ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

The following discussion and analysis provide 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.

Company Overview

The Company is a corporation incorporated under the laws of Florida on September 21, 2005, which focuses on the business of using proprietary technology to provide e-banking and e-commerce services delivering mobile banking, online banking, prepaid debit and digital content services to the unbanked, underbanked and underserved communities. The Company’s exclusivity with CIMA’s proprietary software platform enables Cuentas to offer comprehensive financial services and additional robust functionality that is absent from other General-Purpose Reloadable Cards (“GPR”).

Operating Subsidiaries. The Company’s business operations are conducted primarily through its subsidiaries, described elsewhere in this report.

Properties. The Company’s headquarters are located in Miami, Florida.

The ecosystem includes a mobile wallet for digital currency, stored value card balances, prepaid telecom minutes, loyalty reward points, and purchases made in the Cuentas Virtual Marketplace. The Fintech Card is integrated with the Los Angeles Metro, Connecticut Transit Authority and Grand Rapids Transit system to store mass transit currency and pay for transit access via the Cuentas Digital Wallet

The Fintech Card stores products purchased in the Cuentas Virtual Market Place where Tier-1 retailers, virtual in-game currencies, Amazon Cash, and cellular telecom prepaid minutes “top ups”. Additionally, well-known brand name restaurants sell discounted prepaid gift cards in the Cuentas Virtual Marketplace.

The Latino Market

The name “Cuentas” is a Spanish word that has multiple meanings and was chosen for strategic reasons, to develop a close relationship with the Spanish speaking population. It means “Accounts” as in “bank accounts” and it can also mean “You can count on me” as in “Cuentas conmigo”. Additionally, it can be used to “Pay or settle accounts” (saldar cuentas), “accountability” (rendición de cuentas), “to be accountable” (rendir cuentas) and other significant meanings.

The U.S. Latino population numbers 43.8 million U.S. immigrants, according to the 2017 FDIC Survey. It excludes immigrants, illegal aliens and undocumented individuals. The FDIC defines the “unbankable” as those adults without an account at a bank or other financial institution and are considered to be outside the mainstream for one reason or another. The Federal Reserve estimated that there were approximately 55 million unbanked or underbanked adult Americans in 2018, which account for 22 percent of U.S. households. The Latino demographic is more distrusting of banking institutions and generally have more identification, credit, and former bank account issues more so than any other U. S. minority group.

The Fintech Card is positioned to service the Latino demographic with comprehensive financial products that do not require any visits to bank branches, and our fees are completely transparent via the Cuentas Digital Wallet and online banking. Most importantly our strategic banking partner, Sutton Bank, is able to use various forms of U.S. and some foreign government issued identification to confirm qualification.

The Cuentas General-Purpose Reloadable Card

The Cuentas Mastercard acts as a comprehensive banking solution marketed toward the over 20 million unbanked U.S. Latino community. The “unbanked” is described by the FDIC as those adults without an account at a bank or other financial institution and are considered to be outside the mainstream for one reason or another. The Cuentas Mastercard is enabling access to the U.S. financial system to those without the necessary paperwork to bank at a traditional financial institution while enabling greater functionality than a traditional bank account. This proprietary GPR card allows consumers that reside in the U.S. to acquire a Cuentas Mastercard using their SSN or ITIN together with their U.S. or Foreign Passport, Driver’s License, Matricula Consular or certain U.S. residency documentation. The Cuentas Mastercard’s funds are protected in an FDIC-insured bank account at the Issuing Bank. Functionality includes ATM withdrawals, direct deposit, cash reload, fee free Cuentas App to Cuentas App fund transfers and mobile banking capabilities, among other key features such as purchasing discounted gift cards and adding “mass transit credits” to digital accounts (available in California, Connecticut, Michigan and other cities in the future). Upcoming Cuentas App upgrades should also include international remittance and other services. Consumers are able to use funds in their account to purchase third party digital and gift cards (many at discounted prices), U.S. and international mobile phone top-ups, mass transportation and tolling access (available in select markets - Connecticut, Grand Rapids, MI, Los Angeles, CA, etc.) as well as digital content for virtual gaming, dining, shopping and cash reloads.

The Cuentas App is available for download now on the Apple App Store and on the Google Play Store for Android. The Cuentas App allows consumers to easily activate their Cuentas Mastercard, review their account balance and conduct certain financial transactions. Cuentas is introducing fee free fund transfers to friends, family and vendors that have their own Cuentas App, which will be a very useful feature to compete with other popular apps that charge fees for immediate fund transfers and availability on the same day.

The Cuentas Business Model

The Cuentas business model leverages profitability from multiple revenue sources, many of which are synergistic market segments.

The Cuentas Mastercard has several revenue centers. The Company receives a one-time activation charge for each activated Cuentas Mastercard and a monthly recurring charge. These charges were designed to be very reasonable to both consumers and the Company. In addition to these charges, Cuentas will receive a commission each time funds are loaded and reloaded to the Cuentas Mastercard.

