ALF ALFI Inc

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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 March 31, 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 April 30, 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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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 IPO yielding net proceeds to the Company of approximately $15.7 million from the sale of 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.

The Company intends to raise additional capital through private placements of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, reduce overhead, or scale back its current business plan until sufficient additional capital is raised to support further operations. There is no assurance that such a plan will be successful.

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.

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.

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 amended Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2021. The interim consolidated financial statements for the quarter ended March 31, 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.

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

During the three months ended March 31, 2021, the Company accrued interest expense of $356,914 on debt payable to related parties. All borrowings from related parties were paid in full upon completion of the Company’s IPO in May 2021. Debt payable to related parties immediately prior to the IPO included the following notes and loans:

The Company entered into six promissory note agreements with a related-party pursuant to which the Company could borrow up to $2,500,000 at an annual interest rate of 5%. Borrowings pursuant to those agreements were $2,500,000.

A related party provided financing of approximately $950,000 for the Company’s purchase of 7,600 tablets. Payment was due to the related party upon the closing of the Company’s IPO. There was no stated interest rate or additional repayment terms.

The Company entered into a $2,000,000 bridge loan agreement with a related party. The terms of the bridge loan included repayment of principal on or before June 30, 2021, and an annual interest rate of 18%.

During the year ended December 31, 2021, the Company entered into bridge loans totaling $800,000 with related party investors. Terms of the bridge loans with related parties included repayment of principal on or before June 30, 2021, and an annual interest rate of 18%. In addition to repayment of principal and interest under the bridge loans, the Company issued 472,510 shares of Common Stock. Management valued these issuances of shares at $750,000 and recorded that amount in interest expense.

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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 March 31, 2022, and December 31, 2021, cash balances in excess of FDIC requirements were $95,949 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 Company’s 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 Company’s 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 Securities and Exchange Commission (the “SEC”). Both complaints assert that the putative plaintiff class includes: (i) persons or entities, other than the defendants, 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.

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.

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 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 $339,000 for the period January 1, 2022 through March 31, 2022.  Additional amounts may be subject to claims for

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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.

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 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 an investor 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 three months ended March 31, 2022, no preferred stock was issued by the Company, and no shares of preferred stock were outstanding as of March 31, 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 March 31, 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 year ended December 31, 2020, the Company issued 31,501 shares of Common Stock to an unaffiliated third party in exchange for services associated with investment relations and fundraising, and to support the development of revenue producing contracts. Management valued this issuance of shares at $25,000 and recorded that amount in other general and administrative expense.

During the year ended December 31, 2020, the Company issued 1,260,023 shares of Common Stock to related party investors in exchange for bridge loan funding necessary to procure ongoing business operations. Management valued this issuance of shares at $2,000,000 and recorded that amount in interest expense.

During the year ended December 31, 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.

During the year ended December 31, 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.

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

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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, we 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

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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. No warrants to purchase shares of Common Stock were issued or exercised during the quarter ended March 31, 2022. As of March 31, 2022, there were warrants to purchase 969,385 shares of Common Stock outstanding.

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Share Buy-Back

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On June 23, 2021, Alfi announced a $2.0 million buy-back of its Common Stock.  The buyback was completed on July 9, 2021, with Alfi acquiring 137,650 shares of Common Stock, for an aggregate price of $1,999,997, which are recorded as treasury stock.

Employee Equity (Stock) Incentive Plan

The Company has a stock equity 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 March 31, 2022 and 2021, respectively, the Company granted -0- and 197,668 Common Stock options under the 2018 Plan.

On March 31, 2022 and 2021, total Common Stock options issued and outstanding under the 2018 Plan were 429,939 and 433,927, respectively, and weighted average strike price per employee stock option was approximately $2.37 and $1.52 per share, respectively. Management recorded stock-based compensation expense associated with the issuance of employee stock options of $68,038 and $46,684 for the three months ended March 31, 2022 and 2021, respectively.

