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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 March 31, 2003 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ____ No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
41,414,689 shares of Common Stock, $0.0001 par value, as of May 1, 2003.
1
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002...................................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002................................................................ 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002.......................................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................... 13
ITEM 4. Controls and Procedures.............................................................. 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................... 14
ITEM 2 Changes in Securities and Use of Proceeds............................................ 14
ITEM 6. Exhibits and Reports on Form 8-K................................................... 14
Signature....................................................................................... 15
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31,
2003 December 31,
(Unaudited) 2002
------------------------- --------------------------
Assets
Current assets:
Cash and cash equivalents $ 239,192 $ 156,780
Receivables - 5,666
Other current assets 30,111 42,784
------------------------- --------------------------
Total current assets 269,303 205,230
Property and equipment, net 23,403 27,600
Other assets 1,801 2,018
------------------------- --------------------------
Total assets $ 294,507 $ 234,848
========================= ==========================
Liabilities and stockholders' (deficiency) equity
Current liabilities:
Accounts payable $ 56,679 $ 20,741
Accrued expenses 257,843 242,001
Current portion of deferred revenue 17,647 25,000
------------------------- --------------------------
Total current liabilities 332,169 287,742
Convertible notes 1,030,336 830,336
Deferred revenue 27,941 25,000
Commitments and contingent liabilities Stockholders' equity:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
43,582,697 and 43,049,363 shares at March 31, 2003 and
December 31, 2002, respectively 4,358 4,305
Additional paid-in capital 70,489,096 70,441,149
Common stock warrants 52,000 52,000
Treasury stock, at cost (2,168,008 shares at March 31, 2003 and
December 31, 2002) (3,505,287) (3,505,287)
Accumulated deficit (68,136,106) (67,900,397)
------------------------- --------------------------
Total stockholders' (deficiency) equity (1,095,939) (908,230)
------------------------- --------------------------
Total liabilities and stockholders' (deficiency) equity $ 294,507 $ 234,848
========================= ==========================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2003 2002
------------------------- --------------------------
Revenues:
Transactions $ - $ 60,831
Patent license revenue 4,412 -
Other income - 8,430
------------------------- --------------------------
4,412 69,261
Costs and expenses:
Cost of revenues 442 7,962
Selling, general and administrative expenses 222,567 444,759
------------------------- --------------------------
Total costs and expenses 223,009 452,721
------------------------- --------------------------
Operating loss (218,597) (383,460)
Interest income 250 -
Interest expense (17,362) (18,119)
------------------------- --------------------------
Net loss $ (235,709) $ (401,579)
========================= ==========================
Net loss per share - basic and diluted $ (0.01) $ (0.01)
========================= ==========================
Shares used in computing net loss per share 41,296,170 40,281,355
========================= ==========================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2003 2002
-------------------------- --------------------------
Operating activities
Net loss $ (235,709) $ (401,579)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 4,416 58,258
Provision for doubtful accounts - 3,000
Inventory valuation allowance - 15,000
Deferred revenue (4,412) -
Other 25,840 50,213
Changes in current assets and liabilities:
Accounts receivable 5,666 411,174
Other current assets 12,671 31,391
Accounts payable and accrued expenses 51,780 (93,097)
-------------------------- --------------------------
Net cash (used in) provided by operating activities (139,748) 74,360
Investing activities
Sales of property and equipment 22,160 3,950
-------------------------- --------------------------
Net cash provided by investing activities 22,160 3,950
Financing activities
Proceeds from convertible notes 200,000 -
Payments on notes payable - (38,737)
-------------------------- --------------------------
Net cash provided by (used in) financing activities 200,000 (38,737)
-------------------------- --------------------------
Net increase in cash 82,412 39,573
Cash and cash equivalents at beginning of period 156,780 27,720
-------------------------- --------------------------
Cash and cash equivalents at end of period $ 239,192 $ 67,293
========================== ==========================
Supplemental cash flow information:
Income taxes paid $ - $ -
========================== ==========================
Interest paid $ - $ -
========================== ==========================
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 and internally
generated funds will be sufficient to fund its operations through October 2003.