The Cuentas Digital Wallet produces recurring revenue and is an integral part of the Cuentas offering. It will produce revenue each time that consumers purchase third party gift cards, digital access, mass transit tickets and mobile phone top-ups (U.S. and international) with most at discounted prices. The actual discount is shown to the consumer and is immediately applied to their purchase, so smart shoppers will be able to get everyday products and services at discounted prices.

In 2021 the Cuentas Digital Wallet is projected to add several new, profitable, mass market services including bill pay and international remittances.

Cuentas also offers rewards for free long distance calling to its cardholders (“Cuentas Rewards”) who earn value with certain transactions. Our target demographic uses both internet and prepaid calling services to communicate with family members around the U.S. and in their country. This added benefit is designed, at a very low cost, to provide extra benefits to our cardholders, which should help to maintain and solidify valuable relationships with them.

Prepaid Debit Card Market Overview

The Research and Markets report titled “Prepaid Card Market: Payment Trends, Market Dynamics, and Forecasts 2020 - 2025” released in January 2020 states that, “[i]n the United States, prepaid cards remain the preferred choice for the unbanked market segment....” It also states that “[t]he move towards a cashless society is substantial, further driving the prepaid card market.”

Major competitors to Cuentas are Green Dot, American Express Serve, Netspend Prepaid, Starbucks Rewards, Walmart Money card and Akimbo Prepaid.

Cuentas is strategically positioned in the marketplace to have a lower monthly fee and lower reload fees than most cards. Additional benefits and features should move the Cuentas Mastercard ahead of other offerings as consumers realize the value of the Cuentas Digital Wallet and the Cuentas Rewards program.

The Cuentas Technology platform

The Cuentas technology platform is comprised of CIMA Group’s Knetik and Auris software platforms (the “CIMA Licensed Technology”). The platform is built on a powerful integrated component framework delivering a variety of capabilities accessible by a set of industry standard REST-based API endpoints. In addition to handling electronic transactions such as deposits and purchasing, the platform will have the capability of organizing virtual currencies into wallets, essentially future proofing it in today’s evolving financial environment. It enables the organizing of the user’s monetary deposits into a tree-based set of wallets, through strictly enforced user permissions, to delineate proper controls in a tiered monetary asset organizational structure, thus providing a sound basis for family and/or corporate control and distribution of funds across individuals.

The platform also contains a sound and proven gamification engine, capable of driving user behaviors in a manner that entices and rewards using incentivization based on proven behavioral science patterns. At the heart of this gamification engine lies a proven and robust rules engine that can easily integrate and modify process flows and orchestrations between disparate platforms, allowing for a quick and easy integration of complex, orchestrated integrations between internal process automation and invocations of external systems. The platform will provide Android and iOS software for users to execute a wide variety of transactions including, but not limited to, account balances, account transfers and in-app purchases. User messaging are also integrated and are achieved via SMS, email, in-app messaging, and voice.

The user management application uses rich metadata CRM and single sign-on (“SSO”) to track user behavior and personalize the user experience. It is fully integrated with our Strategic Partners, scalable and manages the digital ecosystem entitlements. The platform can process both physical and virtual goods, digital assets, real time currency value exchange, virtual currency support with current exchange rates and support nontraditional assets, in addition to credit card, POS, debits, and digital wallet management.

The unique rules engine is capable of all aspects of gamification: badging, questing, leveling, points consumption, leader boards, loyalty and reward points and personalization with tracking and messaging to support behavior management. Business intelligence is used for reporting and communication of product management via Rate Deck Management, Pinless ANI Recognition, IV and Call Flows and Access Number Management. The platform has redundant reporting for enhanced billing and fraud control and integrates customer service with Business Intelligence and platform integrity. 

SDI NEXT

On December 6, 2017, the Company completed its formation of SDI NEXT Distribution LLC (“SDI NEXT”) in which it owns a 51% membership 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. 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 Reload (“GPR”) cards, prepaid gift cards, prepaid money transfer, prepaid utility payments, and other prepaid products. The completed formation of an established distribution business for third-party gift cards, digital content, mobile top up, financial services and digital content, which presently includes more than 31,600 U.S. active Point of Sale locations, including store locations, convenience stores, bodegas, store fronts, etc. The parties agreed that additional product lines may be added with unanimous decision by the Managing Members of the LLC. During 2018, it was agreed between the parties to distribute the Company’s recently announced CUENTAS GPR card and mobile banking solution aimed to the unbanked, underbanked and financially underserved consumers, making them available to customers at the more than 31,600 retail locations SDI NEXT presently serves. It was also agreed between the parties to renegotiate the terms of the Company’s investment in SDI NEXT once the development of the GPR card and the retail stores system are completed and the GPR card is ready for distribution in the retail locations of SDI NEXT. 

Strategic Partners

The graphic below illustrates Cuentas’ strategic agreements with Sutton Bank and InComm, Sutton Bank is the issuer of the Cuentas Mastercard while the InComm “Processor” relationship provides access to many third party products and services.

