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 June 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 July 31, 2002, there are 49,873,664 shares of the par value $.01
common stock outstanding.
Page 1
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Three months ended June 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
Sales $ 480,000 $ 354,000
Cost of goods sold 353,000 193,000
-----------------------------------------------------------------------------------------------------------
127,000 161,000
Reserve for obsolete and slow moving inventory (117,000) (125,000)
-----------------------------------------------------------------------------------------------------------
Gross profit 10,000 36,000
Operating expenses 1,366,000 260,000
Compensation expense, executive stock appreciation rights 2,010,000 -
-----------------------------------------------------------------------------------------------------------
Operating loss (3,366,000) (224,000)
Other expense (3,000) (22,000)
Interest expense, related parties (34,000) (73,000)
Interest expense and financing fees, other (18,000) (83,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,421,000) (402,000)
Loss from operations of discontinued segments (185,000) (254,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (3,606,000) $ (656,000)
-----------------------------------------------------------------------------------------------------------
Loss per share computation- basic and diluted:
Loss from continuing operations (3,421,000) (402,000)
Less dividends on preferred shares (40,000) -
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
stockholders (3,461,000) (402,000)
Loss from operations of discontinued segments (185,000) (254,000)
-----------------------------------------------------------------------------------------------------------
Net loss available to common stockholders (3,646,000) (656,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 48,800,288 16,346,983
-----------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted:
Loss from continuing operations ($0.07) ($0.02)
Loss from operations of discontinued segments 0.00 (0.02)
-----------------------------------------------------------------------------------------------------------
Net loss ($0.07) ($0.04)
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 2
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
Sales $ 854,000 $ 764,000
Cost of goods sold 642,000 448,000
-----------------------------------------------------------------------------------------------------------
212,000 316,000
Reserve for obsolete and slow moving inventory (117,000) (250,000)
-----------------------------------------------------------------------------------------------------------
Gross profit 95,000 66,000
Operating expenses 2,137,000 646,000
Compensation expense, executive stock appreciation rights 2,010,000 -
-----------------------------------------------------------------------------------------------------------
Operating loss (4,052,000) (580,000)
Other expense (9,000) (5,000)
Interest expense, related parties (60,000) (128,000)
Interest expense and financing fees, other (41,000) (132,000)
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations (4,162,000) (845,000)
Loss from operations of discontinued segments (306,000) (996,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (4,468,000) $ (1,841,000)
-----------------------------------------------------------------------------------------------------------
Loss per share computation- basic and diluted:
Loss from continuing operations (4,162,000) (845,000)
Less dividends on preferred shares (80,000) -
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations attributable to common
stockholders (4,242,000) (845,000)
Loss from operations of discontinued segments (306,000) (996,000)
-----------------------------------------------------------------------------------------------------------
Net loss available to common stockholders (4,548,000) (1,841,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 45,567,487 14,527,830
-----------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted:
Loss from continuing operations ($0.09) ($0.06)
Loss from operations of discontinued segments (0.01) (0.07)
-----------------------------------------------------------------------------------------------------------
Net loss ($0.10) ($0.13)
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 3
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
-----------------------------------------------------------------------------------------------------------
As of June 30, 2002
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 3,000
Accounts receivable, net 279,000
Inventories, net 881,000
Notes receivable 17,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,180,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment and Software Costs:
Property, plant and equipment 2,464,000
Less accumulated depreciation and amortization (2,441,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 23,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Exclusive license agreement, net (see footnote 8) 1,042,000
Security deposits 21,000
Patents, net 10,000
-----------------------------------------------------------------------------------------------------------
Total other assets 1,073,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,276,000
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,547,000
Accrued payroll and payroll taxes, executive officers 1,649,000
Accrued payroll 405,000
Accrued payroll taxes 1,427,000
Notes payable executive officer, including interest 1,430,000
Notes payable, related parties, including accrued interest 686,000
Other current liabilities 473,000
Net current liabilities of discontinued segments 1,063,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 9,680,000
-----------------------------------------------------------------------------------------------------------
Commitments and contingencies (see footnote 6)
-----------------------------------------------------------------------------------------------------------
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, 60,000 Series C preferred
