Cuentas(CUEN) - 2024 Q1 - Quarterly Report

PART II – OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, debt defaults, mine safety, other information, and exhibits ITEM 1. LEGAL PROCEEDINGS The Company is involved in legal proceedings, including an arbitration demand, a settled breach of contract, and an employee compensation claim - The Company received an arbitration demand from Secure IP Telecom, Inc. concerning alleged avoidable transfers from Limecom, with aggregate transfers of less than $600,000. The Company denies liability and has accrued $300,000 as of December 31, 2023, for this matter[3] - Crosshair Media Placement, LLC filed a breach of contract complaint for $629,807.74. The parties reached a settlement agreement for $630,000, with $70,000 paid by December 31, 2023, and a final payment of $425,000 due May 1, 2024[4] - A former employee filed a complaint for breach of employment agreement, alleging unpaid compensation. The Company estimates the maximum settlement amount will not exceed $30,000[5] ITEM 1A. RISK FACTORS Investors should review risks and uncertainties detailed in the Company's Annual Report on Form 10-K and other SEC filings - Investors are encouraged to review the risks and uncertainties disclosed in Item 1A ("Risk Factors") of the Company's Annual Report on Form 10-K for the year ended December 31, 2023, and other public filings[6] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No unregistered equity securities were sold during the period, except as previously disclosed - No sales of unregistered securities occurred during the period covered by this report, other than those previously reported[8] ITEM 3. DEFAULTS UPON SENIOR DEBT The Company reported no defaults on senior debt during the period - There were no defaults upon senior debt[9] ITEM 4. MINE SAFETY DISCLOSURES The Company had no mine safety disclosures to report - There were no mine safety disclosures[10] ITEM 5. OTHER INFORMATION The Company reported no other information for this item - There was no other information to report[11] ITEM 6. EXHIBITS Various exhibits were filed, including CEO/CFO certifications and Inline XBRL documents Filed Exhibits | Exhibit Number | Exhibit Description | Filed herewith | | :--------------- | :------------------------------------------------------------------------------------- | :------------- | | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | | 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | | 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | | 101.INS | Inline XBRL Instance Document. | X | | 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | SIGNATURES The report was signed by the CEO and CFO of Cuentas, Inc. on May 20, 2024 - The report was signed by Shalom Arik Maimon, Chief Executive Officer, and Shlomo Zakai, Chief Financial Officer, on May 20, 2024[16] PART I – FINANCIAL INFORMATION This part details the Company's unaudited condensed consolidated interim financial statements and related disclosures ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated interim financial statements and their accompanying notes CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) This subsection contains the unaudited condensed consolidated interim financial statements Unaudited Condensed Consolidated Interim Balance Sheets This statement provides a snapshot of the Company's assets, liabilities, and equity at specific points in time Condensed Consolidated Interim Balance Sheets (USD in thousands) | Item | March 31, 2024 | December 31, 2023 | | :---------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $28 | $205 | | Total Current Assets | $492 | $1,760 | | Total Non-Current Assets | $2,956 | $2,960 | | Total Assets | $3,448 | $4,720 | | Total Current Liabilities | $3,741 | $4,689 | | Total Non-Current Liabilities | $102 | $101 | | Total Liabilities | $3,843 | $4,790 | | Total Stockholders' Deficit | $(395) | $(70) | Unaudited Condensed Consolidated Interim Statements of Comprehensive Loss This statement details the Company's revenues, expenses, and net loss over specific interim periods Condensed Consolidated Interim Statements of Comprehensive Loss (USD in thousands) | Item | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------------ | :-------------------------------- | :-------------------------------- | | Total revenues | $639 | $64 | | Total cost of revenues | $(708) | $(123) | | Gross loss | $(69) | $(59) | | Total Operating expenses | $(774) | $(1,627) | | Operating loss | $(843) | $(1,686) | | Total other income | $398 | $0 | | Net loss | $(445) | $(1,695) | | Loss per share (basic and diluted) | $(0.15) | $(1.00) | | Basic and diluted weighted average number of shares outstanding | 2,719,668 | 1,696,022 | - Total revenues increased significantly from $64 thousand in Q1 2023 to $639 thousand in Q1 2024, primarily driven by wholesale telecommunication services[42] - Net loss decreased substantially