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, 2003
[ ] 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)
21634 Club Villa Terrace, Boca Raton, Florida 33433
(Address of principal executive offices) (Zip Code)
(561) 447-6612
(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 August 14, 2003, there are 498,026,474 shares of the par value
$.01 common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Indicate by checkmark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934. Yes [ ] No [X]
Page 1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Three Months Ended June 30, 2003 2002
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Revenues $ 2,000 $ -
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Operating expenses 549,000 1,054,000
Compensation expense, executive stock appreciation rights - 2,010,000
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants 452,000 171,000
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Total operating expenses 1,001,000 3,235,000
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Operating loss (999,000) (3,235,000)
Other income - (9,000)
Interest expense, related parties (27,000) (34,000)
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Loss from continuing operations (1,026,000) (3,278,000)
Discontinued Operations: (See Note 8)
Loss on disposal of discontinued segments (9,000) -
Income (loss) from operations of discontinued segments 13,000 (328,000)
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Net loss $ (1,022,000) $ (3,606,000)
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Loss per share computation- basic and diluted:
Loss from continuing operations $ (1,026,000) $ (3,278,000)
Less dividends on preferred shares (31,000) (40,000)
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Loss from continuing operations attributable to common
stockholders (1,057,000) (3,318,000)
Loss on disposal of discontinued segments (9,000) -
Income (loss) from operations of discontinued segments 13,000 (328,000)
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Net loss available to common stockholders $ (1,053,000) $ (3,646,000)
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Weighted average shares outstanding 307,261,587 48,800,288
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Loss per common share - basic and diluted:
Loss from continuing operations ($0.00)* ($0.07)
Loss from disposal of discontinued operations (0.00)* -
Income (loss) from operations of discontinued segments 0.00 * (0.01)
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Net loss ($0.00)* ($0.08)
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See Notes to Unaudited Consolidated Interim Financial Statements.
* less than $.01
Page 2
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The Finx Group, Inc. and Subsidiaries
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Unaudited Consolidated Statements of Operations
Six months ended June 30, 2003 2002
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Revenues $ 12,000 $ -
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Operating expenses 1,176,000 1,695,000
Compensation expense, executive stock appreciation rights - 2,010,000
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants 1,418,000 171,000
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Total operating expenses 2,594,000 3,876,000
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Operating loss (2,582,000) (3,876,000)
Other income (expense) 1,000 (21,000)
Interest expense, related parties (53,000) (60,000)
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Loss from continuing operations (2,634,000) (3,957,000)
Loss on disposal of discontinued segments (9,000) -
Income (loss) from operations of discontinued segments 13,000 (511,000)
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Net loss $ (2,630,000) $ (4,468,000)
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Loss per share computation- basic and diluted:
Loss from continuing operations (2,634,000) (3,957,000)
Less dividends on preferred shares (65,000) (80,000)
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Loss from continuing operations attributable to common
stockholders (2,699,000) (4,037,000)
Loss on disposal of discontinued segments (9,000) -
Income (loss) from operations of discontinued segments 13,000 (511,000)
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Net loss available to common stockholders (2,695,000) (4,548,000)
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Weighted average shares outstanding 238,209,351 45,567,487
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Loss per common share - basic and diluted:
Loss from continuing operations ($0.01) ($0.09)
Loss from disposal of discontinued operations (0.00)* -
Loss from operations of discontinued segments (0.00)* (0.01)
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Net loss ($0.01) ($0.10)
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See Notes to Unaudited Consolidated Interim Financial Statements.