shares issued and outstanding, 40,000 Series D preferred shares issued
and outstanding as of June 30, 2002 3,100,000
Common stock, $.01 par value; 50,000,000 shares authorized;
49,873,664 shares issued and outstanding as of June 30, 2002 (see
footnote 7) 499,000
Additional paid-in capital, common stock 24,578,000
Accumulated deficit (35,581,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (7,404,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,276,000
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 4
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Six Months ended June 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Loss from continuing operations $ (4,162,000) $ (845,000)
Adjustments to reconcile loss from continuing operations to
net cash provided by (used in) continuing operations:
Reserve for obsolete and slow moving inventory 117,000 250,000
Depreciation and amortization 72,000 15,000
Bad debt expense 15,000 22,000
Non cash expense from issuance of stock options and
stock purchase warrants 171,000 --
Compensation expense, executive stock appreciation rights 2,010,000 --
Inpairment charge 102,000 --
Changes in assets and liabilities:
Inventories (166,000) (350,000)
Accounts receivable, net (192,000) 94,000
Prepaid expense and other current assets 4,000 11,000
Accounts payable 365,000 148,000
Accrued payroll 354,000 303,000
Accrued payroll taxes 244,000 260,000
Accrued interest expense, related parties 204,000 120,000
Other current liabilities 8,000 (8,000)
-----------------------------------------------------------------------------------------------------------
Net cash-continuing operations (854,000) 20,000
-----------------------------------------------------------------------------------------------------------
Loss from discontinued operations (306,000) (996,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash used in discontinued operations:
Depreciation and amortization 10,000 84,000
Impairment charge 191,000 --
Bad debt expense -- 5,000
Net change in other assets and liabilities 33,000 467,000
-----------------------------------------------------------------------------------------------------------
Net cash-discontinued operations (72,000) (440,000)
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (926,000) (420,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities (43,000) (1,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (43,000) (1,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 90,000 598,000
Repayments on related party loans (20,000) (108,000)
Proceeds from exercise of stock options 873,000 --
Proceeds from exercise of stock purchase warrants 1,000 33,000
Net advances (payments) under revolving lines of credit (7,000) (100,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 937,000 423,000
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (32,000) 2,000
Cash - Beginning of period 35,000 3,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 3,000 $ 5,000
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 5
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Six Months ended June 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ -- $ 102,000
Income Taxes -- --
-----------------------------------------------------------------------------------------------------------
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 and 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, in consideration for two
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 $1,100,000, 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 18, 2009.
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 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 Company to calculate
compensation expense on the underlying shares for each reporting period that the
warrants or any portion thereof are outstanding. As of June 30, 2002, the non
cash compensation expense charged to operations for such stock appreciation
rights related to the warrants was $2,010,000.
See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 6
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Six Months ended June 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
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 August 31, 2001, the Company 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
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Six Months Ended June 30, 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 June 30, 2002 has a
working capital deficiency of $8.5 million and capital deficiency of $7.4
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 Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies 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)."
The Company expects that the adoption of the new statements will not
have a significant impact on its financial statements. It is not possible to
quantify the impact until the newly issued statements have been studied.
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. 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
June 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 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 per share, the
fair market value at date of issuance, all such warrants were outstanding for
the period from April 8, 2002 through June 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 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 May 4, 2001, the
Company had outstanding warrants to purchase 135,000 shares of common stock at
$10 per share.
For the three and six months ended June 30, 2002 and 2001, all of the
Company's potential common shares were anti-dilutive and a dual presentation of
loss per share is not presented. As of June 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. Such warrants may dilute
earnings per share in the future.
Page 9
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 four
separate reportable business segments as follows:
(1) Electro-Mechanical and Electro-Optical Products
(2) Specialized Vending Machines and Avionics Equipment
(3) Security Systems
(4) 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 June 30, 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.