from $(1,695) thousand in Q1 2023 to $(445) thousand in Q1 2024, largely due to a gain from the change in fair value of derivative warrants liability and reduced operating expenses[42] Unaudited Condensed Consolidated Interim Statements of Changes in Stockholders' Deficit This statement outlines changes in the Company's stockholders' deficit over specific interim periods Changes in Stockholders' Deficit (USD in thousands) | Item | December 31, 2023 | March 31, 2024 | | :---------------------------------- | :---------------- | :------------- | | Common Stock Amount | $3 | $3 | | Additional paid-in capital | $54,906 | $55,026 | | Treasury stock | $(33) | $(33) | | Accumulated deficit | $(54,946) | $(55,391) | | Total stockholders' deficit | $(70) | $(395) | | Share based Compensation | - | $120 | | Comprehensive loss for the period | - | $(445) | - The total stockholders' deficit increased from $(70) thousand at December 31, 2023, to $(395) thousand at March 31, 2024, primarily due to the comprehensive loss for the period of $(445) thousand, partially offset by $120 thousand in share-based compensation[44] Unaudited Condensed Consolidated Interim Statements of Cash Flows This statement reports the cash generated and used by the Company's operating, investing, and financing activities Condensed Consolidated Interim Statements of Cash Flows (USD in thousands) | Cash Flow Activity | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(310) | $(1,453) | | Net cash used in investing activities | $0 | $0 | | Net cash provided by finance activities | $133 | $4,315 | | Increase (decrease) in cash and cash equivalents | $(177) | $2,862 | | Cash and cash equivalents at end of year | $28 | $3,328 | - Net cash used in operating activities decreased from $(1,453) thousand in Q1 2023 to $(310) thousand in Q1 2024, primarily due to changes in operating assets and liabilities, including a significant increase in accounts payable[48] - Net cash provided by financing activities decreased substantially from $4,315 thousand in Q1 2023 (due to common stock issuance) to $133 thousand in Q1 2024 (due to short-term loans)[48] NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) This section provides detailed explanations and additional information supporting the interim financial statements NOTE 1 – GENERAL This note provides general information about the Company, its delisting, and going concern considerations - The Company was delisted from Nasdaq on December 20, 2023, due to non-compliance with the $2,500,000 shareholders' equity requirement and now trades on the OTC Pink Current Information tier[52][53][54] - As of March 31, 2024, the Company had $28 thousand in cash, a negative working capital of $3,249 thousand, a shareholder's deficit of $395 thousand, and an accumulated deficit of $55,391 thousand, raising substantial doubt about its ability to continue as a going concern[56] - Management is pursuing fund-raising in private equity and capital markets, negotiating to sell mobile services as an MVNO, and has approved a letter of intent to sell the Brooksville Property for $7.2 million to address liquidity issues[56] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION This note outlines the significant accounting policies and the basis used for preparing the financial statements - The unaudited consolidated financial statements are prepared in accordance with GAAP and SEC rules, including all material adjustments deemed necessary by management[57] - The Company does not expect recently issued accounting standards (ASU 2023-07 on Segment Reporting and ASU 2023-09 on Income Tax Disclosures) to have a material impact on its consolidated financial statements upon adoption[66][73] NOTE 3 – EVENTS DURING THE PERIOD This note details significant events that occurred during the reporting period, including financing and asset sales - On February 7, 2024, the Company sold an unsecured promissory note for $178,250 principal, receiving net proceeds of $150,000. The note incurs a 12% interest charge, matures November 15, 2024, and is convertible into common shares upon default[74] - On March 13, 2024, the Company approved a Letter of Intent to sell the Brooksville Property for gross proceeds of $7.2 million. The property was originally purchased for $5.05 million on April 28, 2023[69][75] NOTE 4 – STOCK OPTIONS This note provides information on the Company's stock option activity and related compensation expenses Stock Option Activity (Three months ended March 31, 2024) | Item | Number of Options | Average Exercise Price | | :------------------------ | :---------------- | :--------------------- | | Outstanding at Dec 31, 2023 | 84,999 | $36.97 | | Granted | 270,920 | $0.32 | | Outstanding at Mar 31, 2024 | 355,919 | $9.07 | | Exercisable at Mar 31, 2024 | 355,919 | $9.07 | - Stock options outstanding increased from 84,999 at December 31, 2023, to 355,919 at March 31, 2024, primarily