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 September 30, 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 November 18, 2002, there are 120,565,329 shares of the par value
$.01 common stock outstanding.
Page 1
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Three months ended September 30, 2002 2001
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Operating expenses $ 517,000 $ 197,000
Compensation expense adjustment from executive stock
appreciation rights (2,010,000) -
Compensation expense from issuance of stock options - 3,060,000
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Operating income (loss) 1,493,000 (3,257,000)
Interest expense, related parties (28,000) (44,000)
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Income (loss) from continuing operations 1,465,000 (3,301,000)
Gain on disposal of discontinued segments 2,339,000 -
Income (loss) from operations of discontinued segments 174,000 (2,699,000)
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Net Income (loss) $ 3,978,000 $ (6,000,000)
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Income (loss) per share computation - basic:
Income (loss) from continuing operations 1,465,000 (3,301,000)
Less dividends on preferred shares (42,000) (40,000)
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Income (loss) from continuing operations attributable to
common stockholders $ 1,423,000 $ (3,341,000)
Gain on disposal of discontinued segments 2,339,000 -
Income (loss) from operations of discontinued segments 174,000 (2,699,000)
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Net income (loss) available to common stockholders $ 3,936,000 $ (6,040,000)
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Income (loss) per share computation - diluted:
Income (loss) from continuing operations attributable to
common stockholders - basic $ 1,423,000 $ (3,341,000)
Assumed reduction of dividends on preferred shares 41,000 -
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Income (loss) from continuing operations attributable to
common stockholders 1,464,000 (3,341,000)
Gain on disposal of discontinued segments 2,339,000 -
Income (loss) from operations of discontinued segments 174,000 (2,699,000)
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Net income (loss) available to common stockholders $ 3,977,000 $ (6,040,000)
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Weighted average shares outstanding:
Basic 49,873,664 22,206,489
Assumed exercise of warrants 5,931,475 -
Assumed conversion of Series B Preferred Stock 68,965,517 -
Assumed conversion of Series C Preferred Stock 4,000,000 -
Assumed conversion of Series D Preferred Stock 16,000,000 -
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Diluted 144,770,656 22,206,489
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Income (loss) per common share - basic:
Income (loss) from continuing operations $0.03 ($0.15)
Gain on disposal of discontinued segments 0.05 -
Income (loss) from operations of discontinued segments 0.00 (0.12)
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Net income (loss) $0.08 ($0.27)
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Income (loss) per common share - diluted:
Income (loss) from continuing operations $0.01 ($0.15)
Gain on disposal of discontinued segments 0.02 -
Income (loss) from operations of discontinued segments 0.00 (0.12)
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Net income (loss) $0.03 ($0.27)
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 2
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Nine months ended September 30, 2002 2001
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Operating expenses 2,217,000 662,000
Compensation expense from issuance of stock options 171,000 3,060,000
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Operating loss (2,388,000) (3,722,000)
Interest expense, related parties (59,000) (117,000)
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Loss from continuing operations (2,447,000) (3,839,000)
Gain on disposal of discontinued segments 2,339,000 -
Loss from operations of discontinued segments (382,000) (4,002,000)
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Net loss $ (490,000) $ (7,841,000)
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Loss per share computation- basic and diluted:
Loss from continuing operations $ (2,447,000) $ (3,839,000)
Less dividends on preferred shares (122,000) (67,000)
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Loss from continuing operations attributable to common
stockholders (2,569,000) (3,906,000)
Gain on disposal of discontinued segments 2,339,000 -
Loss from operations of discontinued segments (382,000) (4,002,000)
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Net loss available to common stockholders $ (612,000) $ (7,908,000)
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Weighted average shares outstanding 47,018,653 17,115,509
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Loss per common share - basic and diluted:
Loss from continuing operations ($0.05) ($0.23)
Gain on disposal of discontinued segments 0.05 -
Loss from operations of discontinued segments (0.01) (0.23)
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Net loss ($0.01) ($0.46)
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 3
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
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As of September 30, 2002
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ASSETS
CURRENT ASSSETS:
Notes receivable $ 18,000
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Total current assets 18,000
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Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost 90,000
Less accumulated depreciation (85,000)
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Net furniture, fixtures and equipment 5,000
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Other assets:
Exclusive license agreement, net (see Note 3) 1,946,000
Patents, net 9,000
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Total other assets 1,955,000
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TOTAL ASSETS $ 1,978,000
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LIABILITIES AND CAPITAL DEFICIENCY
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CURRENT LIABILITIES:
Accounts payable $ 1,337,000
Accrued payroll and payroll taxes, executive officers 574,000
Accrued payroll 111,000
Current portion of notes payable executive officers, including interest 1,029,000
Notes payable, related parties, including accrued interest 700,000
Other current liabilities 48,000
Net current liabilities of discontinued segments 636,000
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Total current liabilities 4,435,000
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LONG-TERM LIABILITIES:
Deferred executive compensation 1,250,000
Accrued dividends on Series B Preferred stock, executive officer 284,000
Accrued interest, executive officer 529,000
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Total long-term liabilities 2,063,000
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Commitments and contingencies (see Note 8)
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CAPITAL DEFICIENCY
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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, 160,000 Series C preferred
shares issued and outstanding, 40,000 Series D preferred shares issued
and outstanding as of September 30, 2002 (see Note 9) 4,030,000
Common stock, $.01 par value; 750,000,000 shares authorized;
49,873,664 shares issued and outstanding as of September 30, 2002
(see Note 9) 499,000
Additional paid-in capital, common stock 22,596,000
Accumulated deficit (31,645,000)
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Total capital deficiency (4,520,000)
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TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 1,978,000
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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
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Nine Months ended September 30, 2002 2001
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CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (2,447,000) $ (3,839,000)
Adjustments to reconcile loss from continuing operations to
net cash - continuing operations:
Depreciation and amortization 101,000 19,000
Non cash expense from issuance of stock options and
stock purchase warrants 171,000 3,060,000
Impairment charge 102,000 -
Other adjustments - (27,000)
Changes in assets and liabilities:
Other assets 3,000 -
Accounts payable 485,000 163,000
Accrued payroll 513,000 405,000
Accrued payroll taxes - 53,000
Accrued interest expense, related parties 59,000 29,000
Other current liabilities (16,000) 4,000
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Net cash-continuing operations (1,029,000) (133,000)
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Loss from discontinued operations (382,000) (4,002,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Gain on disposal of discontinued segments 2,339,000 -
Changes in the reserve for obsolete and slow moving
inventory 117,000 340,000
Depreciation and amortization 15,000 131,000
Non cash expense from issuance of stock options 28,000 -
Acquired in-process research and development costs - 2,044,000
Impairment charge 191,000 -
Bad debt expense 14,000 30,000
Net change in other assets and liabilities (2,177,000) 1,466,000
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Net cash-discontinued operations 145,000 9,000
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Net cash - operating activities (884,000) (124,000)
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CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities (44,000) -
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Net cash - investing activities (44,000) -
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CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 130,000 201,000
Repayments on related party loans (76,000) (49,000)
Proceeds from exercise of stock options 873,000 -
Proceeds from exercise of stock purchase warrants 1,000 -
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Net cash - financing activities 928,000 152,000
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Net change in cash - 28,000
Cash - Beginning of period - 1,000
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Cash - End of period $ - $ 29,000
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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
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Nine Months ended September 30, 2002 2001
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the year for:
Interest $ - $ -
Income Taxes $ - $ -
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See Notes to Unaudited Consolidated Interim Financial Statements.