Sutton Bank (“Sutton”)

Sutton is our issuing bank for the Fintech Card. Sutton provides online banking, direct deposit, bank accounts, and debit functionality for our Cuentas Mastercards. Sutton is responsible for know your client (“KYC”) and Anti-Money Laundering (“AML”) compliance and enables customers to open Cuentas Prepaid Mastercard accounts electronically with non-conventional documentation that may not be accepted at traditional banks. They accept over 13 forms of identification, which, when used together with either Social Security or ITIN, can be used for confirmation of identity. These forms of identification include: Passport, Driver’s License, Matricula Consular and U.S. residency documentation, among others.

Interactive Communications International, Inc. (“InComm”)

On July 23, 2019, the Company entered into a Prepaid Services Agreement with InComm (the “InComm PSA”) to power and expand the Company’s GPR card network. InComm distributes gift and GPR cards through many major U.S. retailers and has long standing partnerships with over 1,000 of the most recognized brands that are eligible for Cuentas’ Discount Purchase Platform.

Under the InComm PSA, InComm will act as prepaid card processor and through its VanillaDirect network, expand the Company’s ability for cardholders to reload their Prepaid Cuentas Mastercards through a nationwide network of retailers. VanillaDirect is currently available at major retailers such as: Walmart, 7-Eleven, Walgreens, CVS Pharmacy, Rite Aid and many more. In addition, the Company is planning to implement the Vanillacash reload services into up to 31,600 U.S. locations through which it has access.

Under the InComm PSA, InComm will provide processing services, telephone support, data storage services, account servicing, reporting, output and hot carding services to the Company. Processing services will consist mainly of authorization and transaction processing services whereby InComm will process authorizations for transactions made with or on a prepaid product, along with any payments or adjustments made to a prepaid product. InComm will also process the Company’s data and post entries in accordance with the specifications. Data storage services will consist mainly of storage of the Company’s data in a format that is accessible online by the Company through APIs designated by InComm, subject to additional API and data sharing terms and conditions. InComm will also provide Web/API services for prepaid Cuentas GPR applications and transactions.

In consideration for InComm’s services the Company agreed to pay an initial program setup and implementation fees in the amount of $500,000, of which, $300,000 was paid in 2020. Cuentas will then pay $50,000 each year at the beginning of the second, third, fourth and fifth anniversary of the agreement. In addition, the Company agreed to pay a minimum monthly fee of $30,000 starting October 2020, $50,000 during the second year following the launch of the Cuentas Mastercard and $75,000 thereafter. The Company also agreed to pay 0.25% of all funds added to the Cuentas Mastercards, excluding VanillaDirect Reload Network and an API Services fee of $0.005 per transaction. The Company may pay other fees as agreed between the Company and InComm.

Cuentas is currently offering discounted prices to its cardholders, through the Cuentas Wallet for the digital products and services illustrated in the graphic below. We intend to work to increase the quantity of offerings considerably in the future.

The below graphic illustrates the elements that Cuentas has strategically developed to provide marketplace advantages.

The Cuentas Competitive GPR Advantages

Cuentas’ strategic overview to augment growth and minimize churn is illustrated in the graphic below. The goal is to offer the consumer a one-stop shop, easy to use, mobile wallet that can solve many of their daily needs and desires while saving them time and money.

The Cuentas ECO System

The Western Union Company (“Western Union”)

On December 8, 2020, the Company entered into an Agency Agreement with Western Union whereby the Company is appointed as Western Union’s delegate and authorized to offer Western Union Money Transfer Services. This cooperation would allow Cuentas cardholders to transfer money internationally via the Western Union network directly from the Cuentas Mobile App. Western Union has been providing money transfer services around the world for more than a century and currently has more than 500,000 agent locations worldwide.

Agreements and Arrangements with CIMA

License Agreement with CIMA

On December 31, 2019, the Company entered into a Platform Exclusive License Agreement with CIMA Telecom, Inc. (“CIMA”) and two subsidiaries of CIMA (the “CIMA License Agreement”). Pursuant to the CIMA License Agreement, the Company has an exclusive, non-transferable, non-sublicensable, royalty-free license to access and use the CIMA Licensed Technology in the form provided to the Company via the Hosting Services (as defined in the CIMA License Agreement) and solely within the Fintech space for the Company’s business purposes. Under the CIMA License Agreement, CIMA received a one-time licensing fee in the amount of $9,000,000 in the form of a convertible note that may be converted, at the option of CIMA, into up to 25% of the total shares of Common Stock of the Company on a fully diluted basis as of December 31, 2019. The transactions with CIMA closed on December 31, 2019 (the “CIMA Transaction Closing”). Pursuant to the CIMA License Agreement, the Company shall pay CIMA annual fees for the maintenance and support services in accordance with the following schedule: (i) for the first calendar year from the CIMA Transaction Closing, $300,000 to be paid on June 30, 2020; (ii) for the second calendar year from the CIMA Transaction Closing, $500,000 to be paid on December 31, 2020; (iii) for the third calendar year from the CIMA Transaction Closing, $700,000 to be paid on December 31, 2021; (iv) for the fourth) calendar year from the CIMA Transaction Closing, $1,000,000 to be paid on December 31, 2022; (v) for the fifth calendar year from the CIMA Transaction Closing, $640,000 to be paid on December 31, 2022; and (vi) for each calendar year thereafter, $640,000 to be paid on the anniversary date.

