ALF Centurion Acquisition Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ 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: 001-40294

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

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Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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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. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

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As of July 29, 2022, there were 16,094,882 shares of the Company’s common stock, par value $0.0001, outstanding.

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ALFI, INC.

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See accompanying notes to the consolidated financial statements

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See accompanying notes to the consolidated financial statements

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See accompanying notes to the consolidated financial statements

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ALFI, INC.

f/k/a LECTREFY, INC.

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The Company’s primary source of operating funds since inception through April 2021 was cash proceeds from the private placements of preferred equity and debt securities. During 2021, the Company completed its initial public offering (“IPO”) yielding net proceeds to the Company of approximately $15.7 million from the sale of the Company’s common stock, par value $0.0001 (the “Common Stock”), and warrants and approximately $16.0 million from the exercise of warrants. The capital raised included funding for working capital to launch and expand operations in accordance with its business model.

On April 12, 2022, the Company entered into a Credit and Security Agreement (as may be amended from time to time, the “Credit Agreement”) with a related party lender pursuant to which the Company could borrow under a revolving line of credit up to $2,500,000 for up to one year. On June 27, 2022, the Company and the related party lender entered into Amendment No. 1 to the Credit and Security Agreement (“Amendment No. 1”) and an Amended and Restated Non-Revolving Line of Credit Note (the “Amended Note”), pursuant to which the non-revolving line of credit available to the Company from the related party lender was increased to $2,750,000. The Company’s ability to draw on the non-revolving line of credit, to the extent available under the Credit Agreement, is in the related party lender’s sole discretion and subject to the Company requesting such additional funds from the related party lender in accordance with the Credit Agreement, the accuracy of the Company’s representations in the Credit Agreement and related documents, and that no default under the Credit Agreement has occurred and is continuing under the Credit Agreement.

Through June 30, 2022, the related party lender funded to the Company $2,750,000 under the Credit Agreement. The Amended Note matures on the earlier of: (i) the date upon which the Company consummates a debt or equity financing in an amount equal to or greater than $4,000,000 or (ii) April 12, 2023.

The Company has borrowed the maximum amount available under the Credit Agreement. Since its inception, the Company has generated only nominal revenue from customers and business activity and currently has very limited cash on hand. The Company is endeavoring to raise additional capital through debt or equity financing, but there is no assurance that additional capital will be available on terms acceptable to the Company or will be sufficient to enable the Company to complete its development activities or sustain operations. If the Company is unable to raise sufficient additional capital to sustain operations, then it will have to further extend payables, reduce overhead, or scale back its current business plan until such additional capital is raised, any of which could have a material adverse effect on the Company. There is no assurance that such a plan will be successful. If the Company is unable to raise sufficient additional capital to sustain operations, then the Company will be required to pursue other alternatives which may include selling assets, selling or merging its business, ceasing operations or filing a petition for bankruptcy (either liquidation or reorganization) under applicable bankruptcy laws.

Accordingly, the accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

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NOTE 4 RESTATEMENTS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Prior Period Restatements

On March 11, 2022, the Audit Committee (the “Audit Committee”) of the Company’s Board of Directors (the “Board”) and the Company’s management concluded that the previously issued audited financial statements for the years ended December 31, 2019 and 2020, included in the Company’s Registration Statement on Form S-1 (File No. 333-251959), and the Company’s previously issued interim financial statements included in the Company’s Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2021 and June 30, 2021 (collectively, the “Prior Period Financial Statements”), should no longer be relied upon as a result of the accounting errors described below and should be restated. Similarly, any previously furnished or filed reports, press releases, earnings releases, investor presentations or other communications describing the Prior Period Financial Statements and related financial information should not be relied upon.

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In connection with the Company’s evaluation of the issues and findings identified in the Company’s previously disclosed internal independent investigation (the “Investigation”), the Company reviewed the Prior Period Financial Statements and identified the following accounting errors:

On May 16, 2022, the Company filed interim consolidated financial statements restated to correct the accounting errors and conform to current period presentation in an Amendment No. 1 to the  Quarterly Report on Form 10-Q/A for the quarter and six months ended June 30, 2021. The interim consolidated financial statements for the periods ended June 30, 2021, included in this Quarterly Report reflect all such restatements.

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NOTE 5 FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures the fair value of financial assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company also follows a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 — inputs that are unobservable based on an entity’s own assumptions, as there is little, if any, related market activity (e.g., cash flow modeling inputs based on assumptions).

