deemed to have sold, transferred, assigned, set
over and conveyed to the financial institution, without recourse except as expressly stated in the agreement, all of the Company’s
right, title and interest in and to the purchased accounts receivable. Purchases have an initial gross liquidation advance rate
of 90%, up to a maximum cumulative outstanding face amount of $4,000,000. The initial discount fee is 2.1%, and an additional
0.85% of certain receivables.
The
Company has a credit insurance policy covering all factored accounts receivable, under which the financial institution is the
beneficiary on the policy if default were to occur.
License
Fee
The
Company entered into an agreement with a certain vendor whereby it obtained a license to market and distribute certain closed
loop general purpose reloadable debit cards for an initial term of three years. The Company remitted $250,000 as a license fee
in connection with the agreement which it is recognizing over the initial term of the agreement on a straight line basis. The
unamortized balance of the license fee was $0 and $34,722 as of June 30, 2018 and December 31, 2017, respectively.
Investments
The
Company accounts for equity investments under ASC 321. Equity investments with a readily determinable market price are measured
at fair value as of the date of the financial statements with the change in any unrealized gains or losses being recognized in
current period income or loss.
During
the year ended December 31, 2017, the Company acquired 50,000 shares of common stock of Green Spirit Industries, a publicly held
company, as a referral fee. The total value of the common shares was recorded as other income using the price of the common stock
as quoted on Nasdaq on the date received resulting in other income of $550,000 during the year ended December 31, 2017. At December
31, 2017, the Company marked the value of the shares to fair value resulting in an unrealized loss of $300,000 being recorded
as other comprehensive loss for the year ended December 31, 2017. On June 30, 2018, the Company measured the fair value of the
common stock as quoted on Nasdaq resulting in an unrealized loss of $70,000 being recorded as other expense for the six months
ended June 30, 2018. The fair value of the common shares, as quoted by Nasdaq, as of June 30, 2018 and December 31, 2017 was $180,000
and $250,000, respectively.
On
January 1, 2018, the Company adopted
FASB Accounting Standards Update (“ASU”) 2016-01 Financial Instruments - Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The update provides guidance
to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company’s
adoption of ASU 2016-01 resulted in an adjustment to beginning retained earnings in the current period equal to the accumulated
unrealized net losses on available for sale securities previously carried in other accumulated comprehensive income totaling $300,000.
Recently
Issued Accounting Standards
In
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
January 2017, the FASB issued ASU 2017-04, “
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for
Goodwill Impairment”.
The amendments in this update simplify how an entity is required to test goodwill for impairment
by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will
implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update
will have a material impact on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
“
Business Combinations (Topic 805): Clarifying the Definition of a Business,
” which revises the definition of
a business. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those
years. Early adoption is permitted. The Company has adopted this guidance on January 1, 2018.
In
April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing” (“ASU 2016-10”). The amendments in this update clarify the following two aspects to Topic 606:
identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those
areas. The entity first identifies the promised goods or services in the contract and reduces the cost and complexity. An entity
evaluates whether promised goods and services are distinct. Topic 606 includes implementation guidance on determining whether
an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property
(which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over
time). The Company evaluated the impacts of ASU 2016-10 and determined it did not have an impact on the Company’s revenue
recognition practices.
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the guidance in ASC 840, “Leases.”
The purpose of the new standard is to improve transparency and comparability related to the accounting and reporting of leasing
arrangements. The guidance will require balance sheet recognition for assets and liabilities associated with rights and obligations
created by leases with terms greater than twelve months. The guidance is effective for fiscal years beginning after December 15,
2018, including interim periods within those years. Modified retrospective application is required. Early adoption is permitted.
The Company does not expect the standard to have a material impact on its consolidated balance sheets or consolidated statements
of operations.
On
August 26, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, seeking to eliminate
diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of
cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business
entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash
Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The
Company has adopted this standard which does not have an impact on the Company’s presentation of the consolidated statements
of cash flows.
On
May 10, 2017, The FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification
accounting for share-based payment arrangements, provides guidance on the types of changes to the terms of conditions of
share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all
entities, ASU 2017-09 is effective for annual reporting periods, including interim periods within those annual reporting
periods, beginning after December 15, 2017. The Company has adopted this standard and has not yet had an impact on its
accounting practices.
Other
accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on our financial statements upon adoption.
NOTE 3 – GOING CONCERN
The Company’s unaudited condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business.
The Company had net income
of $537,108 and a loss of $4,176,268 and net cash used in operating activities of $97,327 and $116,881, for the six months ended
June 30, 2018 and 2017, respectively. The Company has a working capital deficit of $5,976,529 and $7,075,716, and an accumulated
deficit of $13,953,044 and $14,207,568 as of June 30, 2018 and December 31, 2017, respectively.