Contemporaneously with the CIMA Transaction Closing, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) by and between the Company, CIMA and Dinar Zuz LLC (“Dinar”), pursuant to which the Company made and sold (i) to CIMA a 3% convertible promissory note (the “CIMA Convertible Promissory Note”) in the principal amount of $9,000,000 and (ii) a warrant to each of CIMA and Dinar (as described below). The Purchase Agreement contained customary representations, warranties, covenants, and conditions, including indemnification. Among other conditions to closing, the Company has agreed to take all necessary steps to amend and restate its Articles of Incorporation and to amend and restate its Bylaws.

On December 31, 2019 and pursuant to the CIMA Convertible Promissory Note, CIMA exercised its option to convert the CIMA Convertible Promissory Note into 702,992 shares of Common Stock of the Company.

Warrants

Contemporaneously with the CIMA Transaction Closing, the Company made and sold a warrant to each of (a) CIMA (the “CIMA Warrant”) and (b) Dinar (the “Dinar Warrant”), each in accordance with the Purchase Agreement. Pursuant to the CIMA Warrant and Dinar Warrant, upon exercise, each of CIMA and Dinar shall be entitled to purchase from the Company, in the aggregate, an amount of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock equal to 25% of total outstanding shares of the Company on a fully-diluted basis (taking into account any warrants, options, debt convertible into shares or other rights underlying shares of the Company) as of the conversion date; provided, however, that each of the CIMA Warrant and Dinar Warrant shall increase to include 25% of any additional shares (or warrants, options, debt convertible into shares or other rights underlying shares of the Company) of the Company only to the extent such shares are issued in breach of the Voting Agreement (as defined below). Pursuant to their terms, the CIMA Warrant and Dinar Warrant were exercisable, in whole and not in part during the term commencing on December 31, 2019 and ending on the earlier of (a) thirty days following the date on which the Company amends and restates its Articles of Incorporation, which is amendment and restatement is filed with and accepted by the Secretary of State of the State of Florida or (b) upon a Change of Control, as defined in such warrants. At that point, the Warrants are automatically exercised. On September 17, 2020, the Company issued 2,000,000 of its Common Stock to each of Dinar and CIMA, under the automatic exercise of the warrants.

Voting Agreement

Contemporaneously with the CIMA Transaction Closing, on December 31, 2019, the Company, CIMA, Dinar, Arik Maimon and Michael De Prado entered into a Voting Agreement (the “Voting Agreement”). Pursuant to the Voting Agreement, each of CIMA, Dinar and Mr. De Prado shall have the right to designate one director to the Board, and Mr. Maimon will have the right to designate two directors to the Board as promptly as practicable after the CIMA Transaction Closing. At each meeting of the Company’s shareholders at which the election of directors is to be considered, each of CIMA, Dinar, Mr. Maimon and Mr. De Prado shall have the right to designate one nominee for election at such meeting. Additionally, the Company has granted CIMA board observer rights whereby CIMA shall have the right to invite one representative to attend all meetings of the Board in a non-voting observer capacity. The size of the Board and appointee rights are subject to change in the event that the Company’s shares of Common Stock become listed on Nasdaq. Furthermore, pursuant to the Voting Agreement, each of Mr. Maimon and Mr. De Prado appointed each of CIMA and Dinar as their proxy and attorney-in-fact, with full with full power of substitution and resubstitution, to vote or act by written consent with respect to the shares of Voting Stock (as defined in the Voting Agreement) representing each individual’s pro rata percentage of the CIMA Proxy Stock and Dinar Proxy Stock (each as defined in the Voting Agreement), as may be recalculated from time to time subject to the terms and conditions of the Voting Agreement until the CIMA Warrant and Dinar Warrant are exercised, respectively. CIMA’s rights under the Voting Agreement automatically terminate upon the earliest to occur of: (a) the termination of the CIMA License Agreement; (b) the payment in full of all outstanding principal, accrued and unpaid interest, and all other amounts required to be paid by the Company to CIMA under the Debenture in cash and not as a result of the conversion of the debenture in the principal amount of $9,000,000 that is convertible into Common Stock of the Company; or (c) after the conversion of the Debenture into Common Stock of the Company, the date on which CIMA ceases to own 5% or more of the issued and outstanding Common Stock of the Company. Dinar’s rights under the Voting Agreement automatically terminate when Dinar ceases to own 5% or more of the issued and outstanding Common Stock of the Company.