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The risk-free interest rate is the United States Treasury rate on the measurement date having a term equal to the remaining contractual life of the instrument. The volatility is a measure of the amount by which the comparable companies’ share price has fluctuated or is expected to fluctuate. Since the Common Stock was not publicly traded prior to the IPO, an average of the historical volatility of comparative companies was used.

Level 3 financial assets and liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of fair value. The determination of fair value and the assessment of a measurement's placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management's assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods.

An increase or decrease in volatility or interest free rate, in isolation, can significantly increase or decrease the fair value of financial assets and liabilities. Changes in the values of the assets and liabilities are recorded as a component of other income (expense) on the accompanying consolidated statement of operations.

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Non-financial assets that are measured on a non-recurring basis include our intellectual property and property and equipment which are measured using fair value techniques whenever events or changes in circumstances indicate a condition of impairment exists.

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NOTE 6 DEBT – RELATED PARTIES

On April 12, 2022, the Company entered into the Credit Agreement with Lee Aerospace, Inc. (“Lee Aerospace”), as lender, pursuant to which the Company could borrow under a non-revolving line of credit up to $2,500,000 for up to one year. The lender is wholly owned by an entity which is majority owned and controlled by James Lee, the Company’s Chairman of the Board. Mr. Lee is also President of the lender. In addition, Mr. Lee and the lender, together, beneficially own over 30% of the Common Stock. Mr. Lee also was appointed as the Company’s Interim Chief Executive Officer effective July 22, 2022.

On June 27, 2022, the Company and the related party lender entered into Amendment No. 1 and the Amended Note, pursuant to which the non-revolving line of credit available to the Company from the related party lender was increased to $2,750,000. The Amendment No. 1 and the Amended Note do not otherwise amend the terms of the Credit Agreement and related documents. Through June 30, 2022, the related party lender funded to the Company $2,750,000 under the Credit Agreement.

The Company’s ability to draw on the non-revolving line of credit, to the extent available under the Credit Agreement, is in the related party lender’s sole discretion and subject to the Company requesting such additional funds from the related party lender in accordance with the Credit Agreement, the accuracy of the Company’s representations in the Credit Agreement and related documents, and that no default under the Credit Agreement has occurred and is continuing under the Credit Agreement. The Amended Note matures on the earlier of (i) the date upon which the Company consummates a debt or equity financing in an amount equal to or greater than $4,000,000 or (ii) April 12, 2023. Borrowings under the Credit Agreement are collateralized by a security interest in the Company’s assets. Interest on the unpaid principal amount accrues an annual rate of 6% through October 12, 2022 and an annual rate of 9% thereafter, except that in event of default additional penalty interest at an annual rate of 3% will accrue on borrowings through October 12, 2022. In connection with the Credit Agreement, the Company issued a warrant to the related party lender on April 12, 2022, pursuant to which the related party lender may purchase up to 1,250,000 shares of the Common Stock at a price of $1.51 per share. The warrant is exercisable on or after July 12, 2022 and expires on April 12, 2025. Management valued the warrant at $1,281,817 and recorded that amount as a debt discount. The debt discount is being amortized and recorded as interest expense over the term of the Amended Note.

Debt payable, related parties at June 30, 2022 of $1,745,617 is comprised of $2,750,000 payable pursuant to the Credit Agreement, net of unamortized debt discount of $1,004,383. During the three and six months ended June 30, 2022, the Company accrued interest expense on debt payable to related parties of $293,734 and $293,734, respectively.

During the three and six months ended June 30, 2021, the Company accrued interest expense on debt payable to related parties of $561,786 and $918,700, respectively. All borrowings from related parties outstanding immediately prior to the IPO in May 2021 were paid in full upon completion of the IPO. Debt payable to related parties immediately prior to the IPO included the following notes and loans:

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NOTE 7 COMMITMENTS AND CONTINGENCIES

Concentration of Credit Risk

Generally, the Company’s cash balances, which are deposited in non-interest-bearing accounts may exceed FDIC insurance limits from time to time. The financial stability of these institutions is periodically reviewed by senior management. At June 30, 2022, and December 31, 2021, cash balances in excess of FDIC requirements were $-0- and $4,141,816, respectively.

Litigation, Claims, and Assessments

The Company is in legal proceedings, claims and assessments. Such matters are subject to many uncertainties, and outcomes are not predictable.

On December 2, 2021, the Company and certain of its present and former officers and directors were named as defendants in a putative class action lawsuit styled Steppacher v. Alfi, Inc., et al., Case No. 1:21-cv-24232, brought in the United States District Court for the Southern District of Florida. On December 15, 2021, the Company, certain of its present and former officers and directors, and the underwriters in the IPO were named as defendants in a second putative class action styled Kleinschmidt v. Alfi, Inc., et al., Case No. 1:21-cv-24338, also brought in the United States District Court for the Southern District of Florida.

