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, 2006 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.
8807-A Two Notch Road
Columbia, SC 29223
(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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (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.
43,909,469 shares of Common Stock, $0.0001 par value, as of May 1, 2006.
AFFINITY TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2006 and
December 31, 2005........................................................... 4
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2005..................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005............................................... 6
Notes to Condensed Consolidated Financial Statements............................ 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............. 17
ITEM 4. Controls and Procedures................................................. 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................... 17
ITEM1A. Risk Factors.......................................................... 18
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds........... 18
ITEM 3. Defaults Upon Senior Securities....................................... 19
ITEM 5. Other Information..................................................... 19
ITEM 6. Exhibits.............................................................. 19
Signature............................................................................ 20
2
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 Company's
very limited capital resources and the possibility that it may be unable to
raise additional capital in amounts sufficient to permit it to continue
operations; the risk that the Company may lose all or part of the claims covered
by its patents as a result of challenges to its patents; the risk that its
patents may be subject to additional reexamination by the U.S. Patent and
Trademark Office or challenge by third parties; the possibility that all or some
of the holders of the convertible secured notes issued by the Company may take
action to collect the amounts outstanding under these notes; the result of
ongoing litigation; and unanticipated costs and expenses affecting the Company's
cash position. If the Company is not able to raise additional capital, it may be
forced to consider alternatives for winding down its business, which may include
offering its patents for sale or filing for bankruptcy protection. Moreover, if
any of the holders of the convertible notes issued by the Company take action to
collect the amounts owed by the Company under these notes, the Company will be
forced to consider alternatives for winding down its business, which may include
offering its patents for sale or filing for bankruptcy protection. These and
other factors discussed in the Company's filings with the Securities and
Exchange Commission, including the information set forth in Part I, Item 1A.
"Risk Factors" of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, may cause actual results to differ materially from those
anticipated.
3
Part I. Financial Information
Item 1. Financial Statements
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31,
2006 December 31,
(Unaudited) 2005
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 23,443 $ 13,776
Receivable -- 100,000
Prepaid expenses 32,663 33,739
----------------------------
Total current assets 56,106 147,515
Property and equipment, net 4,292 4,796
----------------------------
Total assets $ 60,398 $ 152,311
============================
Liabilities and stockholders' deficiency
Current liabilities:
Accounts payable $ 87,188 $ 119,768
Accrued expenses 715,637 685,134
Convertible notes 1,276,336 1,301,336
Current portion of deferred revenue 33,333 33,333
----------------------------
Total current liabilities 2,112,494 2,139,571
----------------------------
Deferred revenue 52,778 61,111
Commitments and contingent liabilities
Stockholders' deficiency:
Common stock, par value $0.0001; authorized 60,000,000 shares, issued
44,556,104 shares at March 31, 2006 and 44,393,104 at
December 31, 2005 4,456 4,439
Additional paid-in capital 70,730,322 70,696,896
Treasury stock, at cost (2,168,008 shares at March 31, 2006 and
December 31, 2005) (3,505,287) (3,505,287)
Accumulated deficit (69,334,365) (69,244,419)
----------------------------
Total stockholders' deficiency (2,104,874) (2,048,371)
----------------------------
Total liabilities and stockholders' deficiency $ 60,398 $ 152,311
============================
See accompanying notes.
4
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2006 2005
----------------------------
Revenues:
Patent license revenue $ 8,333 $ 4,412
----------------------------
Costs and expenses:
Cost of revenues 833 441
General and administrative expenses 71,719 110,247
----------------------------
Total costs and expenses 72,552 110,688
----------------------------
Operating loss (64,219) (106,276)
Other income (expenses):
Interest income 244 61
Interest expense (25,971) (23,410)
----------------------------
Net loss $ (89,946) $ (129,625)
============================
Net loss per share - basic and diluted $ (0.00) $ (0.00)
============================
Shares used in computing net loss per share 42,243,207 42,159,292
============================
See accompanying notes.