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, on May
17 2002, the Company issued 60,000 shares of its series C preferred stock,
convertible into 6,000,000 shares of its common stock and on September 9, 2002
The Finx Group, Inc. issued 100,000 shares of The Finx Group, Inc. series C
preferred stock, convertible into 10,000,000 shares of The Finx Group, Inc.
common stock, in consideration for three separate expansions of its exclusive
licensing agreement with GIL Security Systems, Inc. Using the Black-Scholes
option valuation formula, the convertible preferred stock was valued at
$2,030,000, the amount included in other assets as "Exclusive License
Agreement".
On April 8, 2002, the Company entered into a settlement agreement with
a creditor in order to settle a $17,000 obligation. On April 8, 2002 the Company
placed 500,000 shares of its common stock into escrow and on May 17, 2002, in
final settlement, 353,844 shares of common stock held in escrow were remitted to
the creditor and 146,156 shares of common stock were returned to the Company.
The value of the shares remitted to the creditor approximated $17,000.
In April 2002, the Company issued options and warrants to purchase an
aggregate of 5,300,000 shares of common stock to its key consultants. Such
options and warrant, using the Black-Scholes option valuation formula, were
valued at $157,000, which was charged to operations as a non cash expense.
In April of 2002, the Company issued to Lewis S. Schiller, its Chief
Executive Officer and Chairman, a warrant to purchase 20,000,000 shares of
common stock at $0.043 per share, the fair market value at date of issuance 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. Originally, the warrants issued to Lewis S. Schiller
provided for an exercise price of $0.001 per share with regards to 10,000,000
shares and such exercise price was subsequently increased to $0.043 per share.
These warrants issued to Lewis S. Schiller and Grazyna B. Wnuk provide for
cashless exercise provisions which requires the Company to calculate
compensation expense on the underlying shares for each reporting period that the
warrants or any portion thereof are outstanding. As of September 30, 2002 the
fair market value of the underlying common stock was less than the exercise
price and all previous non cash compensation expense, amounting to $2,010,000,
was reversed against operating expense during the 3rd quarter. Subsequent to
September 30, 2002, these warrants were modified whereby they no longer provide
for cashless exercise provisions and therefore, there will be no further
compensation expense related to these warrants.
See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 6
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In May 2002, the Company issued to Lewis S. Schiller an option to
purchase 1,500,000 shares of common stock, which resulted in a $15,000 of non
cash charge to operations.
On July 2, 2001, the Company issued options to purchase 13,735,000
shares of common stock and using the Black-Scholes option valuation formula,
such options were valued at $3.06 million, which was charged to operations as a
non cash expense.
On August 31, 2001, the Company, through its subsidiary Qode
Acquisition Corp., entered into a non-binding letter of intent with NeoMedia
Technologies, Inc. to purchase from them, all assets related to NeoMedia-Qode
Software and Service Business of NeoMedia, Inc., which 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. Since August 31,
2001, the Company had made certain payments related to the NeoMedia-Qode
Software and Service Business of NeoMedia, Inc. in the amount of $117,000 and in
June 2002, upon its determination that it would not consummate the asset
acquisition, such amounts were written-off and charged to operations.
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 7
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The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Nine Months Ended September 30, 2002 and 2001
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1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. and its subsidiaries consisting of Secured Portal Systems,
Inc., FMX Corp. and Granite Acquisition Corp., (collectively "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 operating losses and as of September 30,
2002 has a working capital deficiency of $4.4 million and capital deficiency of
$4.5 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.
On April 30, 2002, the Financial Accounting Standards Board (FASB)
issued Statement No 145, Rescission of FASB Statement No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. Statement 145
rescinds Statement 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Opinion 30 will now
be used to classify those gains and losses. Statement 64 amended Statement 4,
and is no longer necessary because Statement 4 has been rescinded. Statement 145
amends Statement 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. This amendment is consistent with
the FASB's goal of requiring similar accounting treatment for transactions that
have similar economic effects. This Statement also makes technical corrections
to existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice.
Page 8
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses the
recognition, measurement, and reporting of costs associated with exit or
disposal activities, and supercedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company applied SFAS 146 in accounting for the disposal of its
discontinued business segments as of September 30, 2002.
3. Exclusive License Agreement
On September 13, 1999, the Company, entered into an exclusive
distribution agreement with GIL Security Systems, Inc. ("GIL"). GIL is engaged
in the manufacture and sale of security entrance systems for use as a security
device by a variety of customers at airports, federal buildings, court houses,
embassies, correctional facilities, schools, governmental operations, department
stores and other retail outlets. GIL is a subsidiary of Georal International,
Ltd. ("Georal") and holds all world-wide rights related to the intellectual
property related to the GIL security systems, including trademarks, patents and
technology, as licensed to it by Alan J. Risi, the controlling owner of both GIL
and Georal. The exclusive distribution agreement gives the Company distribution
rights for the sale of GIL's security entrance systems to certain categories of
customers. The products covered by the exclusive distribution agreement includes
all of GIL's products that existed on September 13, 1999 and all products
developed during the term of the exclusive distribution agreement including all
models of the GIL-2001 security door. The categories of customers covered by the
exclusive distribution agreement includes the United States Treasury Department,
the United States Central Intelligence Agency and all other United States
Government intelligence agencies, the United States National Security Agency,
the United States Defense Intelligence Agency, the United States Department of
the Navy, the United States Air Force, the United States Army, all United States
Federal Courts and all United States Embassies, all department stores and retail
stores located in the United States (including all retail stores located in
foreign countries which are part of a retail store chain which is based in the
United States), the Government of Israel, NCR Corp. and Sun Microsystems, Inc.