The complaints in both actions allege that the Company and other named defendants violated Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), with respect to allegedly false and misleading statements included in the registration statement and prospectus supplements issued in connection with the  IPO (the “Offering Documents”) in May 2021, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, by allegedly making false and materially misleading statements and failing to disclose material adverse facts in the Company’s public filings with the SEC. Both complaints assert that the putative plaintiff class includes: (i) persons or entities, other than the defendants, the officers and directors of the Company, members of their immediate families, their legal representatives, and any entity in which they had a controlling interest, among others, who purchased or acquired the Common Stock or warrants to purchase the Common Stock pursuant and/or traceable to the Offering Documents; and (ii) persons or entities, other than the defendants, who purchased or acquired the Company’s securities between May 4, 2021, and November 15, 2021 (both dates inclusive). The plaintiffs seek unspecified compensatory damages, including interest, and costs and expenses, including attorney’s and expert fees. On February 3, 2022, the court consolidated the two actions under the caption Steppacher, Jr., et al. v. Alfi, Inc. et al., Case No. 21-cv-24232-KMW. Three putative stockholders (or groups of stockholders) moved to be appointed as lead plaintiff, and the court appointed Candido Rodriguez as lead plaintiff. The consolidated actions are now captioned Rodriguez, et al. v. Alfi, Inc., et al., Case No. 21-cv-24232-KMW. The Company intends to vigorously defend these actions. The Company is currently unable to estimate the costs and timing of the resolution of this matter.

On April 27, 2022, Ryan Dodgson filed a Verified Shareholder Derivative Complaint on behalf of the Company styled Ryan Dodgson, derivatively on behalf of Alfi, Inc., Plaintiff, v. Paul Pereira, Dennis McIntosh, Charles Pereira, Peter Bordes, John M. Cook, II, Justin Elkouri, Allison Ficken, Jim Lee, Richard Mowser, and Frank Smith, Defendants, and Alfi, Inc., Nominal Defendant, Case 1:22-cv-21318, in the United States District Court for the Southern District of Florida.  The complaint alleges, as to the defendants: (i) violations of Section 10(b) and Rule 10b-5 of the Exchange Act; (ii) violations of Section 20(a) of the Exchange Act; (iii) breach of fiduciary duties; (iv) unjust enrichment; (v) abuse of control; (vi) gross mismanagement; and (vii) waste of corporate assets, in connection with alleged improper corporate transactions, an alleged pattern and practice of abuse of control of the Company and allegedly deficient internal controls, among other things.  The complaint also seeks contribution under Section 11(f) of the Securities Act and Section 21D of the Exchange Act as to the defendants, and seeks contribution under Sections 10(b) and 21D of the Exchange Act as to defendants Mr. P. Pereira and Mr. McIntosh. Plaintiff requests a declaration that the defendants have breached or aided and abetted the breach of their fiduciary duties to the Company, an award of damages to the Company, restitution, and an award of plaintiff’s costs and disbursements in the action, including reasonable attorneys’ and experts’ fees, costs and expenses, and alleged improvements to the Company’s corporate governance and internal procedures regarding compliance with laws. The Company is currently unable to estimate the costs and timing of the resolution of this matter.

During February and March 2022, two former employees filed breach of contract claims against the Company. The Company is currently unable to estimate the costs and timing of arbitration of these claims.

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Other Matters

As previously disclosed, on November 9, 2021, the Company received a letter from the staff of the SEC indicating that the Company, its affiliates and agents may possess documents and data relevant to an ongoing investigation being conducted by the staff of the SEC and notifying the Company that such documents and data should be reasonably preserved and retained until further notice. The materials to be preserved and retained include documents and data created on or after April 1, 2018 that: (i) were created, modified or accessed by certain named former and current officers and directors of the Company or any other officer or director of the Company; or (ii) relate or refer to the condominium or the sports tournament sponsorship identified in the Company’s Current Report on Form 8-K filed on November 1, 2021, or financial reporting and disclosure controls, policies or procedures. On March 8, 2022, the Company received a subpoena from the SEC relating to the investigation. The Company intends to cooperate fully with the SEC in this matter. The Company is currently unable to estimate the costs and timing of the resolution of this matter.

