U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE EXCHANGE ACT for the
transition period from ___________________ to ________________________.
Commission File Number 0-9940
THE FINX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
(Formerly known as Fingermatrix, Inc.
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
249 Saw Mill River Road, Elmsford, NY 10523
(Address of principal executive offices) (Zip Code)
(914) 592-5930
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 ___
As of May 10, 2002, there were 49,955,045 shares of the par value $.01
common stock outstanding.
Page 1
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of
The Finx Group, Inc.
Elmsford, New York
We have reviewed the accompanying consolidated balance
sheet of The Finx Group, Inc. and its subsidiaries as of March 31, 2002
and the related consolidated statements of operations and cash flows for
the three month periods ended March 31, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements referred to above for them to be in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the
Company has suffered a net loss of $885,000 for the three month period
ended March 31, 2002 and has a working capital deficiency of $7,605,000
and a capital deficiency of $6,731,000 as of March 31, 2002. Management's
plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments which
might arise from the outcome of these uncertainties.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 10, 2002
Page 2
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Three months ended March 31, 2002 2001
-----------------------------------------------------------------------------------------------------------
Sales $ 379,000 $ 513,000
Cost of goods sold 289,000 289,000
-----------------------------------------------------------------------------------------------------------
90,000 224,000
Reserve for obsolete and slow moving inventory - (125,000)
-----------------------------------------------------------------------------------------------------------
Gross profit 90,000 99,000
Operating expenses 853,000 831,000
-----------------------------------------------------------------------------------------------------------
Operating loss (763,000) (732,000)
Other income - 26,000
Interest expense, related parties (44,000) (70,000)
Interest expense and financing fees, other (34,000) (48,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations (841,000) (824,000)
Loss from operations of discontinued segments (44,000) (362,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (885,000) $ (1,186,000)
===========================================================================================================
Loss per share computation- basic and diluted:
Loss from continuing operations (841,000) (824,000)
Less dividends on preferred shares (40,000) -
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
stockholders (881,000) (824,000)
Loss from operations of discontinued segments (44,000) (362,000)
-----------------------------------------------------------------------------------------------------------
Net loss available to common stockholders (925,000) (1,186,000)
===========================================================================================================
Weighted average shares outstanding 42,298,767 11,522,108
-----------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted:
Loss from continuing operations ($0.02) ($0.07)
Loss from operations of discontinued segments 0.00) (0.03)
-----------------------------------------------------------------------------------------------------------
Net loss ($0.02) ($0.10)
===========================================================================================================
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 3
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
-----------------------------------------------------------------------------------------------------------
As of March 31, 2002
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 66,000
Accounts receivable, net 202,000
Inventories, net 1,001,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,269,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment and Software Costs:
Property, plant and equipment 2,472,000
Software costs 98,000
Less accumulated depreciation and amortization (2,488,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 82,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Exclusive license agreement, net 658,000
Investment in Qode.com 102,000
Security deposits 22,000
Patents, net 10,000
-----------------------------------------------------------------------------------------------------------
Total other assets 792,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,143,000
===========================================================================================================
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,592,000
Accrued payroll and payroll taxes, executive officers 1,474,000
Accrued payroll 396,000
Accrued payroll taxes 1,334,000
Notes payable executive officer, including interest 1,246,000
Notes payable, related parties, including accrued interest 697,000
Other current liabilities 523,000
Net current liabilities of discontinued segments 612,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 8,874,000
-----------------------------------------------------------------------------------------------------------
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000 Series A
preferred shares issued and outstanding; 20,000 Series B preferred shares
issued and outstanding, 40,000 Series D preferred