Pledge Agreement

The Company also entered into an Asset Pledge Agreement with CIMA (the “Pledge Agreement”) pursuant to which the Company unconditionally and irrevocably pledged all of its rights, title and interest in and to the Licensed Technology and any rights and assets granted pursuant to the CIMA License Agreement to CIMA as a guarantee for the full and punctual fulfillment of its obligations under certain provisions of the Voting Agreement, which terms expire upon the exercise of the CIMA Warrant and Dinar Warrant, respectively, and the issuance of the securities under the CIMA Convertible Promissory Note and the CIMA Warrant. This occurred on September 21, 2020 and the Pledge Agreement expired.

Side Letter Agreement

Contemporaneously with the CIMA Transaction Closing, the Company, Mr. Maimon, Mr. De Prado, Dinar and CIMA entered into a side letter agreement (the “CIMA Side Letter”), dated December 31, 2019. Pursuant to the CIMA Side Letter, for as long as the CIMA License Agreement is in effect, the convertible promissory note (the “CIMA Convertible Note”) is outstanding and unpaid, or CIMA is a shareholder of the Company and owns at least 5% of the Company’s Common Stock, in addition to any other vote or approval required under the Company’s Articles of Incorporation, Bylaws, or any other agreement, each as amended from time to time, the Company has agreed not to take certain actions without certain approval thresholds of the directors appointed by CIMA, Dinar, Mr. Maimon and Mr. De Prado. These negative covenants restrict, among other things, the Company’s ability to incur additional debt, alter certain employment agreements currently in place, enter into any consolidation, combination, recapitalization or reorganization transactions, and issue additional capital stock. Additionally, pursuant to the CIMA Side Letter, upon conversion of the CIMA Convertible Note by CIMA, Cuentas shall have the primary right of first refusal, and each of Dinar, Mr. De Prado and Mr. Maimon have a secondary right of first refusal, to purchase any shares of Common Stock that CIMA intends to sell to the bona fide third party purchaser on the same terms and conditions as CIMA would have sold such shares of the Common Stock to any third party purchaser. Further, CIMA has a co-sale right to participate in a sale of shares of the Common Stock, in the event that Mr. De Prado, Mr. Maimon or any other director or officer of the Company holding greater than 1% of the Common Stock (on a fully diluted basis) proposes to sell any of his, her or its shares of Common Stock. In addition, CIMA and/or Dinar have been granted certain information rights, subject to their continued ownership of the CIMA Convertible Note or of 5% or more shares of the Company’s issued and outstanding Common Stock. Furthermore, pursuant to the CIMA Side Letter, upon a successful up-listing of the Company’s shares on Nasdaq, and once the market capitalization of the Company is greater than $50 million for a period of 10 consecutive trading days, each of Mr. Maimon and Mr. De Prado will have a right to earn a special bonus in the amount of $500,000 each.

Cuentas Mobile 

Cuentas Mobile is our Mobile Virtual Network Operator (“MVNO”), which provided NextMobile branded mobile phones and prepaid voice, text, and data mobile phone services to a customer base currently consisting of approximately 1,000 subscribers. The brand name of these services is being migrated to Cuentas Mobile. Cuentas Mobile operates this business pursuant to contracts with Sprint Corporation, which allow Cuentas Mobile to use T-Mobile’s (formerly Sprint)’s network infrastructure to operate a virtual telecommunications network providing voice, text, and data services of essentially the same quality as those Sprint provides to its own retail subscribers. MVNOs such as Cricket, Boost, Simple and Lyca Mobile have been successful at creating brands, without owning the towers, hardware or network. Cuentas is currently reactivating distribution projects through grass roots retailers that normally interact with Cuentas’ target audience, specifically offering low-cost mobile phone service with the ability to make international calls to specific Spanish speaking countries in Central and South America. 

Graphic Description: Sample of creative message planned for future advertising campaign.

We believe that our potential customers worldwide will migrate away from legacy telephone and banking systems to enhanced mobility solutions, the Company’s technological advantage and the synergies created by its unique combination of reloadable bank card and mobile virtual network operator rights will make its products increasingly useful to unbanked, under-banked, under-served and other emerging niche markets.

Meimoun & Mammon LLC

Meimoun & Mammon LLC (“M&M”) is a retail provider of domestic and international long-distance voice, text, and data telephony services to consumers in the United States and throughout the world. M&M holds International and Domestic Section 214 authority issued by the FCC. M&M operates the retail Tel3 business as a separate division.

M&M uses both private and public Internet services to function as the backbone of the M&M Network.

Regulatory Compliance

We operate in an ever-evolving and complex legal and regulatory environment. We, the products and services that we offer and market, and those for which we provide processing services, are subject to a variety of federal, state and foreign laws and regulations, including, but not limited to: federal communications laws and regulations; foreign jurisdiction communications laws and regulations; federal anti-money laundering laws and regulations, including the Patriot Act, the BSA, anti-terrorist financing laws and anti-bribery and corrupt practice laws and regulations in the U.S., and similar international laws and regulations, including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in Canada; state unclaimed property laws and money transmitter or similar licensing requirements; federal and state consumer protection laws, including the CARD Act, and the Dodd-Frank Act, and regulations relating to privacy and data security; and foreign jurisdiction payment services industry regulations.

