Cuentas Inc. - Quarter Report: 2018 June (Form 10-Q)
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE SIX MONTH PERIOD ENDED: JUNE 30, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 333-148987
CUENTAS, INC.
(formerly NEXT GROUP HOLDINGS, INC)
(Exact name of Registrant as specified in its charter)
Florida | 20-3537265 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
19 W. FLAGER ST, SUITE 507, MIAMI, FL 33130
(Address of principal executive offices)
800-611-3622
(Registrant’s telephone number)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 21, 2018, the issuer had 1,305,088 shares of its common stock issued and outstanding.
Part I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUENTAS, INC.
(formerly NEXT GROUP HOLDINGS, INC)
Table of Contents
Pages | ||
Unaudited Condensed Consolidated Balance Sheets | 2 | |
Unaudited Condensed Consolidated Statements of Operations | 3 | |
Unaudited Condensed Consolidated Statements of Cash Flows | 4 | |
Notes to Unaudited Condensed Consolidated Financial Statements | 5 - 21 |
1
CUENTAS, INC.
(FORMERLY NEXT GROUP HOLDINGS, INC.)
UNADUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2018 | December 31, 2017 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 12,770 | $ | 92,714 | ||||
Accounts receivable, net | 4,382,269 | 7,623,197 | ||||||
Accounts receivable, related party | 610,006 | 8,545 | ||||||
Prepaid expenses and other current assets | 90,755 | 74,365 | ||||||
Related party receivable | 36,000 | 36,000 | ||||||
Other receivable | 641 | 100,000 | ||||||
Total current assets | 5,132,441 | 7,934,821 | ||||||
Equipment, net of accumulated depreciation | 15,734 | 5,608 | ||||||
Intangible assets, net of accumulated amortization | 2,721,472 | 2,935,757 | ||||||
License fee, net of accumulated amortization | - | 34,722 | ||||||
Investments | 180,000 | 250,000 | ||||||
Goodwill | 1,333,713 | 1,333,713 | ||||||
Total assets | $ | 9,383,360 | $ | 12,494,621 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 4,524,873 | $ | 7,030,050 | ||||
Accounts payable, related party | 1,341,427 | 499,668 | ||||||
Dividends payable | 30,000 | 30,000 | ||||||
Deferred revenue | 612,174 | 685,905 | ||||||
Loan payable | 75,000 | 75,000 | ||||||
Convertible notes payable, net of discounts and debt issue costs | - | 48,897 | ||||||
Derivative liability | 119,269 | 574,130 | ||||||
Related party payables | 3,072,482 | 3,032,567 | ||||||
Notes payable, current | 72,015 | 71,048 | ||||||
Stock based liabilities | 1,261,730 | 2,963,272 | ||||||
Total current liabilities | 11,108,970 | 15,010,537 | ||||||
Related party payables, net of discounts | 2,607,670 | 2,535,601 | ||||||
Other long term liabilities | - | 120,000 | ||||||
Total liabilities | 13,716,640 | 17,666,138 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholders’ Deficit | ||||||||
Common stock subscribed | - | 400,000 | ||||||
Preferred stock, $0.001 par value, authorized 60,000,000 shares; Series A preferred stock; $0.001 par value, designated 50,000,000; 0 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | - | - | ||||||
Series B preferred stock, $0.001 par value, designated 10,000,000; 10,000,000 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | 10,000 | 10,000 | ||||||
Common stock, authorized 360,000,000 shares, $0.001 par value; 1,191,972 and 1,140,398 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | 1,192 | 1,140 | ||||||
Additional paid in capital | 10,254,782 | 9,554,844 | ||||||
Accumulated deficit | (13,953,044 | ) | (14,207,568 | ) | ||||
Accumulated other comprehensive income | - | (300,000 | ) | |||||
Total Cuentas, Inc. stockholders’ deficit | (3,687,070 | ) | (4,541,584 | ) | ||||
Non-controlling interest in subsidiaries | (646,210 | ) | (629,933 | ) | ||||
Total stockholders’ deficit | (4,333,280 | ) | (5,171,517 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 9,383,360 | $ | 12,494,621 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
CUENTAS, INC.