The Company’s former Chief Executive Officer and former Chief Financial Officer have made claims that the Company indemnify and advance the legal fees and expenses incurred by them in connection with the Investigation (see Note 11) and the putative class action litigations, the derivative action, and the SEC investigation, each referred to above. With respect to the advancement of fees and expenses incurred in connection with the Investigation prior to December 31, 2021, the amount of such fees and expenses that is subject to advancement is approximately $147,000. The former officers have also demanded advancement of fees and expenses of additional amounts of approximately $636,000 for the period January 1, 2022 through June 30, 2022.  Additional amounts may be subject to claims for advancement and indemnification, but the Company is unable to estimate the amount of additional fees and expenses that may be subject to advancement or indemnification.

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NOTE 8 STOCKHOLDERS’ EQUITY

Common shares issued before the IPO were recorded at estimated fair value. In May 2021, the Company completed its IPO of its Common Stock. The Common Stock is listed on the Nasdaq Capital Market under the symbol “ALF”.

In 2018, the Company created the Series Seed Preferred Stock, $0.0001 par value per share (the “Series Seed Preferred Stock”), and 2,500,000 shares of Series Seed Preferred Stock were authorized. During 2018 and 2019, 2,500,000 shares of Series Seed Preferred Stock were issued to Lee Aerospace in exchange for $2,500,000 cash consideration. Shares of Series Seed Preferred Stock converted to Common Stock at a ratio of 1.260023:1 at any time at the option of the holder. Holders of Series Seed Preferred Stock had preferential liquidation rights in the event of the Company’s dissolution. Shares of Series Seed Preferred stock bore no interest or dividend payments to its holders. The Series Seed Preferred Stock had a buyout feature if not converted into Common Stock by the holder. Series Seed Preferred Stock could be bought out by the Company if full return of principal was made to investor ($2,500,000), plus an additional 1x return of capital to the holder ($2,500,000). On December 31, 2020, 2,500,000 Series Seed Preferred Stock shares were issued and outstanding. In May 2021, 2,500,000 shares of Series Seed Preferred Stock were converted into 3,150,058 shares of Common Stock at a conversion ratio of 1:1.260023. During the year ended December 31, 2021, and the six months ended June 30, 2022, no preferred stock was issued by the Company, and no shares of preferred stock were outstanding as of June 30, 2022.

Dividends

Holders of preferred stock are not entitled to dividend payment but do have liquidation preference in the event of dissolution of the Company. Holders of Common Stock are not entitled to dividend payments but would receive such payments in the event dividend payments were made to stockholders. There was no dividend payment made on any class of stock (Common Stock or preferred stock) through June 30, 2022.

Common Stock

The Company is authorized to issue 80,000,000 shares of Common Stock, par value $0.0001. In 2018, 3,150,058 shares of Common Stock were issued to the three management members who are the Company’s founders, at par. In March 2021, a 1.260023 to 1 forward stock split was effected. Common Stock share numbers contained herein in this Quarterly Report are presented on a post-split basis unless specifically noted otherwise.

During the six months ended June 30, 2021, the Company arranged two bridge loans with related party investors. The Company issued 472,510 shares of Common Stock in exchange for bridge loan funding necessary to procure ongoing business operations. Management valued these issuances of shares at $750,000 and recorded that amount in interest expense.

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During the six months ended June 30, 2021, the Company also issued 300,000 shares of Common Stock in connection with certain vendor contracts. Management valued this issuance of shares at $476,180 and recorded that amount in other general and administrative expense. (See Note 11 Changes in Management.)

Initial Public Offering

On May 3, 2021, the Company’s registration statement on Form S-1 (File No. 333-251959) was declared effective by the SEC and the Company completed its IPO on May 6, 2021. In connection with the IPO, the Company issued and sold 4,291,045 shares of Common Stock and warrants to purchase 4,291,045 shares of Common Stock (including 559,701 shares of Common Stock and warrants to purchase 559,701 shares of Common Stock pursuant to the full exercise of the underwriters' overallotment option), at the combined public offering price of $4.15 for aggregate gross proceeds of approximately $17.8 million, before deducting underwriting discounts and commissions and other estimated offering expenses payable by Alfi. Net IPO proceeds of approximately $15.7 million were allocated $11.0 million to Common Stock and $4.7 million to warrants. The warrants were exercisable immediately upon issuance and at any time up to the date that is five years from the date of issuance and have an exercise price of $4.57 per share.

On May 3, 2021, pursuant to the underwriting agreement for the IPO, the Company issued to the underwriters warrants to purchase up to an aggregate of 186,567 shares of Common Stock (“Underwriter’s Warrants”). The Underwriter’s Warrants may be exercised beginning on May 3, 2022 until May 3, 2026. The initial exercise price of each Underwriter’s Warrant is $5.19 per share.