Accordingly, to remain viable the Company must raise additional capital and
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 and generate working capital through the sale of patent licenses soon,
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 and execute a patent licensing
strategy, 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 generate working capital from its
patent licensing business 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.
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 and classification 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, 2002 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, 2002.
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 2002 have been reclassified to conform to 2003
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
3. New Accounting Standards
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123, "Accounting for Stock Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require in both
annual and interim financial statements prominent disclosures about the method
of accounting for stock based employee compensation and the effect of the method
used on reported results. The Company is required to follow the prescribed
disclosure format and has provided the additional disclosures required by SFAS
No. 148 for the quarterly period ended March 31, 2003 (see Note 4).
6
On January 1, 2003, the Company adopted Financial Accounting Standards
Board No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
SFAS No. 143 provides guidance on the recognition and measurement of an asset
retirement obligation and its associated retirement cost. It also provides
accounting guidance for legal obligations associated with the retirement of
tangible long-lived assets. The adoption of SFAS No. 143 did not materially
impact the Company's consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities and
Interpretation of ARB No. 51" ("Fin 46"). Many variable interest entities have
been commonly referred to as special-purpose entities or off-balance sheet
structures, but this interpretation applies to a larger population of entities.
In general, a variable interest entity ("VIE") is any legal structure used for
business purposes that either: (1) does not have equity investors with voting
rights, or (2) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. Under Fin 46, the VIE is
required to be consolidated by the Company if it is subject to a majority of the
risk of loss from the VIE's activities or entitled to receive a majority of the
entity's residual returns. The consolidation requirements of FIN 46 apply to
VIEs created after January 31, 2003 and apply to existing VIEs in the first year
or interim period beginning after June 15, 2003. The Company has adopted FIN 46,
and it did not have a material impact of the Company's consolidated financial
statements.
4. Stock Based Compensation
The Company accounts for stock options in accordance with APB Opinion
No.25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued at fair
value. For stock options granted at exercise prices below the estimated fair
value, the Company records deferred compensation expense for the difference
between the exercise price of the shares and the estimated fair value. The
deferred compensation expense is amortized ratably over the vesting period of
the individual options. For performance based stock options, the Company records
compensation expense related to these options over the performance period.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123" as amended by FASB Statements No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
148")), provides an alternative to APB 25 in accounting for stock based
compensation issued to employees. SFAS 123 provides for a fair value based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock based compensation
arrangements under APB 25, SFAS 123 requires disclosure of the pro forma effect
on net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied. The Company intends to continue to
account for stock based compensation arrangements under APB No. 25 and has
adopted the pro forma disclosure requirements of SFAS 123.
7
Had compensation cost for options granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with SFAS 123, the Company's net income and earnings per share would
have changed to the pro forma amounts listed below:
Three Months Ended March 31,
2003 2002
------------------- -------------------
Net loss:
As reported $ (235,709) $ (401,579)
Add: stock-based compensation expense
included in reported net income - -
Deduct: stock-based compensation expense
determined under the fair value based
method for all awards (15,792) (19,354)
------------------- -------------------
Pro forma net loss $ (251,501) $ (420,933)
=================== ===================
Net loss per common share:
As reported:
Basic and diluted $ (0.01) $ (0.01)
Pro forma:
Basic and diluted $ (0.01) $ (0.01)
The pro forma disclosures required by SFAS 123 regarding net loss and net
loss per share are stated as if the Company had accounted for stock options
using fair values. Compensation expense is recognized on a straight-line basis
over the vesting period of each option installment. Using the Black-Scholes
option-pricing model the fair value at the date of grant for these options was
estimated using the following assumptions:
Three Months Ended March 31,
2003 2002
---------------------- ---------------------
Dividend yield - -
Expected volatility 134% 136%
Risk-free rate of return 4.31% 4.32%
Expected option life, years 3 3
The Company did not grant any options under the Option Plans during the
three months ended March 31, 2003. The weighted average fair value for options
granted under the Option Plans during the three months ended March 31, 2002 was
$0.07.
