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 quarter ended September 30, 2002 Commission file number: 0-28152
Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0991269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Affinity Technology Group, Inc.
1122 Lady Street, Suite 1145
Columbia, SC 29201
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
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 X No ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
40,881,355 shares of Common Stock, $0.0001 par value, as of November 1, 2002.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I.FINANCIAL INFORMATION
ITEM 1.Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk 13
ITEM 4.Controls and Procedures 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 6.Exhibits and Reports on Form 8-K 13
Signature 14
Certification 15
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
2002 December 31,
(Unaudited) 2001
------------------------------------------
Assets
Current assets:
Cash and cash equivalents $250,789 $27,720
Receivables, less allowance for doubtful accounts of
$19,601 and $10,601 at September 30, 2002 and
December 31, 2001, respectively 18,504 459,107
Inventories 55,379 100,379
Other current assets 53,892 114,490
------------------------------------------
Total current assets 378,564 701,696
Property and equipment, net 116,447 182,918
Software development costs, less accumulated
amortization of $709,660 and $670,858 at September 30,
2002 and December 31, 2001, respectively 1,313 40,114
Other assets 2,276 2,929
------------------------------------------
Total assets $498,600 $927,657
==========================================
Liabilities and stockholders' (deficiency) equity
Current liabilities:
Accounts payable $59,076 $139,758
Accrued expenses 214,822 219,371
Convertible debenture - 225,090
------------------------------------------
Total current liabilities 273,898 584,219
------------------------------------------
Convertible notes 830,336 -
------------------------------------------
Commitments and contingent liabilities
Stockholders' equity:
Common stock, par value $0.0001; authorized
60,000,000 shares, issued 43,049,363 and 42,399,363
shares at September 30, 2002 and December 31, 2001,
respectively 4,305 4,240
Additional paid-in capital 70,441,149 70,386,464
Common stock warrants 52,000 52,000
Treasury stock, at cost (2,168,008 shares at
September 30, 2002 and December 31, 2001) (3,505,287) (3,505,287)
Accumulated deficit (67,597,801) (66,593,979)
------------------------------------------
Total stockholders' (deficiency) equity (605,634) 343,438
------------------------------------------
Total liabilities and stockholders' equity $498,600 $927,657
==========================================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------------------------------- ------------------------------
Revenues:
Transactions $10,486 $63,396 $104,849 $207,048
Professional services - 227,399 - 248,171
Other income 36,921 16,469 51,111 743,548
---------------------------------------------------------------
Total revenue 47,407 307,264 155,960 1,198,767
Costs and expenses:
Cost of revenues 1,707 26,289 14,319 53,133
Research and development - 99,905 - 414,389
Selling, general and administrative
expenses 262,445 598,297 1,092,731 2,557,666
------------------------------- ------------------------------
Total costs and expenses 264,152 724,491 1,107,050 3,025,188
------------------------------- ------------------------------
Operating loss (216,745) (417,227) (951,090) (1,826,421)
Interest income 996 819 996 10,100
Interest expense (18,857) (36,547) (53,728) (102,846)
------------------------------- ------------------------------
Loss from continuing operations $(234,606) $(452,955) $(1,003,822) $(1,919,167)
Income from operations of discontinued
subsidiary - 77,805 - 124,413
------------------------------- ------------------------------
Net loss $(234,606) $(375,150) $(1,003,822) $(1,794,754)
=============================== ==============================
Loss per share - basic and diluted:
Continuing operations $(0.01) $(0.01) (0.02) (0.05)
=============================== ==============================
Net loss per share $(0.01) $(0.01) (0.02) (0.05)
=============================== ==============================
Shares used in computing net loss per
share 40,881,355 40,231,355 40,648,388 37,253,508
=============================== ==============================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2002 2001
--------------------------------
Operating activities
Net loss $(1,003,822) $(1,794,754)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 115,210 625,265
Amortization of deferred compensation - 31,804
Provision for doubtful accounts 9,000 45,000
Inventory valuation allowance 45,000 90,000
Deferred revenue - (566,035)
Other 63,986 18,807
Changes in current assets and liabilities:
Accounts receivable 431,603 (833,189)
Net investment in sales-type leases - 157,139
Inventories - 11,895
Other current assets 60,597 96,813
Accounts payable and accrued expenses (80,724) (104,333)
--------------------------------
Net cash used in operating activities (359,150) (2,221,588)
Investing activities
Purchases of property and equipment, net (4,044) (89,971)
--------------------------------
Net cash used in investing activities (4,044) (89,971)
Financing activities
Proceeds from convertible notes 625,000 -
Proceeds from notes payable - 18,349,081
Payments on notes payable (38,737) (16,492,969)
Exercise of warrants - 347
--------------------------------
Net cash provided by financing activities 586,263 1,856,459
--------------------------------
Net increase (decrease) in cash 223,069 (455,100)
Cash and cash equivalents at beginning of period 27,720 646,198
--------------------------------
Cash and cash equivalents at end of period $250,789 $191,098
================================
See accompanying notes.