Warrants Issued and Exercised

Warrants to purchase 4,477,612 shares of Common Stock were issued in connection with the Company’s May 2021 IPO. As of December 31, 2021, warrant holders have exercised warrants to purchase 3,508,227 shares of Common Stock providing Alfi with $16,034,189 in additional funding. As of December 31, 2021, there were warrants to purchase 969,385 shares of Common Stock outstanding.

During the six months ended June 30, 2022, the Company issued a warrant to purchase up to 1,250,000 shares of the Common Stock at a price of $1.51 per share in connection with the Credit Agreement (see Note 6 Debt - Related Parties). No warrants were exercised by warrant holders during the six months ended June 30, 2022. As of June 30, 2022, there were warrants to purchase 2,219,385 shares of Common Stock outstanding.

Share Buy-Back

On June 23, 2021, the Company announced a $2.0 million buy-back of its Common Stock.  The buyback was completed on July 9, 2021, with the Company acquiring 137,650 shares of Common Stock, for an aggregate price of $1,999,997, which are recorded as treasury stock. The Company did not purchase any of its shares of Common Stock during the six months ended June 30, 2022.

Employee Equity (Stock) Incentive Plan

The Company has a stock equity incentive plan, the Alfi, Inc. 2018 Stock Incentive Plan (the “2018 Plan”), in which, at its sole discretion, it may award employees Common Stock or Common Stock options, among other awards, as an incentive for performance. Total shares of Common Stock reserved under the 2018 Plan for grants is not to exceed 1,575,029 shares. During the three months ended June 30, 2022 and 2021, respectively, the Company granted -0- and 251,500 Common Stock options under the 2018 Plan. During the six-month periods ended June 30, 2022 and June 30, 2021, respectively, the Company granted -0- and 449,168 Common Stock options under the 2018 Plan.

On June 30, 2022 and 2021, total Common Stock options issued and outstanding under the 2018 Plan were 338,534 and 673,535, respectively, and weighted average strike price per employee stock option was approximately $2.33 and $2.20 per share, respectively. Management recorded credits of $88,861 and $20,823 in stock option expense for the three and six months ended June 30, 2022, respectively, due to the cancellation of 91,405 options due to forfeitures. Management recorded stock-based compensation expense associated with the issuance of employee stock options of $85,256 and $131,942 for the three and six months ended June 30, 2021, respectively.

No employees exercised stock options during the three months ended June 30, 2022. During the six months ended June 30, 2022, two employees exercised stock options and received 25,535 shares of Common Stock.

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Stock option and warrant valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from the Company’s historical stock prices and an index of historical stock prices for comparable entities. For warrants and stock options issued to non- employees, the Company accounts for the expected life based on the contractual life of the warrants and stock options. For employees, the Company accounts for the expected life of options in accordance with the “simplified” method, which is used for “plain-vanilla” options, as defined in the accounting standards codification. The risk-free interest rate was determined from the implied yields of U.S. Treasury zero-coupon bonds with a remaining life consistent with the expected term of the options.

Potentially dilutive securities excluded from the computation of basic net loss per share as of are as follows:

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The Company incurred depreciation expense of $372,067 and $204,167 for the three months ended June 30, 2022, and June 30, 2021, respectively, and $744,633 and $407,476 for the six months ended June 30, 2022, and June 20, 2021, respectively.

During the three months ended June 30, 2022, the Company reviewed the carrying value of tablets for impairment and concluded that 5,600 tablets distributed to rideshare drivers were no longer in service and may not be returned to the Company. The Company recorded a charge of $833,337 for the loss on disposal associated with these tablets. At June 30, 2022, property and equipment includes approximately 16,000 tablets including 13,300 Lenovo tablet hardware devices available for distribution and approximately 2,700 tablets placed with rideshare and other businesses. Tablets are provided to rideshare and other businesses at no charge but remain the property of the Company and must be returned to the Company upon termination of the rideshare or other use agreement. The Company may pay a revenue share or commission to such third party for the placement of the Alfi-enabled device.

During the three months ended June 30, 2022, the Company recorded a charge of $16,000 for the loss on disposal of furniture and fixtures located in its Belfast, N.I. office. The Company is in negotiations with its landlord to terminate the Belfast, N.I. office lease.