The exclusive distribution agreement commenced on September 1, 1999 and had an
initial expiration date of August 31, 2004 which was later extended to August
31, 2009 and subsequent to September 30, 2002 was again extended to August 31,
2014.
As an inducement to obtain the exclusive distribution agreement and in
exchange for 1,000,000 common stock shares of GIL, the Company issued 14,134
shares of Fingermatrix, Inc.'s (the predecessor company) Series A preferred
stock, convertible into 10,498,735 shares of Fingermatrix, Inc.'s common stock
(on July 14, 2000, such shares were exchanged for 1,049,874 shares of The Finx
Group, Inc.'s common stock) to Alan J. Risi. On the initial date that the
exclusive distribution agreement was entered into, the GIL 2001 security door
had not been certified by the U.S. State Department and no sales channel
pipeline had been developed and the underlying costs of the shares issued were
not capitalized.
On December 11, 2001, the GIL 2001 security door received certification
by the U.S. State Department. On February 21, 2002, the exclusive licensing
agreement was amended whereby the categories of customers was expanded to
include all financial institutions around the world and whereby the Company
received a right of first refusal to be the exclusive distributor for sales to
any governmental body in the world which is not currently included in the
exclusive licensing agreement as a protected customer. As consideration for the
amendment entered into on February 21, 2002, the Company issued to Alan Risi
40,000 shares of a newly created Series D Preferred Stock that is convertible
into 4,000,000 million shares of the Company's common stock. On May 16, 2002,
the exclusive licensing agreement for the Georal security systems was further
amended whereby the exclusive distribution agreement was expanded to give the
Company exclusive world wide sales and marketing rights, for the term of the
agreement extending to all casinos, malls, stadiums, office buildings and high
rises. As consideration for the amendment entered into on May 16, 2002, the
Company issued to Alan Risi 60,000 shares of its Series C Preferred Stock which
are convertible into 6,000,000 shares of the Company's Common Stock. On
September 9, 2002, the exclusive licensing agreement was expanded to include
World Wide rights to all Airports, Airport Authorities, Schools and Education
Centers. As consideration for the amendment entered into on September 9, 2002,
the Company issued to Alan Risi 100,000 shares of its Series C Preferred Stock
which are convertible into 10,000,000 shares of the Company's Common Stock.
Using the Black-Scholes option
Page 9
valuation formula, the convertible preferred stock was valued at $2,030,000, 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 as of September 30, 2002 would expire on August 31,
2009. During the three and nine months ended September 30, 2002, amortization
expense on the exclusive license amounted to $26,000 and $84,000, respectively.
On October 16, 2002, the exclusive licensing agreement was amended to
provide the Company with the following: (i) the right to receive forty percent
of all maintenance revenues generated from service contracts obtained from the
Company's protected customer base; (ii) the right to share with Georal, any
leasing revenues generated from leasing contracts related to the GIL-2001
security door; (iii) the right to renegotiate the discount received by the
Company from its licensor at such time as the gross sales generated under the
licensing agreement reaches $5 million; and (iv) extended the term of the
agreement an additional five years, to September 18, 2014.
4. Definitive Information Statement
On September 4, 2002, the Company filed a definitive information
statement in order to increase its authorized shares of common stock from
50,000,000 shares to 750,000,000 shares which was authorized by the written
consent of the holders of a majority of the voting power of the outstanding
shares of the Common Stock. The Company requires additional shares of its Common
Stock in order to (i) continue efforts to obtain equity financings from the
proposed sale of convertible preferred stock; (ii) to provide compensation in
the form of option grants to its executive employees and key consultants; (iii)
to facilitate the conversion of its existing convertible preferred stock; (iv)
to reserve shares for outstanding warrants to purchase Common Stock; and (v)
provide sufficient shares for other corporate purposes as such needs may arise.
5. Executive Debt Deferrals
Effective September 30, 2002, Lewis S. Schiller, the Company's Chief
Executive Officer, Chairman of the Board and Director, agreed to defer payment
of his salary until January 1, 2004, payment of accrued interest on notes
payable to him until January 1, 2004 and payment of accrued dividends on
preferred stock held by him until January 1, 2004. Such amounts are presented as
long-term liabilities as of September 30, 2002.
6. Basic and Diluted Income (Loss) Per Share
Basic income (loss) per share reflects the amount of income (loss) for
the period attributable to each share of common stock outstanding during the
reporting period. Diluted income (loss) per share reflects basic income (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 income (loss) per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on income (loss) per share (i.e. increasing income per share or 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. On April 1, 2002 the Company issued a warrant to purchase
150,000 shares of common stock at $0.01 per share of which 148,500 were
exercised upon issuance and 1,500 were outstanding from April 1, 2002 through
September 30, 2002. On April 8, 2002, the Company issued options to purchase
5,150,000 shares of common stock at $0.04 per share, which were all exercised on
the date of issuance. On April 8, 2002, the Company issued to Lewis S. Schiller,
its Chief Executive Officer and Chairman, a warrant to purchase 20,000,000
million shares of common stock at $0.043 per share, the fair market value at
date of issuance 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
Page 10
per share, the fair market value at date of issuance, all such warrants were
outstanding for the period from April 8, 2002 through September 30, 2002. On May
8, 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. For the three months ended September 30, 2002 warrants to purchase
30,000,000 shares of common stock and preferred stock convertible into an
aggregate of 88,965,517 shares of common stock were dilutive potential common
shares. For the nine months ended September 30, 2002, all of the Company's
potential common shares were anti-dilutive.