5
Affinity Technology Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2006 2005
-----------------------
Operating activities
Net loss $ (89,946) $(129,625)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,290 2,000
Amortization of stock option compensation 843 --
Deferred revenue (8,333) (4,412)
Changes in current assets and liabilities:
Accounts receivable 100,000 --
Prepaid expenses 1,076 18,829
Accounts payable and accrued expenses 5,523 60,337
----------------------
Net cash provided by (used in) operating activities 10,453 (52,871)
Investing activities
Purchases of property and equipment (786) --
----------------------
Net cash used in investing activities (786) --
Net increase (decrease) in cash 9,667 (52,871)
Cash and cash equivalents at beginning of period 13,776 62,756
----------------------
Cash and cash equivalents at end of period $ 23,443 $ 9,885
======================
See accompanying notes.
6
Notes to Condensed Consolidated Financial Statements
1. The Company - Going Concern
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), 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 operate 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 attempt to license
certain of 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 certain of 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
(the "PTO") 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 PTO as a result of 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. On December
20, 2005, the Company received a Reexamination Certificate (U.S. Patent No.
5,940,811 C1) from the PTO which formally concluded the reexamination of U.S.
Patent No. 5,940,811.
On March 26, 2004, the Company was notified by Federated Department Stores,
Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") that they
had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has similar litigation pending against Household International, Inc.
("Household"), in which it claims that Household infringes U.S. Patent No.
5,870,721 C1, No. 5,940,811 C1 and No. 6,105,007. As a result of the
reexamination of U.S. Patent No. 6,105,007, the Company jointly, with Federated,
Ameritrade and Household, requested the Columbia Federal Court to stay the
lawsuits against Federated, Ameritrade and Household pending resolution of the
reexamination. On March 30, 2006 the Company was notified that the PTO had
concluded the reexamination of U.S. Patent No. 6,105,007 and had issued a
"Notice of Intent to Issue Ex Parte Reexamination Certificate" (the "Notice").
The Notice indicates that the reexamination resulted in the full allowance of
all the claims of the Company's U.S. Patent No. 6,105,007. As a result of the
completion of the reexamination, the stay of the lawsuits against Federated,
Ameritrade and Household automatically lifted so that the lawsuits may proceed
in the Columbia Federal Court. It may take an extended period of time to
complete the litigation with Federated, Ameritrade and Household. Moreover,
protracted litigation with Federated, Ameritrade and Household may have a
material adverse effect on the Company's patent licensing program and impede its
ability to attract additional capital resources in order to continue its
operations.
7
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 and has
been required to use a substantial amount of cash resources to fund its
operations. At March 31, 2006, the Company had cash and cash equivalents of
$23,433. In May 2006, the Company sold an additional $150,000 principal amount
of its 8% convertible secured notes. However, to continue its operations through
the remainder of 2006 and beyond, the Company must raise additional capital.
Unless the Company raises additional capital, it will have to consider
alternatives for winding down its business, which may include offering its
patents for sale or filing for bankruptcy protection. Moreover, the Company
currently does not have the resources to repay the principal and accrued
interest outstanding under its convertible secured notes, which have become due
and payable in full as discussed in the following paragraphs. If any of the
holders of these notes take action to collect the amounts owed by the Company
under these notes, the Company will be forced to consider alternatives for
winding down its business, which may include offering its patents for sale or
filing for bankruptcy protection.
In 2002 the Company initiated a convertible note program under which it was
authorized to issue up to $1,500,000 principal amount of its 8% convertible
secured notes (the "notes"). In April 2006, the convertible note program was
amended to allow the Company to issue up to $3,000,000 principal amount of its
notes and to issue notes with a conversion price greater than $.20 per share. To
date, the Company has issued an aggregate of $1,575,336 principal amount of
notes under this program, including $150,000 principal amount of notes issued in
May 2006 as discussed above. To date, holders of notes having an aggregate of
$386,336 principal amount have converted their notes (and interest accrued
thereon) into shares of the Company's common stock. The outstanding notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share (for notes issued prior to the April 2006 amendment to
the program) or $.50 per share (for notes issued in May 2006), and are secured
by the Company's equity interest in decisioning.com, Inc., which owns the
Company's patent portfolio. The outstanding notes include a note in the
principal amount of $125,000 acquired on June 3, 2002 by the Company's Chief
Executive Officer and a note in the principal amount of $100,000 acquired on
November 5, 2003 by a subsidiary of The South Financial Group, which at the time
owned approximately 12% of the Company's outstanding capital stock. Principal
and interest under these notes generally becomes payable in full on the second
anniversary of the date on which these notes were issued. However, under the
terms of the notes, the full amount of principal and interest under all notes
becomes immediately due and payable in certain events, including bankruptcy or
similar proceedings involving the Company, a default in the payment of principal
and interest under any note, or a change in control of the Company.