-------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 2001
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 353,000 $ 309,000
Specialized Vending Machines and Avionics Equipment 127,000 45,000
-------------------------------------------------------------------------------------------------------------
480,000 354,000
Corporate consulting fees 135,000 135,000
Inter segment consulting fees (135,000) (135,000)
-------------------------------------------------------------------------------------------------------------
Total revenues $ 480,000 $ 354,000
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (183,000) $ (40,000)
Specialized Vending Machines and Avionics Equipment 42,000 9,000
Security Systems (496,000) (191,000)
Software Development (34,000) --
-------------------------------------------------------------------------------------------------------------
(671,000) (222,000)
Corporate costs and expenses (2,695,000) (2,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (3,366,000) $ (224,000)
-------------------------------------------------------------------------------------------------------------
Page 10
4. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 2001
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 74,000 $ 134,000
Specialized Vending Machines and Avionics Equipment 14,000 34,000
Security Systems 42,000 13,000
Software Development 13,000 --
-------------------------------------------------------------------------------------------------------------
143,000 181,000
Corporate costs and expenses 19,000 23,000
Inter segment charges (110,000) (48,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 52,000 $ 156,000
-------------------------------------------------------------------------------------------------------------
Net Income (Loss):
Electro-Mechanical and Electro- Optical Products $ (246,000) $ (182,000)
Specialized Vending Machines and Avionics Equipment 23,000 (24,000)
Security Systems (540,000) (205,000)
Software Development (48,000) --
-------------------------------------------------------------------------------------------------------------
(811,000) (411,000)
Corporate costs and expenses (2,610,000) 9,000
-------------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,421,000) (402,000)
Loss from discontinued segments (185,000) (254,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (3,606,000) $ (656,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 1,000 $ 1,000
Security Systems 36,000 --
Software development 1,000 --
-------------------------------------------------------------------------------------------------------------
38,000 1,000
Corporate 5,000 6,000
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization, continuing operations 43,000 7,000
Depreciation and amortization, discontinued segments -- 50,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 43,000 $ 57,000
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 608,000 $ 634,000
Specialized Vending Machines and Avionics Equipment 231,000 130,000
Software Development 15,000 --
-------------------------------------------------------------------------------------------------------------
854,000 764,000
Corporate consulting fees 270,000 270,000
Inter segment consulting fees (270,000) (270,000)
-------------------------------------------------------------------------------------------------------------
Total revenues $ 854,000 $ 764,000
-------------------------------------------------------------------------------------------------------------
Page 11
4. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 2001
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (250,000) $ (223,000)
Specialized Vending Machines and Avionics Equipment 43,000 19,000
Security Systems (810,000) (372,000)
Software Development (57,000) --
-------------------------------------------------------------------------------------------------------------
(1,074,000 (576,000)
Corporate costs and expenses (2,978,000) (4,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (4,052,000) $ (580,000)
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 136,000 $ 204,000
Specialized Vending Machines and Avionics Equipment 28,000 45,000
Security Systems 67,000 28,000
Software Development 41,000 --
-------------------------------------------------------------------------------------------------------------
272,000 277,000
Corporate costs and expenses 36,000 43,000
Inter segment charges (207,000) (60,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 101,000 $ 260,000
-------------------------------------------------------------------------------------------------------------
Net Income (Loss):
Electro-Mechanical and Electro- Optical Products $ (365,000) $ (405,000)
Specialized Vending Machines and Avionics Equipment 5,000 (23,000)
Security Systems (877,000) (402,000)
Software Development (98,000) --
-------------------------------------------------------------------------------------------------------------
(1,335,000) (830,000)
Corporate costs and expenses (2,827,000) (15,000)
-------------------------------------------------------------------------------------------------------------
Loss from continuing operations (4,162,000) (845,000)