These conditions raise
substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date
of issuance of this report. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
The Company has a minimum cash balance
available for payment of ongoing operating costs, has experienced losses from operations since inception, and it does not have
a source of revenue sufficient to cover its operating costs. Its continued existence is dependent upon its ability to continue
to execute its operating plan and to obtain additional debt or equity financing. There can be no assurance the necessary debt or
equity financing will be available, or will be available on terms acceptable to the Company.
Management plans to fund operations through
additional debt and equity financing. Debt instruments may be convertible or non-convertible and will vary based on the Company’s
needs and financing options available at such times.
NOTE
4 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Notes
Payable
During
the year ended December 31, 2017, the Company entered into two separate loans to be paid by collection of its future accounts
receivable and secured by substantially all assets of the Company including accounts receivable, cash, equipment, intangible assets,
inventory and other receivables. The first loan resulted in cash proceeds of $125,000 to the Company for future payments totaling
$168,750 from future receivables and requires daily repayments of $1,339. The second resulted in cash proceeds of $50,000 for
future payments totaling $68,000 from future receivables and requires daily cash repayments of $540. There was $0 and $46,048
due for the agreements as of June 30, 2018 and December 31, 2017, respectively, included in current notes payable.
On
May 1, 2017, the Company received a loan from an unrelated party for $25,000. The loan is due on demand and as such is included
in current notes payable. The note does not accrue interest and had a principal balance due of $25,000 as of June 30, 2018 and
December 31, 2017, respectively.
On
April 25, 2018, the Company entered into a loan agreement to be paid by collection of its future accounts receivable and secured
by substantially all assets of the Company including accounts receivable, cash, equipment, intangible assets, inventory and other
receivables. The loan resulted in cash proceeds to the Company of $180,000 for future payments totaling $234,000 from future receivables
and requires daily repayments of $1,858. There was $47,015 and $0 due as of June 30, 2018 and December 31, 2017, respectively,
included in current notes payable.
Convertible
Notes Payable
The
Company has entered into a series of convertible notes payable to fund operations. While with differing noteholders, the terms
of the outstanding convertible notes are substantially similar and accrue interest at 8% annually with a default interest rate
of 24% and allow for the conversion of outstanding principal and interest to common stock at a price equal to 45% to 50% from
the lowest trading price in the preceding 20 days.
The
Company settled the majority of its convertible notes payable in December 2017 for a combination of cash and shares of common
stock. An additional convertible note payable was settled in January 2018 for a combination of cash and shares of common stock.
The
following table summarizes all convertible notes payable activity for the six months ended June 30, 2018:
Holder
|
|
Issue Date
|
|
Due Date
|
|
Original Principal
|
|
|
Balance, December 31, 2017
|
|
|
Repayments
|
|
|
Conversions to Common Stock
|
|
|
Forgiveness of
Principal
|
|
|
Balance, June 30,
2018
|
|
Noteholder 5
|
|
11/9/2015
|
|
11/9/2016
|
|
|
100,000
|
|
|
|
48,897
|
|
|
|
(12,000
|
)
|
|
|
(26,640
|
)
|
|
|
(10,257
|
)
|
|
|
-
|
|
Totals
|
|
|
|
|
|
$
|
100,000
|
|
|
$
|
48,897
|
|
|
$
|
(12,000
|
)
|
|
$
|
(26,640
|
)
|
|
$
|
(10,257
|
)
|
|
$
|
-
|
|
The
following is a summary of all convertible notes outstanding as of June 30, 2018:
Holder
|
|
Issue Date
|
|
Due Date
|
|
Principal
|
|
|
Discount
|
|
|
Unamortized Debt Issue Costs
|
|
|
Carrying Value
|
|
|
Accrued Interest
|
|
Noteholder 6
|
|
11/2/2016
|
|
11/2/2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,326
|
|
Totals
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,326
|
|
Accrued
Interest
There
was $5,326 and $35,136 of accrued interest due on all convertible notes as of June 30, 2018 and December 31, 2017, respectively
which is included in accounts payable and accrued liabilities on the balance sheet (see
Note 8 – Accounts Payable and
Accrued Liabilities)
.
NOTE
5 – DERIVATIVE LIABILITIES
The
Company analyzed the conversion features of the convertible notes payable as discussed in
Note 4 – Notes Payable and
Convertible Notes Payable
for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and
determined that the embedded conversion features should be classified as a derivative liability because the exercise price of
these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature
is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance
with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.