(FORMERLY NEXT GROUP HOLDINGS, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Restated) | ||||||||||||||||
Revenue | $ | 11,967,987 | $ | 500,426 | $ | 29,718,263 | $ | 997,224 | ||||||||
Revenue, sales to related parties | 8,941,435 | 73,638 | 11,189,379 | 77,431 | ||||||||||||
Total revenue | 20,909,422 | 574,064 | 40,907,642 | 1,074,655 | ||||||||||||
Cost of revenue | 12,293,982 | 450,175 | 28,479,619 | 785,432 | ||||||||||||
Cost of revenue, purchases from related parties | 8,361,849 | - | 11,434,687 | - | ||||||||||||
Gross profit (loss) | 253,591 | 123,889 | 993,336 | 289,223 | ||||||||||||
Operating expenses | ||||||||||||||||
Officer compensation | 193,525 | 147,777 | 328,717 | 363,943 | ||||||||||||
Professional fees | 214,340 | 641,603 | 514,698 | 1,132,887 | ||||||||||||
General and administrative | 419,997 | 132,688 | 855,003 | 229,580 | ||||||||||||
Total operating expenses | 827,862 | 922,068 | 1,698,418 | 1,726,410 | ||||||||||||
Loss from operations | (574,271 | ) | (798,179 | ) | (705,082 | ) | (1,437,187 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Other income | - | 178,712 | - | 179,580 | ||||||||||||
Other expense | (69,912 | ) | - | (94,862 | ) | - | ||||||||||
Interest expense | (346,325 | ) | (238,477 | ) | (748,907 | ) | (597,719 | ) | ||||||||
Gain (loss) on derivative liability | 14,729 | (1,579,105 | ) | 427,935 | (1,993,142 | ) | ||||||||||
Gain on extinguishment of debt | - | - | 98,611 | - | ||||||||||||
Gain (loss) on fair value of stock based liabilities | (3,069 | ) | - | 1,559,413 | - | |||||||||||
Total other income (expense) | (404,577 | ) | (1,638,870 | ) | 1,242,190 | (2,411,281 | ) | |||||||||
Loss from discontinued operations | - | - | - | (327,800 | ) | |||||||||||
Income (loss) before income taxes | (978,848 | ) | (2,437,049 | ) | 537,108 | (4,176,268 | ) | |||||||||
Income taxes | - | - | - | - | ||||||||||||
Net income (loss) | (978,848 | ) | (2,437,049 | ) | 537,108 | (4,176,268 | ) | |||||||||
Net (income) loss attributable to non-controlling interest | 9,619 | (144 | ) | 17,416 | 9,630 | |||||||||||
Net income (loss) attributable to Cuentas, Inc. | $ | (969,229 | ) | $ | (2,437,193 | ) | $ | 554,524 | $ | (4,166,638 | ) | |||||
Net income (loss) per basic share | $ | (0.81 | ) | $ | (2.62 | ) | $ | 0.47 | $ | (4.71 | ) | |||||
Net income (loss) per diluted share | $ | (0.81 | ) | $ | (2.62 | ) | $ | 0.43 | $ | (4.71 | ) | |||||
Weighted average number of basic common shares outstanding | 1,191,972 | 930,122 | 1,183,555 | 884,706 | ||||||||||||
Weighted average number of diluted common shares outstanding | 1,191,972 | 930,122 | 1,287,382 | 884,706 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
(FORMERLY NEXT GROUP HOLDINGS, INC.)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
(Restated) | ||||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | 537,108 | $ | (4,176,268 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Shares issued for services | - | 720,200 | ||||||
Stock based compensation | 44,333 | 154,943 | ||||||
Imputed interest | 119,517 | 119,518 | ||||||
Gain on extinguishment of debt | (98,611 | ) | - | |||||
Loss on fair value of investments | 70,000 | - | ||||||
Debt discount amortization | 72,069 | 328,537 | ||||||
Gain on derivative fair value adjustment | (427,935 | ) | 1,993,142 | |||||
License fee amortization | 34,722 | 41,667 | ||||||
Amortization of debt issue costs | - | 13,004 | ||||||
Loss on disposal of business | - | 327,800 | ||||||
Gain on fair value of stock based liabilities | (1,559,413 | ) | - | |||||
Allowance for doubtful accounts | - | 25,000 | ||||||
Depreciation expense | 1,373 | - | ||||||
Amortization of intangible assets | 214,285 | - | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts receivable | 3,240,928 | 1,363 | ||||||
Accounts receivable, related party | (601,461 | ) | (49,720 | ) | ||||
Prepaid expenses | (16,390 | ) | 44,758 | |||||
Other receivable | 99,359 | - | ||||||
Accounts payable | (2,595,239 | ) | 317,301 | |||||
Accounts payable, related party | 841,759 | - | ||||||
Deferred revenue | (73,731 | ) | 21,874 | |||||
Net Cash Used by Operating Activities | (97,327 | ) | (116,881 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of equipment | (11,499 | ) | - | |||||
Net Cash Used by Investing Activities | (11,499 | ) | - | |||||
Cash Flows from Financing Activities: | ||||||||
Bank overdraft | - | (7 | ) | |||||
Proceeds from loans payable | 967 | 25,000 | ||||||
Repayments of convertible notes | (12,000 | ) | - | |||||
Proceeds from related party loans | 40,199 | - | ||||||
Repayments of related party loans | (284 | ) | (100,542 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | 28,882 | (75,549 | ) | |||||
Net Increase (Decrease) in Cash | (79,944 | ) | (192,430 | ) | ||||
Cash at Beginning of Period | 92,714 | 256,302 | ||||||
Cash at End of Period | $ | 12,770 | $ | 63,872 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 586,145 | $ | - | ||||
Cash paid for income taxes | $ | - | $ | - | ||||
Supplemental disclosure of non-cash financing activities | ||||||||