* less than $.01
Page 3
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
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As of June 30, 2003
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ASSETS
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Furniture, Fixtures and Equipment:
Furniture, fixtures and equipment, cost 90,000
Less accumulated depreciation (90,000)
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Net furniture, fixtures and equipment -
Other assets:
Exclusive license agreement, net (see Note 4) 2,750,000
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TOTAL ASSETS $ 2,750,000
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LIABILITIES AND CAPITAL DEFICIENCY
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CURRENT LIABILITIES:
Accounts payable $ 1,344,000
Accrued payroll and payroll taxes, executive officers 2,397,000
Notes payable executive officers, including interest 1,688,000
Notes payable, related parties, including accrued interest 293,000
Other current liabilities 422,000
Current liabilities of discontinued segments (see Note 8) 1,211,000
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Total current liabilities 7,355,000
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Commitments and contingencies (see Note 9)
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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; 15,540 Series B
preferred shares issued and outstanding as of June 30, 2003 1,554,000
Common stock, $.01 par value; 750,000,000 shares authorized;
359,526,474 shares issued and outstanding as of June 30, 2003 3,595,000
Additional paid-in capital, common stock 29,213,000
Accumulated deficit (38,192,000)
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(3,830,000)
Subscriptions receivable (775,000)
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Capital deficiency (4,605,000)
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TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,750,000
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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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Six Months Ended June 30, 2003 2002
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CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (2,634,000) $ (3,957,000)
Loss on disposal of discontinued segments (9,000) -
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(2,643,000) (3,957,000)
Adjustments to reconcile loss from continuing operations to
net cash - continuing operations:
Depreciation and amortization 122,000 69,000
Compensation expense, executive stock appreciation rights - 2,010,000
Non cash expense from stock grants and the issuance of
stock options and stock purchase warrants 1,418,000 171,000
Loss on disposal of discontinued segments 9,000 -
Other operating adjustments - 102,000
Changes in assets and liabilities:
Other assets - -
Accounts payable 45,000 321,000
Accrued payroll 386,000 338,000
Accrued interest expense, related parties 43,000 204,000
Other current liabilities (18,000) 10,000
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Net cash-continuing operations (638,000) (732,000)
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Income (loss) from discontinued operations 13,000 (511,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Depreciation and amortization - 14,000
Reserve for obsolete and slow moving inventory - 117,000
Impairment charge - 191,000
Bad debt expense - 15,000
Net change in other assets and liabilities (18,000) 4,000
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Net cash-discontinued operations (5,000) (170,000)
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Net cash - operating activities (643,000) (902,000)
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CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities - (43,000)
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Net cash - investing activities - (43,000)
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CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 509,000 90,000
Repayments on related party loans (218,000) (19,000)
Proceeds from exercise of stock options 352,000 873,000
Proceeds from exercise of stock purchase warrants - 1,000
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Net cash - financing activities 643,000 945,000
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Net change in cash - -
Cash - Beginning of period - -
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Cash - End of period $ - $ -
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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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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the year for:
Interest $ - $ -
Income Taxes $ - $ -
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SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the Six Months Ended June 30, 2003
On January 2, 2003, a warrant to purchase 5,000,000 shares of Common
Stock for $0.04 per share was issued to a consultant resulting in stock
compensation expense of $99,000.
On January 17, 2003, options to purchase 17,604,168 shares of Common
Stock for $0.02 per share were granted and exercised resulting in stock
compensation expense of $366,000.
On February 28, 2003, the Company issued to a consultant a warrant to
purchase 2,200,000 shares of common stock for $.04 per share and a warrant to
purchase 2,800,000 shares of common stock for $.01 per share resulting in
stock-based compensation of $46,000.
On March 17, 2003 stock grants for 85,000,002 shares of Common Stock
were issued to consultants resulting in stock compensation expense of $425,000
and a stock grant for 14,999,998 shares of Common Stock was issued to Grazyna B.
Wnuk, an officer and director of The Finx Group, Inc., resulting in stock
compensation expense of $75,000.
In April 2003, the Company issued to Grazyna B. Wnuk, 9,006,976 shares
of its common stock in exchange for expenses she paid on behalf of the Company
amounting to $34,000, the approximate value of the shares issued. Such issuance
was pursuant to the March 17, 2003 approval of the board of directors.
On June 1, 2003, the Company issued to a consultant, a warrant to
purchase 100,000,000 shares of common stock for $.01 per share resulting in
stock-based compensation of $271,000.
On June 2, 2003, the Company issued to an investor for $5,000, a
warrant to purchase 50,000,000 shares of common stock for $.01 per share
resulting in stock-based compensation of $135,000.
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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During the Six Months Ended June 30, 2002
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.
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.
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 Six Months Ended June 30, 2003 and 2002
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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., 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 of America 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 as amended for the year ended December 31, 2002. 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, 2003 has a
working capital deficiency of $7.4 million and a capital deficiency of $4.6
million. During 2003 and 2002 the Company has relied on financial support from
its controlling stockholder, Trinity Group-I, Inc. ("Trinity"), the Company's
controlling stockholder, and other related parties and during 2003 and 2002 has
compensated its employees and key consultants with stock options and stock
grants of which some 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, 2002 Form 10-KSB as
amended.
In preparing the consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. Some of the more significant estimates include the carrying value of
the Company's exclusive license and its amortization.
Certain long-term assets of the Company are reviewed when changes in
circumstances require as to whether their carrying value has become impaired,
pursuant to guidance established in Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations [undiscounted
and without interest charges]. If impairment is deemed to exist, the asset will
be written down to fair value. Management also reevaluates the period of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of June 30, 2003, management expects those
assets related to its continuing operations to be fully recoverable.