As
of June 30, 2018, the Company had a $119,269 derivative liability on the balance sheet and recorded gains from derivative liability
fair value adjustments of $14,729 and $427,935 during the three and six months ended June 30, 2018. The derivative
liability activity comes from convertible notes payable as discussed in
Note 4
–
Notes Payable and Convertible
Notes Payable
. In addition to derivative liabilities associated with convertible notes payable, the Company recorded a derivative
liability due to a ratchet strike price feature associated with the options issued in the sale of TPP. Taking into account the
effect of the reverse stock split (see
Note 9 – Stockholders’ Equity
), the options are exercisable at $54 per
share unless the Company’s common stock is quoted at a price greater than $150 per share at which point the options are
exercisable at $0.30 per share.
A
summary of outstanding derivative liabilities as of June 30, 2018 is as follows:
Holder
|
|
Derivative Balance
|
|
Option Holder
|
|
$
|
119,269
|
|
Total
|
|
$
|
119,269
|
|
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:
|
|
June 30,
2018
|
|
December 31,
2017
|
Expected
volatility
|
|
213%
|
|
178%
- 334%
|
Expected
term
|
|
1.76
years
|
|
.01
- 2.25 years
|
Risk
free rate
|
|
2.52%
|
|
0.97%
- 1.89%
|
Forfeiture
rate
|
|
0%
|
|
0%
|
Expected
dividend yield
|
|
0%
|
|
0%
|
A
summary of the changes in derivative liabilities balance for the six months ended June 30, 2018 is as follows:
Fair Value of Embedded Derivative Liabilities:
|
|
|
|
Balance, December 31, 2017
|
|
$
|
574,130
|
|
Initial measurement of derivative liabilities
|
|
|
-
|
|
Change in fair value
|
|
|
(427,935
|
)
|
Change due to conversion
|
|
|
(26,926
|
)
|
Balance, June 30, 2018
|
|
$
|
119,269
|
|
NOTE
6 – STOCK OPTIONS
The
following table summarizes all stock option activity for the six months ended June 30, 2018, taking into account the effect of
the reverse stock split (see
Note 9 – Stockholders’ Equity
):
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
Outstanding, December 31, 2017
|
|
|
105,378
|
|
|
$
|
39.27
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2018
|
|
|
105,378
|
|
|
$
|
39.27
|
|
The following table discloses information regarding outstanding and exercisable options at June 30, 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
|
|
|
|
58,334
|
|
|
$
|
54.00
|
|
|
|
2.34
|
|
|
|
36,112
|
|
|
$
|
54.00
|
|
|
21.00
|
|
|
|
47,044
|
|
|
|
21.00
|
|
|
|
1.99
|
|
|
|
47,044
|
|
|
|
21.00
|
|
|
|
|
|
|
105,378
|
|
|
$
|
39.27
|
|
|
|
2.16
|
|
|
|
83,156
|
|
|
$
|
35.33
|
|
On May 31, 2016, the Company issued 33,334
options to a board member pursuant to its agreement with the member. One third of the 33,334 options issued vested immediately
upon execution of the related agreement. The remaining shares of the issuance vest based on performance milestones which the Company
believes is 80% likely of occurring resulting in stock based expense of $334,997 during the year ended December 31, 2017. There
was no change in the estimated probability to attain the performance criteria during the six months ended June 30, 2018. The remaining
fair value of the unvested shares of $223,331 will be recognized according to the estimated probability of the performance obligations
being achieved.
On March 31, 2017, the Company, as part
of its sale of TPP issued 25,000 options that are exercisable for a period of three years and carry an exercise price of $54 per
share. The options carried a value of $898,490 which was recorded as a derivative liability as discussed in
Note 5 – Derivative
Liabilities
. The options carry a ratchet pricing feature whereby they become exercisable at $0.30 per share if the Company’s
common stock trades at a price greater than $150 per share.
There was an unrecognized stock option
based expense of $223,331 as of June 30, 2018.
As discussed in
Note 9 – Stockholders’
Equity,
as of June 30, 2018 the Company has committed to issue more shares of common stock than it has authorized. The Company
does not have available shares in its treasury to issue should option holders choose to exercise. As a result, the value of certain
stock options are included in stock based liabilities on the balance sheet and subject to remeasurement at each reporting period. During
August 2018, the Company effected a 1:300 reverse stock split on its common shares to remedy the shortfall in its authorized
common shares.
NOTE 7 – 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 six months ended June 30, 2018 and year ended December 31, 2017. 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.
With the exception of the Company’s
purchase of a 9% interest in Next Cala, Inc. from a related party and the related party payable to Orlando Taddeo for the acquisition
of Limecom as described below, amounts scheduled below as “due to related parties” and “due from related parties”
have not had their terms, including amounts, collection or repayment terms or similar provisions memorialized in formalized written
agreements.
