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 June 30, 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.
1053 B Sparkleberry Lane Extension
Columbia, SC 29223
(Address of principal executive offices)
(Zip code)
(803) 758-2511
(Registrant's telephone number, including area code)
1122 Lady Street, Suite 1145
Columbia, SC 29201
(Former name, former address and former fiscal year,
if changed since last report)
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.
41,454,689 shares of Common Stock, $0.0001 par value, as of July 1, 2003.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003 and December
31, 2002.............................................................. 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2003 and 2002................................... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 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 Disclosure About Market Risk.......... 14
ITEM 4. Controls and Procedures............................................ 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................. 14
ITEM 2. Changes in Securities and Use of Proceeds.......................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders................ 15
ITEM 6. Exhibits and Reports on Form 8-K................................... 15
Signature..................................................................... 16
2
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30,
2003 December 31,
(Unaudited) 2002
----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 66,973 $ 156,780
Receivables - 5,666
Other current assets 29,787 42,784
----------------------------------
Total current assets 96,760 205,230
Property and equipment, net 19,426 27,600
Other assets 1,583 2,018
----------------------------------
Total assets $ 117,769 $ 234,848
==================================
Liabilities and stockholder's (deficiency) equity
Current liabilities:
Accounts payable $ 59,011 $ 20,741
Accrued expenses 271,471 242,001
Convertible notes 830,336 -
Current portion of deferred revenue 17,647 25,000
----------------------------------
Total current liabilities 1,178,465 287,742
Convertible notes 200,000 830,336
Deferred revenue 23,529 25,000
Commitments and contingent liabilities
Stockholders' (deficiency) equity:
Common stock, par value $0.0001; authorized 60,000,000
shares, issued 43,622,697 and 43,049,363 shares at
June 30, 2003 and December 31, 2002, respectively 4,362 4,305
Additional paid-in capital 70,498,292 70,441,149
Common stock warrants 52,000 52,000
Treasury Stock, at cost (2,168,008 shares at June 30, 2003
and December 31, 2002) (3,505,287) (3,505,287)
Accumulated deficit (68,333,592) (67,900,397)
----------------------------------
Total stockholders' (deficiency) equity (1,284,225) (908,230)
----------------------------------
Total liabilities and stockholder's (deficiency) equity $ 117,769 $ 234,848
==================================
See accompanying notes.
3
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ----------- -------------
Revenues:
Transactions $ - $ 33,532 $ - $ 94,363
Patent license revenue 4,412 - 8,824 -
Other income - 5,760 - 14,190
--------------------------- ---------------------------
Total revenue 4,412 39,292 8,824 108,553
Costs and expenses:
Cost of revenues 440 4,650 882 12,612
Selling, general and administrative expenses 181,099 385,527 403,666 830,286
--------------------------- ---------------------------
Total cost and expenses 181,539 390,177 404,548 842,898
--------------------------- ---------------------------
Operating loss (177,127) (350,885) (395,724) (734,345)
Interest income 248 - 498 -
Interest expense (20,607) (16,752) (37,969) (34,871)
--------------------------- ---------------------------
Net loss $ (197,486) $ (367,637) $ (433,195) $ (769,216)
=========================== ===========================
Net loss per share - basic and diluted: $ (0.00) $ (0.01) $ (0.01) $ (0.02)
=========================== ===========================
Shares used in computing net loss per share 41,454,689 40,775,860 41,379,624 40,529,974
=========================== ===========================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2003 2002
---------------------------------
Operating activities
Net loss $ (433,195) $ (769,216)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,609 92,934
Provision for doubtful accounts - 6,000
Inventory valuation allowance - 30,000
Deferred revenue (8,824) -
Other 19,430 63,986
Changes in current assets and liabilities:
Accounts receivable 5,666 435,585
Other current assets 12,997 84,376
Accounts payable and accrued expenses 67,740 (93,922)
----------------------------------
Net cash used in operating activities (327,577) (150,257)
Investing activities
Sale (purchases) of property and equipment, net 37,770 (4,044)
----------------------------------
Net cash provided by (used in) investing activities 37,770 (4,044)
Financing activities
Proceeds from convertible notes 200,000 625,000
Payments on notes payable - (38,737)
----------------------------------
Net cash provided by financing activities 200,000 586,263
----------------------------------
Net (decrease) increase in cash (89,807) 431,962
Cash and cash equivalents at beginning of period 156,780 27,720
----------------------------------
Cash and cash equivalents at end of period $ 66,973 $ 459,682
==================================
Supplemental cash flow information:
Income taxes paid $ - $ -
==================================
Interest paid $ - $ -
==================================
See accompanying notes.