Loss from discontinued segments (306,000) (996,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (4,468,000) $ (1,841,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 2,000 $ 2,000
Security Systems 58,000 --
Software development 1,000 --
-------------------------------------------------------------------------------------------------------------
61,000 2,000
Corporate 11,000 13,000
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization, continuing operations 72,000 15,000
Depreciation and amortization, discontinued segments 10,000 84,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 82,000 $ 99,000
-------------------------------------------------------------------------------------------------------------
Page 12
4. Segment Information (continued)
-------------------------------------------------------------------------------------------------------------
December
June 30, 31,
2002 2001
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 1,664,000 $ 1,564,000
Specialized Vending Machines and Avionics Equipment 397,000 310,000
Security Systems 1,052,000 10,000
Software Development 3,000 12,000
-------------------------------------------------------------------------------------------------------------
3,116,000 1,896,000
Corporate 20,176,000 18,496,000
Inter segment investments (13,443,000) (13,443,000)
Inter segment receivables (7,573,000) (5,832,000)
-------------------------------------------------------------------------------------------------------------
Assets, continuing operations 2,276,000 1,117,000
Net assets of discontinued segments -- 99,000
-------------------------------------------------------------------------------------------------------------
Total assets $ 2,276,000 $ 1,216,000
-------------------------------------------------------------------------------------------------------------
5. Discontinued Segments
During the fourth quarter of 2001, the operations of Shopclue.com, Inc.
("Shopclue.com") and Bizchase, Inc. ("Bizchase") ceased and during the 2nd
quarter of 2002 the operations of Starnet365.com, Inc. ("Starnet365.com") ceased
and as such their operations are presented as discontinued. The information
regarding the Company's discontinued operations is summarized as follows:
-------------------------------------------------------------------------------------------------------------
As of June 30, 2002 Starnet365.com Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------
Net Current Liabilities of Discontinued
Segments:
Accounts payable $431,000 $31,000 $28,000 $490,000
Accrued payroll - 132,000 130,000 262,000
Accrued payroll taxes - 164,000 97,000 261,000
Customer deposits 13,000 - - 13,000
Capital lease obligations - - 37,000 37,000
Accrued management fees, related
Parties 360,000 - 270,000 630,000
Accrued interest expense, related
Parties 130,000 18,000 170,000 318,000
Notes payable, related parties 816,000 - 1,513,000 2,329,000
Eliminated inter segment liabilities (1,306,000) (18,000) (1,953,000) (3,277,000)
-------------------------------------------------------------------------------------------------------------
Total current liabilities 444,000 327,000 292,000 1,063,000
-------------------------------------------------------------------------------------------------------------
Interest income receivable, related
Parties 2,000 2,000 - 4,000
Notes receivable, related party 41,000 8,000 - 49,000
Eliminated inter segment assets (43,000) (10,000) - (53,000)
-------------------------------------------------------------------------------------------------------------
Total current assets - - - -
-------------------------------------------------------------------------------------------------------------
Net current liabilities of discontinued
Segments $444,000 $327,000 $292,000 $1,063,000
-------------------------------------------------------------------------------------------------------------
Page 13
5. Discontinued Segments (continued)
-------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
2002 Starnet365.com Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------
Loss from Operations of Discontinued
Segments:
Write-off impaired assets $154,000 - - $154,000
Other general and administrative
Expense 3,000 $2,000 $1,000 6,000
Related party management fees 45,000 - - 45,000
-------------------------------------------------------------------------------------------------------------
Operating expenses 202,000 2,000 1,000 205,000
-------------------------------------------------------------------------------------------------------------
Operating loss (202,000) (2,000) (1,000) (205,000)
Other income (1,000) - - (1,000)
Interest income, related parties 2,000 - - 2,000
Interest expense and financing fees,
related parties (19,000) - - (19,000)
Interest expense and financing fees (1,000) (3,000) (1,000) (5,000)
Elimination of inter segment
Transactions 43,000 - - 43,000
-------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued
Segments ($178,000) $(5,000) $(2,000) $(185,000)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
For the Three Months Ended June 30,
2001 Starnet365.com Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------