Related party balances at June 30, 2018 and December 31, 2017
consisted of the following:
Due from related parties
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
(a) Glocal Card Services
|
|
|
36,000
|
|
|
|
36,000
|
|
Total Due from related parties
|
|
$
|
36,000
|
|
|
$
|
36,000
|
|
Related party payables, net of discounts
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
(b) Due to Next Communications, Inc. (current)
|
|
$
|
2,943,519
|
|
|
$
|
2,919,615
|
|
(c) Due to Asiya Communications SAPI de C.V. (current)
|
|
|
19,009
|
|
|
|
5,998
|
|
(d) Michael DePrado (current)
|
|
|
99,604
|
|
|
|
99,604
|
|
(e) Orlando Taddeo, net of discount of $0 and $72,069 (long term, due July 21, 2019)
|
|
|
2,607,670
|
|
|
|
2,535,601
|
|
(f) Next Cala 360 (current)
|
|
|
10,350
|
|
|
|
7,350
|
|
Total related party payables
|
|
$
|
5,680,152
|
|
|
$
|
5,568,168
|
|
(a)
|
Glocal Card Services is our partner in the Glocal Joint Venture
|
(b)
|
Next Communication, Inc. is a corporation in which our Chief Executive Officer holds a controlling interest and serves as the Chief Executive Officer
|
(c)
|
Asiya Communications SAPI de C.V.is a telecommunications company organized under the laws of Mexico, in which our Chief Executive Officer holds a substantial interest and is involved in active management.
|
(d)
|
Michael DePrado is our Chief Operating Officer
|
(e)
|
Amount due to Orlando Taddeo from the acquisition of Limecom
|
(f)
|
Next Cala 360, is a Florida corporation established and managed by our Chief Executive Officer.
|
During the three and six months ended June
30, 2018 and 2017, the Company recorded interest expense of $59,760 and $59,760 and $119,517 and $119,518 using an interest rate
equal to that on the outstanding convertible notes payable as discussed in
Note 4 – Notes Payable and Convertible Notes
Payable
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.
Accounts Receivable, Related Party
The Company had outstanding accounts receivable
of $610,006 from related parties as of June 30, 2018 of which $609,312 was due from Next Communications and $694 was due from Asiya
Communications SAPI de C.V. The accounts receivable arose from the sale of wholesale telecommunications minutes to these entities.
Accounts Payable, Related Party
The Company had outstanding accounts payable
of $1,341,427 to related parties as of June 30, 2018 all of which was to Asiya Communications SAPI de C.V.
Revenues (Related Party)
The Company made sales to and generated
revenues from related parties of $8,941,435 and $73,638 during the three months ended June 30, 2018 and 2017 as itemized below:
|
|
For the Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Next Communications, Inc.
|
|
$
|
4,688,134
|
|
|
$
|
71,666
|
|
Asiya Communications SAPI de C.V.
|
|
|
4,253,301
|
|
|
|
1,972
|
|
Next Cala 360
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
8,941,435
|
|
|
$
|
73,638
|
|
The Company made sales to and generated
revenues from related parties of $11,189,379 and $77,431 during the six months ended June 30, 2018 and 2017 as itemized below:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Next Communications, Inc.
|
|
$
|
5,812,611
|
|
|
$
|
71,666
|
|
Asiya Communications SAPI de C.V.
|
|
|
5,376,768
|
|
|
|
1,972
|
|
Next Cala 360
|
|
|
-
|
|
|
|
3,793
|
|
Total
|
|
$
|
11,189,379
|
|
|
$
|
77,431
|
|
Costs of Revenues (Related Party)
The Company made purchases from related
parties totaling $8,361,849 and $0 during the three months ended June 30, 2018 and 2017 which are included in cost of revenues
as itemized below:
|
|
For the Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Next Communications, Inc.
|
|
$
|
3,579,013
|
|
|
$
|
-
|
|
Asiya Communications SAPI de C.V.
|
|
|
4,782,836
|
|
|
|
-
|
|
Total
|
|
$
|
8,361,849
|
|
|
$
|
-
|
|
The Company made purchases from related
parties totaling $11,434,687 and $0 during the six months ended June 30, 2018 and 2017 which are included in cost of revenues as
itemized below:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Next Communications, Inc.
|
|
$
|
4,701,659
|
|
|
$
|
-
|
|
Asiya Communications SAPI de C.V.