Our subsidiaries Cuentas Mobile and M&M are subject to regulation by the FCC and other government agencies and task forces. M&M holds International and Domestic Section 214 licenses issued by the FCC, which may be suspended or revoked by the FCC if M&M does not strictly comply with all applicable regulations and the terms and conditions under which the International and Domestic Section 214 licenses were issued. Cuentas Mobile and M&M are also subject to foreign jurisdiction communications laws and regulations. We believe that we, including our subsidiaries, are currently operating in compliance with all applicable laws and regulations, but there is no certainty that laws and regulations affecting our business will not change. Any such change of laws and regulations applicable to our business might adversely affect our ability to execute our business plan and achieve profitable operating results.

At the federal level, Congress and federal regulatory agencies have enacted and implemented new laws and regulations that affect the prepaid industry, such the CARD Act and FinCEN’s Prepaid Access Rule. Moreover, there are currently proposals before Congress that could further substantially change the way banks, including prepaid card issuing banks and other financial services companies, are regulated and are permitted to offer their products to consumers. Non-bank financial services companies, including money transmitters and prepaid access providers, are now regulated at the federal level by the Consumer Financial Protection Bureau (the “CFPB”), which began operations in July 2011, bringing additional uncertainty to the regulatory system and its impact on our business. We are increasingly facing more stringent anti-money laundering rules and regulations, compliance with which may increase our costs of operation, decrease our operating revenues and disrupt our business. Abuse of our prepaid products for purposes of financing sanctioned countries, terrorist funding, bribery or corruption could cause reputational or other harm that could have a material adverse effect on our business, results of operations and financial condition. Failure to comply with, or further expansion of, consumer protection regulations could have a material adverse effect on our business, results of operations and financial condition. Failure by us to comply with federal banking regulation may subject us to fines and penalties and our relationships with our issuing banks may be harmed.

Most states regulate the business of sellers of traveler’s checks, money orders, drafts and other monetary instruments, which we refer to collectively as money transmitters. While many states expressly exempt banks and their agents from regulation as money transmitters, others purport to regulate the money transmittal businesses of bank agents or do not extend exemptions to non-branch bank agents. In those states where we are required to be licensed, we are subject to direct supervision and regulation by the relevant state banking departments or similar agencies charged with enforcement of the money transmitter statutes and must comply with various restrictions and requirements, such as those related to the maintenance of certain levels of net worth, surety bonding, selection and oversight of our authorized delegates, permissible investments in an amount equal to our outstanding payment obligations with respect to some of the products subject to licensure, recordkeeping and reporting, and disclosures to consumers. We are also subject to periodic examinations by the relevant licensing authorities, which may include reviews of our compliance practices, policies and procedures, financial position and related records, various agreements that we have with our issuing banks, retail distribution partners and other third parties, privacy and data security policies and procedures, and other matters related to our business. As a regulated entity, Cuentas may incur significant costs associated with regulatory compliance. We anticipate that compliance costs and requirements will increase in the future for our regulated subsidiaries and that additional subsidiaries will need to become subject to these or new regulations. If we fail to maintain our existing money transmitter licenses or permits, or fail to obtain new licenses or permits in a timely manner, our business, results of operations and financial condition could be materially and adversely affected.

Recent Developments

COVID-19

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020 the World Health Organization characterized the outbreak as a “pandemic”. A significant outbreak of COVID-19 and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, as well as our business and operations. The extent to which COVID-19 impacts our business and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our business and results of operations may be materially adversely affected. 

Amendment to Bylaws

On December 30, 2020, in connection with the Company’s IPO, the Company amended its Bylaws to, among other items:

Reverse Split

On January 28, 2021, the Company filed Articles of Amendment to the Articles of Incorporation of the Company with the Secretary of State of Florida, pursuant to which, effective as of February 2, 2021, the Company effected a 1-for-2.5 reverse split of its authorized and issued and outstanding shares of Common Stock. No fractional shares will be issued as a result of the reverse stock split. Fractional shares will be rounded up the nearest whole share, after aggregating all fractional shares held by a stockholder.

On February 4, 2021 the Company sold an aggregate of 2,790,697 units at a price to the public of $4.30 per unit (the “Offering”), each unit consisting of one share of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and a warrant exercisable for five years to purchase one share of Common Stock at an exercise price of $4.30 per share (the “Warrants”), pursuant to that certain Underwriting Agreement, dated as of February 1, 2021 (the “Underwriting Agreement”), between the Company and Maxim Group LLC (the “Representative” or “Maxim”), as representative of the sole underwriter. In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to 418,604 additional shares of Common Stock, and/or 418,604 additional Warrants, to cover over-allotments in connection with the Offering. The Company received gross proceeds of approximately $12.0 million, before deducting underwriting discounts and commissions of 8% of the gross proceeds and estimated Offering expenses. Pursuant to the Underwriting Agreement, the Company also issued to the Underwriter warrants (the “Underwriter’s Warrants”) to purchase up to a total of 223,256 shares of Common Stock (8% of the shares of Common Stock sold in the Offering). The Underwriter’s Warrants are exercisable at $5.375 per share of Common Stock and have a term of five years.