During the three months ended March 31, 2022, two employees exercised stock options and received 23,072 restricted shares of Common Stock.

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 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 $372,317 and $203,308 for the three-month periods ended March 31, 2022, and 2021, respectively.

Property and equipment includes approximately 27,000 Lenovo tablet hardware devices including over 9,000 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.

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 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 March 31, 2022 and 2021, respectively.

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Future amortization of intangible assets as of March 31, 2022, is as follows:

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NOTE 11 CHANGES IN MANAGEMENT

Replacement of Executive Officers, Board Members, and Independent Accountants

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, replacing Mr. P. Pereira in such role; (ii) new management personnel, including Peter Bordes as Interim Chief Executive Officer, Louis Almerini as Interim Chief Financial Officer and David Gardner as Chief Technology Officer; (iii) two new independent directors to the Board, Allen Capsuto and Patrick Dolan; and (iv) Mr. Capsuto as Chair of the Audit Committee and Mr. Dolan as a member of the Compensation Committee and the Nominating and Corporate Governance Committee. 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.

Findings of the Investigation

The Investigation was conducted by a special committee of the Board (the “Special Committee”) consisting of Mr. Capsuto, the 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:

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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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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 is to place our Alfi-enabled devices in malls, airports rideshares and taxis.  We also have begun offering our software solution to other DOOH media operators as a SaaS product.

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.

Recent Developments

Warrants Exercised

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Through March 31, 2022, 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 March 31, 2022, there were warrants outstanding to purchase 969,385 shares of Common Stock.

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Share Buy-Back

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On June 23, 2021, Alfi announced a $2.0 million buy-back of its Common Stock.  The buy-back was completed on July 9, 2021, with Alfi acquiring 137,650 shares of Common Stock, for an aggregate price of $1,999,997, which are recorded as treasury stock.

Changes in Management

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, replacing Mr. P. Pereira in such role; (ii) new management personnel, including Peter Bordes as Interim Chief Executive Officer, Louis Almerini as Interim Chief Financial Officer and David Gardner as Chief Technology Officer; (iii) two new independent directors to the Board, Allen Capsuto and Patrick Dolan; and (iv) Mr. Capsuto as Chair of the Audit Committee and Mr. Dolan as a member of the Compensation Committee and the Nominating and Corporate Governance Committee. 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.

Findings of the Investigation

The Investigation was conducted by a Special Committee. 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.

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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.

Credit and Security Agreement – Related Party

On April 12, 2022, the Company entered into a Credit and Security Agreement with a related party lender. Pursuant to the agreement, the Company may borrow up to $2,500,000 for up to one year. Through May 10, 2022, the lender has funded to the Company $1,000,000 under the Credit Agreement. Prior to the maturity date, the Company may borrow an additional $1.5 million under the Credit Agreement, in the lender’s sole discretion and subject to the Company requesting such additional funds from the 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.

The line of credit 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 lender pursuant to which the lender may purchase up to 1,250,000 shares of the Common Stock at a price of $1.51 per share. The warrant can be exercised commencing on the three-month anniversary of the Credit Agreement (i.e., on July 12, 2022) and expires on April 12, 2025.

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.

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

Revenues

For the three-month periods ended March 31, 2022, and 2021, net revenues were $63,303 and $17,450, respectively. During the three-month period ended March 31, 2022, the Company earned revenues from customers for advertising delivered through Alfi-owned devices. Revenue earned during the three-month period ended March 31, 2021 was earned from a single customer.

Operating Expenses

For the three months ended March 31, 2022, and 2021, total operating expenses were $5,357,933 and $2,382,385, respectively, an increase of $2,975,548. Compensation and benefits expense increased as independent contractors became full time employees effective March 1, 2021. Other general and administrative expenses increased due to higher costs related to the Company’s growth and launch of its technology platform and the Company’s May 2021 IPO. Legal and professional fees increased due to additional fees related

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to the Investigation, and data network charges and payments to drivers increased due to significant year-over-year growth in the number of tablets in service. Depreciation and amortization expense rose because the three months ended March 31, 2022 included depreciation expense for additional tablets purchased since March 31, 2021.