5
Notes to Condensed Consolidated Financial Statements
1. Going Concern
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
The Company is evaluating alternatives to secure sufficient additional
working capital to continue its business activities through 2003 and beyond.
Such alternatives include the placement of additional debt and/or equity
securities and the possible sale of certain assets. Pursuant to its
capital-raising initiatives, in June 2002, the Company sold its convertible
secured notes as more fully discussed in Note 6 - Convertible Notes.
There is substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classification of liabilities that may result from this
uncertainty. However, management believes that any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts of liabilities would not be material to the Company's financial
position.
2. Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 2001 has been derived
from the audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal, recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the results for
the periods shown. The results of operations for such periods are not
necessarily indicative of the results expected for the full year or for any
future period. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended December 31, 2001.
In accordance with management's oversight of the Company's operations, the
Company conducts its business in one industry segment - financial services
technology (see Note 7).
Certain amounts in 2001 have been reclassified to conform to 2002
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
6
3. Inventories
Inventories consist of the following:
September 30, December 31,
2002 2001
---------------------------------
Electronic parts and other components $312,164 $312,164
Work in process 28,784 28,784
Finished goods 744,324 744,324
---------------------------------
1,085,272 1,085,272
Reserve for obsolescence (1,029,893) (984,893)
---------------------------------
$55,379 $100,379
=================================
4. Net Loss Per Share of Common Stock
Net loss per share of Common Stock amounts presented on the face of the
consolidated statements of operations have been computed based on the weighted
average number of shares of Common Stock outstanding in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." Stock warrants and stock options were not
included in the calculation of diluted loss per share because the Company has
experienced operating losses in all periods presented and, therefore, the effect
would be anti-dilutive.
5. Convertible Debenture
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with AMRO International, S.A. ("AMRO"). The
agreement was amended in August 2001 as described below. Under the original
agreement, on November 22, 2000 the Company issued to AMRO an 8% convertible
debenture in the principal amount of $1,000,000. The debenture was convertible,
at the option of AMRO, into shares of the Company's common stock at a price
equal to the lesser of $1.00 per share or 65% of the average of the three lowest
closing prices of the Company's stock during the month prior to conversion.
Under the original agreement, the debenture matured on May 22, 2002, subject to
earlier conversion and certain provisions regarding acceleration upon default
and prepayment. Under the original agreement, on November 22, 2000 the Company
also issued to AMRO a three-year warrant to acquire 200,000 shares of the
Company's common stock. The warrant exercise price was $0.3542 per share. AMRO
exercised a portion of the debenture into an aggregate of 6,214,655 shares of
the Company's stock.
In August 2001, the Company and AMRO amended the convertible debenture and
warrants purchase agreement. Under the terms of the amendment, the Company
agreed to repay the debenture in full in a series of monthly payments through
June 2002, and AMRO agreed not to convert the debenture into any additional
shares of the Company's common stock. In addition, the Company agreed to reduce
the exercise price of the warrant issued to AMRO from $0.3542 per share to $0.05
per share, and to reduce the exercise price of a warrant to acquire 720,000
shares issued to the investor under the Company's equity line agreement from
$0.8554 per share to $0.05 per share. The effect of such warrant repricing was
not material to the Company's financial statements. The outstanding principal
and interest under the debenture as of the date it was amended was $703,435.
In June 2002, the Company issued to AMRO an 8% convertible secured note in
the principal amount of $205,336 in full satisfaction of amounts outstanding
under its convertible debenture. The terms of the 8% convertible secured notes
are more fully discussed in Note 6. - Convertible Notes.
7
6. Convertible Notes
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital-raising initiatives. The principal
amount of notes issued totaled $830,336 and included the issuance of a note to
AMRO in satisfaction of the principal and accrued interest outstanding under
AMRO's convertible debenture as discussed above. The notes bear interest at 8%
and principal and accrued interest are due in June 2004. The notes are secured
by the stock of the Company's wholly-owned subsidiary, Decisioning.com, Inc.