shares issued and outstanding as of March 31, 2002 2,680,000
Common stock, $.01 par value; 50,000,000 shares authorized; 42,656,545
shares issued and outstanding 427,000
Additional paid-in capital, common stock 22,184,000
Accumulated deficit (31,958,000)
-----------------------------------------------------------------------------------------------------------
(6,667,000)
Subscriptions receivable (64,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (6,731,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,143,000
===========================================================================================================
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 4
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Three Months ended March 31, 2002 2001
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (841,000) $ (824,000)
Adjustments to reconcile loss from continuing operations to
net cash used in continuing operations:
Reserve for obsolete and slow moving inventory -- 125,000
Depreciation and amortization 40,000 21,000
Bad debt expense 5,000 --
Changes in assets and liabilities:
Inventories (52,000) (164,000)
Accounts receivable, net (105,000) 113,000
Prepaid expense and other current assets 19,000 (1,000)
Accounts payable (32,000) 239,000
Accrued payroll 170,000 239,000
Accrued payroll taxes 151,000 191,000
Accrued interest expense, related parties 152,000 70,000
Other current liabilities 64,000 (42,000)
-----------------------------------------------------------------------------------------------------------
Net cash used in continuing operations (429,000) (33,000)
-----------------------------------------------------------------------------------------------------------
Loss from discontinued operations (44,000) (362,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash used in discontinued operations:
Depreciation and amortization -- 21,000
Impaired asset write-down 36,000 --
Loss on disposal of fixed assets -- 5,000
Net change on other assets and liabilities 8,000 74,000
-----------------------------------------------------------------------------------------------------------
Net cash used in discontinued operations -- (262,000)
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (429,000) (295,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Investment in Qode.com (26,000) --
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,000) --
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 58,000 625,000
Repayments on related party loans (108,000) (348,000)
Proceeds from exercise of stock options 543,000 --
Proceeds from exercise of stock purchase warrants -- 13,000
Net advances (payments) under revolving lines of credit (7,000) 5,000
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 486,000 295,000
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 31,000 --
Cash - Beginning of period 35,000 3,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 66,000 $ 3,000
===========================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ -- $ 34,000
Income Taxes -- --
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 5
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On February 21, 2002, the Company issued 40,000 shares of its series D
preferred stock, convertible into 4,000,000 shares of its common stock, in
consideration for the expansion of its exclusive licensing agreement with GIL
Security Systems, Inc. Using the Black-Scholes option valuation formula, the
convertible preferred stock was valued at $680,000, the amount included in other
assets as "Exclusive License Agreement". The asset is being amortized on the
straight-line method over the remaining life of the exclusive license which
expires September, 2009.
Page 6
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three Months Ended March 31, 2002 and 2001
--------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. ("The Finx Group" or, the "Company") have been prepared in
accordance with Regulation S-B promulgated by the Securities and Exchange
Commission and do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, these interim financial
statements include all adjustments necessary in order to make the financial
statements not misleading. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto of the Company
and management's discussion and analysis of financial condition and results of
operations included in the Annual Report on Form 10-KSB for the year ended
December 31, 2001. Certain reclassifications were made to prior year amounts to
conform to the current year presentation.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, the Company has a history of net losses and as of March 31, 2002 has a
working capital deficiency of $7.6 million and capital deficiency of $6.7
million. Since April of 1999 the Company has relied on financial support from
its controlling stockholder, The Trinity Group-I, Inc. ("Trinity") and other
related parties and since September 25, 2001 has compensated its employees and
key consultants with stock options which were registered on Form S-8. Management
is currently seeking additional financing; however no assurances can be made
that such financing will be consummated. The continuation of the Company as a
going concern is dependent upon its ability to obtain financing, and to use the
proceeds from any such financing to increase its business to achieve profitable
operations. The accompanying consolidated financial statements do not include
any adjustments that would result should the Company be unable to continue as a
going concern.
2. Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in the December 31, 2001 Form 10-KSB.