Loss from Operations of Discontinued
Segments:
Sales $88,000 $9,000 - $97,000
Cost of goods sold 2,000 1,000 - 3,000
-------------------------------------------------------------------------------------------------------------
Gross profit 86,000 8,000 - 94,000
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization 13,000 2,000 $35,000 50,000
Selling expense 49,000 - - 49,000
Other general and administrative
Expense 142,000 8,000 54,000 204,000
Related party management fees 45,000 - 45,000 90,000
-------------------------------------------------------------------------------------------------------------
Operating expenses 249,000 10,000 134,000 393,000
-------------------------------------------------------------------------------------------------------------
Operating income (loss) (163,000) (2,000) (134,000) (299,000)
Other income (expense) 5,000 - - 5,000
Interest income, related parties - 3,000 - 3,000
Interest expense and financing fees,
related Parties (18,000) - (35,000) (53,000)
Elimination of inter segment
Transactions 45,000 (3,000) 48,000 90,000
-------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued
Segments $(131,000) $(2,000) $(121,000) $(254,000)
-------------------------------------------------------------------------------------------------------------
Page 14
5. Discontinued Segments (continued)
-------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
2002 Starnet365.com Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------
Loss from Operations of Discontinued
Segments:
Sales $5,000 - - $5,000
Cost of goods sold 1,000 - - 1,000
-------------------------------------------------------------------------------------------------------------
Gross profit 4,000 - - 4,000
-------------------------------------------------------------------------------------------------------------
Write-off impaired assets 154,000 $12,000 $25,000 191,000
Bad debt expense 10,000 - - 10,000
Other general and administrative
Expense 57,000 4,000 3,000 64,000
Related party management fees 90,000 - - 90,000
-------------------------------------------------------------------------------------------------------------
Operating expenses 311,000 16,000 28,000 355,000
-------------------------------------------------------------------------------------------------------------
Operating loss (307,000) (16,000) (28,000) (351,000)
Interest income, related parties 2,000 - - 2,000
Interest expense and financing fees,
related Parties (37,000) - - (37,000)
Interest expense and financing fees - (5,000) (3,000) (8,000)
Elimination of inter segment
Transactions 88,000 - - 88,000
-------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued
Segments $(254,000) $(21,000) $(31,000) $(306,000)
-------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
2001 Starnet365.com Shopclue.com Bizchase Total
-------------------------------------------------------------------------------------------------------------
Loss from Operations of Discontinued
Segments:
Sales $146,000 $18,000 - $164,000
Cost of goods sold 34,000 1,000 - 35,000
-------------------------------------------------------------------------------------------------------------
Gross profit 112,000 17,000 - 129,000
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization 26,000 4,000 $54,000 84,000
Bad debt expense - 5,000 - 5,000
Selling expense 108,000 - - 108,000
Other general and administrative
Expense 516,000 11,000 322,000 849,000
Related party management fees 90,000 - 90,000 180,000
-------------------------------------------------------------------------------------------------------------
Operating expenses 740,000 20,000 466,000 1,226,000
-------------------------------------------------------------------------------------------------------------
Operating income (loss) (628,000) (3,000) (466,000) (1,097,000)
Other income (expense) 14,000 - - 14,000
Interest income, related parties - 7,000 - 7,000
Interest expense and financing fees,
related Parties (34,000) - (66,000) (100,000)
Ellimination of inter segment
Transactions 90,000 (7,000) 97,000 180,000
-------------------------------------------------------------------------------------------------------------
Loss from operations of discontinued
Segments $(558,000) $(3,000) $(435,000) $(996,000)
-------------------------------------------------------------------------------------------------------------
Page 15
6. 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.
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.
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 of the following contingent
liability 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 16
7. Subsequent Events
On July 25, 2002, the Company filed a preliminary information statement
in order to increase its authorized shares of common stock from its existing
50,000,000 shares to 750,000,000 shares which has been 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.
8. Exclusive License Agreement
On September 13, 1999, Secured Portal Systems, Inc. ("Secured
Portals"), an 89% owned subsidiary of 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 Secured Portals
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.