To date, notes with a principal amount of $1,206,336 have become due and
payable in accordance with their contractual two-year maturity dates. The
Company has had discussions with the holders of these notes regarding the
extension of the maturity date of these notes. However, the Company has not been
successful in reaching an agreement with all of the holders of these notes
regarding an extension of their maturity date. Because the Company is currently
in default regarding payment of principal and interest due under certain of the
notes, the full amount of principal and interest outstanding under all notes has
become due and payable. Accordingly, the full amount of principal and accrued
interest under all of these notes is shown as a current liability of the Company
as of March 31, 2006 and December 31, 2005. As of March 31, 2006, and December
31, 2005, the amount of principal and accrued interest outstanding under all of
the notes was $1,589,278 and $1,595,906, respectively.
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Accordingly, to remain viable, it is critical
that the Company raise additional capital immediately. The uncertainties of
these litigation matters and other factors affecting the Company's short and
long-term liquidity discussed above have impeded the Company's ability to raise
additional capital. 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.
8
There is substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or amounts and classification of liabilities that may result from this
uncertainty. However, management believes that any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
amounts of liabilities would not materially change 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, 2005 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 2005 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, 2005.
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 2005 have been reclassified to conform to 2006
presentation for comparability. These reclassifications have no effect on
previously reported stockholders' equity or net loss.
3. New Accounting Standards
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by the
Company:
In March 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 156, "Accounting for
Servicing of Financial Assets" (SFAS 156), which amends SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", with the respect to the accounting for separately recognized
servicing assets and servicing liabilities. SFAS 156 permits the choice of the
amortization method or the fair value measurement method, with changes in fair
value recorded in income, for the subsequent measurement for each class of
separately recognized servicing assets and servicing liabilities. The statement
is effective for years beginning after September 15, 2006, with earlier adoption
permitted. The Company does not expect SFAS 156 to have a material impact on the
Company's financial position or results of operations.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the Company's consolidated
financial statements upon adoption.
4. Stock Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123R, "Share-Based Payments" (SFAS 123R), on January 1, 2006. This statement
requires the Company to recognize the cost of employee and director services
received in exchange for the stock options it has awarded. Under SFAS 123R the
Company is required to recognize compensation expense over an award's vesting
period based on the award's fair value at the date of grant. The Company has
elected to adopt SFAS 123R on a modified prospective basis; accordingly the
financial statements for the periods prior to January 1, 2006 do not include
stock based compensation under the fair value method.
9
The Company uses the Black-Scholes option pricing model to value its stock
option grants. The Company did not issue any new stock option awards in the
quarter ended March 31, 2006. Stock based compensation expense recognized in the
period for previously issued awards was approximately $800.
Prior to January 1, 2006, the Company applied APB Opinion No. 25,
"Accounting for Stock Issued to Employees" for measurement and recognition of
stock based transactions with its employees and directors. If the Company had
recognized compensation expense for its stock based transactions based on the
fair value method prescribed by SFAS 123R, net loss and net loss per share for
the first quarter of 2005 would have been as follows:
Three Months
Ended March 31,
2005
-------------
Net loss:
As reported $ (129,625)
Less: stock-based compensation expense
determined under the fair value based
method for all awards (3,463)
-----------
Pro forma net loss $ (133,088)
===========
Net loss per common share:
As reported:
Basic and diluted $ (0.00)
Pro forma:
Basic and diluted $ (0.00)
Using the Black-Scholes option-pricing model the fair value at the date of
grant for these options was estimated using the following assumptions: expected
volatility, 85% to 142%; risk free rate of return, 1.99% to 6.60%; dividend
yield, 0%; and expected option life, 3 years.
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 SFAS
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 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 initially issued totaled $830,336 and included the issuance of a
note in the principal amount of $125,000 to the Company's Chief Executive
Officer and 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 were due in
June 2004. In 2005, 2004 and 2003, the Company issued additional convertible
notes in the aggregate amount of $145,000, $25,000 and $425,000, respectively.