3. Basic and Diluted Loss Per Share
Basic loss per share reflects the amount of loss for the period
attributable to each share of common stock outstanding during the reporting
period. Diluted loss per share reflects basic loss per share, while giving
effect to all dilutive potential common shares that were outstanding during the
period, such as common shares that could result from the potential exercise or
conversion of securities into common stock. The computation of diluted loss per
share does not assume conversion, exercise, or contingent issuance of securities
that would have an anti-dilutive effect on loss per share (i.e. reducing loss
per share). The dilutive effect, if any, of outstanding options and warrants and
their equivalents would be reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon the exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price of the common stock during the
period. For the period from January 1, 2002 through January 15, 2002, the
Company had outstanding options to purchase 2,300,000 shares of common stock at
$0.15 per share. For the period from January 1, 2001 through March 30, 2001,
the Company had outstanding warrants to purchase 1,280,000 shares of common
stock at $0.01 per share and for the period from January 1, 2001 through March
31, 2001, the Company had outstanding warrants to purchase 135,000 shares of
common stock at $10 per share. For the three months ended March 31, 2002 and
2001, all of the Company's potential common shares were anti-dilutive and a dual
Page 7
presentation of loss per share is not presented. As of March 31, 2002 there were
no outstanding options or warrants to purchase shares of common stock.
In April 2002, the Company issued to consultants, options and warrants
to purchase an aggregate of 5,300,000 shares of common stock, all of which were
exercised for $0.04 per share and will result in $157,000 of compensation
expense in the 2nd Quarter of 2002. In April of 2002, the Company issued to
Lewis S. Schiller, its Chief Executive Officer and Chairman, a warrant to
purchase 10,000,000 million shares of common stock at $0.043 per share, the fair
market value at date of issuance, and 10,000,000 million shares of common stock
at $0.001 per share and issued to Grazyna B. Wnuk, its Vice-President and
director, a warrant to purchase 10,000,000 shares of common stock at $0.043 per
share, the fair market value at date of issuance. These warrants issued to Lewis
S. Schiller and Grazyna B. Wnuk may result in compensation expense equal to the
amount by which the fair market value of such underlying shares of common stock
exceeds the exercise price of such warrants and will be calculated for each
future reporting period for which the warrants remain outstanding. In May 2002,
the Company issued to Lewis S. Schiller an option to purchase 1,500,000 shares
of common stock at $0.04 per share, which was exercised on the date of issuance
and will result in $7,500 of compensation expense in the 2nd Quarter of 2002
based on the fair market value of $0.045 on the date of issuance. Such options
and warrants may dilute earnings per share in the future.
4. Segment Information
Statement of Financial accounting standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" established standards for the
reporting of information about operating segments and defines operating segments
as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is Lewis S. Schiller, the Company's Chief
Executive Officer, who evaluates the Company's businesses based upon the
separate financial statements and information of the underlying subsidiaries of
the Company. Based on the above evaluation, the Company has identified five
separate reportable business segments as follows:
(1) Electro-Mechanical and Electro-Optical Products
(2) Specialized Vending Machines and Avionics Equipment
(3) Security Systems
(4) Internet Marketing
(5) Software Development
The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. There are no
intersegment sales but there are intersegment advances and related interest
charges, and management fees charged by The Finx Group, all of which are
eliminated in the consolidated financial statements. All of the Company's
segments are beyond their development stages and have developed commercially
viable products and or services. However, as of March 31, 2002, only the
Electro-Mechanical and Electro-Optical Products and Specialized Vending Machines
and Avionic Equipment segments have generated meaningful revenues. The remaining
segments require additional funding to enable them to either produce their
products or provide their services and to market such products and services to
their target consumers. Until such funding is obtained, if ever, no assurances
can be given that the Company's segments will ever produce meaningful revenues.