Common stock issued as related party loan and accrued interest repayment | $ | - | $ | 294,923 | ||||
Common stock issued for conversion of convertible note principal | $ | 26,640 | $ | 167,069 | ||||
Common stock issued for conversion of convertible accrued interest | $ | - | $ | 11,580 | ||||
Common stock issued for settlement of stock based liabilities | $ | 154,973 | $ | - | ||||
Common stock issued for settlement of common stock subscribed | $ | 400,000 | $ | - |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
CUENTAS, INC.
(Formerly NEXT GROUP HOLDINGS, INC)
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.
5
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.
6
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.
7
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.
8
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.
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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.
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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.
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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.
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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).
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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 |
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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 |
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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 |
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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 |
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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. |
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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.
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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.
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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.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management of the Company believes to be relevant to an assessment and understanding of the Company’s results of operations and financial condition. This discussion should be read together with the Company’s financial statements and the notes to the financial statements, which are included in this report.
Forward-Looking Statements
This Report contains forward-looking statements that relate to future events or our future financial performance. Some discussions in this report may contain forward-looking statements that involve risk and uncertainty. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this Report. Forward-looking statements are often identified by words like “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project” and similar words or expressions that, by their nature, refer to future events.
In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential,” or “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or achievements. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this Report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements in an effort to conform these statements to actual results.
Business History
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.
Next Group Holdings, 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) and 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.
Overview
On January 12, 2016, and effective as of January 1, 2016, the Company issued 177,539,180 pre-split shares of its restricted common stock and 10,000,000 shares of its Series B preferred stock for 100% of the issued and outstanding shares of Next Group Holdings, Inc. (NEXT). Based on the completion of the agreement NEXT became a wholly-owned subsidiary of the Company.
On December 31, 2015, we signed our merger with Next Group Holdings, Inc. a Florida Corporation but the transaction was not completed until January 12, 2016, when the document was filed with the State of Florida. The accounting effective date of the transaction is January 1, 2016. The Company filed for a change of name to Next Group Holdings, Inc. and its symbol was NXGH.
As a result of this merger, we adopted Next Group’s corporate structure and began a transition into its business model. Through our subsidiaries, we engage in use of certain licensed technology to provide innovative telecommunications, mobility, and remittance solutions to unserved, unbanked, and emerging markets.
On June 25, 2018, holders of a majority of the Company’s voting stock approved by written consent in lieu of a special meeting of stockholders in accordance with 607.0704 of the Florida Business Corporation Act to change the company name to Cuentas, Inc and effect a reverse stock split of 1:300. In early August 2018, FINRA approved the new stock symbol CUEN and also approved the 1:300 reverse stock split.