Such notes also bear interest at 8% and were scheduled to mature at various
dates in 2007, 2006 and 2005. Included in the aggregate $425,000 principal
amount of convertible notes issued by the Company in 2003 is a $100,000
convertible note issued to a subsidiary of The South Financial Group, which at
that time owned approximately 12% of the Company's outstanding common stock. All
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.
10
As of May 15, 2006, certain investors have converted principal and accrued
interest related to their convertible notes purchased since June 2002 into
shares of the Company's common stock at the rate of $0.20 per share as detailed
in the table below:
Conversion Date Principal Interest Shares of Common Stock
- ---------------------------------------------------------------------------
October 2003 $ 74,000 $ 7,959 409,796
October 2004 25,000 4,683 148,417
February 2005 25,000 5,439 152,194
March 2006 25,000 7,600 163,000
April 2006 237,336 66,939 1,521,373
--------------- -------------- -----------------
$ 386,336 $ 92,620 2,394,780
=============== ============== =================
As more fully explained in Note 1, all the convertible notes are in default
and are classified as current liabilities. The contractual maturities of the
principal outstanding under the Company's 8% convertible notes are as follows:
March 31, December 31,
Contractual Maturity Date 2006 2005
-------------------------------------------------------------------
June 2004 $ 681,336 $ 706,336
March 2005 200,000 200,000
August 2005 25,000 25,000
November 2005 150,000 150,000
December 2005 50,000 50,000
January 2006 25,000 25,000
May 2007 75,000 75,000
August 2007 45,000 45,000
December 2007 25,000 25,000
-------------------------------
1,276,336 1,301,336
Less: current portion (1,276,336) (1,301,336)
-------------- --------------
Long-term portion $ - $ -
============== ==============
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.
8. Commitments and Contingencies
The Company and its founder, Jeff Norris, have been defendants in a lawsuit
filed by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the
County of Richland in Columbia, South Carolina. Mr. Ligon claims, among other
things, that the Company and Mr. Norris breached an agreement to give him a 1%
equity interest in the Company in consideration of services Mr. Ligon claims to
have performed in 1993 and 1994 in conjunction with the formation of the
Company, and seeks monetary damages of $5,463,000. This lawsuit initially
resulted in a jury verdict against the Company of $68,000. However, Mr. Ligon
subsequently requested and was granted a new trial. In January 2004, this
lawsuit resulted in another jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.
11
The Company is involved in three other lawsuits involving claims by the
Company that third parties have infringed its patents.
9. Subsequent Event
Under the terms of the note purchase agreement that governs the Company's
convertible secured note program, the Company previously was not permitted to
issue additional notes in excess of $1,500,000 aggregate principal amount. In
April 2006 the note purchase agreement was amended to allow the Company to issue
additional convertible notes up to an aggregate principal amount of $3,000,000
and to issue notes with a conversion price greater than $.20 per share. On May
11, 2006 the Company sold additional convertible notes in an aggregate principal
amount of $150,000 that have a conversion price of $.50 per share. Additionally,
in April 2006 certain noteholders converted aggregate principal of $237,336 and
$66,939 of accrued interest into 1,521,373 shares of the Company's common stock.
12
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 Company's
very limited capital resources and the possibility that it may be unable to
raise additional capital in amounts sufficient to permit it to continue
operations; the risk that the Company may lose all or part of the claims covered
by its patents as a result of challenges to its patents; the risk that its
patents may be subject to additional reexamination by the U.S. Patent and
Trademark Office or challenge by third parties; the possibility that all or some
of the holders of the convertible secured notes issued by the Company may take
action to collect the amounts outstanding under these notes; the result of
ongoing litigation; and unanticipated costs and expenses affecting the Company's
cash position. If the Company is not able to raise additional capital, it will
be forced to consider alternatives for winding down its business, which may
include offering its patents for sale or filing for bankruptcy protection.