Page 8
In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company expects that the adoption of SFAS 149 will not have a
significant impact on its financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), which established
standards for how an issuer classifies and measures certain financial
instruments. SFAS 150 requires that an issuer classify certain financial
instruments as liabilities (or assets in some circumstances) that were
previously classified as equity. Financial instruments which embody an
unconditional obligation requiring the issuer to redeem or repurchase it by the
transfer of assets or by issuing a variable number of its equity shares must be
classified as a liability. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
expects that the adoption of SFAS 150 will not have a significant impact on its
financial statements.
3. Recent Business Developments
In September 2002, the Company's Board of Directors approved a plan to
focus the Company's business exclusively on its security systems business and on
October 18, 2002 the Company disposed of all non security system business
segments. The Company's primary source of future revenues, if any, is expected
to be generated under its exclusive license agreement (the "Georal License")
with GIL Security Systems, Inc. ("GIL"). 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. 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
(the "Georal Security Products"). The Georal License gives us distribution
rights for the sale of all of the Georal Security Products, including all models
of the GIL-2001 security door, to specified categories of customers. The Company
may market and distribute the Georal Security Products to both those customers
for which it has exclusive distribution rights and to others as to which it has
non-exclusive rights.
On December 13, 2002 the Company entered into a memorandum of
understanding incorporating a reseller agreement with TRW, Inc., which has been
acquired by Northrop Grumman Corp. and is now operating as Northrop Grumman
Mission Systems. The agreement gives Northrop Grumman Mission Systems the right
to market Georal Security Products to the Federal Government and other
significant commercial opportunities. On March 26, 2003, the Company entered
into a distribution and marketing agreement with Lockheed Martin. The agreement
gives Lockheed Martin worldwide rights to market the Georal Security Products.
In April 2003, the Company entered into reciprocal marketing agreements with
Advanced Biometric Security, Inc. ("ABS") which provide both the Company and ABS
with non-exclusive marketing rights for each others security product lines. ABS
provides enterprise software and services related to identity management and the
security of physical and logical assets. In July 2003, the Company entered into
a representation agreement with Thacher Associates, LLC, a New York based
consulting company which provides consulting services to corporate security
companies, and who will market the Company's security products. Many of the
customers to whom the Company 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 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 Georal License.
Page 9
The Company may also generate revenue from its sale of software
programs for device management and smart card applications ("Secured Card
Solutions"). The Company has provided Virginia Commonwealth University with two
of its Secured Card Solutions - the "Secured Recreational Sports Solution" and
"The Secured Card Solution". The Secured Recreational Sports Solution, which
currently serves Virginia Commonwealth University ("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 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. The Company has also entered into a
services and support agreement with Florida International University ("FIU") for
the installation, support and use of the Secured Recreational Sports Solution.
During 2003 and 2002, all of the Company's revenues were generated from sales of
its Secured Card Solutions.
4. Exclusive License Agreement
On September 13, 1999, the Company obtained the Georal License which
gives the Company distribution rights for the sale of Georal Security Products
to certain categories of customers. The Georal Security Products covered by the
Georal License includes all of GIL's products that existed on September 13, 1999
and all products developed during the term of the Georal License including all
models of the GIL-2001 security door. The categories of customers covered by the
Georal License 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 Georal License
commenced on September 1, 1999 and, as amended, expires on August 31, 2014.
As an inducement to obtain the Georal License and in exchange for
1,000,000 common stock shares of GIL, the Company issued to Alan J. Risi
preferred shares which were exchanged for 1,049,874 shares of the Company's
Common Stock in July of 2002. On the initial date that the Georal License 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 Georal License 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 Georal License 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 2% Convertible Preferred Stock (the "Series D Preferred Stock") that is
convertible into 4,000,000 million shares of the Company's Common Stock. On May
16, 2002, the Georal License 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 2% Convertible Preferred Stock (the
"Series C Preferred Stock") which are convertible into 6,000,000 shares of the
Company's Common Stock. On September 9, 2002, the Georal License 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. On October 16, 2002, the Company issued to Alan Risi 250,000
shares of its Series C Preferred Stock for an amendment to the Georal License
which provided 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
Page 10
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. Using the Black-Scholes option valuation formula, the
convertible preferred stock was valued at $2.98 million, the amount included in
other assets as "Exclusive License Agreement". During 2002, all of the Series C
and Series D Preferred Stock issued pursuant to the Georal License was converted
into shares of Common Stock. Beginning 2002, the Georal License is being
amortized on the straight-line method over the remaining life of the exclusive
license and during the three months ended June 30, 2003 and 2002, such
amortization expense was $61,000 and $41,000, respectively, and for the six
months ended June 30, 2003 and 2002 was $122,000 and $69,000, respectively.