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NOTE 10 INTANGIBLE ASSETS – INTELLECTUAL PROPERTY

Intellectual Property – Software Development and Patent Acquisition Costs

The Company’s intellectual property includes capitalized software development and patent acquisition costs associated with creation of its technology (see Note 1). During the period between the Company’s formation in 2018 through June 2020, the Company created and developed the proprietary software that is the basis of its ability to deliver targeted digital advertising. The Company considers this software to be internal-use software, as it is used exclusively by the Company on devices it controls to deliver the

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advertising services it is engaged to provide. The Company determined that the application development phase for this software began in May 2018 and ended in June 2020, and its first release of production software was activated in a tablet in July 2020.

On July 1, 2020 forward, the Company commenced amortization of these intangible assets. The Company estimated a 5-year useful life for capitalized software development costs and a 15-year useful life for patent acquisition costs. Management selected a 5-year useful life for software development costs as an expectation of the length of time the Company expects its technology product set to produce future cash flows assuming that there are no significant software or version upgrades. All software development costs incurred beyond June 30, 2020 are being expensed.

Intangible assets, net of accumulated amortization, consists of the following:

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The Company incurred amortization expense of $44,006 and $44,006 for the three-month periods ended June 30, 2022, and June 30, 2021, respectively and $88,012 and $88,012 for the six-month periods ended June 30, 2022, and June 30, 2021, respectively.

Future amortization of intangible assets as of June 30, 2022, is as follows:

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NOTE 11 CHANGES IN MANAGEMENT

Replacement of Executive Officers and Board Members

As previously disclosed in the Company’s filings with the SEC, on October 22, 2021 the Board placed each of Paul Pereira, the Company’s then President and Chief Executive Officer, Dennis McIntosh, the Company’s then Chief Financial Officer and Treasurer, and Charles Pereira, the Company’s then Chief Technology Officer, on paid administrative leave and authorized an  Investigation into certain corporate transactions and other matters.

Also as previously disclosed, since placing the former executives on leave, the Board has appointed: (i) James Lee as Chairman of the Board (effective October 22, 2021), replacing Mr. P. Pereira in such role; (ii) new management personnel, including Peter Bordes as Interim Chief Executive Officer (serving in such role from October 22, 2021 until July 22, 2022), Mr. Lee as Interim Chief Executive Officer (effective July 22, 2022), Louis Almerini as Interim Chief Financial Officer (effective November 8, 2021) and David Gardner as Chief Technology Officer (serving in such role from October 27, 2021 until July 1, 2022); (iii) Allen Capsuto as an independent director of the Company and Chair of the Audit Committee (serving in such roles from November 1, 2021 until July 14, 2022); (iv) Patrick Dolan as an independent director of the Company (effective November 1, 2021) and a member of each of the Compensation Committee and the Nominating and Corporate Governance Committee of the Board (effective December 29, 2021); and (v) Jeremy D. Daniel as an independent director of the Company and Chair of the Audit Committee (effective July 14, 2022).

Furthermore, Mr. P. Pereira resigned as a director and from all positions he held with the Company, Mr. McIntosh resigned from all positions he held with the Company, and Mr. C. Pereira’s employment with the Company was terminated.

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Findings of the Investigation

The Investigation was conducted by a special committee of the Board (the “Special Committee”) consisting of Mr. Capsuto, the then Audit Committee Chair, who was appointed to the Special Committee on November 8, 2021. The Special Committee retained outside legal counsel to assist in conducting the Investigation, and such counsel retained additional advisors to provide forensic accounting services, computer forensics and e-discovery services and other legal services.

The Investigation found, among other things, that the Company’s former senior management caused the Company to enter into certain transactions and certain agreements that were not approved by the Board, some of which included the unauthorized issuance of shares of Common Stock, as follows:

These findings and other conduct by the Company’s former senior management were previously disclosed in the Company’s Current Report on Form 8-K filed on February 23, 2022.

The Investigation found the Company’s internal control over financial reporting to be deficient with respect to: (i) the disbursement process for third-party vendors; (ii) the review and approval process for significant vendor contracts; (iii) the use of Company credit cards by executives; (iv) the supervision and approval of travel and entertainment expenses incurred by executives; (v) the segregation of duties in connection with the payment and recording of invoices and related bank reconciliations; (vi) the lack of a sufficient accounting manual; and (vii) guidelines for the capitalization of fixed assets.