The total expenses of the offering were approximately $1.4 million, which included Maxim’s expenses relating to the offering.

On March 4, 2021 and pursuant to the Underwriting Agreement, Maxim exercised its 45-day option to purchase up to 418,604 additional Warrants, to cover over-allotments in connection with the Offering.

Entry into and Repayment of a Short-Term Loan with Labrys Funds LP

On September 2, 2020, the Company issued the Labrys Note to Labrys Funds LP (“Labrys”). The Labrys Note bears interest at a rate of 12% per annum, and was to mature on September 2, 2021. An amortized, monthly payment of principal and interest in the sum of $67,760 started in December 2020, with ability to extend the starting date of such amortized payments for up to two months upon notice, and the remaining loan principal becomes payable on maturity. The Labrys Note had an original issue discount in the amount of $60,500, and the issuing expenses were $40,000, resulting in net proceeds of $505,000. The Company also issued 70,906 shares of its Common Stock to Labrys. Out of those, 16,500 shares of Common Stock were issued in consideration of a commitment fee and the balance are subject to return to the Company once the Labrys Note is paid in full, if there were no defaults. In the event of a default, as defined in the Labrys Note, Labrys would have the right, to convert all or any portion of the then outstanding and unpaid principal amount and interest into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the date of the Labrys Note, or any shares of capital stock or other securities of the Company into which such Common Stock shall be changed or reclassified, at the conversion price as set forth in the Labrys Note. On February 12, 2021, the Company prepaid its loan to Labrys and Labrys returned the Second Commitment shares to the Company. 

Results of operations for the three months ended March 31, 2021 and 2020

Revenue

Revenues during the three months ended March 31, 2021 totaled $225,000 compared to $134,000 for the three months ended March 31, 2020. The Company generated most of its revenue through the sale and distribution of prepaid telecom minutes, digital products and other related telecom services. The Company have generated sales from its Fintech products and services in the amount of $18,000 during the first quarter of 2021.

Costs of Revenue

Costs of revenue consists of the purchase of wholesale minutes for resale and related telecom platform costs. Cost of revenues during the three months ended March 31, 2021 totaled $ 247,000 compared to $177,000 for the three months ended March 31, 2020. Cost of revenue consists mainly of the purchase of wholesale minutes for resale, related telecom platform costs and purchase of digital products. Cost of revenue also consisted from cost related to the sale of the Company’s GPR Card in the amount of $92,000 due to additional developments and testing that the Company conducted on its GPR product.

Gross Loss

Gross loss is the net loss existing after the cost of sales. Gross loss decreased to a loss of $22,000 for the quarter ended March 31, 2021, as compared to a loss of $47,000 for the same period in the prior year. The decrease in gross profit for the quarter ended March 31, 2021, as compared to the same period in the prior year, was primarily a result of higher profits in our telecom business.

Stock-based Compensation and shares issued for services

Stock-based compensation and shares issued for services expenses decreased to $276,000 from $1,125,000 as a result of fewer issuance of shares issued for employees and for service providers.

Other Selling, General and Administrative Expenses

Other selling, general and administrative expenses totaled $862,000 during the three months ended March 31, 2021 compared to $1,414,000 during the three months ended March 31, 2020 representing a net decrease of $552,000. The decrease in the operating expenses is mainly due to a one-time fee implantation fee in the amount of $300,000 that was paid to Incomm during the three months ended March 31, 2020

Amortization of Intangible assets

Amortization of Intangible assets totaled $452,000 for the quarter ended March 31, 2021 and $450,000 for the quarter ended March 31, 2020, respectively. The increase is due to the amortization of the domain cuemtas.com which was purchased by the Company during the quarter ended March 31, 2021 in consideration of approximately $47,000.

Operating Expenses

Operating expenses totaled $1,590,000 during the three months ended March 31, 2021 compared to $2,539,000 during the three months ended March 31, 2020 representing a net decrease of 945,000. The decrease in the operating expenses is mainly due to decrease in Stock based compensation and shares issued for services.

Other Income 

The Company recognized other expense of $63,000 during the three months ended March 31, 2021 compared to an income $422,000 during the three months ended March 31, 2020. The net change from the prior period is mainly due to the change in our stock-based liabilities and interest expenses that we occurred. Gain from Change in Fair Value of stock-based liabilities for the three-month period ended March 31, 2021 was $56,000 as compared to a gain of $359,000 for the three-month period ended March 31, 2020. The gain (loss) is attributable to the decrease in the Fair Value of our stock-based liabilities mainly due to the decrease (increase) in the price of share of our common stock.

Net Income (Loss) 

We incurred a net loss of $1,675,000 for the three-month period ended March 31, 2021, as compared to a net loss of $2,163,000 for the three-month period ended March 31, 2020.