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. For the period from January 1, 2001 through May 4, 2001, the Company
had outstanding warrants to purchase 135,000 shares of common stock at $10 per
share. For the period from July 2, 2001 through September 25, 2001 the Company
had outstanding options to purchase 6,700,000 shares of common stock at $0.15
per share, for the period from July 2, 2001 through September 30, 2001 the
Company had outstanding options to purchase 300,000 shares of common stock at
$0.15 per share, for the period from July 2, 2001 through September 30, 2001 the
Company had outstanding options to purchase 500,000 shares of common stock at
$0.15 per share, for the period from July 2, 2001 through September 30, 2001 the
Company had outstanding options to purchase 200,000 shares of common stock at
$0.15 per share, for the period from July 2, 2001 through September 30, 2001 the
Company had outstanding options to purchase 4,200,000 shares of common stock at
$0.15 per share and for the period from July 2, 2001 through September 30, 2001
the Company had outstanding options to purchase 2,225,000 at $0.15 per share.
For the three and nine months ended September 30, 2001, all of the Company's
potential common shares were anti-dilutive.
As of September 30, 2002 the Company had outstanding warrants to
purchase 30,000,000 shares of common stock at $0.043 per share and a warrant to
purchase 1,500 shares at $0.01 per share. On October 31, 2002, the Company
issued options to purchase 57,900,000 shares of common stock for $.04 per share,
the fair market value on the date of issuance. On October 31, 2002, Carol
Schiller, the wife of Lewis S. Schiller, agreed to convert $400,000 of related
party debt owed to her into 10,000,000 common shares at the rate of $.04 per
share, the fair value of the common stock on the date of the conversion, on
October 31, 2002, holders of convertible preferred stock elected to convert a
portion of their preferred shares into an aggregate of 32,500,000 shares of
common stock and as of November 18, 2002, the preferred shareholders have the
right to convert, at the option of the holders, their remaining preferred shares
into an aggregate of 81,465,517 shares of common stock. Such warrants, options
and shares of convertible preferred stock may dilute earnings per share in the
future.
7. Discontinued Segments
On October 18, 2002, the Company consummated a plan to dispose of
certain of its subsidiaries. In September 2002, the Board of Directors of the
Company approved a plan whereby it was determined to be in the best interests of
the Company to focus all of its resources on the Security Systems business
segment, whereby all business segments other than the Security Systems business
segment would be disposed. The decision to dispose of all businesses unrelated
to the Security Systems segment was based on management's evaluation of its
capability to support multiple and diverse business segments. Management's
evaluation was confirmed in a business assessment report received from vFinance
Investments, Inc. ("vFinance"), who is performing management and investment
banking services to the Company. The business assessment report received from
vFinance, among other things, recommended that the Company streamline its
operating activities to focus on its Security Systems business segment. The
Company's management investigated various possible venues to undertake the
disposal of the non Security System segments which include Sequential Electronic
Systems, Inc. ("Sequential"), S-Tech, Inc. ("S-Tech"), Granite Technologies,
Inc. ("Granite Technologies"), Shopclue.com, Inc. ("Shopclue"), Bizchase, Inc.
("Bizchase") and Starnet365.com, Inc. ("Starnet").
Page 11
The Company engaged a consultant, pursuant to a consulting agreement,
to assist in developing an exit strategy for the disposal of Granite
Technologies, Shopclue, Bizchase and Starnet for which the consultant received
an option to purchase 1,000,000 shares of its Common Stock at an exercise price
of $.04 per share, the fair market value on the date of grant. Through the
efforts of the consultant, the Company found a purchaser who agreed to acquire
Granite Technologies, Shopclue, Bizchase and Starnet for nominal consideration
subject to the forgiveness of the amounts owed by such subsidiaries to the
Company and the retention by the Company of certain rights to the assets of
Granite Technologies. As a result, the Company entered into the following
purchase agreements with Thomas Banks Ltd. ("Thomas Banks").
Granite Technologies
Granite Technologies Acquisition Corp. ("Granite Acquisition") is
wholly owned by The Company and Granite Technologies is wholly owned by Granite
Acquisition. Pursuant to the terms of a stock purchase agreement among Granite
Acquisition, Granite Technologies and Thomas Banks dated as of September 30,
2002, (the "Granite Stock Purchase Agreement"), Thomas Banks agreed to purchase
all of the issued and outstanding capital stock of Granite Technologies from
Granite Acquisition for one dollar ($1) and the Company agreed to cancel
approximately $600,000 of principal and interest owed by Granite Technologies to
the Company. In addition, pursuant to the Granite Stock Purchase Agreement,
Granite Acquisition retained the rights to all Intellectual Property of Granite
Technologies, Inc. including (i) patents, pending patent applications and patent
applications in process but not yet filed, owned by or assignable to Granite
Technologies (the "Patents"); registered trademarks and service marks and
pending applications therefor and trade names owned Granite Technologies; and
copyright registrations and pending applications therefor owned by Granite
Technologies and used by Granite Technologies in the conduct of its business
(the "Marks"; (ii) written licenses and other agreements relating to the
Patents, Marks and Copyrights, and (iii) manufacturing, process, and other
technology transfer and license agreements which are material to the conduct of
such business and retained all rights and benefits inured from any and all
contracts between Granite Technologies and Virginia Commonwealth University. As
of the date of the Granite Stock Purchase Agreement, Granite Technologies had an
excess of liabilities over assets of approximately $1.4 million, including the
$600,000 owed to the Company. The Company believes that it may be required pay
approximately $200,000 of such remaining liabilities which represent delinquent
payroll taxes. As a result of the disposal of Granite Technologies, the net
reduction in the liabilities of the Company approximated $800,000 and the gain
on disposal approximated $723,000.
Starnet
Pursuant to the terms of a stock purchase agreement among the Company,
Starnet, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Starnet
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Starnet Stock
Purchase Agreement"), Thomas Banks agreed to purchase 98.05% of the issued and
outstanding capital stock of Starnet from the Starnet Sellers for one dollar
($1) and the Company agreed to cancel approximately $1.3 million of principal
and interest owed by Starnet to the Company. As of the date of the Starnet Stock
Purchase Agreement, Starnet had an excess of liabilities over assets of
approximately $1.7 million, including the $1.3 million owed to the Company,
resulting in remaining liabilities of approximately $400,000. The Company
believes that it may be required to pay approximately $132,000 of such remaining
liabilities based on the existence of corporate guarantees previously made on
such amounts by the Company. As a result of the disposal of Starnet, the net
reduction in the liabilities of the Company approximated $268,000 and the gain
on disposal approximated $312,000.