Page 8
4. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2002 2001
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 255,000 $ 325,000
Specialized Vending Machines and Avionics Equipment 104,000 85,000
Internet Marketing 5,000 58,000
Software Development 15,000 --
-------------------------------------------------------------------------------------------------------------
379,000 468,000
Corporate consulting fees 180,000 225,000
Intersegment consulting fees (180,000 ) (180,000 )
-------------------------------------------------------------------------------------------------------------
Total revenues $ 379,000 $ 513,000
=============================================================================================================
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (67,000) $ (182,000)
Specialized Vending Machines and Avionics Equipment (17,000) 10,000
Security Systems (314,000) (181,000)
Internet Marketing (105,000) (466,000)
Software Development (23,000) --
-------------------------------------------------------------------------------------------------------------
(526,000 (819,000)
Corporate costs and expenses (237,000) 87,000
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (763,000) $ (732,000)
=============================================================================================================
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 63,000 $ 70,000
Specialized Vending Machines and Avionics Equipment 25,000 9,000
Security Systems 26,000 15,000
Internet Marketing 19,000 16,000
Software Development 27,000 --
-------------------------------------------------------------------------------------------------------------
160,000 110,000
Corporate costs and expenses 17,000 22,000
Intersegment charges (99,000) (14,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 78,000 $ 118,000
=============================================================================================================
Net Income (Loss):
Electro-Mechanical and Electro- Optical Products $ (119,000) $ (222,000)
Specialized Vending Machines and Avionics Equipment (42,000) --
Security Systems (340,000) (197,000)
Internet Marketing (122,000) (472,000)
Software Development (50,000) --
-------------------------------------------------------------------------------------------------------------
(673,000) (891,000)
Corporate costs and expenses (168,000) 67,000
-------------------------------------------------------------------------------------------------------------
Loss from continuing operations (841,000) 824,000
Loss from discontinued segments (44,000) (362,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (885,000) $ (1,186,000)
=============================================================================================================
Page 9
4. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2002 2001
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 1,000 $ 1,000
Security Systems 22,000 --
Internet Marketing 10,000 13,000
-------------------------------------------------------------------------------------------------------------
33,000 14,000
Corporate 7,000 7,000
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization, continuing operations 40,000 21,000
Depreciation and amortization, discontinued segments -- 21,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 40,000 $ 42,000
=============================================================================================================
-------------------------------------------------------------------------------------------------------------
March 31, December 31,
2002 2001
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 1,703,000 $ 1,564,000
Specialized Vending Machines and Avionics Equipment 335,000 310,000
Security Systems 668,000 10,000
Internet Marketing 199,000 195,000
Software Development 19,000 12,000
-------------------------------------------------------------------------------------------------------------
2,924,000 2,091,000
Corporate 19,685,000 18,496,000
Intersegment investments (13,443,000) (13,443,000)
Intersegment receivables (7,023,000) (5,832,000)
-------------------------------------------------------------------------------------------------------------
Assets, continuing operations 2,143,000 1,312,000
Net assets of discontinued segments -- 36,000
-------------------------------------------------------------------------------------------------------------
Total assets $ 2,143,000 $ 1,348,000
=============================================================================================================
5. Discontinued Segments
During the fourth quarter of 2001, the operations of Shopclue.com, Inc.
("Shopclue.com") and Bizchase, Inc. ("Bizchase") ceased and as such their
operations are presented as discontinued. The information regarding the
Company's discontinued operations is summarized as follows:
------------------------------------------------------------------------------------------------------------
As of March 31, 2002 Shopclue.com Bizchase Total
------------------------------------------------------------------------------------------------------------
Net Current Liabilities of Discontinued Segments:
Accounts payable $ 30,000 $ 30,000 $ 60,000
Accrued payroll 132,000 130,000 262,000
Accrued payroll taxes 159,000 94,000 253,000
Capital lease obligations -- 37,000 37,000
Accrued management fees, related parties -- 270,000 270,000
Accrued interest expense, related parties -- 170,000 170,000
Notes payable, related parties 18,000 1,513,000 1,531,000
Eliminated intercompany liabilities (18,000) (1,953,000) (1,971,000)
------------------------------------------------------------------------------------------------------------
Total current liabilities 321,000 291,000 612,000
------------------------------------------------------------------------------------------------------------
Interest income receivable, related parties 2,000 -- 2,000
Notes receivable, related party 8,000 -- 8,000
Eliminated intercompany assets (10,000) -- (10,000)