due to 270,920 options granted with an average exercise price of $0.32[70] - Costs incurred for stock-options compensation for employees and directors were $120 thousand for the three months ended March 31, 2024, a decrease from $283 thousand in the prior year period[77] NOTE 5 – RELATED PARTIES This note discloses transactions and balances with related parties, including officers and affiliated entities Related Party Transactions (USD in thousands) | Item | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :---------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Sales to SDI Cuentas LLC | $45 | $12 | | Cost of sales from Next Communications INC | $565 | $0 | | Consulting fees to Angelo De Prado | $0 | $2 | | Consulting fees to Sima Maimon Bakhar | $0 | $2 | Balances with Related Parties and Officers (USD in thousands) | Item | March 31, 2024 | December 31, 2023 | | :---------------------------------------------------------------- | :------------- | :---------------- | | Arik Maimon (Chairman/CEO) | $73 | $73 | | Michael De Prado (Vice Chairman/President) | $96 | $99 | | Current assets - Related parties | $169 | $172 | | Next Communications INC (controlled by Arik Maimon) | $271 | $1,300 | | SDI Cuentas LLC. | $19 | $0 | | Current assets – Accounts receivables | $290 | $1,300 | | Total Due from related parties | $459 | $1,472 | - Sales to SDI Cuentas LLC increased from $12 thousand in Q1 2023 to $45 thousand in Q1 2024. Cost of sales from Next Communications INC, a company controlled by the CEO, was $565 thousand in Q1 2024, up from $0 in Q1 2023[80] NOTE 6 – SEGMENTS OF OPERATIONS This note provides financial information disaggregated by the Company's operating segments and product lines Revenue by Product (USD in thousands) | Product | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Telecommunications | $25 | $52 | | Wholesale telecommunication services | $569 | $0 | | Digital products and General Purpose Reloadable Cards | $45 | $12 | | Total revenues | $639 | $64 | Gross Loss by Product (USD in thousands) | Product | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Telecommunications | $14 | $(7) | | Wholesale telecommunication services | $4 | $0 | | Digital products and General Purpose Reloadable Cards | $(87) | $(52) | | Total Gross Loss | $(69) | $(59) | - Wholesale telecommunication services generated $569 thousand in revenue in Q1 2024, up from $0 in Q1 2023, becoming the largest revenue contributor. Digital products and GPR Cards revenue increased from $12 thousand to $45 thousand[87] NOTE 7 – SUBSEQUENT EVENTS This note describes significant events that occurred after the balance sheet date but before the financial statements were issued - On May 1, 2024, the Company signed a Letter of Intent with Sekur Private Data Ltd. for a possible share issuance of 30 million SWISF common shares. This includes 5 million shares for $500 thousand in working capital and 25 million shares for the transfer of the M&M Telecom MVNO Agreement and FCC 214 license, valued at $2.5 million after a 50% discount[90][91][92] - On May 16, 2024, the Company received a Notice of Termination of Contract from Sutton Bank, its prepaid issuing bank provider, and is evaluating alternative FinTech solutions[94] - On May 20, 2024, the Company acquired 19.99% of the membership interests of Cuentas SDI, LLC from OLB Group, Inc. for $215,500[95] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS This section discusses the Company's business, financial condition, and operational results, including forward-looking statements and performance analysis OVERVIEW AND OUTLOOK This subsection provides a strategic overview of the Company's business focus, market position, and future plans - The Company focuses on FinTech services, delivering mobile financial services, prepaid debit, and digital content to unbanked, underbanked, and underserved populations in the USA, particularly the Hispanic/Latino market[100][111][112][113] - The Company made equity investments in Florida real estate projects (Cuentas Casa) to provide affordable housing and plans to sell the Brooksville Property for $7.2 million, with Cuentas' pro rata portion of net proceeds (estimated $1.625 million-$1.9 million) to be used for working capital[102][143] - The Company is upgrading its fintech mobile app platform after disruptions in 2023 and is in final negotiations for a new banking partner following the termination notice from Sutton Bank[103][108] RESULTS OF OPERATIONS This subsection analyzes the Company's financial performance, including revenue, gross profit, and expenses, for the reporting period Revenue Comparison (USD in thousands) | Revenue Source | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Telecommunications | $25 | $52 | | Wholesale telecommunication services | $569 | $0 | | Digital products and General Purpose Reloadable Cards | $45 | $12 | | Total Revenue | $639 | $64 | - Total revenues