Cuentas, formerly Next Group Holdings, through its operating subsidiaries, engages in the business of using proprietary technology and certain licensed technology to provide innovative telecommunications and telecommunications mobility and remittance solutions in emerging markets. The Company offers prepaid telecommunications minutes to consumers through its Tel3 division and also offers wholesale telecommunications minutes through its Limecom subsidiary.
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Results of operations for the three months ended June 30, 2018 and 2017
Revenue
The Company generates revenues through the sale and distribution of prepaid telecom minutes and other related telecom services.
Three Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Revenue | $ | 11,967,987 | $ | 500,426 | $ | 11,467,561 | ||||||
Revenue, related party | 8,941,435 | 73,638 | 8,867,797 | |||||||||
Total revenue | $ | 20,909,422 | $ | 574,064 | $ | 20,335,358 |
Revenues during the three months ended June 30, 2018 totaled $20,909,422 compared to $574,064 for the three months ended June 30, 2017. The increase in revenues of $20,335,358 is due to the acquisition of Limecom which was consolidated for the full three months ended June 30, 2018 and not included in the three months ended June 30, 2017. Limecom contributed a total of $20,499,288 of revenues during the three months ended June 30, 2018.
Costs of Revenue
Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs.
Three Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Cost of revenue | $ | 12,293,982 | $ | 450,175 | $ | 11,843,807 | ||||||
Cost of revenue, related party | 8,361,849 | - | 8,361,849 | |||||||||
Total cost of revenue | $ | 20,655,831 | $ | 450,175 | $ | 20,205,656 |
Cost of revenues during the three months ended June 30, 2018 totaled $20,655,831 compared to $450,175 for the three months ended June 30, 2017. The increase in cost of revenues of $20,205,656 is due to the acquisition of Limecom which was consolidated for the full three months ended June 30, 2018 and not included in the three months ended June 30, 2017. Limecom contributed a total of $20,306,388 of costs of revenues during the three months ended June 30, 2018.
Operating Expenses
Three Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Officer compensation | $ | 193,525 | $ | 147,777 | $ | 45,748 | ||||||
Professional fees | 214,340 | 641,603 | (427,263 | ) | ||||||||
General and administrative | 419,997 | 132,688 | 287,309 | |||||||||
Total operating expenses | $ | 827,862 | $ | 922,068 | $ | (94,206 | ) |
Operating expenses totaled $827,862 during the three months ended June 30, 2018 compared to $922,068 during the three months ended June 30, 2017 representing a net decrease of $94,206. The Company incurred approximately $45,000 of incremental officer compensation expenses during the three months ended June 30, 2018 as the three months ended June 30, 2017 due to stock based compensation occurring in the current period not present in the prior period totaling $44,333. Additionally, the Company incurred fewer professional fees during the current period as the result of issuing fewer shares of common stock for professional services in the current period when compared to the same quarter in 2017. Lastly, the increase in general and administrative expenses is the result of the acquisition of Limecom which contributed a total of $329,186 of general and administrative expenses during the three months ended June 30, 2018.
Other Income (Expense)
Three Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Other income | $ | - | $ | 178,712 | $ | (178,712 | ) | |||||
Other expense | (69,912 | ) | - | (69,912 | ) | |||||||
Interest expense | (346,325 | ) | (238,477 | ) | (107,848 | ) | ||||||
Gain (loss) on derivative liability | 14,729 | (1,579,105 | ) | 1,593,834 | ||||||||
Gain on fair value of stock based liabilities | (3,069 | ) | - | (3,069 | ) | |||||||
Total other income (expense) | $ | (404,577 | ) | $ | (1,638,870 | ) | $ | 1,234,293 |
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The Company recognized other expense of $404,577 during the three months ended June 30, 2018 compared to a net expense of $1,638,870 during the three months ended June 30, 2017. The net change from the prior period to the current is driven by a $1,593,834 favorable change in the gain recognized on the fair value measurement of derivative liabilities, offset by a decrease in other income of $178,712.