------------------------------------------------------------------------------------------------------------
Total current assets -- -- --
------------------------------------------------------------------------------------------------------------
Net current liabilities of discontinued segments $ 321,000 $ 291,000 $ 612,000
============================================================================================================
Page 10
5. Discontinued Segments (continued)
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For the Three Months Ended March 31, 2002 Shopclue.com Bizchase Total
------------------------------------------------------------------------------------------------------------
Loss form Operations of Discontinued Segments:
Write-off impaired assets $ 12,000 $ 25,000 $ 37,000
Other general and administrative expense 2,000 1,000 3,000
------------------------------------------------------------------------------------------------------------
Operating loss (14,000) (26,000) (40,000)
Interest expense and financing fees (3,000) (1,000) (4,000)
------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued segments $ (17,000) $ (27,000) $ (44,000)
============================================================================================================
------------------------------------------------------------------------------------------------------------
For the Three Months Ended March 31, 2001 Shopclue.com Bizchase Total
------------------------------------------------------------------------------------------------------------
Loss form Operations of Discontinued Segments:
Revenues $ 9,000 $ -- $ 9,000
------------------------------------------------------------------------------------------------------------
Depreciation and amortization 2,000 19,000 21,000
Bad debt expense 5,000 -- 5,000
Related party management fees -- 45,000 45,000
Other general and administrative expense 4,000 268,000 272,000
------------------------------------------------------------------------------------------------------------
Operating expense 11,000 332,000 343,000
------------------------------------------------------------------------------------------------------------
Operating loss (2,000) (332,000) (334,000)
Interest income, related parties 4,000 -- 4,000
Interest expense and financing fees -- (32,000) (32,000)
------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued segments $ 2,000 $ (364,000) $ (362,000)
============================================================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty. Although management believes that its expectations are based on
reasonable assumptions, it can give no assurance that its expectations will be
achieved.
The important factors that could cause actual results to differ from
those in the forward-looking statements herein (the "Cautionary Statements") are
more fully described in the Company's December 31, 2001 Form 10-KSB and include,
without limitation: We have a history of losses and cash flow deficits; the
market for our common stock is limited; trading in our securities may be
restricted due to compliance with applicable penny stock regulations; our
company is subject to control by a principal stockholder; a significant portion
of the net proceeds of any potential financing may be used for the payment of
related party and other indebtedness and for salaries of executives and key
personnel; we require additional financing for our business activities; we may
use a significant portion of the proceeds from any financing offering to fund
new businesses; we have granted significant benefits under certain existing and
proposed employment agreements; the proposed activities of FMX Corp. will be
dependent upon patent protection; rapid technological change could render
certain of our products and proposed products obsolete or non-competitive; we
cannot predict market acceptance for our proposed products; the business in
which we intend to engage in is subject to intense competition; e-commerce
products and services may become subject to government regulation; the board of
directors may issue additional preferred stock in the future; a substantial
number of our shares of common stock will be available for future sale in the
public market; we do not intend to pay any dividends on the common stock in the
foreseeable future; our subsidiaries have outstanding significant delinquent
payroll taxes due; the liability of our officers and directors to us and our
shareholders is limited; dependence on key suppliers; reliance on management;
dependence on key
Page 11
personnel; computer viruses; Starnet365.com, Inc. will be subject to regulatory
scrutiny of network marketing systems; we could be subject to potential
uninsured liability, the risks relating to legal proceedings, as well as other
risks referenced from time to time in the Company's filings with the SEC. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
As more fully disclosed in the footnotes to the unaudited interim
financial statements, The Finx Group has four identifiable business segments.
The operations of each of the business segments are discussed separately as
follows:
Electro-Mechanical and Electro-Optical Products
The Electro-Mechanical and Electro-Optical Products segment comprises
the activities of Sequential Electronic Systems, Inc., which is primarily
engaged in the design, manufacture and assembly of precision electro-mechanical
and electro-optical products and devices for sale to commercial and governmental
customers throughout the United States. Among such products and devices are
optical encoders, encoded motors and limit programmers. Sequential Electronic
Systems, Inc.'s revenues decreased $70,000, or 22%, from $325,000 for three
months ended March 31, 2001 (the "2001 1st Quarter") to $255,000 for the three
months ended March 31, 2002 (the "2002 1st Quarter"). Sequential Electronic
Systems, Inc.'s 2002 1st Quarter gross profit was $54,000, or 21%. Sequential
Electronic Systems, Inc.'s 2002 1st Quarter gross profit was $1,000 after a
deduction of $125,000 for a reserve for obsolete and slow moving inventory.