5. Executive Debt Deferrals
Effective September 30, 2002, Lewis S. Schiller, the Company's Chief
Executive Officer and Chairman of the Board, agreed to defer payment of his
salary until January 1, 2004, payment of accrued interest on notes payable to
Trinity, which is wholly owned by him until January 1, 2004 and payment of
accrued dividends on preferred stock held by Trinity until January 1, 2004. Such
amounts were presented as long-term liabilities as of December 31, 2002. As of
June 30, 2003, the remaining deferral period is less than twelve months and such
amounts are presented as current liabilities.
6. Basic and Diluted Loss Per Share
Basic and diluted per share results for all periods presented were
computed based on the net earnings or loss for the respective periods. The
weighted average number of common shares outstanding during the period was used
in the calculation of basic earnings (loss) per share. In accordance with FAS
128, "Earnings Per Share," the weighted average number of common shares used in
the calculation of diluted per share amounts is adjusted for the dilutive
effects of stock options based on the treasury stock method and the assumed
conversion of convertible preferred stock only if an entity records earnings
from continuing operations (i.e., before discontinued operations), as such
adjustments would otherwise be anti-dilutive to earnings per share from
continuing operations. As a result of the Company recording a loss from
continuing operations, the average number of common shares used in the
calculation of diluted loss per share have not been adjusted for the effects of
204,861,500 potential common shares from unexercised stock options and warrants
and 740,000,000 potential common shares from unconverted preferred shares.
Subsequent to June 30, 2003, the Company granted and issued an additional
138,500,000 shares of common stock. Such warrants, options, stock grants and
shares of convertible preferred stock may dilute earnings per share in the
future (see Notes 7, 10, and 12.).
7. Stock-based Compensation
On January 2, 2003, the Company issued to a consultant, a warrant to
purchase 5,000,000 shares of common stock for $.04 per share resulting in
stock-based compensation of $100,000. The fair value of the Company's common
stock at the date of issuance of the warrant was $.021 per share.
On January 17, 2003, the Company issued to consultants, stock options
to purchase 17,604,168 shares of common stock for $.02 per share resulting in
stock-based compensation of $366,000. All of such options were exercised on
January 17, 2003. The fair value of the Company's common stock at the date of
issuance of the options was $.024 per share.
On February 28, 2003, the Company issued to a consultant a warrant to
purchase 2,200,000 shares of common stock for $.04 per share and warrant to
purchase 2,800,000 shares of common stock for $.01 per share. The fair value of
the Company's common stock at the date of issuance of the warrants was $.01 per
share and the stock-based compensation resulting from the issuance of such
warrants was $46,000.
In April 2003, the Company issued 100,000,000 shares of its common
stock pursuant to stock grant rights issued on March 17, 2003 of which
85,000,002 shares were issued to consultants, resulting in stock-based
compensation of $425,000, and 14,999,998 shares were issued to Grazyna B. Wnuk,
resulting in stock-based compensation of $75,000.
Page 11
On June 1, 2003, the Company issued to a consultant, a warrant to
purchase 100,000,000 shares of common stock for $.01 per share resulting in
stock-based compensation of $271,000. The fair value of the Company's common
stock at the date of issuance of the warrant was $.006 per share.
On June 2, 2003, the Company issued to an investor for $5,000, a
warrant to purchase 50,000,000 shares of common stock for $.01 per share
resulting in stock-based compensation of $135,000. The fair value of the
Company's common stock at the date of issuance of the warrant was $.006 per
share.
The Company has elected to use the intrinsic value method of accounting
for stock options issued to employees under its stock option plans whereby the
amount of stock-based compensation expense is calculated as the difference
between the fair market value and the exercise price on the date of issuance.