The fair value measurements related to derivative liabilities and stock-based liabilities are driven by market inputs and inherently subject to volatility. The decrease in other income is the result of the Company recognizing forgiveness of accounts payable during the three months ended June 30, 2017 that was not present during the current period.
Net Loss
Three Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Net income (loss) | $ | (978,848 | ) | $ | (2,437,049 | ) | $ | 1,458,201 | ||||
Net income attributable to non-controlling interest | 9,619 | (144 | ) | 9,763 | ||||||||
Net loss attributable to Cuentas, Inc. | $ | (969,229 | ) | $ | (2,437,193 | ) | $ | 1,467,964 |
The Company recognized a net loss for the three months ended June 30, 2018 of $969,229 compared to a loss of $2,437,193 for the three months ended June 30, 2017. The change in net loss for the three months ended June 30, 2018 is due mainly to the increased revenues and margins in absolute dollars during the current period combined with favorable changes in gains for the fair value measurements of derivative and stock-based liabilities.
Results of operations for the six months ended June 30, 2018 and 2017
Revenue
The Company generates revenues through the sale and distribution of prepaid telecom minutes and other related telecom services.
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Revenue | $ | 29,718,263 | $ | 997,224 | $ | 28,721,039 | ||||||
Revenue, related party | 11,189,379 | 77,431 | 11,111,948 | |||||||||
Total revenue | $ | 40,907,642 | $ | 1,074,655 | $ | 39,832,987 |
Revenues during the six months ended June 30, 2018 totaled $40,907,642 compared to $1,074,655 for the six months ended June 30, 2017. The increase in revenues of $39,832,987 is due to the acquisition of Limecom which was consolidated for the full six months ended June 30, 2018 and not included in the six months ended June 30, 2017. Limecom contributed a total of $40,086,285 of revenues during the six months ended June 30, 2018.
Costs of Revenue
Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs.
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Cost of revenue | $ | 28,479,619 | $ | 785,432 | $ | 27,694,187 | ||||||
Cost of revenue, related party | 11,434,687 | - | 11,434,687 | |||||||||
Total cost of revenue | $ | 39,914,306 | $ | 785,432 | $ | 39,128,874 |
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Cost of revenues during the six months ended June 30, 2018 totaled $39,914,306 compared to $785,432 for the six months ended June 30, 2017. The increase in cost of revenues of $39,128,874 is due to the acquisition of Limecom which was consolidated for the full six months ended June 30, 2018 and not included in the six months ended June 30, 2017. Limecom contributed a total of $39,265,195 of costs of revenues during the six months ended June 30, 2018.
Operating Expenses
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Officer compensation | $ | 328,717 | $ | 363,943 | $ | (35,226 | ) | |||||
Professional fees | 514,698 | 1,132,887 | (618,189 | ) | ||||||||
General and administrative | 855,003 | 229,580 | 625,423 | |||||||||
Total operating expenses | $ | 1,698,418 | $ | 1,726,410 | $ | (27,992 | ) |
Operating expenses totaled $1,698,418 during the six months ended June 30, 2018 compared to $1,726,410 during the six months ended June 30, 2017 representing a net decrease of $27,992. The Company incurred fewer officer compensation expenses during the six months ended June 30, 2018 from there being approximately $110,000 of stock option-based compensation recognized during the six months ended June 30, 2017 compared to approximately $44,000 during the six months ended June 30, 2018. Additionally, the Company incurred fewer professional fees during the current period as the result of issuing fewer shares of common stock for professional services in the current period when compared to the same period in 2017. Lastly, the increase in general and administrative expenses is the result of the acquisition of Limecom which contributed a total of $670,066 of general and administrative expenses during the six months ended June 30, 2018.
Other Income (Expense)
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Other income | $ | - | $ | 179,580 | $ | (179,580 | ) | |||||
Other expense | (94,862 | ) | - | (94,862 | ) | |||||||
Interest expense | (748,907 | ) | (597,719 | ) | (151,188 | ) | ||||||
Gain (loss) on derivative liability | 427,935 | (1,993,142 | ) | 2,421,077 | ||||||||
Gain on extinguishment of debt | 98,611 | - | 98,611 | |||||||||
Gain on fair value of stock based liabilities | 1,559,413 | - | 1,559,413 | |||||||||
Total other income (expense) | $ | 1,242,190 | $ | (2,411,281 | ) | $ | 3,653,471 |
The Company recognized other income of $1,242,190 during the six months ended June 30, 2018 compared to a net expense of $2,411,281 during the six months ended June 30, 2017. The net change from the prior period to the current is driven by a $2,421,077 favorable change in the gain recognized on the fair value measurement of derivative liabilities, $98,611 favorable variance in the gain on extinguishment of debt and $1,559,413 favorable change in gains recognized from the fair value measurements of stock-based liabilities.