Decisioning.com is the Company's patent licensing subsidiary and owns the
Company's patent portfolio. The notes are convertible into the Company's common
stock at a conversion rate of $.20 per share. The Company may prepay the notes
subject to a prepayment penalty of 8% and 4% if the prepayment occurs within the
first twelve months or thereafter, respectively.
7. Segment Information
The Company conducts its business within one industry segment - financial
services technology. To date, all revenues generated have been from transactions
with North American customers. All other segment disclosures required by SFAS
131 are included in the consolidated financial statements or in the notes to the
consolidated financial statements.
8. Commitments and Contingencies
The Company is subject to legal actions which from time to time have arisen
in the ordinary course of business. In addition, a claim was filed by a
plaintiff who claimed certain rights, damages and interests incidental to the
Company's formation and development. The claim resulted in a jury verdict of
$68,000 in favor of the plaintiff and the plaintiff subsequently requested, and
was granted, a new trial. The Company appealed the grant of a new trial. In May
2002 the South Carolina Appeals Court upheld the lower court's decision to grant
the plaintiff a new trial. In the opinion of management, the Company has
meritorious defenses to these claims.
On March 29, 2001, Citibank, N.A. filed a lawsuit against the Company in
the New York Federal Court seeking a declaratory judgment releasing Citibank,
N.A. from any obligation to the Company for amounts the Company has billed to
Citibank, N.A. under the Company's prior contract to develop a system to process
automobile loans for Citibank, N.A. Citibank, N.A. ultimately transferred this
contract to The Dime Savings Bank of New York. Citibank, N.A.'s lawsuit against
the Company was dismissed on January 8, 2002. Citibank, N.A. has appealed the
Court's decision. On July 19, 2001, the Company filed a lawsuit against
Citibank, N.A. in the Federal Court in South Carolina seeking to collect certain
amounts it believes it is due under the terms of the aforementioned contract.
Citibank, N.A. petitioned the court to dismiss the Company's lawsuit, and in May
2002 the court dismissed the Company's lawsuit pending the completion of certain
mandatory dispute resolution requirements of the contract. The Company and
Citibank, N.A. have subsequently refiled their respective lawsuits.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements in this report (including Management's Discussion and Analysis
of Financial Condition and Results of Operations) that are not descriptions of
historical facts, such as statements about the Company's future prospects and
cash requirements, are forward-looking statements and are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results may vary due to risks and uncertainties, including economic,
competitive and technological factors affecting the Company's operations,
markets, products, services and prices, unanticipated costs and expenses
affecting the Company's cash position and other factors discussed in the
Company's filings with the Securities and Exchange Commission, including the
information set forth under the caption "Business Risks" in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. These
and other factors may cause actual results to differ materially from those
anticipated.
Overview
Affinity Technology Group, Inc. (the "Company") was formed to develop and
market technologies that enable financial institutions and other businesses to
provide consumer financial services electronically with reduced or no human
intervention. The Company's DeciSys/RT(R) loan processing system automates the
processing and consummation of consumer financial services transactions.
DeciSys/RT can simultaneously accept and capture consumer information through
remote input devices, such as touch-screen terminals or terminals used by loan
officers, and automatically interact with credit bureaus and other third parties
that supply information necessary to process a consumer financial transaction.
Due to capital constraints, the Company has suspended efforts to deploy its
products and services that utilize DeciSys/RT(R), including the Affinity
Automated Loan Machine (the ALM(R)), the Mortgage ALM, the e-xpert(R) Lender
system, iDEAL and rtDS. The Company's one remaining loan processing contract was
terminated in October 2002, and the Company has suspended all of its loan
processing operations. Currently, the Company is exploring ways to license
certain of its patents.
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital-raising initiatives. The principal
amount of the notes issued totaled $830,336 and included the issuance of a note
in the principal amount of $205,336 to AMRO in satisfaction of the principal and
accrued interest outstanding under AMRO's convertible debenture as discussed
under "Liquidity and Capital Resources." The notes bear interest at 8% and
principal and accrued interest are due in June 2004. The notes are secured by
the stock of the Company's wholly-owned subsidiary, Decisioning.com, Inc.