The Black-Scholes and other option pricing models were developed for use in
estimating fair value of traded options, which have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions. The Company's employee stock options have
characteristics significantly different than those of traded options, and
changes in the subjective assumptions can materially affect the fair value
estimate. Accordingly, in management's opinion, these existing models may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
5. 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.
8
6. Convertible Debenture and 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 in
the principal amount of $205,336 to AMRO International, S.A. ("AMRO") in
satisfaction of the principal and accrued interest outstanding under a
convertible debenture previously issued to AMRO. The notes bear interest at 8%
and principal and accrued interest are due in June 2004. The notes are
collateralized by the stock of the Company's wholly-owned subsidiary,
decisioning.com. 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 March
2003, the Company issued an additional $200,000 principal amount of convertible
notes on terms identical to the terms of the notes issued in June 2002, except
that the new notes mature in March 2005.
On September 22, 2000, the Company entered into a convertible debenture and
warrants purchase agreement with 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 originally $0.3542 per share. AMRO exercised a
portion of the debenture into an aggregate of 6,214,665 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 previous 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 remaining amounts
outstanding under its convertible debenture. The terms of the 8% convertible
secured notes are discussed above.
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 is appealing the grant of a new trial. In
the opinion of management, the Company has meritorious defenses to these claims.
9
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 the failure by
the Company to raise additional capital or generate revenues in amounts
sufficient to permit it to continue its operations, challenges to the Company's
patents, 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, 2002. 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. Products and services previously offered by the Company include
its DeciSys/RT(R) loan processing system, which automated the processing and
consummation of consumer financial services transactions; the Affinity Automated
Loan Machine (the ALM(R)), which allowed an applicant to apply for and, if
approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which
allowed an applicant to apply for a mortgage loan; e-xpertLender(R), which
permitted a financial institution to make automated lending decisions through
its call centers and branches; iDEAL, which permitted automobile lenders to make
automobile lending decisions for loan applications originated at automobile
dealers; and rtDS, which permitted lenders to deliver credit decisions to
applicants over the Internet. Due to capital constraints, the Company has
suspended all efforts to further develop, market and offer these products and
services. The Company's last processing contract terminated in late 2002, and
the Company has no plans in the near term to engage in further sales or other
activities related to its products or services, other than to license the
patents that it owns. Currently, the Company's business activities consist
exclusively of attempting to enter into license agreements with third parties to
license the Company's rights under its patents.
In conjunction with its product development activities, the Company applied
for and obtained three patents. 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 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). 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).
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 challenges to such patents by third parties. On
January 28, 2003, the Company received a Reexamination Certificate (U. S. Patent
No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U.
S. Patent No. 5,870,721. The reexamination of the Company's other loan
processing patent (U. S. Patent No. 5,940,811) is still ongoing. 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.
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 and internally
generated funds will be sufficient to fund its operations through October 2003.
Accordingly, to remain viable the Company must raise additional capital and
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 and generate working capital through the sale of patent licenses soon,
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 and execute a patent licensing
strategy, 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 generate working capital from its
patent licensing business in a manner that would allow it to continue its
operations.