The fair value measurements related to derivative liabilities and stock-based liabilities are driven by market inputs and inherently subject to volatility. The increase in the gain on extinguishment of debt is from the Company entering into a settlement agreement with a convertible noteholder during the current period where similar events did not exist during the six months ended June 30, 2017.
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Loss from Discontinued Operations
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Loss from discontinued operations | $ | - | $ | 327,800 | $ | (327,800 | ) |
The Company recorded a loss from discontinued operations of $327,800 during the six months ended June 30, 2017 from its disposal of a former subsidiary, Transaction Processing Products, LLC. There were no discontinued operations or disposals of business entities or segments during the six months ended June 30, 2018.
Net Income (Loss)
Six Months Ended June 30, | ||||||||||||
2018 | 2017 | Change | ||||||||||
Net income (loss) | $ | 537,108 | $ | (4,176,268 | ) | $ | 4,713,376 | |||||
Net income attributable to non-controlling interest | 17,416 | 9,630 | 7,786 | |||||||||
Net loss attributable to Cuentas, Inc. | $ | 554,524 | $ | (4,166,638 | ) | $ | 4,721,162 |
The Company recognized net income for the six months ended June 30, 2018 of $554,524 compared to a loss of $4,166,638 for the six months ended June 30, 2017. The change in net income (loss) for the six months ended June 30, 2018 is due mainly to the increased revenues and margins during the current period combined with favorable changes in gains for the fair value measurements of derivative and stock-based liabilities.
GOING CONCERN, LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2018, the Company had cash of $12,770, current assets of $5,132,441 and current liabilities of $11,108,970 creating a working capital deficit of $5,976,529. Net cash used in operating activities was $97,327 during the six months ended June 30, 2018 and $116,881 used during the six months ended June 30, 2017. Current assets consisted of $12,770 of cash; $4,382,269 of accounts receivable; $610,006 of related party accounts receivable; $90,755 of prepaid expenses and other current assets; $36,000 of related party receivables and $641 of other receivables.
As of December 31, 2017, the Company had $92,714 of cash, total current assets of $7,934,821 and total current liabilities of $15,010,537 creating a working capital deficit of $7,075,716. Current assets as of December 31, 2017 consisted of $92,714 of cash, accounts receivable net of allowance of $7,623,197, accounts receivable from related parties totaling $8,545, prepaid expenses and other current assets of $74,365, related party receivables of $36,000 and an other receivable of $100,000.
Liquidity and Other Considerations
During the six months ended June 30, 2018, the Company’s loss from operations was $705,082. As of June 30, 2018, the Company had $12,770 of cash, a working capital deficit of $5,976,529, which included accounts payable and accrued liabilities of $4,524,873 and accounts payable to related parties of $1,341,427, and the Company’s shareholder deficit was $4,333,280. During 2017, the Company acquired a cash flow positive subsidiary.
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. There was $2,943,519 and $2,919,615 due to Next Communications as of June 30, 2018 and December 31, 2017, respectively.
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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 $554,524 and a net 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.
Operating Activities
The Company used $97,327 of cash in operations during the six months ended June 30, 2018 and $116,881 during the six months ended June 30, 2017. The Company’s primary uses of cash have been for professional support, marketing expenses and working capital. Net cash used in operating activities during the six months ended June 30, 2018 consisted of net income of $537,108, net non-cash gains of $1,529,660 and changes in working capital totaling $895,225.
Investing Activities
The Company used cash of $11,499 in investing activities during the six months ended June 30, 2018 which consisted solely of the purchase of equipment. There was no cash used in or provided by investing activities during the six months ended June 30, 2017.