5
Notes to Condensed Consolidated Financial Statements
1. Going Concern
To date, Affinity Technology Group, Inc. (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 other anticipated 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 very 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.
6
3. New Accounting Standards
In December 2002, the Financial Accounting Standards Board ("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 June 30, 2003 (see Note 4).
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 FASB 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.
In April 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS No. 149"). This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149
improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as defined by SFAS No. 133, (2)
clarifies when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to the language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others", and (4)
amends certain other existing pronouncements. Those changes will result in more
consistent reporting of contracts as either derivatives or hybrid instruments.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003.
In May 2003, the Financial Accounting Standards Board issued Statement
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity" ("SFAS 150"). This statement specifies that
instruments within its scope embody obligations of the issuer and that,
therefore, the issuer must classify them as liabilities.
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.
7
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.
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:
Six Months Ended June 30,
2003 2002
----------------------------
Net loss:
As reported $ (433,195) $ (769,216)
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 (25,490) (80,108)
----------------------------
Pro forma net loss $ (458,685) $ (849,324)
============================
Net loss per common share:
As reported:
Basic and diluted $ (0.01) $ (0.02)
Pro forma:
Basic and diluted $ (0.01) $ (0.02)
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:
Six Months Ended June 30,
2003 2002
---------------------------
Dividend yield - -
Expected volatility 132% 136%
Risk-free rate of return 1.99% 4.32%
Expected option life, years 3 3
The weighted average fair value for options granted under the Option
Plans during the six months ended June 30, 2003 and 2002 was $0.14 and $0.07,
respectively.
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.
8
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.
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.
9
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's appeal of the order granting a new trial
was denied in August 2003. Accordingly, there will be a new trial with respect
to this action. The plaintiff alleges that the Company breached an agreement to
give him a 1% equity interest in the Company for services he claims to have
performed in 1993 and 1994. The plaintiff seeks monetary damages of $5,463,000.
In the opinion of management, the Company has meritorious defenses to this
claim.
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.
10
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 other
anticipated 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 very
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.
On May 27, 2003, decisioning.com entered into a legal representation
agreement with Withrow & Terranova, PLLC, pursuant to which decisioning.com
appointed Withrow & Terranova, PLLC as exclusive representative for the
solicitation and negotiation of agreements to license decisioning.com's patents.
(This arrangement replaced the former patent licensing agent agreement between
decisioning.com and Information Ventures LLC d/b/a LPS Group, which was
terminated on April 30, 2003.) Under the agreement, Withrow & Terranova, PLCC
has agreed to promote, market, solicit, and negotiate the licensing of patents
with third parties and to represent decisioning.com as legal counsel in
connection with any patent litigation associated with the enforcement of the
patents. As compensation for its services under the agreement, Withrow and
Terranova will receive 25% of all revenues received by decisioning.com under any
patent agreements and 25% of all amounts paid in settlement of any patent
litigation commenced by the Company. The term of the agreement is for the life
of the patents, subject to either party's right to terminate the agreement for
"cause," as specified in the agreement, and without cause following the third
anniversary of the agreement. If the agreement is terminated by decisioning.com,
Withrow & Terranova, PLLC will be entitled to continue to receive compensation
attributable to patent agreements negotiated prior to termination and, if such
termination is without cause, compensation for certain future patent agreements.
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 June 30, 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 and $8,824 from the monthly
amortization of deferred patent license fees for the three and six months ended
June 30, 2003, respectively. 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. Revenues recognized for the
three and six months ended June 30, 2002, were $39,292 and $108,553,
respectively. Such revenues consisted of transaction fees and other income, as
discussed below.