For purposes of pro forma disclosures the amount of stock-based compensation as
calculated using the fair value method of accounting for stock options issued to
employees is amortized over the options' vesting period. The Company's pro forma
information for the three and six month periods ended June 30, 2003 and 2002 is
as follows:
Three Months Ended June 30, 2003 2002
-----------------------------------------------------------------------------------------------------------
Net loss as reported $ (1,022,000) $ (3,606,000)
-----------------------------------------------------------------------------------------------------------
Deduct: Amount by which stock- based employee compensation
as determined under fair value based method for all
awards exceeds the compensation as determined under the
intrinsic value method - (1,099,000)
-----------------------------------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ (1,022,000) $ (4,705,000)
-----------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
As reported (0.00)* (0.08)
Pro forma under SFAS No. 123 (0.00)* (0.10)
-----------------------------------------------------------------------------------------------------------
* - less than $.01
Six Months Ended June 30, 2003 2002
-----------------------------------------------------------------------------------------------------------
Net loss as reported $ (2,630,000) $ (4,468,000)
-----------------------------------------------------------------------------------------------------------
Deduct: Amount by which stock- based employee compensation
as determined under fair value based method for all
awards exceeds the compensation as determined under the
intrinsic value method - (1,099,000)
-----------------------------------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ (2,630,000) $ (5,567,000)
-----------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
As reported (0.01) (0.10)
Pro forma under SFAS No. 123 (0.01) (0.12)
-----------------------------------------------------------------------------------------------------------
8. Discontinued Operations
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 for 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
Page 12
-Tech"), Granite Technologies, Inc. ("Granite Technologies"), Shopclue.com, Inc.
("Shopclue"), Bizchase, Inc. ("Bizchase") and Starnet365.com, Inc. ("Starnet").
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 by 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 $1.45 million, including
$435,000 owed to the Company. The Company believes that it may be required to
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 and the corresponding gain
on disposal approximated $815,000. Such gain was recognized in the third quarter
of 2002.
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 $444,000. 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 a gain on
disposal approximating $312,000 was recorded in the third quarter of 2002.
Page 13
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 and the
corresponding gain on disposal approximated $163,000. Such gain was recognized
in the third quarter of 2002.
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 $296,000. The Company
believes that it may be required to 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 and the corresponding gain on
disposal approximated $160,000. Such gain was recognized in the third quarter of
2002.
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 stock 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 and in connection therewith have
reserved $550,000 of such payroll taxes against the gain on disposal of
Sequential Electronic Systems, Inc. and S-Tech, Inc. 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 $1.8 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
$1.8 million and the gain on disposal which approximated $458,000 was recorded,
in the third quarter of 2002, as an addition to paid-in capital because the
transaction was consummated with the controlling stockholder of the Company.
Page 14
FMX Corp.
On June 30, 2003 the Company ceded its 49.9% ownership in FMX Corp.
("FMX") upon return of all of its shares of FMX's common and preferred stock to
Michael Schiller, who owned the remaining 51.1% of FMX and is the brother of
Lewis S. Schiller. Since its inception, FMX has had no operating activities and
all but $25,000 of its liabilities were intercompany notes payable. As a result
of the disposal of FMX, the Company recorded a loss on disposal of $9,000.
The loss from operations of discontinued operations for the three
months ended June 30, 2003 and 2002 and the six months ended June 30, 2003 and
2002 are summarized as follows:
Three Months Ended June 30, 2003 2002
--------------------------------------------------------------------------------
Bizchase $ - $ (3,000)
Shopclue - (5,000)
Granite - (48,000)
Starnet - (241,000)
S-Tech - 23,000
Sequential - (245,000)
FMX (43,000) (57,000)
Less intercompany transactions 56,000 248,000
--------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ 13,000 $ (328,000)
--------------------------------------------------------------------------------
Six Months Ended June 30, 2003 2002
--------------------------------------------------------------------------------
Bizchase $ - $ (30,000)
Shopclue - (22,000)
Granite - (98,000)
Starnet - (382,000)
S-Tech - 5,000
Sequential - (365,000)
FMX (99,000) (113,000)
Less intercompany transactions 112,000 494,000
--------------------------------------------------------------------------------
Pro forma net loss under FAS No. 123 $ 13,000 $ (511,000)
--------------------------------------------------------------------------------
9. Commitments and Contingencies
Employment Agreements
Lewis S. Schiller has an employment agreement with the Company 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 for annual compensation of $500,000. Mr. Schiller's contract may be
extended an additional five years and also provides for an annual increase as
calculated as 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.
Page 15
Grazyna B. Wnuk has an employment agreement with the Company whereby
she is employed as the Company's Vice-President. Ms. Wnuk's contract was
executed in 2002 and was negotiated pursuant to a board authorization dated
April 29, 1999. Ms, Wnuk's contract's initial expiration is April 28, 2009 and
provides for annual compensation of $200,000 per year. Ms. Wnuk's contract may
be extended an additional five years and for an annual increase as calculated as
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.
Indemnifications
Pursuant to the terms of the stock purchase agreement to sell
Sequential and S-Tech, the Company 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 at the time of their disposal and as of June 30, 2003,
the Company has reserved $550,000 against such potential claims. In addition,
pursuant to separate indemnification agreements, the Company has agreed to
indemnify Grazyna B. Wnuk and the former president of S-Tech for any claims made
against them regarding the delinquent payroll taxes.