Moreover, if any of the holders of the convertible notes issued by the Company
take action to collect the amounts owed by the Company under these notes, the
Company will be forced to consider alternatives for winding down its business,
which may include offering its patents for sale or filing for bankruptcy
protection. These and other factors discussed in the Company's filings with the
Securities and Exchange Commission, including the information set forth in Part
I, Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the
year ended December 31, 2005, 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), 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 operate 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 attempt to license
certain of 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 certain of 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
(the "PTO") 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 PTO as a result of 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. On December
20, 2005, the Company received a Reexamination Certificate (U.S. Patent No.
5,940,811 C1) from the PTO which formally concluded the reexamination of U.S.
Patent No. 5,940,811.
13
On March 26, 2004, the Company was notified by Federated Department Stores,
Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") that they
had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has similar litigation pending against Household International, Inc.
("Household"), in which it claims that Household infringes U.S. Patent No.
5,870,721 C1, No. 5,940,811 C1 and No. 6,105,007. As a result of the
reexamination of U.S. Patent No. 6,105,007, the Company jointly, with Federated,
Ameritrade and Household, requested the Columbia Federal Court to stay the
lawsuits against Federated, Ameritrade and Household pending resolution of the
reexamination. On March 30, 2006 the Company was notified that the PTO has
concluded the reexamination of U.S. Patent No. 6,105,007 and has issued a
"Notice of Intent to Issue Ex Parte Reexamination Certificate" (the "Notice").
The Notice indicates that the reexamination resulted in the full allowance of
all the claims of the Company's U.S. Patent No. 6,105,007. As a result of the
completion of the reexamination, the stay of the lawsuits against Federated,
Ameritrade and Household automatically lifted so that the lawsuits may proceed
in the Columbia Federal Court. It may take an extended period of time to
complete the litigation with Federated, Ameritrade and Household. Moreover,
protracted litigation with Federated, Ameritrade and Household may have a
material adverse effect on the Company's patent licensing program and impede its
ability to attract additional capital resources in order to continue its
operations.
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 and has
been required to use a substantial amount of cash resources to fund its
operations. At March 31, 2006, the Company had cash and cash equivalents of
$23,433. In May 2006, the Company sold an additional $150,000 principal amount
of its 8% convertible secured notes. However, to continue its operations through
the remainder of 2006 and beyond, the Company must raise additional capital.
Unless the Company raises additional capital, it will have to consider
alternatives for winding down its business, which may include offering its
patents for sale or filing for bankruptcy protection. Moreover, the Company
currently does not have the resources to repay the principal and accrued
interest outstanding under its convertible secured notes, which have become due
and payable in full as discussed in the following paragraphs. If any of the
holders of these notes take action to collect the amounts owed by the Company
under these notes, the Company will be forced to consider alternatives for
winding down its business, which may include offering its patents for sale or
filing for bankruptcy protection.
In 2002 the Company initiated a convertible note program under which it was
authorized to issue up to $1,500,000 principal amount of its notes. In April
2006, the convertible note program was amended to allow the Company to issue up
to $3,000,000 principal amount of its notes and to issue notes with a conversion
price greater than $.20 per share. To date, the Company has issued an aggregate
of $1,575,336 principal amount of notes under this program, including $150,000
principal amount of notes issued in May 2006 as discussed above. To date,
holders of notes having an aggregate of $386,336 principal amount have converted
their notes (and interest accrued thereon) into shares of the Company's common
stock. The outstanding notes bear interest at 8%, are convertible into the
Company's common stock at a conversion rate of $.20 per share (for notes issued
prior to the April 2006 amendment to the program) or $.50 per share (for notes
issued in May 2006), and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which at the time owned approximately 12% of the
Company's outstanding capital stock. Principal and interest under these notes
generally becomes payable in full on the second anniversary of the date on which
these notes were issued. However, under the terms of the notes, the full amount
of principal and interest under all notes becomes immediately due and payable in
certain events, including bankruptcy or similar proceedings involving the
Company, a default in the payment of principal and interest under any note, or a
change in control of the Company.