We may incur future operating losses. To regain and sustain profitability, we must, among other things, incrementally grow and maintain our customer base, sell our GPR products to existing and new customers, implement successful marketing strategies, maintain and upgrade our technology and transaction-processing systems, provide superior customer service, respond to competitive developments, attract, retain and motivate personnel, and respond to unforeseen industry developments among other factors.

We believe that our success will depend in large part on our ability to (a) grow sales, (b) manage our operating expenses, (c) add customers to our client base, (d) meet evolving customer requirements and (e) adapt to technological changes in an emerging market. We continue to invest in our sales force and technology platforms to drive revenue growth.

Inflation and Seasonality

In management’s opinion, our results of operations have not been materially affected by inflation or seasonality, and management does not expect that inflation risk or seasonality would cause material impact on our operations in the future.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

As of March 31, 2021, the Company had $6,482,000 of cash, total current assets of $6,727,000 and total current liabilities of $3,249,000 creating a working capital of $3,478,000. As of December 31, 2020, the Company had $227,000 of cash, total current assets of $296,000 and total current liabilities of $6,480,000 creating a working capital deficit of $6,184,000. The increase in our working capital deficit was mainly attributable to the decrease in Accounts Payables in the amount of 1,952,000, decrease in our other Accounts Payables in the amount of 1,376,000 and increase in our Cash and Cash equivalents in the amount of $6,255,000.

On February 4, 2021 the Company sold an aggregate of 2,790,697 units at a price to the public of $4.30 per unit (the “Offering”), each unit consisting of one share of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and a warrant exercisable for five years to purchase one share of Common Stock at an exercise price of $4.30 per share (the “Warrants”), pursuant to that certain Underwriting Agreement, dated as of February 1, 2021 (the “Underwriting Agreement”), between the Company and Maxim Group LLC (the “Representative” or “Maxim”), as representative of the sole underwriter. In addition, pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase up to 418,604 additional shares of Common Stock, and/or 418,604 additional Warrants, to cover over-allotments in connection with the Offering. The Company received gross proceeds of approximately $12.0 million, before deducting underwriting discounts and commissions of 8% of the gross proceeds and estimated Offering expenses. Pursuant to the Underwriting Agreement, the Company also issued to the Underwriter warrants (the “Underwriter’s Warrants”) to purchase up to a total of 223,256 shares of Common Stock (8% of the shares of Common Stock sold in the Offering). The Underwriter’s Warrants are exercisable at $5.375 per share of Common Stock and have a term of five years. The total expenses of the offering were approximately $1.4 million, which included Maxim’s expenses relating to the offering.

On February 12 2021 the Company prepaid its loan to Labrys and Labrys returned the Second Commitment shares to the Company. The prepayment amount was approximately $635,000.

On March 5, 2021 the Company prepaid its loan to Dinar Zuz. The prepayment amount was approximately $378,000.

On April 20, 2021 the Company paid off its convertible promissory note and accrued interest in the amount of $260,000 to the private investor. The Company paid an amount equal to $125,000 plus $ 5,000, which represents the amount of interest accrued on such $125,000 since the date on which the loan was made under the Note through April 16, 2021. In addition, The Company issued 30,233 shares of Common Stock of the Company. The Company issued such shares in reliance on the exemptions from registration pursuant to Section 4(a)(2) of the Securities Act.

Cash Flows

Net cash used in operating activities was $3,356,000 for the three-month period ended March 31, 2021, as compared to cash used in operating activities of $738,000 for the three-month period ended March 31, 2020. The Company’s primary uses of cash have been for professional support and working capital purposes.

Net cash used in investing activities was $47,000 for the three-month period ended March 31, 2021. Net cash used in investing activities was $0 for the three-month period ended March 31, 2020. 

Net cash provided by financing activities was approximately $9,658,000 for the three-month period ended March 31, 2020, as compared to net cash provided by financing activities was approximately $743,000 for the three-month period ended March 31, 2020.

Due to our operational losses, we have principally financed our operations through the sale of our Common Stock and the issuance of convertible debt.

We have principally financed our operations through the sale of our Common Stock to private investors, issuance of convertible loans debt and loans from our shareholders.

Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. Such risks for us include, but are not limited to, an evolving and unpredictable business model and the management of growth.

To address these risks, we must, among other things, implement and successfully execute our business and marketing strategy surrounding the Cuentas Mastercard, continually develop and upgrade our website, respond to competitive developments, lower our financing costs and specifically our accounts receivable factoring costs, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

Off-Balance Sheet Arrangements

As at March 31, 2021, we had no off-balance sheet arrangements of any nature.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. Note 3 to our consolidated audited financial statements filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 describes the significant accounting policies and methods used in the preparation of our financial statements. We consider our critical accounting policies to be those related to share-based payments because they are both important to the portrayal of our financial condition and require management to make judgments and estimates about uncertain matters.

Recently Issued Accounting Standards 

New pronouncements issued but not effective as of March 31, 2021 are not expected to have a material impact on the Company’s consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

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