Legal Proceedings
Although the Company is a party to certain legal proceedings that have
occurred in the ordinary course of business, it 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 amount having been
accrued on our books. 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 its operations.
10. Series B 8% Voting Redeemable Convertible Preferred Stock
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received gross loan proceeds of
$335,000. Substantially all of such funds were advanced by Trinity to the
Company. Pursuant to the loan agreements, Trinity pledged an aggregate of 7,200
shares of the Company's Series B 8% Voting Redeemable Convertible Preferred
Stock (the "Series B Preferred Stock") owned by Trinity. Each share of Series B
preferred stock is convertible into shares of Common Stock as calculated by
dividing $100 by the lowest price that the Company's shares of Common Stock have
traded during the period that the Series B preferred stock has been outstanding.
As of June 30, 2003, Trinity was in default on $125,000 of such loans and on
such date, 1,600 shares of pledged Series B Preferred stock held by the lender
was converted into 40,000,000 shares of the Company's preferred stock. As of
August 14, 2003, all but $12,500 of the remaining loans are in default and it is
anticipated that the lenders will convert an aggregate of 4,000 shares of
pledged Series B Preferred stock into an aggregate of 190,474,000 shares of the
Company's common stock.
On June 30, 2003, Trinity and the Company agreed to exchange $125,000
of amounts owed by the Company to Trinity as a result of the above loans into
1,600 shares of Series B. Preferred stock. The Company anticipates that to the
extent that Trinity's pledged shares of Series B Preferred stock are converted,
Trinity will exchange debt for additional shares of Series B Preferred stock.
Page 16
In addition, during the three months ended June 30, 2003, Trinity
converted an aggregate of 1,560 shares of Series B Preferred Stock into an
aggregate of 39,000,000 shares of common stock.
11. Grazyna B. Wnuk Debt Exchange
In April 2003, the Company issued to Grazyna B. Wnuk, its
Vice-President and Secretary and Board Member, 9,006,976 shares of its common
stock in exchange for expenses she paid on behalf of the Company amounting to
$34,000, the approximate value of the shares issued. Such issuance was pursuant
to the March 17, 2003 approval of the board of directors.
12. Subsequent Events
On July 25, 2003, the Company issued 138,500,000 shares of its common
stock pursuant to stock grant rights of which 116,500,000 shares were issued to
consultants, resulting in stock-based compensation of $594,000, 12,000,000
shares were issued to Grazyna B. Wnuk, resulting in stock-based compensation of
$61,000 and 10,000,000 shares were issued to Lewis S. Schiller, resulting in
stock-based compensation of $51,000.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MAY BE DEEMED TO INCLUDE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISK AND UNCERTAINTY. ALTHOUGH MANAGEMENT BELIEVES THAT ITS EXPECTATIONS ARE
BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO ASSURANCE THAT ITS EXPECTATIONS
WILL BE ACHIEVED.
THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS HEREIN (THE "CAUTIONARY STATEMENTS") ARE
MORE FULLY DESCRIBED IN THE COMPANY'S DECEMBER 31, 2002 FORM 10-KSB, AS AMENDED,
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 HAVE
GRANTED SIGNIFICANT BENEFITS UNDER CERTAIN EXISTING AND PROPOSED EMPLOYMENT
AGREEMENTS; 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 SUPPLIER; RELIANCE ON MANAGEMENT, KEY PERSONNEL AND
CONSULTANTS; WE COULD BE SUBJECT TO POTENTIAL UNINSURED LIABILITY, THE RISKS
RELATING TO LEGAL PROCEEDINGS AND OTHER FACTORS BOTH REFERENCED AND NOT
REFERENCED IN THIS QUARTERLY REPORT ON FORM 10-QSB, INCLUDING THOSE SET FORTH
UNDER "RISK FACTORS." 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
Page 17
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.
Discontinuation of the Bulletin Board Exchange
On June 26, 2003, the Nasdaq Stock Market, Inc. ("NSM") announced that
it was discontinuing its efforts to launch the Bulletin Board Exchange ("BBX").
The BBX was to have replaced the OTC Bulletin Board ("OTCBB"), on which the
Company's common stock currently trades.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management 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. We consider our critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of our financial statements, including the
following: impairment of long-lived assets, including the valuation of the
exclusive license agreement; accounting for expenses in connection with stock
options and warrants; and accounting for income taxes. Our 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 financial
statements from the assumptions, estimates and judgments used in the preparation
of our prior year's audited financial statements.