To date, notes with a principal amount of $1,206,336 have become due and
payable in accordance with their contractual two-year maturity dates. The
Company has had discussions with the holders of these notes regarding the
extension of the maturity date of these notes. However, the Company has not been
successful in reaching an agreement with all of the holders of these notes
regarding an extension of their maturity date. Because the Company is currently
in default regarding payment of principal and interest due under certain of the
notes, the full amount of principal and interest outstanding under all notes has
become due and payable. Accordingly, the full amount of principal and accrued
interest under all of these notes is shown as a current liability of the Company
as of March 31, 2006 and December 31, 2005. As of March 31, 2006, and December
31, 2005, the amount of principal and accrued interest outstanding under all of
the notes was $1,589,278 and $1,595,906, respectively.
14
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Accordingly, to remain viable, it is critical
that the Company raise additional capital immediately. The uncertainties of
these litigation matters and other factors affecting the Company's short and
long-term liquidity discussed above have impeded the Company's ability to raise
additional capital. 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.
The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.
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 condensed 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, 2006
and December 31, 2005, the Company recorded a valuation allowance that reduced
its deferred tax assets to zero.
Results of Operations
Revenues
Patent license revenue. The Company recognized $8,333 and $4,412 associated
with its patent licensing activities for the three months ended March 31, 2006
and 2005, respectively, related to a license agreement entered into in 1999
which is renewable every three years.
Costs and Expenses
Cost of Revenues. Cost of revenues for the three months ended March 31,
2006 was $833, compared to $441 for the corresponding period in 2005. Cost of
revenues consists of commissions paid to the Company's patent licensing
representatives.
General and Administrative Expenses. General and administrative expenses
totaled $71,719 for the three months ended March 31, 2006, as compared to
$110,247 for the corresponding period in 2005. The decrease for the three months
ended March 31, 2006, as compared to the corresponding period of 2005 is
attributable to lower compensation expense, professional fees and rent incurred
in the first quarter of 2006 compared to the same period in 2005.
15
Interest expense. Interest expense for the three months ended March 31,
2006, was $25,971, compared to $23,410 for the corresponding period in 2004.
Interest expense is related to the Company's convertible notes which accrue
interest at 8%. The increase in interest expense during the three month period
ended March 31, 2006 compared to the corresponding period in 2005 is due to a
higher average amount of principal outstanding in the first quarter of 2006 as
compared to the same period in 2005.
Liquidity and Capital Resources
The Company has generated net losses of $69,334,365 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 and has
been required to use a substantial amount of cash resources to fund its
operations. At March 31, 2006, the Company had cash and cash equivalents of
$23,433. In May 2006, the Company sold an additional $150,000 principal amount
of its 8% convertible secured notes. However, to continue its operations through
the remainder of 2006 and beyond, the Company must raise additional capital.
Unless the Company raises additional capital, it will have to consider
alternatives for winding down its business, which may include offering its
patents for sale or filing for bankruptcy protection. Moreover, the Company
currently does not have the resources to repay the principal and accrued
interest outstanding under its convertible secured notes, which have become due
and payable in full as discussed in the following paragraphs. If any of the
holders of these notes take action to collect the amounts owed by the Company
under these notes, the Company will be forced to consider alternatives for
winding down its business, which may include offering its patents for sale or
filing for bankruptcy protection.
In 2002 the Company initiated a convertible note program under which it was
authorized to issue up to $1,500,000 principal amount of its notes. In April
2006, the convertible note program was amended to allow the Company to issue up
to $3,000,000 principal amount of its notes and to issue notes with a conversion
price greater than $.20 per share. To date, the Company has issued an aggregate
of $1,575,336 principal amount of notes under this program, including $150,000
principal amount of notes issued in May 2006 as discussed above. To date,
holders of notes having an aggregate of $386,336 principal amount have converted
their notes (and interest accrued thereon) into shares of the Company's common
stock. The outstanding notes bear interest at 8%, are convertible into the
Company's common stock at a conversion rate of $.20 per share (for notes issued
prior to the April 2006 amendment to the program) or $.50 per share (for notes
issued in May 2006), and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which at the time owned approximately 12% of the
Company's outstanding capital stock. Principal and interest under these notes
generally becomes payable in full on the second anniversary of the date on which
these notes were issued. However, under the terms of the notes, the full amount
of principal and interest under all notes becomes immediately due and payable in
certain events, including bankruptcy or similar proceedings involving the
Company, a default in the payment of principal and interest under any note, or a
change in control of the Company.