|
|
|
6,733,028
|
|
|
|
-
|
|
Total
|
|
$
|
11,434,687
|
|
|
$
|
-
|
|
NOTE 8 – ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
Accounts payable and accrued liabilities
consisted of the following as of June 30, 2018 and December 31, 2017:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Trade payables
|
|
$
|
2,671,537
|
|
|
$
|
5,067,841
|
|
Settlements payable (see
Note 12 – Commitments and Contingencies)
|
|
|
1,133,858
|
|
|
|
1,438,994
|
|
Accrued expenses
|
|
|
235,742
|
|
|
|
153,223
|
|
Accrued interest
|
|
|
13,129
|
|
|
|
40,955
|
|
Accrued salaries and wages
|
|
|
470,607
|
|
|
|
329,037
|
|
Total
|
|
$
|
4,524,873
|
|
|
$
|
7,030,050
|
|
NOTE 9 – STOCKHOLDERS’ EQUITY
Preferred Stock
At the time of incorporation, the Company
was authorized to issue 60,000,000 shares of preferred stock with a par value of $0.001 of which 50,000,000 was undesignated and
10,000,000 was designated as Series B. With the completion of the recapitalization as discussed in
Note 1 – Organization
and Description of Business
, the outstanding Series A preferred shares were cancelled leaving a balance outstanding of Preferred
Series A of -0-.
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.
The Company has 36,000,000 shares
of Preferred Stock designated as Series D. The Class D Preferred Stock must be redeemed within six (6) months (or as soon thereafter
as permitted by law) following final resolution of the Corporation’s affiliates lawsuit against ViberMedia , Inc. (Next Communications,
Inc. and Nxtgn, Inc. v. Viber Media, Inc.) which is, as of the date of this filing, pending in U.S. District Court for the Southern
District of New York or any successor or other lawsuit relating to the subject matter thereof in which the Corporation (or any
successor-in-interest) is named as a plaintiff (the “Lawsuit”). There were no Series D Preferred shares issued or outstanding
as of June 30, 2018 or December 31, 2017.
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. On August 7, 2018, the Board approved a one-for-three hundred (1:300) reverse stock split of the common stock.
The effects of the reverse stock split have been reflected in the financial statements retroactively.
During the six months ended June 30, 2018,
the Company issued 38,095 common shares as the settlement for common stock subscriptions totaling $400,000; 11,479 common shares
valued at $154,973 for the settlement of stock based liabilities and 2,000 common shares for the settlement of a convertible note
payable.
Summary of common stock activity for the six months ended June 30, 2018
|
|
Outstanding shares
|
|
Balance, December 31, 2017
|
|
|
1,140,398
|
|
Shares issued for common stock subscriptions
|
|
|
38,095
|
|
Shares issued as settlement of stock based liabilities
|
|
|
11,479
|
|
Shares issued for settlement of convertible notes payable and accrued interest (a)
|
|
|
2,000
|
|
Balance, June 30, 2018
|
|
|
1,191,972
|
|
(a)
|
Shares issued in connection with outstanding convertible note payable and convertible accrued interest on convertible notes payable in accordance with a settlement agreement entered into as discussed in
Note 4 – Notes Payable and Convertible Notes Payable
.
|
The Company has 1,191,972 common shares
issued and outstanding and 107,889 common shares committed to be issued as of June 30, 2018. The values of the unissued shares
are subject to fair value measurement at each reporting period. As of June 30, 2018, stock based liabilities consisted of:
|
|
Number of Common Shares and Common Share Equivalents
|
|
|
Fair Value
|
|
Common stock to be issued (1)
|
|
|
107,889
|
|
|
$
|
803,122
|
|
Options to purchase common stock (2)
|
|
|
80,378
|
|
|
|
458,608
|
|
Totals
|
|
|
188,267
|
|
|
$
|
1,261,730
|
|
(1)
|
Includes 34,537 common shares committed to be issued in connection with our acquisition of Limecom as discussed in
Note 1 Organization and Description of Business
.
|
(2)
|
Excludes 25,000 options with ratchet pricing features included in derivative liabilities. The total value of $458,608 will be reclassified to equity in conjunction with the timing of our reverse stock split taking effect on August 7, 2018.
|
As of June 30, 2018, the Company did not
have adequate authorized common shares to fulfill its obligations under certain agreements. Specifically, the Company had committed
to issue common shares in excess of authorized shares totaling 32,365,826 (pre-reverse split); has 31,613,142 (pre- reverse split)
options to purchase common stock issued of which 24,946,476 (pre-reverse split) are exercisable and has outstanding convertible
accrued interest on a convertible note payable the holder of which has the right to convert into 441,554 (pre-reverse split) shares
of common stock as of June 30, 2018. Total common stock and common stock equivalents in excess of the Company’s authorized
common shares are summarized as follows:
|
|
Pre-Reverse
Split
|
|
|
Post-reverse
split
|
|
Committed shares beyond authorized
|
|
|
32,365,826
|
|
|
|
107,889
|
|
Stock options granted
|
|
|
31,613,142
|
|
|
|
105,378
|
|
Convertible notes payable and accrued interest
|
|
|
441,554
|
|
|
|
1,472
|
|
Total
|
|
|
64,420,522
|
|
|
|
214,739
|
|
The Company effected a 1:300 reverse split
on its common stock on August 7, 2018 to remedy the shortfall in authorized unissued shares.