Page 12
Shopclue
Pursuant to the terms of a stock purchase agreement among the Company,
Shopclue, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Shopclue
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Shopclue Stock
Purchase Agreement"), Thomas Banks agreed to purchase 100% of the issued and
outstanding capital stock of Shopclue from the Shopclue Sellers for one dollar
($1) and the Company agreed to cancel approximately $8,000 of principal and
interest owed by Shopclue to the Company. As of the date of the Shopclue Stock
Purchase Agreement, Shopclue had an excess of liabilities over assets of
approximately $340,000, including the $8,000 owed to the Company, resulting in
remaining liabilities of approximately $332,000. The Company believes that it
may be required to pay approximately $169,000 of such remaining liabilities
which represent delinquent payroll taxes. As a result of the disposal of
Shopclue, the net reduction in the liabilities of the Company approximated
$163,000 and the gain on disposal approximated $916,000.
Bizchase
Pursuant to the terms of a stock purchase agreement among the Company,
Bizchase, Lewis S. Schiller, the Company's Chief Executive Officer and Chairman
of the Board, Grazyna B. Wnuk, the Company's Vice-President and Secretary,
members of Lewis S. Schiller's immediate family (collectively, the "Bizchase
Sellers") and Thomas Banks dated as of September 30, 2002, (the "Bizchase Stock
Purchase Agreement"), Thomas Banks agreed to purchase 100% of the issued and
outstanding capital stock of Bizchase from the Bizchase Sellers for one dollar
($1) and the Company agreed to cancel approximately $2 million of principal and
interest owed by Bizchase to the Company. As of the date of the Bizchase Stock
Purchase Agreement, Bizchase had an excess of liabilities over assets of
approximately $2.3 million, including the $2 million owed to the Company,
resulting in remaining liabilities of approximately $295,000. The Company
believes that it may be required pay approximately $136,000 of such remaining
liabilities of which $99,000 relates to delinquent payroll taxes and $37,000
relates to corporate guarantees. As a result of the disposal of Bizchase, the
net reduction in the liabilities of the Company approximated $295,000 and the
loss on disposal approximated $593,000.
Sequential and S-Tech
Pursuant to the terms of a stock purchase agreement among the Company,
Sequential, S-Tech, Defense Manufacturing and Systems, Inc. ("Defense
Manufacturing") and Trinity Group Acquisition Corp. ("Trinity Acquisition")
dated as of September 30, 2002 (the "Sequential and S-Tech Stock Purchase
Agreement"), Trinity Acquisition agreed to purchase 100% of the issued and
outstanding capital of Sequential, S-Tech and Defense Manufacturing from the
Company for one dollar ($1) and the Company agreed to cancel approximately $2.3
million of principal and interest owed by Sequential and S-Tech to the Company.
Defense Manufacturing is wholly owned by the Company but has had no operating
activities since its organization. Trinity Acquisition is wholly owned by Lewis
S. Schiller, the Company's Chief Executive Officer and Chairman of the Board. As
of the date of the Sequential and S-Tech Stock Purchase Agreement, Sequential
and S-Tech had aggregate assets of $1.2 million and aggregate liabilities of
$2.4 million, excluding the $3.1 million owed to the Company. The aggregate
liabilities include $1.1 million of delinquent payroll taxes and the Company has
agreed to indemnify Lewis S. Schiller for any claims made against him regarding
such delinquent payroll taxes. The Trinity Group-I, Inc. is the Company's
controlling shareholder and both The Trinity Group-I, Inc. and Trinity
Acquisition are wholly owned by Lewis S. Schiller, and the Sequential and S-Tech
Stock Purchase Agreement was not consummated at arms-length. However, the
Company believes that because the transaction will reduce the Company's
liabilities by approximately $2.4 million that such transaction is in its best
interests. As a result of the disposal of Sequential, S-Tech and Defense
Manufacturing, the net reduction in the liabilities of the Company approximated
$2.4 million and the gain on disposal approximated $1 million.
Page 13
The information regarding the Company's discontinued operations is
summarized as follows:
Gain (Loss) on Disposal of Segments for
the Three and Nine Months Ended
September 30, 2002
------------------------------------------------------------------------------
Bizchase $ (593,000)
Shopclue 916,000
Granite Technologies 723,000
Starnet 312,000
S-Tech 448,000
Sequential 561,000
Less consulting fee (28,000)
------------------------------------------------------------------------------
$ 2,339,000
------------------------------------------------------------------------------
Income (Loss) from Operations of
Discontinued Segments
Three Months Ended September 30,
2002 2001
--------------------------------------------------------------------------------
Bizchase $ (16,000) $ (146,000)
Shopclue (5,000) -
Granite Technologies (51,000) (2,044,000)
Starnet (3,000) (398,000)
S-Tech (20,000) (100,000)
Sequential 165,000 (201,000)
Less intercompany transactions 104,000 190,000
--------------------------------------------------------------------------------
$ 174,000 $ (2,699,000)
--------------------------------------------------------------------------------
Income (Loss) from Operations of
Discontinued Segments
Nine Months Ended September 30,
2002 2001
--------------------------------------------------------------------------------
Bizchase $ (46,000) $ (679,000)
Shopclue (26,000) 3,000
Granite (149,000) (2,044,000)
Starnet (346,000) (1,046,000)
S-Tech (15,000) (124,000)
Sequential (200,000) (604,000)
Less intercompany transactions 400,000 492,000
--------------------------------------------------------------------------------
$ (382,000) $ (4,002,000)
--------------------------------------------------------------------------------
Page 14
8. Contingencies and Commitments
Employment Agreements
The Company and Lewis S. Schiller have entered into an employment
agreement whereby he is employed as the Company's Chief Executive Officer. Mr.
Schiller's contract is for an initial term commencing April 29, 1999 through
April 28, 2009 and provides annual compensation of $500,000. Mr. Schiller's
contract may be extended an additional five years and commencing 2002 his annual
compensation shall be increased by the greater of 5% or the increase in the cost
of living index. Mr. Schiller's contract provides him with a bonus for each year
of the term equal to 10% of the amount by which the greater of consolidated net
income before income taxes or consolidated net cash flow exceeds $600,000. Mr.
Schiller's contract entitles him to 20% of the gross profit on the sale of any
of the Company's, or its subsidiaries, investments securities. Mr. Schiller's
contract provides him the opportunity to participate in the future expansion of
the Company whereby he is entitled, at his option, to purchase up to 25% of the
authorized securities of any subsidiary which is organized for any purpose. Mr.