To date, notes with a principal amount of $1,206,336 have become due and
payable in accordance with their contractual two-year maturity dates. The
Company has had discussions with the holders of these notes regarding the
extension of the maturity date of these notes. However, the Company has not been
successful in reaching an agreement with all of the holders of these notes
regarding an extension of their maturity date. Because the Company is currently
in default regarding payment of principal and interest due under certain of the
notes, the full amount of principal and interest outstanding under all notes has
become due and payable. Accordingly, the full amount of principal and accrued
interest under all of these notes is shown as a current liability of the Company
as of March 31, 2006 and December 31, 2005. As of March 31, 2006, and December
31, 2005, the amount of principal and accrued interest outstanding under all of
the notes was $1,589,278 and $1,595,906, respectively.
16
To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Accordingly, to remain viable, it is critical
that the Company raise additional capital immediately. The uncertainties of
these litigation matters and other factors affecting the Company's short and
long-term liquidity discussed above have impeded the Company's ability to raise
additional capital. 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.
Net cash provided by operations during the three months ended March 31,
2006, was approximately $10,000, compared to approximately $53,000 used by
operations for the same period in 2005. The change in cash flows was primarily
attributable to a smaller net loss during the quarter and the collection of a
$100,000 patent license payment from a customer during the quarter. At March 31,
2006 cash and liquid investments were $23,443, as compared to $13,776 at
December 31, 2005. At March 31, 2006 working capital was a deficit of $2,056,388
as compared to a deficit of $1,992,056 at December 31, 2005.
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 defined in Rule 13a-15 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 were effective as of March 31,
2006, 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 were 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 are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
Part II. Other Information
Item 4 is not applicable.
Item 1. Legal Proceedings
The Company and its founder, Jeff Norris, are defendants in a lawsuit filed
by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County
of Richland in Columbia, South Carolina. Mr. Ligon claims, among other things,
that the Company and Mr. Norris breached an agreement to give him a 1% equity
interest in the Company in consideration of services Mr. Ligon claims to have
performed in 1993 and 1994 in conjunction with the formation of the Company, and
seeks monetary damages of $5,463,000. This lawsuit initially resulted in a jury
verdict against the Company of $68,000. However, Mr. Ligon subsequently
requested and was granted a new trial. In January 2004, this lawsuit resulted in
another jury verdict against the Company of $382,148. In connection with the
litigation and the resulting jury verdict, the Company filed post-trial motions
with the trial court in which, among other things, it claimed that the jury
verdict should be set aside. On July 23, 2004, the trial judge granted the
Company's motions, set aside the jury verdict, and ordered entry of a judgment
in favor of the Company. The plaintiff has appealed the trial judge's ruling to
the South Carolina Court of Appeals. If the Company becomes obligated to pay
more than an insignificant amount of damages in connection with this litigation,
it will be forced to consider alternatives for winding down its business, which
may include offering its patents for sale or filing for bankruptcy protection.
17
In June 2003, the Company filed a lawsuit against Federated Department
Stores, Inc., and certain of its subsidiaries alleging that Federated has
infringed one of the Company's patents (U. S. Patent No. 6,105,007). In
September 2003, the Company filed a similar lawsuit against Ameritrade Holding
Corporation and its subsidiary, Ameritrade, Inc. (collectively "Ameritrade"),
alleging infringement of the same patent. Both lawsuits were filed in the United
States District Court in Columbia, South Carolina (the "Columbia Federal
Court"), and both seek unspecified damages. On March 26, 2004, the Company was
notified by Federated and Ameritrade that they had jointly filed a request with
the PTO to reexamine U. S. Patent No. 6,105,007. On June 23, 2004, the Company
received notification that the PTO had granted the request for reexamination. As
a result of the reexamination of U.S. Patent No. 6,105,007, the Company jointly,
with Federated and Ameritrade, requested the Columbia Federal Court to stay the
lawsuits against Federated and Ameritrade pending resolution of the
reexamination of U. S. Patent No. 6,105,007. On March 30, 2006 the Company was
notified that the PTO had concluded the reexamination of U.S. Patent No.