Decisioning.com is the Company's patent licensing subsidiary and owns the
Company's patent portfolio. The notes are convertible into the Company's common
stock at a conversion rate of $.20 per share. The Company may prepay the notes
subject to a prepayment penalty of 8% and 4% if the prepayment occurs within the
first twelve months or thereafter, respectively.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be g iven that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
The Company has been granted two patents covering its fully-automated loan
processing systems (U. S. Patents No. 5,870,721 and 5,940,811). In addition, in
1997 the Company acquired a patent that covers the automated processing of an
insurance binder through a kiosk (U. S. Patent No. 5,537,315). In August 2000,
the U.S. Patent and Trademark Office issued to the Company a patent covering the
fully-automated establishment of a financial account, including credit accounts
(U.S. Patent No. 6,105,007).
9
Both of the Company's patents covering fully-automated loan processing
systems have been subject to reexamination by the U.S. Patent and Trademark
Office (the "PTO") due to requests by third parties who have challenged the
validity of the patents. On October 31, 2002, the Company received a "Notice of
Intent to Issue Ex Parte Reexamination Certificate" relating to the completion
of the PTO's reexamination of U. S. Patent No. 5,870,721. It is possible that
third parties may bring additional actions to contest all or some of the
Company's patents. The Company can make no assurances that it will not lose all
or some of the claims covered by its existing patents.
The Company's patents are specific to the e-commerce businesses of the
financial services industry and generally cover the automated establishment of
loans, financial accounts and credit accounts using specific e-commerce related
systems, processes and methods. The market for products and services that enable
e-commerce is highly competitive, rapidly developing and subject to rapid change
and technological development, shifting consumer preferences, frequent new
product introductions and competition from traditional products and services
having all or some of the same features as products and services which enable
e-commerce. Moreover, competitors in the e-commerce market have frequently taken
different strategic approaches and have launched substantially different
products and services to exploit the same perceived market opportunities.
The Company's patents cover specific systems, processes and methods to
establish certain accounts associated with the financial services industry.
There can be no assurance that new products will not be developed and widely
accepted by the e-commerce market that will render obsolete the systems,
processes and methods over which the Company believes it has intellectual
property rights. Moreover, the delivery of products and services through
e-commerce channels is not fully developed, and competition from traditional
channels to deliver these same products and services is intense. Any wide-scale
rejection of e-commerce channels by consumers will have a material adverse
effect on the Company's business, operating results and financial position.
Results of Operations
Revenues
The Company's revenues from continuing operations for the three and nine
months ended September 30, 2002, were $47,407 and $155,960, respectively,
compared to $307,264 and $1,198,767 for the corresponding periods of 2001.
Transaction Fees. Revenues from transaction fees were $10,486 and $104,849,
respectively, for the three and nine months ended September 30, 2002, compared
to $63,396 and $207,048 for the corresponding periods in 2001. The decrease
during the three and nine months ended September 30, 2002, as compared to the
same periods in 2001 is due to the processing of fewer transactions by the only
customer which used the Company's ASP services. The agreement with this customer
terminated in October 2002.
Professional Services. The Company recognized no professional services
revenue in the first nine months of 2002. Professional services revenue for the
three and nine months ended September 30, 2001, was $227,399 and $248,171,
respectively. The Company previously performed professional services pursuant to
specific contracts with certain of its customers. Such services usually involved
developing or enhancing systems for the Company's customers. The Company
recognized professional services revenues when it completed its obligations
under the specific terms of the contract. Professional services performed by the
Company were performed as needed or requested by the Company's customers and are
not recurring in nature.
Other Income. Other income generally consists of miscellaneous revenue
typically associated with ancillary fees that are non-recurring in nature. Other
income recognized for the three and nine months ended September 30, 2002, was
$36,921 and $51,111, respectively, compared to $16,469 and $743,548 for the
corresponding period in 2001. The increase in other income for the three months
ended September 30, 2002, compared to the corresponding period in 2001 was
primarily due to the acceleration and collection of certain license fees
associated with the termination of the Company's one remaining loan processing
contract. The decrease in other income in the nine month period ended September
30, 2002, compared to the corresponding period in 2001 was primarily associated
with the settlement of a lawsuit in January 2001, which represented the majority
of other income recognized in the first nine months of 2001.
10
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and nine months ended
September 30, 2002 was $1,707 and $14,319, respectively, compared to $26,289 and
$53,133 for the corresponding periods in 2001. The decrease during the three and
nine months ended September 30, 2002 as compared to the same periods in 2001 is
attributable to a decrease in the costs associated with processing fewer
transactions through the Company's DeciSys/RT system.