11
Transaction fees. Revenues from transaction fees were $33,532 and
$94,363 for the three and six months ended June 30, 2002, respectively, 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 and six months ended June 30, 2002,
respectively, were miscellaneous items associated with the Company's final loan
processing contract.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three and six months ended
June 30, 2003 was $440 and $882, respectively, compared to $4,650 and $12,612
for the corresponding periods in 2002. The decrease during the three and six
months ended June 30, 2003 as compared to the same periods 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 and six months
ended June 30, 2003, were attributable to amortization of commissions associated
with patent licenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $181,099 and $403,666 for the three and six
months ended June 30, 2003, as compared to $385,527 and $830,286 for the
corresponding periods in 2002. The decrease for the three and six months ended
June 30, 2003, as compared to the corresponding periods of 2002 is primarily
attributable to a continued 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 and six months ended
June 30, 2003, was $20,607 and $37,969, respectively, compared to $16,752 and
$34,871 for the corresponding periods in 2002. Interest expense for 2003 is
primarily associated with the issuance of $830,336 principal amount of
convertible notes in June 2002 and $200,000 principal amount of convertible
notes in March 2003. Interest expense recognized in the second quarter and first
six months of 2002 is associated with a $1 million 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 as described
above.
Liquidity and Capital Resources
The Company has generated net losses of $68,333,592 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 other
anticipated 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 very
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.
12
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.
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 six months ended June 30, 2003, to fund
operations was approximately $328,000 compared to approximately $150,000 for the
same period in 2002. Net cash used during the six months ended June 30, 2002
reflects the collection of approximately $436,000 of accounts receivable in that
period. At June 30, 2003, cash and liquid investments were $66,973, as compared
to $156,780 at December 31, 2002. At June 30, 2003 working capital was a deficit
of $1,081,705 as compared to a deficit of $82,512 at December 31, 2002. Such
deficit at June 30, 2003 includes approximately $830,000 in convertible notes
which are due in June 2004.
13
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
The Company has 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 of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2003, to provide
reasonable assurances that the information required to be disclosed by the
Company in its reports under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the required time periods.
There have been no changes in the Company's internal controls over
financial reporting that occurred during the Company's most recent fiscal
quarter that materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
Part II. Other Information
Items 3 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's appeal of
the order granting a new trial was denied in August 2003. Accordingly, there
will be a new trial with respect to this action. The plaintiff alleges that the
Company breached an agreement to give him a 1% equity interest in the Company
for services he claims to have performed in 1993 and 1994. The plaintiff seeks
monetary damages of $5,463,000. In the opinion of management, the Company has
meritorious defenses to this claim.
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.
In the second quarter of 2003, the Company issued, effective March 14,
2003, 40,000 shares of its common stock to an individual in a
transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The shares were issued in consideration of the
individual's efforts in introducing the Company to an investor who
acquired a portion of the Company's convertible notes in March 2003.
14
Item 4. Submission of Matters to a Vote of Security Holders
The 2003 Annual Meeting of Stockholders of Affinity Technology Group,
Inc. was held on May 29, 2003 (the "Annual Meeting"). At the Annual Meeting,
Joseph A. Boyle, Wade H. Britt III, Robert M. Price, and Peter R. Wilson were
duly elected to the Board of Directors of the Company. The selection of Scott
McElveen LLP as independent auditors for the year ending December 31, 2003 was
also ratified. Votes cast by the stockholders of the Company at the Annual
Meeting are as follows:
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Joseph A. Boyle 38,927,856 1,554,793 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Wade H. Britt III 38,934,296 1,548,353 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Robert M. Price 38,919,921 1,562,728 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Peter R. Wilson 38,905,096 1,577,553 -
- ----------------------------------------------------------------------------------------------------------------------
Ratification of the selection of Scott McElveen LLP
- ---------------------------------------- -------------------------- ------------------------- ------------------------
Shares Voted In Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- ---------------------------------------- -------------------------- ------------------------- ------------------------
39,703,806 508,162 270,681 -
- ---------------------------------------- -------------------------- ------------------------- ------------------------
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).
10.1 Legal Representation Agreement, dated May 27, 2003, between decisioning.com, Inc., and Withrow
& Terranova, PLLC.
31 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
(b) Reports on Form 8-K
None
15
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: August 14, 2003
16