6,105,007 and had issued a "Notice of Intent to Issue Ex Parte Reexamination
Certificate" (the "Notice"). The Notice indicates that the reexamination
resulted in the full allowance of all the claims of the Company's U.S. Patent
No. 6,105,007. As a result of the completion of the PTO's reexamination of U.S.
Patent No. 6,105,007 the stay of these lawsuits against Federated and Ameritrade
was automatically lifted. It may take an extended period of time to complete the
litigation with Federated and Ameritrade.
In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in the United States District
Court in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811 C1, and No. 6,105,007) and that the patents were not valid.
The Company filed counterclaims against Household claiming that Household
infringes U. S. Patent No. 5,870,721 C1, No. 5,940,811 C1 and No. 6,105,007. The
Company also filed a motion with the Delaware Federal Court to transfer the case
to the Columbia Federal Court. In April 2004, the Delaware Federal Court granted
the Company's motion to transfer the case to Columbia Federal Court. As a result
of the reexamination of U.S. Patent No. 6,105,007, the Company jointly, with
Household, requested and received a stay of the Household action from the
Columbia Federal Court pending the resolution of the PTO's reexamination of U.S.
Patent No. 6,105,007. As discussed above, the PTO has concluded the
reexamination of U.S. Patent No. 6,105,007. Accordingly, the stay of this
lawsuit was automatically lifted. It may take an extended period of time to
complete this litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) On May 11, 2006, the Company issued $150,000 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 $0.50 per share.
On March 21, 2006, a noteholder converted $25,000 principal and $7,600
accrued interest related to a convertible secured note into 163,000
shares of the Company's common stock. In addition, on April 3 and
April 21, 2006, certain investors converted $137,336 and $100,000
principal amount and $42,116 and $24,822 of accrued interest under
their convertible secured notes into 897,262 and 624,111 shares of the
Company's common stock, respectively. All shares issued upon
conversion of the Company's convertible secured notes were issued in
transactions exempt from registration pursuant to Section 3(a)(9) of
the Securities Act of 1933.
18
(b) Not applicable.
(c) Not applicable.
Item 3. Defaults Upon Senior Securities
The Company has a convertible note program under which it is authorized to
issue up to $3,000,000 principal amount of its notes. Principal and interest
under these notes generally becomes payable in full on the second anniversary of
the date on which these notes were issued. However, under the terms of the
notes, the full amount of principal and interest under all notes becomes
immediately due and payable in certain events, including bankruptcy or similar
proceedings involving the Company, a default in the payment of principal and
interest under any note, or a change in control of the Company.
To date, notes with a principal amount of $1,206,336 have become due and
payable in accordance with their contractual two-year maturity dates. Because
the Company is currently in default regarding payment of principal and interest
due under certain of the notes, the full amount of principal and interest
outstanding under all notes has become due and payable. Accordingly, the full
amount of principal and accrued interest under all of these notes is shown as a
current liability of the Company as of March 31, 2006 and December 31, 2005. As
of March 31, 2006, and December 31, 2005, the amount of principal and accrued
interest outstanding under all of the notes was $1,589,278 and $1,595,906,
respectively. At May 15, 2006, the amount of principal and accrued interest
outstanding under all of the notes was $1,446,065.
If any of the holders of these notes take action to collect the amounts
owed by the Company under these notes, the Company will be forced to consider
alternatives for winding down its business, which may include offering its
patents for sale or filing for bankruptcy protection.
Item 5. Other Information
On April 3 and April 21, 2006, holders of certain 8% convertible
secured notes issued by the Company converted $137,336 and $100,000 principal
amount and $42,116 and $24,822 of accrued interest under their convertible
secured notes into 897,262 and 624,111 shares of the Company's common stock,
respectively. All shares issued upon conversion of the Company's convertible
secured notes were issued in transactions exempt from registration pursuant to
Section 3(a)(9) of the Securities Act of 1933.
Item 6. 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 Letter Agreement, effective as of April 17, 2006, between Affinity
Technology Group, Inc. (the "Company") and the holders of the 8%
convertible secured notes issued under the Convertible Note Purchase
Agreement, dated as of June 3, 2002, among the Company and the
investors named there in, which is incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
April 17, 2006.
31 Rule 13a-14(a) 15d-14(a) Certifications
32 Section 1350 Certifications
19
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, 2006
20