increased significantly by $575 thousand (898%) from $64 thousand in Q1 2023 to $639 thousand in Q1 2024, primarily driven by $569 thousand in wholesale telecommunication services[118] Gross Profit (Loss) Comparison (USD in thousands) | Product | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Telecommunications | $14 | $(7) | | Wholesale telecommunication services | $4 | $0 | | Digital products and General Purpose Reloadable Cards | $(87) | $(52) | | Total Gross profit (loss) | $(69) | $(59) | - Gross loss increased slightly from $(59) thousand in Q1 2023 to $(69) thousand in Q1 2024. The digital product and GPR cards segment experienced a gross loss margin of 65% in Q1 2024 due to lower margins[123][124] Selling, General and Administrative Expenses (USD in thousands) | Expense Category | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Officers compensation | $152 | $227 | | Share-based compensation | $121 | $283 | | Professional services | $149 | $258 | | Maintenance and support services | $0 | $120 | | Selling and Marketing | $18 | $142 | | Total Selling, General and Administrative Expenses | $772 | $1,625 | - Selling, General and Administrative expenses decreased by $853 thousand (52%) from $1,625 thousand in Q1 2023 to $772 thousand in Q1 2024, mainly due to reductions in officer compensation, share-based compensation, maintenance, professional services, and marketing expenses[126] - Other income (expenses) shifted from $0 in Q1 2023 to an income of $398 thousand in Q1 2024, primarily due to a $491 thousand gain from the change in fair value of derivative warrants liability[130][131] - Net loss significantly decreased from $1,695 thousand in Q1 2023 to $445 thousand in Q1 2024, attributed to the decrease in selling and general administrative expenses and the gain from derivative warrants[132] Liquidity and Capital Resources This subsection discusses the Company's ability to meet its short-term and long-term financial obligations and its capital management strategies Liquidity Position (USD in thousands) | Item | March 31, 2024 | March 31, 2023 | | :------------------------ | :------------- | :------------- | | Total Current Assets | $492 | $1,760 | | Total Current Liabilities | $3,741 | $4,689 | | Working Capital Deficit | $(3,249) | $(2,929) | | Cash and Cash Equivalents | $28 | $205 | - The Company's working capital deficit increased from $(2,929) thousand at March 31, 2023, to $(3,249) thousand at March 31, 2024, primarily due to negative cash flow from operations, partially offset by financing activities[136] - Net cash used in operating activities was $310 thousand in Q1 2024, an improvement from $1,453 thousand in Q1 2023. Net cash provided by financing activities was $133 thousand in Q1 2024, mainly from short-term loans, a decrease from $4,315 thousand in Q1 2023[139][140][142] - The Company continues to face substantial doubt about its ability to continue as a going concern, with plans to secure additional financing and utilize proceeds from the Brooksville Property sale for working capital[137][143] Critical Accounting Policies Management's assumptions and judgments are crucial for financial statement preparation, with significant policies detailed in the 2022 Form 10-K - The preparation of financial statements requires management to make assumptions, estimates, and judgments affecting reported amounts. Significant accounting policies are described in Note 2 to the consolidated audited financial statements in the Company's 2022 Form 10-K[17] Recently Issued Accounting Standards New accounting pronouncements are not expected to materially impact the Company's consolidated financial statements upon adoption - New pronouncements issued but not effective as of March 31, 2024, are not expected to materially impact the Company's consolidated financial statements[18] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company, Cuentas, Inc. is exempt from market risk disclosures - As a smaller reporting company, the Company is exempt from providing quantitative and qualitative disclosures about market risk[19] ITEM 4. CONTROLS AND PROCEDURES. This section evaluates the effectiveness of disclosure controls and procedures and reports on changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This subsection assesses the effectiveness of the Company's disclosure controls and procedures - The Company's CEO and CFO concluded that disclosure controls and procedures were not effective as of March 31, 2024, to ensure timely accumulation and communication of required information to management for disclosure decisions[21][22] Changes in Internal Control over Financial Reporting This subsection reports on any material changes in the Company's internal control over financial reporting - There were no changes in the Company's internal control over financial reporting during the three-month period ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[23]