Research and Development. Costs incurred for research and development for
the three and nine months ended September 30, 2001, totaled $99,905 and
$414,389, respectively. The Company has elected to stop further research and
development activities in conjunction with its decision to suspend the marketing
and sales of its loan processing products and services. Accordingly, the Company
recognized no research and development expenses in the first nine months of
2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses associated with continuing operations totaled $262,445
and $1,092,731, respectively, for the three and nine months ended September 30,
2002, as compared to $598,297 and $2,557,666 for the corresponding periods in
2001. The decrease for the three and nine months ended September 30, 2002, as
compared to the corresponding periods of 2001 is primarily attributable to a
decrease in employment related costs associated with an overall reduction in the
number of employees and reduced overall expense levels.
Interest Income. The Company recognizes interest income from its cash and
investment balances and accretion of discount associated with sales-type ALM
leases. Interest income for the three and nine months ended September 30, 2002
was $996 compared to $819 and $10,100 for the corresponding periods in 2001.
Interest Expense. The Company incurred interest expense on its convertible
debenture which it placed in late 2000 and its convertible notes issued in June
2002. Interest expense for the three and nine months ended September 30, 2002
was $18,857 and $53,728, respectively, compared to $36,547 and $102,846 in the
corresponding periods in 2001. The decrease in each period in 2002 as compared
to the corresponding period in 2001 was due to the reduction in the balance
outstanding of its convertible debenture in 2002.
Liquidity and Capital Resources
The Company has generated net losses of $67,597,801 since its inception and
has financed its operations primarily through net proceeds from its initial
public offering in May 1996 and cash generated from operations and other
financing transactions. Net proceeds from the Company's initial public offering
were $60,088,516. Additionally, in 2000 the Company sold 484,848 shares of its
common stock for $500,000 and issued a $1 million convertible debenture. In 2001
the Company issued a $1 million note to HomeGold Financial, Inc., and on
December 31, 2001, the Company tendered the stock of Surety Mortgage, Inc., in
full satisfaction of outstanding principal and accrued interest under the note.
In June 2002, the Company also issued $830,336 in principal amount of secured
convertible notes.
To date, the Company has generated substantial operating losses, has
experienced an extremely lengthy sales cycle for its products and services and
has been required to use a substantial amount of cash resources to fund its
operations. The Company does not believe that existing cash will be sufficient
to fund its operations through the end of the first quarter of 2003.
Accordingly, to remain viable the Company must raise additional capital or
generate revenue and working capital through its patent licensing business,
which is in its inception stage. If the Company is unable to raise additional
capital or generate working capital through the sale of patent licenses, it will
be forced to consider alternatives for winding down its business, which may
include filing for bankruptcy protection. To maintain the minimal resources
necessary to support its current operations, the Company does not believe that
substantial additional reductions in its operating expenses are feasible. No
assurances can be given that the Company will be able to raise additional
capital or internally generate working capital in a manner that would allow it
to continue its operations.
11
In June 2002, the Company issued convertible secured notes (the "notes") to
certain investors as part of its capital raising initiatives. The principal
amount of notes issued totaled $830,336 and included the issuance of a note in
the principal amount of $205,336 to AMRO in satisfaction of the principal and
accrued interest outstanding under AMRO's convertible debenture. The notes bear
interest at 8% and principal and accrued interest are due in June 2004. The
notes are secured by the stock of the Company's wholly-owned subsidiary,
Decisioning.com, Inc. Decisioning.com is the Company's patent licensing
subsidiary and owns the Company's patent portfolio. The notes are convertible
into the Company's common stock at a conversion rate of $.20 per share. The
Company may prepay the notes subject to a prepayment penalty of 8% and 4% if the
prepayment occurs within the first twelve months or thereafter, respectively.
In the second quarter of 2001, the Company issued a $1 million note to
HomeGold Financial, Inc., which was secured by the stock of its wholly-owned
mortgage subsidiary, Surety Mortgage, Inc. The note matured on December 31,
2001, at which time the Company tendered the stock of Surety in full
satisfaction of outstanding principal and accrued interest under the note. The
Company had previously entered into a contract with HomeGold under which it
processed certain mortgage loan applications originated by HomeGold. Such
contract expired on December 31, 2001.
In June 2000, the Company entered into an agreement with Redmond Fund, Inc.
("Redmond") under which Redmond acquired, for $500,000, 484,848 shares of the
Company's common stock and a warrant to acquire an additional 484,848 shares for
$1.37 per share.