As an inducement to obtain the exclusive distribution agreement and in
exchange for 1,000,000 common stock shares of GIL, we issued 14,134 shares of
Fingermatrix, Inc.'s 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 Secured Portals
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
Secured Portal System's Inc. 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
Page 17
shares of its Series C Preferred Stock which are convertible into 6,000,000
shares of the Company's Common Stock. Using the Black-Scholes option valuation
formula, the convertible preferred stock was valued at $1,100,000, 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 18, 2009. During the three and six months ended
June 30, 2002, amortization expense on the exclusive license amounted to $36,000
and $58,000, respectively.
Page 18
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; 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 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 19
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. ("Sequential"), 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's revenues in the current quarter were $353,000,
representing an increase of $44,000 from the prior year quarter. Sequential's
cost of sales for the current quarter included a reserve for slow moving
inventory of $117,000 compared to a reserve of $125,000 in the prior year
quarter. As a result of the inventory reserves, Sequential's cost of sales
exceeded its revenues in the current quarter by $46,000 and its gross profit in
the prior year quarter was a nominal $20,000. Excluding the effects of the
inventory reserves, Sequential's current quarter margin, was 20% of sales
compared to 47% of sales in the prior year quarter. Sequential's revenues in the
current six month period were $608,000, representing a decrease of $26,000 from
the prior year six month period. Sequential's cost of sales for the current and
prior six month periods included reserves for slow moving inventory of $117,000
and $250,000, respectively. The inventory reserves resulted in nominal gross
profits for both the current and prior six month periods. Excluding the effects
of the inventory reserves, Sequential's current six month period margin was 20%
of sales compared to 43% of sales in the prior six month period.
Sequential's relatively low revenue volume has resulted in margins that
are volatile whereby any dollar value changes in production costs have a
significant impact on margins as a percentage of sales. Sequential's revenue has
been negatively impacted by its inability to pay for the materials necessary to
build the products included in its backlog and its inability to fund the sales
costs necessary to procure new contracts. This inability to manufacture product
has resulted in excessive downtime and idle capacity and consequently margins
have been significantly reduced. As of June 30, 2002, Sequential's backlog
approximated $125,000.
Sequential's operating expenses for the current and prior year quarters
were $137,000 and $60,000, respectively, and included $45,000 in each quarter
for management fees charged by The Finx Group. Sequential's operating expenses
for the current and prior year six month periods were $257,000 and $244,000,
respectively, and included $90,000 in each period for management fees charged by
The Finx Group. As a result of the foregoing, Sequential's operating loss
increased $143,000 when comparing the current and prior year quarters and
increased $27,000 when comparing the current and prior year six month periods.
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment segment comprises the
activities of S-Tech, Inc. ("S-Tech") 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 are prepaid telephone debit
card machines, bill payment kiosks, information kiosks, and stamp vending
machines.
S-Tech's revenues for the current quarter were $127,000, representing
an increase of $82,000 from the prior year quarter while margins for the current
and prior year quarters were 44% and 36% of sales, respectively. S-Tech's
revenues for the current six month period were $231,000, representing an
increase of $101,000 from the prior six month period, while margins for the
current and prior six month periods was
Page 20
32% and 35% of sales, respectively. S-Tech's revenues have been negatively
impacted as a result of its inability to pay vendors for materials necessary to
build components for its existing contracts and its lack of meaningful revenue
has resulted in volatile margin percentages.
S-Tech's operating expenses were nominal for all periods. As a result
of the foregoing, S-Tech's operating income increased $33,000 from $9,000 for
the prior year quarter $42,000 for the current quarter, and increased $24,000
from $19,000 for the prior six month period to $43,000 for the current six month
period.