Schiller's contract provides him with certain fringe benefits including a
vehicle, health insurance and life insurance. In the event of a change of
control, Mr. Schiller's contract provides him with severance equal to all
amounts owed to him for the full term of the employment agreement. Mr. Schiller
has irrevocably agreed to forego the 20% of the gross profit due to him from the
gain on sale of Bizchase, Shopclue, Granite Technologies, Starnet, Granite
Technologies, Sequential, Defense Manufacturing and S-Tech.
In June of 2002, the Company and Grazyna B. Wnuk entered into an
employment agreement whereby she is employed as the Company's Vice-President.
Ms. Wnuk's contract is for an initial term commencing April 29, 1999 through
April 28, 2009 and provides annual compensation of $200,000. Ms. Wnuk's contract
may be extended an additional five years and commencing 2002 her annual
compensation shall be increased by the greater of 5% or the increase in the cost
of living index. Ms. Wnuk's contract provides her with a bonus for each year of
the term equal to 1% of the amount by which the greater of consolidated net
income before income taxes or consolidated net cash flow exceeds $600,000. Ms.
Wnuk's contract entitles her to 1% of the gross profit on the sale of any of the
Company's, or its subsidiaries, investments securities. Ms. Wnuk's contract
provides her the opportunity to participate in the future expansion of the
Company whereby she is entitled, at her option, to purchase up to 1% of the
authorized securities of any subsidiary which is organized for any purpose. Ms.
Wnuk's contract provides her with certain fringe benefits including a vehicle,
health insurance and life insurance. In the event of a change of control, Ms.
Wnuk's contract provides her with severance equal to all amounts owed to her for
the full term of the employment agreement. Ms. Wnuk has irrevocably agreed to
forego the 1% of the gross profit due to him from the gain on sale of Bizchase,
Shopclue, Granite Technologies, Starnet, Granite Technologies, Sequential,
Defense Manufacturing and S-Tech.
Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, the Company does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against The Finx Group, Inc. f/k/a Fingermatrix, Inc., The Trinity Group-I,
Inc." was filed in the Supreme Court of the State of New York County of New
York. The nature of the action is for breach of contract with regard to the
non-payment of legal invoices for services purported to have been rendered by
the plaintiff, and the relief sought is $334,595, such amounts having been
accrued on the books of the Company as of December 31, 2000, with interest from
January 1999. The Company believes it has meritorious defenses to the complaint
and intends to vigorously contest this complaint. Due to uncertainties in the
legal process, it is at least reasonably possible that the Company's opinion of
the outcome will change in the near term and there exists the possibility that
there could be a material adverse impact on the operations of the Company.
Page 15
Contingent Liabilities
Pursuant to the terms of the Sequential and S-Tech Stock Purchase Agreement, the
Company has agreed to indemnify Lewis S. Schiller and Fred Zivatofsky, the
president of S-Tech, for any claims made against them regarding $1.1 million of
delinquent payroll taxes owed by Sequential and S-Tech. The Company has not
accrued a liability for the payroll taxes because Sequential and S-Tech are in
the process of obtaining a payment program that S-Tech and Sequential would be
able to meet with cash generated from their ongoing operations. However, it is
at least reasonably possible that the Company's opinion of the outcome will
change in the near term and there exists the possibility that there could be a
material adverse impact on the operations of the Company.
9. Subsequent Events
Amendment to the Exclusive License
On October 16, 2002, the exclusive licensing agreement was amended to
provide the Company with the following: (i) the right to receive forty percent
of all maintenance revenues generated from service contracts obtained from the
Company's protected customer base; (ii) the right to share with Georal, any
leasing revenues generated from leasing contracts related to the GIL-2001
security door; (iii) the right to renegotiate the discount received by the
Company from its licensor at such time as the gross sales generated under the
licensing agreement reaches $5 million; and (iv) extended the term of the
agreement an additional five years, to September 18, 2014. As consideration for
the October 16, 2002 amendment to the license agreement, the Company issued to
Georal, 250,000 shares of its Series C Preferred Stock which is convertible into
25,000,000 shares of common stock.
Conversion of Related Party Debt to Common Stock
On October 31, 2002, Carol Schiller, the wife of Lewis S. Schiller,
agreed to convert $400,000 of related party debt owed to her into 10,000,000
common shares at the rate of $.04 per share, the fair value of the common stock
on the date of the conversion.
Issuance of Stock Options
On October 31, 2002, the Company issued options, to purchase 57,900,000
shares of common stock for $.04 per share, the fair market value on the date of
issuance, of which an option to purchase 3,000,000 shares of common stock was
issued to Lewis S. Schiller, an option to purchase 2,500,000 shares of common
stock was issued to Grazyna B. Wnuk, an option to purchase 1,000,000 million
shares of common stock was issued to Douglas Schiller, the adult son of Lewis S.
Schiller for consulting services, and options to purchase 51,400,000 shares of
common stock were issued to the Company's consultants.
Conversion of Preferred Stock into Common Stock
On October 31, 2002, holders of convertible preferred stock elected to
convert a portion of their preferred shares into an aggregate of 32,500,000
shares of common stock and as of November 14, 2002, the preferred shareholders
have the right to convert, at the option of the holders, their remaining
preferred shares into an aggregate of 81,465,517 shares of common stock.
Page 16
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; certain of our proposed activities 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; 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; the liability of our officers and directors to us and our
shareholders is limited; dependence on key suppliers; reliance on management;
dependence on key personnel; computer viruses; 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.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management of the
Company to make assumptions, estimates and judgments that affect the amounts
reported in the financial statements, including the notes thereto, and related
disclosures of commitments and contingencies, if any. The Company considers its
critical accounting policies to be those that require the more significant
judgments and estimates in the preparation of the Company's financial
statements, including the following: estimates of reserves for slow moving
inventory; impairment of long-lived assets, including the valuation of the
exclusive license agreement; accounting for expenses in connection with stock
options and warrants; provisions for doubtful accounts; and accounting for
income taxes. Management relies on historical experience and on other
assumptions believed to be reasonable under the circumstances in making its
judgment and estimates. Actual results could differ materially from those
estimates. There have been no significant changes in assumptions, estimates and
judgments in the preparation of these quarterly financial statements from the
assumptions, estimates and judgments used in the preparation of the Company's
latest audited financial statements.