Sequential Electronic Systems, Inc.'s margin for the 2001 1st Quarter, prior to
the inventory reserve, was $126,000, or 39% of sales. Sequential Electronic
Systems, Inc.'s decline in revenue is primarily attributed to its inability to
pay for the materials necessary to build the products included in its backlog.
This inability to manufacture product has resulted in excessive downtime and
idle capacity resulting in significantly reduced margins. Sequential Electronic
Systems, Inc.'s operating expenses decreased $62,000, or 34%, from $183,000 for
the 2001 1st Quarter to $121,000 for the 2002 1st Quarter. As a result of the
above, Sequential Electronic Systems, Inc.'s operating loss decreased by
$115,000, or 63%, from $182,000 for the 2001 1st Quarter to $67,000 for the 2002
1st Quarter. For both the 2002 and 2001 1st Quarters, Sequential Electronic
Systems, Inc.'s operating expense included $45,000 of management fees charged by
The Finx Group.
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment comprise the activities
of S-Tech, Inc. which designs and manufactures two specialized product lines
consisting of specialized vending machines and avionics equipment. "Specialized
Vending" is an industry term used to describe a vending product that utilizes
electronic circuitry and/or computer software. Among the vending machines
manufactured by S-Tech, Inc. are prepaid telephone debit card machines, bill
payment kiosks, information kiosks, and stamp vending machines. S-Tech, Inc.'s
revenues for the 2002 1st Quarter increased $19,000, or 22%, from $85,000 for
the 2001 1st Quarter to $104,000 for the 2002 1st Quarter. S-Tech, Inc.'s gross
profit was $17,000, or 16% of sales, for the 2002 1st Quarter and was $28,000,
or 33% of sales, for the 2001 1st Quarter. S-Tech, Inc.'s gross profit has been
negatively impacted as a result of non-variable overhead costs being allocated
to a relatively minimal sales volume. S-Tech, Inc.'s operating expenses
increased $15,000, or 79%, from $19,000 for the 2001 1st Quarter to $34,000 for
the 2002 1st Quarter. As a result of the above, S-Tech, Inc.'s operating income
(loss) decreased $27,000 from operating income of $10,000 for the 2001 1st
Quarter to an operating loss of $17,000 for the 2002 1st Quarter.
Page 12
Security Systems
The Security Systems segment comprises the activities of Secured Portal
Systems, Inc. and FMX Corp. Secured Portal Systems, Inc. activities consist of
the marketing and distribution of the Georal Security Systems to both those
customers for which it has exclusive distribution rights and to others as to
which it has non-exclusive rights. Many of the customers to whom Secured Portal
Systems, Inc. will seek to market the Georal Security Systems will be domestic
and foreign government purchasers as well as commercial users. On December 11,
2001, the GIL-2001 security door received certification from the U.S. State
Department necessary for its possible procurement for use in U.S. embassies,
consulates and other governmental installations both in the U.S. and abroad. FMX
Corp. is developing products and systems utilizing a proprietary and patented
electronic fingerprint identification technology. The fingerprint identification
technology being developed and utilized by FMX Corp. is a fingerprint
identification scanning technology utilized for a variety of access control and
law enforcement purposes. Applications for this technology include access
control systems for banks, airports, industrial and government facilities, voter
registration and electoral anti-fraud systems, welfare and social program
identification systems, immigration control, suspect booking, prisoner and
detainee movement and release control systems, and sensitive employment
authorization systems.
Secured Portal Systems, Inc.'s original marketing strategy was solely
focused on sales of the GIL-2001 security door to the U.S. State Department.