NOTE 10 – CUSTOMER CONCENTRATION
The Company generated approximately 79%
of its revenues for the three months ended June 30, 2018 and 51% of its revenues for the six months ended June 30, 2018 from three
separate customers. The Company did not have any one customer account for more than 10% of its revenues during the three or six
months ended June 30, 2017.
As of June 30, 2018, four separate customers
accounted for approximately 94% of the Company’s total accounts receivable. Of this amount, one customer representing 12%
of the outstanding accounts receivable was due from a related party. As of December 31, 2017, three separate customers accounted
for approximately 78% of the Company’s total accounts receivable.
NOTE 11 – RESTATEMENT OF THE THREE
AND SIX MONTHS ENDED JUNE 30, 2017
The Company has restated its statement
of operations and statement of cash flows for the six months ended June 30, 2017 to correct an error in the treatment of the disposal
of a subsidiary. The Company had originally recorded the elimination of the non-controlling interest component of equity of the
sold subsidiary as an equity only transaction by absorbing $2,540,903 of non-controlling interest equity into that of the Company.
The correct treatment of the disposal necessitates the amount of non-controlling interest to be included in the calculation of
the gain or loss on the disposal of a subsidiary recognized through the income statement. The impact to the financial statements
is an increase in loss from discontinued operations and net loss by $2,540,903 for the six months ended June 30, 2017 and no change
for the three months ended June 30, 2017. Net loss per common share increased from $4.23 as originally stated to $4.71 as restated
for the six months ended June 30, 2017 with no change for the three months ended June 30, 2017. There was no impact on the net
cash used in operations during the six months ended June 30, 2017 as a result of the restatement.
Although
not presented, the impact of the restatement on the Company’s consolidated balance sheet as of June 30, 2017 is an increase
to additional paid in capital and increase to accumulated deficit of $2,540,903.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential
material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of
the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
On April 7, 2016, the Company executed
an agreement with a service provider to provide certain services for the Company. In addition to cash and stock compensation, the
agreement requires 1% of the outstanding common share equivalent to be issued to the third party when the market capitalization
of the Company reaches $500,000,000 and an additional 1% when it reaches $750,000,000. The Company recorded an expense associated
with the non-variable portion of the agreement. However, the probability of the Company’s market capitalization reaching
these thresholds is uncertain at present and the Company has not accrued a contingent fee as of June 30, 2018 or December 31,
2017 as a result.
On October 14, 2014, one of our operating
subsidiaries, NxtGn Inc., and Next Communications, Inc., an entity controlled by our CEO, (collectively the “Plaintiffs”)
filed suit in the United States District Court for the Southern district of New York against Viber Media, Inc. (“Viber”).
Plaintiffs filed an Amended Complaint asserting four claims: misappropriation of a business idea, misappropriation of trade
secrets, breach of contract, and unjust enrichment. Viber moved the Court to dismiss the Amended Complaint. On March
30, 2016, U.S. District Judge Richard Sullivan issued an opinion and order on Viber’s motion to dismiss. Specifically,
Judge Sullivan ordered that Viber’s motion to dismiss is granted on Plaintiffs’ misappropriation of a business idea
claim, but denied as to their misappropriation of trade secrets, breach of contract, and unjust enrichment claims. The Company
has not accrued any gains associated with this case as it would be a contingent gain and recorded when received.
On February 12, 2018, the Company was served
with a complaint from Viber for reimbursement of attorney’s fees and costs totaling $527,782 arising from the litigation
listed above. The Company is vigorously defending their rights in this case as we believe this demand is premature as litigation
is ongoing. The Company has not accrued an estimated loss related to this complaint as of June 30, 2018 or December 31, 2017 given
the premature nature of the motion.
On October 20, 2016, the Company received
a notice it has been named as a defendant in a suit brought against Next Communications, an entity controlled by our CEO. In addition
to being named a defendant, it was requested the Company provide certain documents for the discovery process. Due to the original
suit being filed against a related party and not against the Company or its subsidiaries, we believe it likely the Company and
its subsidiaries will be dismissed as defendants and has not accrued a contingent loss as of June 30, 2018 or December 31, 2017
as a result.