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with AMRO International, S.A. The agreement was
amended in August 2001 as described below. Under the original agreement, on
November 22, 2000 the Company issued to AMRO an 8% convertible debenture in the
principal amount of $1,000,000. The debenture was convertible, at the option of
AMRO, into shares of the Company's common stock at a price equal to the lesser
of $1.00 per share or 65% of the average of the three lowest closing prices of
the Company's stock during the month prior to conversion. Under the original
agreement, the debenture matured on May 22, 2002, subject to earlier conversion
and certain provisions regarding acceleration upon default and prepayment. Under
the original agreement, on November 22, 2000 the Company also issued to AMRO a
three-year warrant to acquire 200,000 shares of the Company's common stock. The
warrant exercise price was originally $0.3542 per share. AMRO exercised a
portion of the debenture into an aggregate of 6,214,655 shares of the Company's
stock.
In August 2001, the Company and AMRO amended the convertible debenture and
warrants purchase agreement. Under the terms of the amendment, the Company
agreed to repay the debenture in full in a series of monthly payments through
June 2002, and AMRO agreed not to convert the debenture into any additional
shares of the Company's common stock. In addition, the Company agreed to reduce
the exercise price of the warrant issued to AMRO from $0.3542 per share to $0.05
per share, and to reduce the exercise price of a warrant to acquire 720,000
shares issued to the investor under the Company's equity line agreement from
$0.8554 per share to $0.05 per share.
In June 2002, the Company issued to AMRO an 8% convertible secured note in
the principal amount of $205,336 in full satisfaction of amounts outstanding
under its convertible debenture. The terms of the 8% convertible secured notes
are discussed above.
Net cash used during the nine months ended September 30, 2002, to fund
operations was approximately $359,150 compared to approximately $2,221,588 for
the same period in 2001. At September 30, 2002, cash and liquid investments were
$250,789, as compared to $27,720 at December 31, 2001. At September 30, 2002
working capital was $104,666 as compared to $117,477 at December 31, 2001.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that its current business operations expose it
to significant market risk for changes in interest rates.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Financial Officer has evaluated
the Company's disclosure controls and procedures as of September 30, 2002, and
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There are no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to September 30, 2002.
Part II. Other Information
Items 2, 3, 4 and 5 are not applicable.
Item 1. Legal Proceedings
On March 29, 2001, Citibank, N.A. filed a lawsuit against the Company in
the New York Federal Court seeking a declaratory judgment releasing Citibank,
N.A. from any obligation to the Company for amounts the Company has billed to
Citibank, N.A. under the Company's prior contract to develop a system to process
automobile loans for Citibank, N.A. Citibank, N.A. ultimately transferred this
contract to The Dime Savings Bank of New York. Citibank, N.A.'s lawsuit against
the Company was dismissed on January 8, 2002. Citibank, N.A. has appealed the
Court's decision. On July 19, 2001, the Company filed a lawsuit against
Citibank, N.A. in the Federal Court in South Carolina seeking to collect certain
amounts it believes it is due under the terms of the aforementioned contract.
Citibank, N.A. petitioned the court to dismiss the Company's lawsuit, and in May
2002 the court dismissed the Company's lawsuit pending the completion of certain
mandatory dispute resolution requirements of the contract. The Company and
Citibank, N.A. have subsequently refiled their respective lawsuits.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of Affinity Technology Group, Inc.,
which is hereby incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 of Affinity Technology Group,
Inc. (File No. 333-1170).
3.2 Bylaws of Affinity Technology Group, Inc., which is hereby
incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1 of Affinity Technology Group, Inc. (File
No. 333-1170).
99.1 Certification Pursuant to 18 U. S. C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 2002.
13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Affinity Technology Group, Inc.
By: /s/ Joseph A. Boyle
-------------------
Joseph A. Boyle
Chairman, President, Chief Executive Officer and Chief Financial Officer
(principal executive and financial officer)
Date: November 14, 2002
14
CERTIFICATIONS
I, Joseph A. Boyle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Affinity
Technology Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Joseph A. Boyle
-------------------
Joseph A. Boyle
Chairman, President, Chief Executive Officer and Chief Financial Officer
(principal executive and financial officer)
Date: November 14, 2002
15
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Affinity Technology Group, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Joseph A. Boyle, President, Chief Executive Officer and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joseph A. Boyle
Joseph A. Boyle
President, Chief Executive Officer
and Chief Financial Officer
November 14, 2002
16