10
On January 22, 2003, decisioning.com, Inc. entered into a patent licensing
agent agreement with Information Ventures LLC d/b/a LPS Group ("LPS"), pursuant
to which decisioning.com appointed LPS as its exclusive representative for the
solicitation and negotiation of agreements to license decisioning.com's patent
rights. Under the agreement, LPS agreed to promote, market, solicit and
negotiate the licensing of patents with third parties and to coordinate and
arrange for legal counsel to represent decisioning.com in connection with any
patent litigation. As compensation for its services under the agreement, LPS was
to receive 25% of all revenues received by decisioning.com under any patent
agreements. The term of the agreement was for the life of the patents, subject
to either party's right to terminate the agreement for "cause," as specified in
the agreement. Pursuant to such termination provisions, the Company had the
right to terminate the agreement for cause if Dooyong Lee, the president of LPS,
left the employment of LPS. On April 30, 2003, the Company terminated the
agreement due to the resignation of Mr. Lee from employment with LPS. The
Company is currently evaluating engaging another patent licensing agent or law
firm to assist the Company in the execution of its patent licensing program.
Critical Accounting Policies
The Company applies certain accounting policies, which are critical in
understanding the Company's results of operations and the information presented
in the consolidated financial statements. We consider critical accounting
policies to be those that require more significant judgments and estimates in
the preparation of our financial statements, the most critical of which pertains
to the valuation reserve on net deferred tax assets. The Company records a
valuation allowance to reduce its deferred tax assets to the amount that it
estimates is more likely than not to be realized. As of March 31, 2003 and
December 31, 2002, the Company recorded a valuation allowance that reduced its
deferred tax assets to equal its deferred tax liability.
Results of Operations
Revenues
The Company recognized revenues of $4,412 from the monthly amortization of
deferred patent license fees for the three months ended March 31, 2003. The
Company has exited all of its previous business activities and is pursuing
opportunities to license its patents. The Company's patent licensing business is
in an early stage, and only insignificant revenues were generated by this
business in the first quarter of 2003. Revenues recognized for the three months
ended March 31, 2002, were $69,261. Such revenues consisted of transaction fees
and other income, as discussed below.
Transaction fees. Revenues from transaction fees were $60,831 for the three
months ended March 31, 2002, and consisted of fees charged for services provided
pursuant to the Company's final loan processing contract. Such contract was
terminated in October 2002.
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 months ended March 31, 2002, were miscellaneous
items associated with the Company's final loan processing contract.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three months ended March 31,
2003 was $442, compared to $7,962 for the corresponding period in 2002. The
decrease during the three months ended March 31, 2003 as compared to the same
period in 2002 is primarily attributable to the Company's withdrawal from its
activities as an application service provider. Cost of revenues incurred during
the three months ended March 31, 2003 were attributable to amortization of
commissions associated with patent licenses.
11
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $222,567 for the three months ended March 31,
2003, as compared to $444,759 for the corresponding period in 2002. The decrease
for the three months ended March 31, 2003, as compared to the corresponding
period of 2002 is primarily attributable to a decrease in employment and related
costs associated with an overall reduction in the number of employees and
reduced overall expense levels.
Interest expense. Interest expense for the three months ended March 31,
2003, was $17,362, compared to $18,119 for the corresponding period in 2002.
Interest expense is primarily associated with the issuance of a $1 million
convertible debenture in November 2000 and the issuance of $830,336 principal
amount of convertible notes in June 2002. Interest expense recognized in the
first quarter of 2002 is associated with the convertible debenture issued in
November 2000. The outstanding balance of this debenture of $205,336 was
satisfied in June 2002 through the issuance of convertible notes which the
Company issued in the aggregate principal amount of $830,336. Interest expense
recognized in the first quarter of 2003 was primarily associated with these
convertible notes.
Liquidity and Capital Resources
The Company has generated net losses of $68,136,106 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.
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 and internally
generated funds will be sufficient to fund its operations through October 2003.
Accordingly, to remain viable the Company must raise additional capital and
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 and generate working capital through the sale of patent licenses soon,
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 and execute a patent licensing
strategy, 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 generate working capital from its
patent licensing business in a manner that would allow it to continue its
operations.
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 International, S.A. ("AMRO") in
satisfaction of the principal and accrued interest outstanding under a
convertible debenture previously issued to AMRO. 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.