Page 17
Phase Out of the OTC Bulletin Board
The Company's common stock currently trades on the OTC Bulletin Board
("OTCBB"), which is operated by the Nasdaq Stock Market, Inc. ("NSM"). NSM has
advised us that the OTCBB will be phased out in 2003 and will be replaced by the
Bulletin Board Exchange ("BBX"). The BBX will be a listed marketplace, with
qualitative listing standards but with no minimum share price, income, or asset
requirements. BBX Listing Standards includes Public Interest Standards, Public
Float/Shareholder Requirements, and Corporate Governance Standards. The Public
Interest Standard will allow the BBX to deny listing or de-list an issuer to
protect investors. Imposition of this standard will include a review of all
directors, officers, and major shareholders for past regulatory or legal issues.
The BBX listing standards will require issuers to demonstrate the existence of
one hundred round-lot shareholders and two hundred thousand shares in the public
float. Corporate Governance Standards will require the Company to have an annual
shareholders' meeting to be held within twelve months of the end of the first
fiscal year after the Company becomes listed. The BBX will require the
appointment of at least one independent director and the creation of an Audit
Committee, a majority of the members of which must be independent directors.
Related party transactions and potential conflict of interest situations will
also be subject to review by the Audit Committee or a comparable body of the
Board of Directors. The BBX will also prohibit the disenfranchisement of the
voting rights of existing shareholders and require shareholder approval of
transactions that involve: the grant of stock options to officers and directors,
below-market issuances of stock, acquisitions, and changes of control. The
Company will be required to distribute its annual report on Form 10KSB to its
shareholders and engage only auditors that are subject to peer review consistent
with the American Institute of Certified Public Accountants ("AICPA")
procedures. If the BBX accepts a listing application filed by the Company, the
initial listing fee will be approximately $10,000 and the Company will also be
subject to an annual renewal fee of $4,000. If a listing application filed by
the Company is not accepted by the BBX, the Company's common stock will trade on
the Pink Sheets which would likely provide holders of the Company's common stock
with less liquidity than either the OTCBB or the BBX.
Results of Operations
In September 2002 we made a decision to focus our business exclusively
on our Security Systems business segment and on October 18, 2002 we disposed of
all non security system segments. Currently, our primary source of future
revenues, if any, will be generated under our Exclusive Licensing Agreement with
Georal International for the sale of Georal Security Systems, including the
GIL-2001 security door. Potential revenues may be generated from the marketing
and distribution of the Georal Security Systems to both those customers for
which we have exclusive distribution rights and to others as to which we have
non-exclusive rights. Many of the customers to whom we 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. In October 2002, Georal International
received broad patent approval for its security entrance system from the United
States Patent Trademark Office (Patent 6,472,984). The patent received by Georal
covers the secured portal which is the subject of the exclusive license
agreement and may provide barriers to entry and possibly eliminate competition
from other portal manufacturers.
Our original marketing strategy was focused solely 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 have built a sales team for such purpose.
We face 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 meaningful revenues using our exclusive license.
We also offer Secured Card Solutions from our development and sale of
software programs for Device Management and Smart Card applications. We have
provided Virginia Commonwealth University ("VCU") with two of our Secured Card
software solutions - the "Secured Recreational Sports Solution" and "The Secured
Card Solution". "The Secured Recreational Sports Solution" which currently
serves VCU from three locations offering a variety of fitness, aquatics and
intramurals. The activities are offered to all students, faculty, and university
and hospital employees. The Secured Recreational Sports Solution's
Page 18
database is integrated with the VCU card database for single university
identification. The Secured Recreational Sports Solution handles all check-in of
members, locker assignment and equipment check-in and check-out. It also keeps
track of member billing and payroll deduction. Further, it handles member
suspensions and automatic emailing of special events. The Secured Sports
Recreation Solution application is written using the new Microsoft.NET
architecture.
We are developing products and systems utilizing a proprietary and
patented electronic fingerprint identification technology. The fingerprint
identification technology being developed and utilized 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. We have also 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.
For the three and nine month periods ended September 30, 2002 and 2001
our continuing business did not generate any revenues. Our operating expenses
during such periods includes executive payroll which is currently $700,000 per
year or $175,000 for the 2002 and 2001 quarter and $525,000 for the 2002 and
2001 nine months. None of such salaries have been paid and as of September 30,
2002, Lewis S. Schiller, our Chief Executive Officer has agreed to defer payment
of his salary until January 1, 2004. Expenses associated with our sales and
marketing represent amounts owed to consultants which approximates $1 million
per year or $250,000 for the 2002 quarter and $750,000 for the 2002 nine months.
Such sales and marketing costs were not incurred during the 2001 comparative
period. Other significant costs include professional fees for legal and
accounting services which approximated $350,000 annually for both 2002 and 2001.
Depreciation and amortization for the three and nine months ended September 30,
2002 was $31,000 and $101,000, respectively, and consisted primarily of
amortization of the exclusive license, and was $6,000 and $19,000, respectively
for the three and nine months ended September 30, 2001.
Since the third quarter of 2001, we have been compensating our
executives and consultants with stock options that have been registered on Form
S-8. In April 2002, we issued options and warrants to purchase an aggregate of
5,300,000 shares of common stock to its key consultants. Such options and
warrants, using the Black-Scholes option valuation formula, were valued at
$157,000, which was charged to operations as a non cash expense. In April of
2002, The Finx Group issued to Lewis S. Schiller, its Chief Executive Officer
and Chairman, a warrant to purchase 20,000,000 million shares of common stock at
$0.043 per share, the fair market value at date of issuance 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. Originally, the warrants issued to Lewis S. Schiller provided
for an exercise price of $0.001 per share with regards to 10,000,000 shares and
such exercise price was subsequently increased to $0.043 per share. These
warrants issued to Lewis S. Schiller and Grazyna B. Wnuk provide for cashless
exercise provisions which requires The Finx Group to calculate compensation
expense on the underlying shares for each reporting period that the warrants or
any portion thereof are outstanding as represented by the amount by which the
fair value of such warrants exceeds the exercise price. At the end of the second
quarter of 2002, such non cash compensation expense related to the stock
appreciation rights was $2,010,000. As of September 30, 2002, the fair value of
the warrants was less than the exercise and therefore the $2,010,000 non cash
compensation expense was reversed in the third quarter of 2002. On October 31,
2002, Lewis S. Schiller and Grazyna B. Wnuk agreed to remove the cashless
exercise provisions from these warrants and as a result there will be no future
compensation expense related to such warrants. In May 2002, The Finx Group
issued to Lewis S. Schiller an option to purchase 1,500,000 shares of common
stock, which resulted in a $15,000 of non cash expense charged to operations.