Starting in February 2002, we have expanded our marketing efforts to include all
customers under the exclusive distribution agreement and we are in the process
of building a sales team for such purpose. Secured Portal Systems, Inc. faces
competition from companies which have far greater financial resources, personnel
and experience. Although we believe that we have a unique product and that the
GIL-2001 security door is the only product of its type that is certified by the
U.S. State Department, we give no assurances that we will be able to generate
any revenues using our exclusive license. FMX Corp. has developed a fingerprint
identification system that could be used in conjunction with the Georal Security
System and may generate revenues in coordination with sales, if any, of the
Georal Security Systems. The Security Systems operating expenses and therefore
its net operating losses increased $133,000, or 73%, from $181,000 for the 2001
1st Quarter to $314,000 for the 2002 1st Quarter. The increase in operating
expenses is due to consulting fees for the increased sales team. During both the
2002 and 2001 1st Quarters, the Security System segment's operating expense
included $90,000 of management fees charged by The Finx Group.
Internet Marketing
Starnet365.com, Inc. is an internet multi-level marketing company.
Starnet365.com, Inc.'s revenue source in the 2002 and 2001 1st Quarters was web
hosting fees. The web hosting fees are generated from replicated web sites,
which Starnet365.com, Inc. maintains for it independent representatives.
Starnet365.com, Inc.'s initial launch, which started in November 2000, has been
stalled due to a lack of funding which has prevented Starnet365.com, Inc. from
providing additional products and marketing support to its independent
representatives. If the Company is able to obtain appropriate levels of funding,
management believes that it may be able to capitalize on a market using the Qode
search engine. On August 31, 2001, we entered into a non-binding letter of
intent with NeoMedia Technologies, Inc. to purchase from them, all assets
related to the NeoMedia-Qode Software and Service Business of NeoMedia, Inc. The
business consists of the ownership and operation of a comprehensive universal
Internet database of consumer product information accessible through the
scanning or searching of Universal Product Codes including the delivery of
targeted promotions, coupons and special offers through a proprietary database
and software. Starnet365.com, Inc. has an inventory of Qode scanning units which
may be used with the Qode search engine. During the 2002 1st Quarter,
Starnet365.com, Inc. generated revenues of $5,000 and during the 2001 1st
Quarter generated revenues of $58,000 resulting in gross profits of $4,000, or
80%, and $25,000, or 43.1%, respectively. Operating expenses of Starnet365.com,
Inc. for the 2002 1st Quarter were $109,000 including $45,000 of management fees
charged by The Finx Group, Inc., $21,000 of consulting fees, $10,000 of
amortization expense and $33,000 of other operating expenses. Operating expenses
of Starnet365.com, Inc. for the 2001 1st Quarter were $491,000 including $59,000
of research and development related to web design and development, $59,000 of
selling expense, primarily promotional allowances and commissions on product
sales, $45,000 of management fees charged by The Finx Group
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and $329,000 of other operating costs. As a result of the above, Starnet365.com,
Inc. incurred an operating loss of $105,000 for the 2002 1st Quarter and
$466,000 for the 2001 1st Quarter.
Software Development
Software Development reflects the activities of Granite Technologies,
Inc. Granite Technologies, Inc was acquired on September 19, 2001 and as such
the Company has reported the operations from this date forward. Revenues
generated for the 2002 1st Quarter were $15,000 from a contract with Virginia
Commonwealth University. Granite Technologies, Inc. develops and sells software
programs for Smart Card applications. Granite Technologies, Inc. has also
developed a software program that is used in e-commerce kiosks that are designed
to operate like an ATM machine but for commercial applications other than just
banking. Granite Technologies, Inc. has provided Virginia Commonwealth
University with two software solutions which we call "the Card Office Solution"
and "the Recreational Sports Solution". During the 2002 1st Quarter, Granite
Technologies, Inc.'s operating expenses were $38,000 and its operating losses
were $23,000.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
Inc., the holding company. During the 2002 and 2001, 1st Quarters The Finx
Group, Inc. recorded $180,000 and $225,000, respectively, of management fees
charged to its subsidiaries. All of such management fees are eliminated in the
consolidated results of operations. The Finx Group Inc.'s operating expenses
increased by $280,000 from $137,000 for the 2000 1st Quarter to $417,000 for the
2002 1st Quarter. As of March 31, 2002, Mr. Lewis S. Schiller and Ms. Grazyna B.