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 March 2003, the Company
issued an additional $200,000 principal amount of its convertible notes on terms
identical to the terms of the notes it issued in June 2002, except that the new
notes mature in March 2005.
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 in
accordance with the terms of 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.
12
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. 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 6,214,665 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 previous 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 three months ended March 31, 2003, to fund
operations was approximately $140,000 compared to approximately $74,000 provided
by operations for the same period in 2002. At March 31, 2003, cash and liquid
investments were $239,192, as compared to $156,780 at December 31, 2002. At
March 31, 2003 working capital was a deficit of $62,866 as compared to a deficit
of $82,512 at December 31, 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company does not believe that its current business exposes it to
significant market risk for changes in interest rates.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as defined in Rule 13a-14 of the Securities Exchange Act of 1934
(the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting information required to be disclosed by the Company (including
consolidated subsidiaries) in the Company's Exchange Act filings.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date we carried out our evaluation.
13
Part II. Other Information
Items 3, 4, and 5 are not applicable.
Item 1. Legal Proceedings
Since early 2001, the Company and Citibank N.A. have been engaged in a
dispute involving amounts the Company claims it is owed by Citibank under a
contract that the Company and Citibank entered into in 1997 related to the
development of a system to process automobile loans. This contract was
transferred by Citibank to The Dime Savings Bank of New York in connection with
the sale of Citibank's automobile loan business to The Dime Savings Bank. On two
occasions, Citibank has filed a lawsuit in federal court in New York seeking a
declaratory judgment releasing Citibank from any obligation to the Company for
amounts the Company has billed Citibank under the contract. The first such
action was filed by Citibank in March 2001, and such action was dismissed in
January 2002 because the court determined that the parties had not complied with
the dispute resolutions provisions of the contract. The second such action was
filed in May 2002, and such action was subsequently transferred to the United
States District Court in Columbia, South Carolina, on March 11, 2003, for
consolidation with the Company's pending lawsuit against Citibank. On two
occasions, the Company has filed actions in federal court in South Carolina
seeking to collect amounts it believes it is owed from Citibank. The first such
action, filed in July 2001, was dismissed by the court in April 2002 because the
court determined that the parties had not complied with the dispute resolution
provisions of the contract. The second such action was filed in May 2002, and is
pending.
The Company is subject to a lawsuit related to a claim filed by a plaintiff
who has alleged certain rights, damages and interests incidental to the
Company's formation and development. The lawsuit initially 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 is appealing the grant of a
new trial. The Company intends to vigorously contest such action and, in the
opinion of management, the Company has meritorious defenses.
Item 2. Changes in Securities and Use of Proceeds
(c) On January 20, 2003, the Company issued 533,334 shares of its
common stock to certain directors and service providers in
transactions exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933. Mr. Robert M. Price and Dr. Peter R.
Wilson, both directors of the Company, each received 141,667
shares of common stock in lieu of cash compensation for service
provided by such persons as directors of the Company from April
1999 to March 2002. Additionally, on this date, the Company issued
an aggregate of 250,000 shares of its common stock to three
individuals in consideration for patent-related consulting
services rendered to the Company.
In addition, on March 14, 2003, the Company issued $200,000
principal amount of its convertible secured notes for cash in a
transaction exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933. These notes are convertible into
shares of common stock of the Company at a price of $0.20 per
share.
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.
14
(b) Reports on Form 8-K
On February 13, 2003, the Company filed a Form 8-K to disclose certain
matters discussed at a meeting with investors, analysts and other professionals.
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: May 15, 2003
15
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 functions):
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.
/s/ Joseph A. Boyle
----------------------------------------------------
Joseph A. Boyle
Chairman, President, Chief Executive Officer and
Chief Financial Officer
(principal executive and financial officer)
Date: May 15, 2003
16
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 March 31, 2003, 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
May 15, 2003
17