Financing Activities
The Company generated $28,882 of cash in financing activities during the six months ended June 30, 2018 compared to using $75,549 during the six months ended June 30, 2017. Cash generated by financing activities during the six months ended June 30, 2018 consisted of repayments of convertible notes payable of $12,000, proceeds from related party loans of $40,199, proceeds from loans payable of $967 and repayments of related party loans of $284. Cash used in financing activities during the six months ended June 30, 2017 consisted of repayments of a bank overdraft of $7, proceeds from loans payable of $25,000 and repayments on related party loans of $100,542.
The Company may not have sufficient resources to fully develop any new products or expand our market area unless it is able to raise additional financing. The Company can make no assurances these required funds will be available on favorable terms, if at all. If additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in dilution to our existing stockholders. Additionally, these conditions may increase costs to raise capital and/or result in further dilution. The failure to raise capital when needed, will adversely affect our business, financial condition and results of operations, and could force the Company to reduce or cease operations.
The Company believes that it will be able to meet the costs of growth and public reporting with funds generated from operations and additional amounts generated through debt and equity financing, Although management believes that the required financing to fund product development can be secured at terms satisfactory to the Company, there is no guarantee these funds will be made available, and if funds are available, that the terms will be satisfactory to the Company.
Impact of Inflation
The Company does not expect inflation to be a significant factor in operation of the business.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements between the Company and any other entity that have, or are reasonably likely to have, a current or future effect on financial conditions, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Some of the critical accounting estimates are detailed below.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if:
● | it requires assumptions to be made that were uncertain at the time the estimate was made, and | |
● | changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition. |
The Company bases estimates and judgments on experience, current knowledge, and beliefs of what could occur in the future, observation of trends in the industry, information provided by customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company has identified the following accounting policies and estimates as those that are believed to be the most critical to the financial condition and results of operations and that require management’s most subjective and complex judgments in estimating the effect of inherent uncertainties: share-based compensation expense, and derivative financial instruments.
Share-Based Compensation Expense
We calculate share-based compensation expense for option awards and warrant issuances (“Share-based Awards”) based on the estimated grant/issue-date fair value using the Black-Scholes-Merton option pricing model (“Black-Scholes Model”) and recognize the expense on a straight-line basis over the vesting period, net of estimated forfeitures. The Black-Scholes Model requires the use of a number of assumptions including volatility of the stock price, the weighted average risk-free interest rate, and the vesting period of the Share-based Award in determining the fair value of Share-based Awards. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
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ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, and as discussed in greater detail below, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, disclosure controls and procedures are not effective:
● | to give reasonable assurance that the information required to be disclosed in reports that are file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and | |
● | to ensure that information required to be disclosed in the reports that are file or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our CEO and our Treasurer, to allow timely decisions regarding required disclosure. |
Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:
Lack of appropriate oversight of third party service providers,
Lack of appropriate segregation of duties,
Lack of an independent audit committee,
Lack of information technology (“IT”) controls over revenue,
Lack of adequate review of internal controls to ascertain effectiveness,
Lack of communication to third party service providers regarding key events and agreements within the organization,
Lack of control procedures that include multiple levels of supervision and review, and
There is an overreliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material, nonstandard transactions.
There have been no changes to our internal controls during the period covered by this report.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 attorneys 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.
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.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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.
ITEM 3. DEFAULTS UPON SENIOR DEBT
None.
ITEM 4. REMOVED AND RESERVED
None.
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ITEM 6. EXHIBITS
(1) | Incorporated by reference from Pleasant Kid’s Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2013 filed on January 14, 2014. |
(2) | Incorporated by reference from Pleasant Kid’s Quarterly Report on Form 10-Q for the Fiscal Quarter Ended March 31, 2015 filed on May 20, 2015. |
(3) | Incorporated by reference from Next Group Holdings’ Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2016 filed on August 19, 2016. |
(4) | Incorporated by reference from Next Group Holdings’ Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2016 filed on November 21, 2016. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Next Group Holdings, Inc. | ||
(Registrant) | ||
Date: November 21, 2018 | By: | /s/ Arik Maimon |
Chief Executive Officer | ||
By: | /s/ Michael DePrado | |
Chief Financial Officer |
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