Wnuk are owed an aggregate of $1.4 million for unpaid salaries of which $163,000
and $100,000, respectively, is included in both the 2002 and 2001 1st Quarters
operating expenses. Other significant corporate costs include legal, accounting
and consulting fees.
Interest Expense and Financing Fees, Other
Interest expense and financing fees, other for the 2002 and 2001 1st
Quarters was $34,000 and $48,000, respectively. For the 2002 1st Quarter all of
such interest is interest expense incurred on delinquent payroll tax
obligations. For 2001, $15,000 of such interest represents accrued interest on
delinquent payroll taxes and $33,000 relates to interest expense on Sequential
Electronic Systems, Inc. revolving line of credit with FINOVA Capital
Corporation. As of March 31, 2002, the revolving line of credit has been paid in
full.
Interest Expense and Factoring Fees, Related Parties
Interest expense and financing fees on related party notes decreased
$36,000 from $70,000 for the 2001 1st Quarter to $44,000 for the 2002 1st
Quarter. The Company and its subsidiaries incur interest expense on advances
from Trinity, advances from Universal International, Inc., a company owned by
Grazyna Wnuk, an officer of the Company, a loan from E. Gerald Kay, a former
director, and advances from Blake Schiller and Carol Schiller, both immediate
family members of Lewis Schiller, an officer of the Company. In addition S-Tech
incurs interest expense and factoring fees pursuant to a factoring agreement
with Trinity Factoring Corp., a financing company owned by Lewis Schiller. In
May of 2001, The Trinity Group, Inc. converted $3.5 million of such debt into
equity of the Company. Total outstanding advances from such related parties as
of March 31, 2002, approximated $1.419 million. Interest accrued on such notes
are generally calculated at 9% and as of March 31, 2002 $524,000 of such
interest remains unpaid.
Discontinued Operations
During the fourth quarter of 2001 both Shopclue.com, Inc. and Bizchase,
Inc. ceased operations and during the 2002 1st Quarter such entities incurred
aggregate losses of $44,000 and during the 2001 1st Quarter incurred aggregate
losses of $362,000.
Page 14
Financial Condition - Liquidity and Capital Resources
As of March 31, 2002 the Company had a working capital deficiency of
$7.6 million. Approximately $3.4 million of such deficiency relates to amounts
owed to related parties, including accrued and unpaid salaries of $1.4 million
owed to Lewis Schiller and Grazyna Wnuk, and $2 million owed in the aggregate to
related parties for advances and loans made to fund the operations of the
Company. The delinquent payroll taxes of Sequential Electronic Systems, Inc.,
S-Tech, Inc., Granite Technologies, Inc., Shopclue.com, Inc. and Bizchase, Inc.
in the aggregate, represents an additional $1.4 million of the working capital
deficiency. Such delinquencies could have an adverse impact on our ability to
obtain additional financing. During the 2002 1st Quarter, we used $429,000 for
operations. Historically, we have funded our operations with advances from The
Trinity Group-I, Inc., our controlling shareholder. During the 1st Quarter of
2002 we used stock options to compensate our employees and a key consultant.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, the Company has a history of net losses and as of March 31, 2002 has a
working capital deficiency of $7.6 million and capital deficiency of $6.7
million. Since April of 1999 the Company has relied on financial support from
its controlling stockholder, The Trinity Group-I, Inc. and other related parties
and since September 25, 2001 has compensated its employees and key consultants
with stock options which were registered on Form S-8. Management is currently
seeking additional financing; however no assurances can be made that such
financing will be consummated. The continuation of the Company as a going
concern is dependent upon its ability to obtain financing, and to use the
proceeds from any such financing to increase its business to achieve profitable
operations. The accompanying consolidated financial statements do not include
any adjustments that would result should the Company be unable to continue as a
going concern.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The FINX GROUP, INC.
/S/ Chief Executive Officer and Director May 13, 2002
Lewis S. Schiller (Principal Executive and Accounting Officer)
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