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Litigation, Claims, and Assessments

On July 28, 2022, Victor Farish filed a Verified Shareholder Derivative Complaint on behalf of the Company styled Victor Farish, derivatively on behalf of Alfi, Inc., Plaintiff, v. Paul Pereira, Dennis McIntosh, Charles Pereira, Peter Bordes, John M. Cook, II, Justin Elkouri, Allison Ficken, Jim Lee, Richard Mowser, and Frank Smith, Defendants, and Alfi, Inc., Nominal Defendant, Case 1:22-cv-22361, in the United States District Court for the Southern District of Florida.  The complaint alleges, as to the individual defendants:  (i) violations of Section 10(b) and Rule 10b-5 of the Exchange Act; (ii) violations of Section 20(a) of the Exchange Act; (iii) breach of fiduciary duty; (iv) aiding and abetting breach of fiduciary duty; (v) unjust enrichment; (vi) waste of corporate assets; (vii) abuse of control; and (viii) gross mismanagement, in connection with allegedly making and/or authorizing false and misleading statements and material omissions regarding the Company’s business, prospects, and internal controls and allegedly failing to establish and/or oversee sufficient internal controls and/or reasonable information, oversight, and reporting systems concerning critical Company operations, including the adequacy of its public reporting.  The complaint also seeks contribution under Section 11(f) of the Securities Act as to defendants Mr. P. Pereira, Mr. McIntosh, Mr. Bordes, Mr. Cook, Mr. Elkouri, Ms. Ficken, Mr. Lee, Mr. Mowser, and Mr. Smith, and seeks contribution under Section 21D(f)(5) of the Exchange Act as to defendants Mr. P. Pereira and Mr. McIntosh.  Plaintiff requests an award of damages against defendants, an award of punitive damages, an award of plaintiff’s costs and disbursements in the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses, and an order directing the defendants to account for all damages allegedly caused by them and all profits and special benefits and unjust enrichment they have allegedly obtained as a result of their allegedly unlawful conduct. On July 29, 2022, the Court sua sponte dismissed the complaint without prejudice finding that the complaint does not properly plead a claim and giving Plaintiff until August 11, 2022 to file an amended complaint addressing the deficiencies in its original complaint. The Company is currently unable to estimate the costs and timing of the resolution of this matter.

Credit and Security Agreement – Related Party

On August 5, 2022, the Company and the related party lender, Lee Aerospace, entered into Amendment No. 2 to Credit and Security Agreement (“Amendment No. 2”), pursuant to which the non-revolving line of credit available to the Company from the related party lender under the Credit Agreement was increased by $500,000, to an aggregate of $3,250,000, and such increased availability became evidenced by a convertible note. In connection with Amendment No. 2, the Company and the related party lender entered into a Non-Revolving Line of Credit Convertible Note in an aggregate principal amount of $500,000 (the “Convertible Note”) and a three-year warrant to purchase 375,000 shares of the Common Stock. Each of the Convertible Note and warrant are convertible or exercisable, respectively, for shares of Common Stock commencing November 5, 2022, at a conversion price of $1.635 per share under the Convertible Note and an exercise price of $1.51 per share under the warrant. The conversion price of the Convertible Note and the exercise price of the Warrant are subject to anti-dilution adjustments for stock splits, stock dividends and similar corporate actions, but not for other dilutive equity issuances. The warrant may be exercised for cash or on a cashless basis. Except as set forth above, Amendment No. 2 and the Convertible Note do not otherwise amend the terms of the Credit Agreement and related documents. The related party lender has funded to the Company the maximum amount, which is $3,250,000, under the Credit Agreement.

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may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

We discuss many of these risks in other filings we make from time to time with the SEC. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

Investors should read this Quarterly Report, and the documents that we reference in this Quarterly Report and have filed with the SEC, with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

We seek to provide solutions that bring transparency and accountability to the DOOH advertising marketplace.  Alfi uses artificial intelligence and big data analytics to measure and disseminate audience presence and audience demographics. Our computer vision technology is powered by proprietary artificial intelligence, to determine the relevant demographic and geospecific information of the audience in front of an Alfi-enabled device, such as a tablet or kiosk.  Alfi can then deliver in real-time, the advertisements to that particular viewer based on the viewer’s demographic profile and/or geolocation.  Alfi is designed to deliver the right marketing content, to the right person at the right time in a responsible and ethical manner.  By delivering the advertisements most relevant to the audience in front of the device, we connect our advertising customers to the viewers they seek to target.  The result is higher click through rates (“CTRs”), higher QR code scans and higher cost per thousand rates (“CPMs”).

Alfi seeks to solve the problems facing advertisers in the DOOH marketplace, as its proprietary technology is designed to measure the audience when an advertisement is displayed.  Our data rich reporting functionality is able to inform the advertiser exactly when someone viewed each ad, as well as the general demographic and geospecific characteristics of the viewing audience. Alfi gives large and small businesses access to data-driven insights by expanding their advertising capabilities, providing analytical sophistication and delivering it all over multiple devices.  In addition to the traditional Content Management System model that delivers adverts on a scheduled loop, Alfi’s technology is able to first analyze the audience and determine the most relevant content to be displayed.