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 have built 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 meaningful 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 $305,000 from $191,000 for the prior year quarter to $496,000
for the current quarter, and increased $438,000, from $372,000 for the prior six
month period to $810,000 for the current six month period. Increases in the
Security System's operating expenses included consulting fees for the expanded
sales team and amortization of the capitalized costs related to the recent
expansion of the exclusive license agreement. For both the current and prior
year quarters, the Security System's operating expense included $45,000 of
management fees charged by The Finx Group and included $90,000 of such fees in
each of the current and prior six month periods.
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 for the
periods presented were $15,000 generated during the 1st Quarter of 2002,
pursuant to 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 current quarter and six month period,
Granite Technologies,
Page 21
Inc.'s operating expenses were $34,000 and $72,000,
respectively, and its operating losses were $34,000 and $57,000, respectively.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
the holding company. The Finx Group charges certain of its subsidiaries
management fees which were $135,000 for both, the current and prior year
quarters, and were $270,000, for both the current and prior six month period.
All of such management fees are eliminated in the consolidated results of
operations.
In April 2002, The Finx Group 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 of June 30, 2002, the non cash
compensation expense charged to operations for such stock appreciation rights
related to the warrants was $2,010,000. 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 August 31, 2001, The Finx Group 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 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.
The Finx Group's operating expenses includes the accrued salaries of
its executive officers which are owed to its executives pursuant to employment
agreements. As of June 30, 2002, Mr. Lewis S. Schiller and Ms. Grazyna B. Wnuk
are owed an aggregate of $1.6 million for unpaid salaries. The current quarterly
charge to operating expenses for such executive contracts is $338,000.
Interest Expense and Financing Fees, Other
All interest expense and financing fees, other for the current quarter
and six month period relates to interest expense accrued on delinquent payroll
taxes. For the prior year quarter and six month period, $27,000 and $53,000,
respectively, of such amounts relates to interest accrued on delinquent payroll
taxes and the remainder for such prior periods relates to interest expense on
Sequential's revolving line of credit with FINOVA Capital Corporation which was
paid in full in January of 2002.
Interest Expense and Factoring Fees, Related Parties
Interest expense and financing fees on related party notes was $34,000
and $73,000, respectively, for the current and prior year quarters and $60,000
and $128,000, respectively, for the current and prior six month periods. 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
Page 22
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. Interest accrued on such notes
are generally calculated at 9% and total principal and interest owed on such
related party obligations as of June 30, 2002, approximated $2.1 million.
Discontinued Operations
During the fourth quarter of 2001 both Shopclue.com, Inc. and Bizchase,
Inc. ceased operations and during the second quarter of 2002 Starnet365.com,
Inc. ceased operations. During the current and prior quarters such entities
incurred aggregate losses of $185,000 and $254,000, respectively, and during the
current and prior six month periods incurred aggregate losses of $306,000 and
$996,000, respectively.
Financial Condition - Liquidity and Capital Resources
As of June 30, 2002 the Company had a working capital deficiency of
$8.5 million. Approximately $3.8 million of such deficiency relates to amounts
owed to related parties, including accrued and unpaid salaries of $1.7 million
owed to Lewis Schiller and Grazyna Wnuk, and $2.1 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 current six month period we used
$926,000 for operations. Historically, we have funded our operations with
advances from The Trinity Group-I, Inc., our controlling shareholder. During the
1st and 2nd Quarters of 2002 we used stock options to compensate our employees
and key consultants.
On July 25, 2002, the Company filed a preliminary information statement
in order to increase its authorized shares of common stock from its existing
50,000,000 shares to 750,000,000 shares which has been 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.
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 June 30, 2002 has a
working capital deficiency of $8.5 million and capital deficiency of $7.4
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.
Page 23
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 of the following contingent liability 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 6. 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.
Page 24
SIGNATURES
In accordance with the Officer requirements of the Exchange Act, and
the registrant caused this report Director to be signed on its behalf by the
undersigned, thereunto duly authorized.
The FINX GROUP, INC.
/S/ Chief Executive Officer and Director August 19, 2002
Lewis S. Schiller (Principal Executive and
Accounting Officer)
Page 25
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 June 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
August 19, 2002
-1-