Operating Loss

For the three months ended March 31, 2022, the operating loss increased from $2,364,935 to $5,294,630, an increase of  $2,929,695 compared with the three months ended March 31, 2021. The increase was primarily due to higher operating expenses, as discussed above.

Other Income (Expense)

Interest expense was $30 and $356,914 for the three months ended March 31, 2022, and 2021, respectively. The Company incurred interest expense during the three months ended March 31, 2021, in connection with related party debt outstanding prior to its IPO. The Company repaid all related party debt in May 2021 with a portion of the cash proceeds from its IPO. No related party debt was outstanding during the three months ended March 31, 2022.

Net Loss

For the three months ended March 31, 2022, the net loss increased from $2,708,831 to $5,292,601, an increase of $2,583,770 compared with the three months ended March 31, 2021. The increase was primarily due to higher operating expenses, as discussed above.

Liquidity and Capital Resources

As of the date of this Quarterly Report, the Company has not yet generated substantial revenue from customers and business activity has mainly consisted of cash outflows associated with its business development activities. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the consolidated financial statements.

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 IPO yielding net proceeds to the Company of approximately $15.7 million from the sale of 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 with a related party lender, pursuant to which it may borrow up to $2,500,000 for up to one year. Through May 10, 2022, the lender has funded to the Company $1,000,000 under the Credit Agreement.

The Company intends to raise additional capital through private placements of debt and equity securities, but there can be no assurance that these funds will be available on terms acceptable to the Company or will be sufficient to enable the Company to fully complete its development activities or sustain operations. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables, reduce overhead, or scale back its current business plan until sufficient additional capital is raised to support further operations. There is no assurance that such a plan will be successful.

Off-Balance Sheet Arrangements

We did not have, during the period presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Significant Accounting Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities

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as of the date of the financial statements as well as the reported expenses during the reporting periods. Actual results may differ materially from these estimates.

We believe that the assumptions and estimates associated with the evaluation of revenue recognition criteria, including the determination of revenue recognition as net versus gross in our revenue arrangements, useful lives of long-lived assets and stock-based compensation expense have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ materially from these estimates.

Our significant accounting policies are more fully described in our consolidated financial statements (Note 2) included in this Quarterly Report.

Recently Issued Accounting Standards

Our analysis of recently issued accounting standards are more fully described in our consolidated financial statements (Note 2) included in this Quarterly Report.

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information included in this Quarterly Report, fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in this Quarterly Report.

Changes in Internal Control Over Financial Reporting

Except as disclosed in Note 4 to the consolidated financial statements included in this Quarterly Report, there have been no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management will seek to remediate the material weaknesses described above through hiring additional qualified accounting and financial reporting personnel, and designing and implementing financial reporting systems, processes, policies and internal controls.

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On March 10, 2022, Charles Pereira, a former Chief Technology Officer of the Company, filed a Statement of Claim against the Company with the AAA, alleging various breaches of contract and torts with respect to his employment, his compensation, and the termination of his employment. In his Statement of Claim, Mr. Pereira seeks damages in an amount to be determined at the hearing, but not less than $10 million dollars, and certain declaratory relief and other money damages. The arbitration proceeding was initiated pursuant to the arbitration provision in Mr. Pereira’s employment agreement with the Company. The Company is in the process of responding to Mr. Pereira’s claims. The Company is currently unable to estimate the costs and timing of the arbitration, including any potential damages, if Mr. Pereira were to prevail on any of his claims.

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’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 4) and the putative class action litigations 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 $339,000 for the period January 1, 2022 through March 31, 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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*Identifies a management contract or compensatory plan or arrangement.

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