Alfi has created an enterprise grade, multimedia computer vision and machine learning platform, capable of generating powerful advertising recommendations and insights.  Multiple technologies work together with viewer privacy and data-rich reporting as our primary objectives.  Alfi is able to use a facial fingerprinting process to make demographic determinations.  As such, Alfi makes no attempt to identify the individual in front of the screen.  Brand owners do not need to know someone’s name or invade their privacy to gain a deeper understanding of the consumers who view their content.  By providing age, gender and geolocation information, we believe brand owners should have the pertinent data they need for meaningful insight.  From an analytics perspective, these data points are intended to provide meaningful reporting instead of arbitrary calculations based on estimates of ad engagement.

Alfi seeks to solve the problem of providing real time, accurate and rich reporting on customer demographics, usage, interactivity and engagement while never storing any personally identifiable information.  No viewer is ever required, or requested by us, to enter any information about themselves on any Alfi-enabled device.

Our initial focus was to place our Alfi-enabled devices in malls, airports rideshares and taxis. We recently shifted our focus to prioritize placement of devices in rideshares with a view toward growing that business to operate it profitably.

Currently, we intend to charge customers solely based on a CPM, or ads delivered, model. As we continue to prove Alfi in the marketplace, we expect to charge customers based on a combination of CPM and CTR, and we expect we will generate higher CPM rates than typical DOOH advertising platforms because of our unique ability to only deliver ads to the customer’s desired demographic.  In addition, we also intend to provide the aggregated data to the brands so they can make more informed advertising decisions.

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Recent Developments

Credit and Security Agreement – Related Party

On June 27, 2022, the Company and a related party lender, Lee Aerospace, entered into Amendment No. 1 to the Credit Agreement and the Amended Note, pursuant to which the non-revolving line of credit available to the Company from the lender was increased to $2,750,000 (see Note 6 Debt – Related Parties). The Amendment No. 1 and the Amended Note do not otherwise amend the terms of the Credit Agreement and related documents. Through June 30, 2022, the related party lender funded to the Company $2,750,000 under the Credit Agreement.

Warrants Issued

During the six months ended June 30, 2022, the Company issued a warrant to purchase up to 1,250,000 shares of the Common Stock at a price of $1.51 per share in connection with the Credit Agreement (see Note 6 Debt – Related Parties). No warrants were exercised by warrant holders during the six months ended June 30, 2022. As of June 30, 2022, there were warrants to purchase 2,219,385 shares of Common Stock outstanding.

Changes in Executive Officers and Board Members

David Gardner, the Company’s Chief Technology Officer, resigned from such position effective July 1, 2022 in order to pursue other opportunities to accommodate personal circumstances.

Allen Capsuto resigned as a director of the Company and Chair of the Audit Committee, effective July 14, 2022. Mr. Capsuto’s resignation was not because of a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

Jeremy D. Daniel was appointed by the Board to serve as a director of the Company, to fill the vacancy on the Board created by Mr. Capsuto’s resignation, and as Chair of the Audit Committee, effective July 14, 2022.

James Lee, the Chairman of the Board, was appointed by the Board to serve as the Company’s Interim Chief Executive Officer, effective July 22, 2022.

Impact of COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency caused by a new strain of the coronavirus and advised of the risks to the international community as the virus spread globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The spread of COVID-19 coronavirus has caused public health officials to recommend precautions to mitigate the spread of the virus, especially as to travel and congregating in large numbers. In addition, certain states and municipalities have enacted quarantining regulations which severely limit the ability of people to move and travel.

COVID-19 has adversely affected the Company’s financial condition and results of operations. The impact of the COVID-19 outbreak on businesses and the economy in the United States is expected to continue to be significant. The extent to which the COVID-19 outbreak will continue to impact businesses and the economy is highly uncertain. Accordingly, the Company cannot predict the extent to which its financial condition and results of operation will be affected.

Results of Operations

Revenues

In general, the Company earns revenue from rideshares or SaaS contracts with operating companies who maintain their own network and lease the Alfi platform.

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Operating Expenses

Compensation and benefits expenses include compensation expenses related to our executive, finance, and administrative personnel (including salaries, commissions, bonuses, stock-based compensation, payroll taxes, and contract labor costs). Other general and administrative expenses include communications and technology costs, professional fees, selling and marketing fees, legal fees, and rent and occupancy expense.