On July 6, 2017, the Company received notice
an existing legal claim against Accent InterMedia (“AIM”) had been amended to include claims against the Company. The
claims brought against the Company include failure to comply with certain judgments for collection of funds by the plaintiff while
having a controlling interest in AIM via its ownership of Transaction Processing Products (“TPP”). The Company believes
the amended case is without merit and that, per its agreement to sell its interest in TPP, any claims brought against AIM or TPP
would be the responsibilities of the current interest holders. Due to the original suit being filed against AIM and amended to
include the Company after it disposed of its interest in TPP, which had a controlling interest in AIM, we believe it likely the
Company and its subsidiaries will be dismissed as defendants.
On December 20, 2017, a Complaint was filed
by J. P. Carey Enterprises, Inc., alleging a claim for $473,264 related to the Franjose Yglesias-Bertheau filed lawsuit against
PLKD listed above. Even though NGH made the agreed payment of $10,000 on January 2, 2017 and issued 3,600,720 shares as conversion
of the $70,000 note as agreed in the settlement agreement, the Plaintiff alleges damages which NGH claims are without merit because
they received full compensation as agreed. NGH is in the process of defending itself against these claims. The Company has not
accrued losses related to this claim due to the early stages of litigation.
During 2016, Limecom had disputed accounts
payable with three (3) carriers, for which the Company entered into separate settlement agreements, totaling approximately $1,147,000.
Under the terms of these settlement agreements, the Company was provided with extended payment terms on the outstanding balances.
These settlement agreements are non-interest bearing and include certain default provisions as disclosed in the related agreements.
The Company assumed a total of $676,563 of this liability on October 23, 2017 as part of its acquisition of Limecom and made repayments
totaling $10,000 during the period of acquisition to December 31, 2017 and $95,136 during the six months ended June 30, 2018. The
remaining outstanding principal balance of these settlement agreements amounted to approximately $571,427 and $666,563 as of June
30, 2018 and December 31, 2017, respectively. Of these totals, $571,427 and $546,563 is current and included in accrued liabilities
and $0 and $120,000 is long term and represented by other long term liabilities as of June 30, 2018 and December 31, 2017, respectively.
On October 23, 2017, the Company assumed
a settlement liability Limecom had entered into with American Express as part of its acquisition as discussed in
Note 1 –
Organization and Description of Business.
As of the date of acquisition, there was a total outstanding balance of $995,158.
The Company made repayments totaling $102,727 from the period of October 23, 2017 to December 31, 2017 and $330,000 during the
six months ended June 30, 2018 leaving a remaining balance due of $562,431 and $892,431 as of June 30, 2018 and December 31, 2017,
respectively. The balance due is included in accounts payable and accrued liabilities as of June 30, 2018 and December 31, 2017.
On
October 23, 2018, the Company received service of a complaint filed against it by a former supplier citing unspecified damages
in excess of $15,000. The Company has not accrued any losses as of June 30, 2018 related to the complaint given the early nature
of the process.
On October 25, 2018, the Company was notified
by its registered agent in the state of Florida it had received notification of a filed complaint by a former employee that alleges
breach of contract. The Company is in the early stages of discovery with a response to the complaint due on November 14, 2018.
The Company has not accrued any losses as of June 30, 2018 related to the complaint given the early nature of the process.
On
October 25, 2018, the Company was received a claim letter issued by TCA Gloal Master Fund in which it claims the Company is liable
for unpaid investment banking services totaling $2,500,000. The Company believes this claim to be without merit and has responded
to the letter as such. The Company has not accrued any losses or a liability related to this letter as of June 30, 2018.
On
November 7, 2018, the Company was serviced with a complaint from a former service provider claiming breach of contract. The complaint
alleges services were performed for which the Company owes $28,833 plus interest. The Company believes this claim to be without
merit and has not accrued any losses as of June 30, 2018 related to the complaint given the early nature of the process.
The Company executed a lease for office
space effective July 10, 2018 with a term to October 31, 2018. The lease requires monthly rental payments of $4,750 plus monthly
maintenance costs of $100. Total future guaranteed payments under this lease are $19,400.
NOTE 13 – PRO FORMA STATEMENTS OF OPERATIONS
On October 23, 2017, the Company completed its
acquisition of Limecom as discussed in
Note 1 – Organization and Description of Business
. The Company is furnishing
the following pro forma statements of operations representing the combined results of the Company and Limecom for the six months
ended June 30, 2017 had the acquisition been completed on January 1, 2017.
CUENTAS, INC.
(FORMERLY NEXT GROUP HOLDINGS, INC.)