On July 2, 2001, the Company issued options to purchase 13,735,000
shares of common stock and using the Black-Scholes option valuation formula,
such options were valued at $3.06 million, which was charged to operations as a
non cash expense for the three and nine months ended September 30, 2001.
On August 31, 2001, The Finx Group, through its subsidiary Qode
Acquisition Corp., entered into a non-binding letter of intent with NeoMedia
Technologies, Inc. to purchase from them, all assets related to
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NeoMedia-Qode Software and Service Business of NeoMedia, Inc., which 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. Since August 31, 2001, The Finx Group had made certain payments
related to the NeoMedia-Qode Software and Service Business of NeoMedia, Inc. in
the amount of $117,000 and in June 2002, upon its determination that it would
not consummate the asset acquisition, such amounts were written-off and charged
to operations.
We incur interest expense at an annual rate of 9% on related party
notes payable. For the three months ended September 30, 2002 and 2001, such
interest was $28,000 and $44,000, respectively, and for the nine months ended
September 30, 2002 and 2001 was $59,000 and $117,000, respectively. The related
party notes payable are the result of advances from Trinity Group-I, Inc., our
controlling shareholder, 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. Total
notes payable owed to related parties as of September 30, 2002 approximates $1.6
million on which accrued and unpaid interest approximates $537,000. All of the
related party notes and interest are payable upon demand, however; Trinity
Group-I, Inc., which is wholly owned by Lewis S. Schiller, has agreed to defer
payment of $529,000 of such interest until January 1, 2004.
As a result of our decision to focus our business exclusively on our
Security Systems business segment we disposed of all non security system
segments resulting in a gain on disposal of $2.339 million. Income (loss) from
operations of discontinued segments was $174,000 and ($2,699,000), respectively,
for the three month periods ending September 30, 2002 and 2001 and was $382,000
and ($4,002,000), respectively, for the nine month periods ending September 30,
2002 and 2001.
Financial Condition - Liquidity and Capital Resources
As a result of the disposal of all non Security System business
segments, our total liabilities were reduced by $3.8 million. As a result of the
Lewis S. Schiller's agreement to defer payment of accrued salary, accrued
interest and accrued dividends owed to him our current liabilities were reduced
by $2.1 million. Our working capital deficiency decreased from $7.1 million at
December 31, 2001 to $4.4 million as of September 30, 2002. During the current
nine month period we used $1 million for our continuing operations.
Historically, nearly all of our funding was provided by The Trinity Group-I,
Inc. and during the nine months ended September 30, 2002 net advances from
related parties was $54,000. Since September of 2001 we have used stock options
to compensate our employees and key consultants and during the nine months ended
September 30, 2002 proceeds from the exercise of stock options was $873,000.
On September 4, 2002, the Company filed a definitive information
statement in order to increase its authorized shares of common stock from
50,000,000 shares to 750,000,000 shares which was authorized by the written
consent of the holders of a majority of the voting power of the outstanding
shares of the Common Stock. The Company requires additional shares of its Common
Stock in order to (i) continue efforts to obtain equity financings from the
proposed sale of convertible preferred stock; (ii) to provide compensation in
the form of option grants to its executive employees and key consultants; (iii)
to facilitate the conversion of its existing convertible preferred stock; (iv)
to reserve shares for outstanding warrants to purchase Common Stock; and (v)
provide sufficient shares for other corporate purposes as such needs may arise.
Pursuant to the terms of the Sequential and S-Tech Stock Purchase
Agreement, the Company has agreed to indemnify Lewis S. Schiller for any claims
made against him regarding $1.1 million of delinquent payroll taxes owed by
Sequential and S-Tech.
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 operating losses and as of September 30,
2002 has a working capital deficiency of $4.4 million and capital deficiency of
$4.5 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
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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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, the Company does not believe such
proceedings to be of a material nature with the exception of the following item.
On or about April 8, 2002, a complaint styled "Law Offices of Jerold K. Levien,
against The Finx Group, Inc. f/k/a Fingermatrix, Inc., The Trinity Group-I,
Inc." was filed in the Supreme Court of the State of New York County of New
York. The nature of the action is for breach of contract with regard to the
non-payment of legal invoices for services purported to have been rendered by
the plaintiff, and the relief sought is $334,595, such amounts having been
accrued on the books of the Company as of December 31, 2000, with interest from
January 1999. The Company believes it has meritorious defenses to the complaint
and intends to vigorously contest this complaint. Due to uncertainties in the
legal process, it is at least reasonably possible that the Company's opinion of
the outcome will change in the near term and there exists the possibility that
there could be a material adverse impact on the operations of the Company.
Item 3. Controls and Procedures
Our Chief Executive Officer, who is also our Chief Accounting Officer,
has supervised and participated in an evaluation of the effectiveness of our
disclosure controls and procedures as of a date within 90 days of the date of
this report, and, based on his evaluation, he believes that our disclosure
controls and procedures, as defined in Rule 13a-14(c) of the Securities Exchange
Act of 1934, as amended, are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms. As a result of the
evaluation, there were no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Chief Executive Officer and Chief Accounting Officer
Certification.
(b) Reports on Form 8-K
On July 8, 2002, an 8-K was filed reporting in Item 5. Other
Events, a complaint that was filed against the Company by
"The Law Offices of JK Levien".
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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 November 19, 2002
Lewis S. Schiller (Principal Executive and Accounting
Officer)
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Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of The Finx Group, Inc. on Form
10QSB for the period ending September 30, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report") the undersigned Chief
Executive Officer and Chief Financial Officer of the Company hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 that (based on his knowledge): 1) the Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities and
Exchange Act of 1934, and 2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company as of and for the periods covered in the Report.
/S/ Lewis S. Schiller
Chief Executive Officer and
Chief Financial Officer
November 19, 2002
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Exhibit 99.2
CHIEF EXECUTIVE OFFICER AND CHIEF ACCOUNTING OFFICER CERTIFICATION
I, Lewis S. Schiller, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of The Finx
Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant, and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of this registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) significant deficiencies in the design or operation of internal
controls which could adversely affect our ability to record,
process, summarize and report financial data and we have
identified no material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 19, 2002
By /s/ Lewis S. Schiller
Chief Executive Officer and
Chief Accounting Officer
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