Results of Operations
In September 2002 we made a decision to focus our business exclusively
on our Security Systems business 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 Georal License for the sale of Georal Security
Products, including the GIL-2001 security door. Potential revenues may be
generated from the marketing and distribution of the Georal Security Products to
both those customers for which we have exclusive distribution rights and to
others as to which we have non-exclusive rights. In December of 2002 TRW, Inc.,
now operating as Northrop Grumman Mission Systems, agreed to market and
distribute the Georal Security Products. In March of 2003, Lockheed Martin
Mission Systems also agreed to market and distribute the Georal Security
Products. In April 2003, we entered into reciprocal marketing agreements with
Advanced Biometric Security, Inc. ("ABS") which provide both us and ABS with
non-exclusive marketing rights for each others security product lines. In July
2003, we entered into a representation agreement with Thacher Associates, LLC,
who will market our security products. Many of the customers to whom we will
seek to market the Georal Security Systems will be domestic and foreign
government purchasers or 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, Ltd. 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 International, Ltd. covers the secured portal which is
the subject of the Georal License 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. In 2002, we 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 Georal License.
Page 18
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 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
Virginia Commonwealth University 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 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 have also entered into a services and support agreement with
Florida International University for the installation, support and use of our
Secured Recreational Sports Solution. During the three and six months ended June
30, 2003, we generated revenues of $2,000 and $12,000, respectively, from the
contracts with Virginia Commonwealth University and Florida International
University.
Our operating expenses include executive payroll which is currently
$723,000 annually and was $193,000 and $175,000 for the respective three month
periods ended June 30, 2003 and 2002 and was $386,000 and $338,000 for the
respective six month periods ended June 30, 2003 and 2002. As of June 30, 2003,
none of the salary owed to Lewis S. Schiller, our Chief Executive Officer, has
been paid and he is owed cumulative salary of $1.68 million. As of June 30,
2003, $23,000 of salary owed to Grazyna B. Wnuk, our Vice-President, has been
paid and she is owed cumulative salary of $660,000. Expenses associated with our
sales and marketing, which currently are $1.1 million on an annual basis,
represent consulting fees for the consultants who perform such functions and
approximated $320,000 and $231,000 for the respective three month periods ended
June 30, 2003 and 2002 and approximated $570,000 and $481,000 for the respective
six month periods ended June 30, 2003. Professional fees for legal and
accounting services currently approximate $350,000 annually. The value assigned
to the Georal License of approximately $3 million was incurred in 2002 and is
being amortized over of the life of the Georal License resulting in ongoing
annual amortization expense of $244,000. Such amortization for the three months
ended June 30, 2003 and 2002 was $61,000 and $36,000, respectively, and for the
six months ended June 30, 2003 was $122,000 and $58,000, respectively.
During 2003 and 2002, we have compensated our employees and consultants
with stock options and stock grants that have been registered on Form S-8 and
unregistered stock purchase warrants. During the six months ended June 30, 2003,
we issued an aggregate of 117,604,168 shares of common stock pursuant to the
exercise of stock options and stock grants and issued warrants to purchase an
aggregate of 160,000,000 shares of common stock. Stock-based compensation
related to the issuances of the stock options, stock grants and stock purchase
warrants was $452,000 and $1.4 million, respectively, for the three and six
months ended June 30, 2003. Stock-based compensation was $171,000 for both the
three and six months ended June 30, 2002
We incur interest expense at an annual rate of 9% on related party
notes payable. For the three month periods ended June 30, 2003 and 2002, such
interest was $27,000 and $34,000, respectively, and for the six month periods
ended June 30, 2003 was $53,000 and $60,000,repsectivley. The related party
notes payable are the result of advances from Trinity Group-I, Inc., our
controlling shareholder, advances from Lewis S. Schiller, our Chief Executive
Officer and Chairman of the Board, advances from Grazyna B. Wnuk, an officer and
director 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 S. Schiller. Total notes payable owed to related parties as of June 30,
2003 approximated $1.3 million on which accrued and unpaid interest approximates
$725,000. All of the related party notes and interest are payable upon demand.
As a result of our decision to focus our business exclusively on our
Security Systems business we disposed of all non security system segments
resulting in a gain on disposal of $1.4 million recorded in the third quarter of
2002. The income (loss) from the operations of discontinued segments was $13,000
and ($328,000) for the respective three months ended June 30, 2003 and 2002 and
was $13,000 and ($511,000) for the respective six month periods ended June 30,
2003 and 2002..