COMBINED PRO FORMA STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2017
|
|
NGH
|
|
|
Limecom
|
|
|
Pro Forma Adjustments
|
|
|
Pro Forma
|
|
Revenue
|
|
$
|
1,074,655
|
|
|
$
|
46,783,665
|
|
|
$
|
-
|
|
|
$
|
47,858,320
|
|
Cost of revenue
|
|
|
785,432
|
|
|
|
45,354,949
|
|
|
|
214,286
|
(a)
|
|
|
46,354,667
|
|
Gross margin
|
|
|
289,223
|
|
|
|
1,428,716
|
|
|
|
(214,286
|
)
|
|
|
1,503,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer compensation
|
|
|
363,943
|
|
|
|
125,165
|
|
|
|
-
|
|
|
|
489,108
|
|
Professional fees
|
|
|
1,132,887
|
|
|
|
257,600
|
|
|
|
-
|
|
|
|
1,390,487
|
|
General and administrative
|
|
|
229,580
|
|
|
|
570,196
|
|
|
|
-
|
|
|
|
799,776
|
|
Total operating expenses
|
|
|
1,726,410
|
|
|
|
952,961
|
|
|
|
-
|
|
|
|
2,679,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,437,187
|
)
|
|
|
475,755
|
|
|
|
(214,286
|
)
|
|
|
(1,175,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
179,580
|
|
|
|
65,465
|
|
|
|
-
|
|
|
|
245,045
|
|
Interest expense
|
|
|
(597,719
|
)
|
|
|
(123,230
|
)
|
|
|
-
|
|
|
|
(720,949
|
)
|
Loss on derivative liability
|
|
|
(1,993,142
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,993,142
|
)
|
Total other income (expense)
|
|
|
(2,411,281
|
)
|
|
|
(57,765
|
)
|
|
|
-
|
|
|
|
(2,469,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
(3,848,468
|
)
|
|
$
|
417,990
|
|
|
$
|
(214,286
|
)
|
|
$
|
(3,644,764
|
)
|
(a)
|
Amortization of acquired intangible assets from acquisition
|
NOTE 14 – SUBSEQUENT EVENTS
On August 7, 2018, the Company effected
a 1:300 reverse stock split on its common stock. The effects of this stock split on the Company’s number of shares issued
and outstanding has been retroactively applied to these financial statements.
Subsequent to the balance sheet date, the
Company issued a total of 781 shares of common stock in conjunction with rounding from its reverse stock split; 61,001 shares of
common stock for the settlement of stock based liabilities; 2,167 common shares as part of a settlement agreement; 13,333 for services
and 35,834 shares of common stock for cash proceeds of $107,500.
The Company entered into a separate
securities purchase agreement to raise a total of $440,000 of cash in exchange for 146,669 shares of common stock. As of the
date of this filing, the Company has received total cash of $90,000. The common shares will be issued upon the receipt of all
cash due under the agreement. The shares associated with this agreement have not been issued and are not included in the preceding
paragraph.
On August 23, 2018, the Company committed to issue
a total of 60,639 common shares for services. Of this total, 33,334 were issued in exchange for previously outstanding options
totaling 33.334 which carried an exercise price of $54.
On September 13, 2018, the Company and certain
officers agreed to convert $282,623 of past wages and other compensation owing to shares of common stock at a rate of $4 per share
resulting in 70,657 common shares being committed to be issued. Additionally, a total of 90,000 options to purchase common stock
were granted with each option grant vesting equally over a three year period and exercisable at $3 per share. The options expire
in September 2023.
On November 6, 2018, the Company finalized
an accounts receivable factoring agreement whereby the factor agent will purchase outstanding accounts receivable at its sole discretion
less certain commissions. The factoring agent commission due under the agreement is 1.19% of the face value of the purchased accounts
receivable for the twenty days immediately following invoice issuance plus 0.59% for each twenty days thereafter. The factoring
agent may advance cash to the Company at its sole discretion up to 90% of the purchase price with an initial maximum advance capacity
of $4,000,000. The Company may request increases to the maximum advance allowed under the agreement not to exceed an additional
$1,000,000 during each 90 day period immediately following execution for up to a maximum advance of $8,000,000.
The Company will issue compensation to
its financial advisor with respect to the agreement totaling 2.5% of the initial credit line limit, or $100,000, in four equal
installments. The advisor will receive further compensation of 3.0% of any future increases in the credit limit above $4,000,000
up to $8,000,000. The advisor also received a warrant to purchase 74,866 shares of common stock at an exercise price of $3.74 per
share for a period of five years. The warrant may be exchanged without the payment of any additional consideration for the Company’s
common stock based upon the values of the warrant and the stock at the time of the exchange.