Page 19
Financial Condition - Liquidity and Capital Resources
As of June 30, 2003, our working capital deficiency approximates $7.4
million, representing an increase of $2.9 million from December 31, 2002.
Effective September 30, 2002, Lewis S. Schiller, the Company's Chief Executive
Officer and Chairman of the Board, agreed to defer payment of his salary until
January 1, 2004, payment of accrued interest on notes payable to Trinity, which
is wholly owned by him until January 1, 2004 and payment of accrued dividends on
preferred stock held by Trinity until January 1, 2004. Such amounts were
presented as long-term liabilities as of December 31, 2002. As of June 30, 2003,
the remaining deferral period is less than twelve months and such amounts are
presented as current liabilities. During the six months ended June 30, 2003 we
used $638,000 for our continuing operations. Since April 1999, our primary
source of funding has been The Trinity Group-I, Inc. and during the six months
ended June 30, 2003 net advances from related parties were $291,000. During 2003
and 2002, we have used stock options to compensate our employees and key
consultants. The proceeds from the exercise of stock options was $352,000 during
the six months ended June 30, 2003.
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received gross loan proceeds of
$335,000. Substantially all of such funds were advanced to us by Trinity.
Pursuant to the loan agreements, Trinity pledged an aggregate of 7,200 shares of
Series B Preferred Stock owned by Trinity. Each share of Series B preferred
stock is convertible into shares of Common Stock as calculated by dividing $100
by the lowest price that the Company's shares of common stock have traded during
the period that the Series B preferred stock has been outstanding. As of June
30, 2003, Trinity was in default on $125,000 of such loans and on such date,
1,600 shares of pledged Series B Preferred stock held by the lender was
converted into 40,000,000 shares of the Company's preferred stock. As of August
14, 2003, all but $12,500 of the remaining loans are in default and it is
anticipated that the lenders will convert an aggregate of 4,000 shares of
pledged Series B Preferred stock into an aggregate of 190,474,000 shares of the
Company's common stock.
On June 30, 2003, Trinity and the Company agreed to exchange $125,000
of amounts owed by us to Trinity as a result of the above loans into 1,600
shares of Series B. Preferred stock. We anticipate that to the extent that
Trinity's pledged shares of Series B Preferred stock are converted, Trinity will
exchange debt for additional shares of Series B Preferred stock.
In April 2003, we issued to Grazyna B. Wnuk 9,006,976 shares of our
common stock in exchange for expenses she paid on our behalf amounting to
$34,000, the approximate value of the shares issued.
Pursuant to the terms of the stock purchase agreement to sell
Sequential Electronic Systems, Inc. and S-Tech, Inc., we have agreed to
indemnify Lewis S. Schiller for any claims made against him regarding $1.1
million of delinquent payroll taxes owed by Sequential Electronic Systems, Inc.
and S-Tech, Inc. at the time of their disposal. A reserve of $550,000 has been
recorded by management based upon our best estimate of the ultimate liability.
In addition, pursuant to separate indemnification agreements, the Company has
agreed to indemnify Grazyna B. Wnuk and the former president of S-Tech for any
claims made against them regarding the delinquent payroll taxes.
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, we have a history of operating losses and as of June 30, 2003 have a
working capital deficiency of $7.4 million and a capital deficiency of $4.6
million. Since April of 1999 we have relied on financial support from our
controlling stockholder, The Trinity Group-I, Inc. and other related parties and
since September 25, 2001 have compensated our employees and key consultants with
stock and stock options some of 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. Our continuation as a going concern is
dependent upon our ability to obtain financing, and to use the proceeds from any
such financing to increase our business to achieve profitable operations. The
accompanying consolidated financial statements do not include any adjustments
that would result should we be unable to continue as a going concern.
Page 20
PART II OTHER INFORMATION
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
31.1 Chief Executive Officer Certification.
31.2 Chief Financial Officer Certification
32 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Page 21
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 August 18, 2003
Lewis S. Schiller (Principal Executive and
Accounting Officer)
Page 22
Exhibit 31.1
CHIEF EXECUTIVE 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this repot;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
August 18, 2003
By /s/Lewis S. Schiller
Chief Executive Officer
Page 23
Exhibit 31.2
CHIEF FINANCIAL 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this repot;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based
on such evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
August 18, 2003
By /s/ Lewis S. Schiller
Chief Financial Officer
Page 24
Exhibit 32
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., (the
"Company") on Form 10-QSB for the period ending June 30, 2003, 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 certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 that (based on their knowledge):
1) the Report fully complies with the requirements of Section 13(a) or 15 (d) of
the Securities 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 18, 2003
Page 25