U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 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)
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 November 18, 2003, there are 749,715,948 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 September 30, 2003 2002
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Revenues $ 20,000 $ -
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Operating expenses 298,000 517,000
Compensation expense adjustment from executive stock
appreciation rights - (2,010,000)
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants 1,619,000 -
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Total operating expenses 1,917,000 (1,493,000)
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Operating income (loss) (1,897,000) 1,493,000
Interest expense, related parties (27,000) (28,000)
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Income (loss) from continuing operations (1,924,000) 1,465,000)
Gain on disposal of discontinued segments - 1,330,000
Income from operations of discontinued segments - 174,000
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Net income (loss) $ (1,924,000) $ 2,969,000
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Income (loss) allocated to common stock- basic:
Income (loss) from continuing operations $ (1,924,000) $ 1,465,000
Less dividends on preferred shares (31,000) (42,000)
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Income (loss) from continuing operations attributable to
common stockholders (1,955,000) 1,423,000
Gain on disposal of discontinued segments - 1,330,000
Income from operations of discontinued segments - 174,000
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Net income (loss) available to common stockholders $ (1,955,000) $ 2,927,000
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Income (loss) allocated to common stock - diluted:
Income (loss) from continuing operations attributable to
common stockholders - basic $ (1,955,000) $ 1,423,000
Assumed reduction of dividends on preferred shares - 41,000
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Income (loss) from continuing operations attributable to
common stockholders (1,955,000) 1,464,000
Gain on disposal of discontinued segments - 1,330,000
Income (loss) from operations of discontinued segments - 174,000
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Net income (loss) available to common stockholders $ (1,955,000) $ 2,968,000
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See Notes to Unaudited Consolidated Interim Financial Statements.
continued
Page 2
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
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Three Months Ended September 30, 2003 2002
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Weighted average shares outstanding:
Basic 580,429,830 49,873,664
Assumed exercise of warrants - 5,931,475
Assumed conversion of Series B Preferred Stock - 68,965,517
Assumed conversion of Series C Preferred Stock - 4,000,000
Assumed conversion of Series D Preferred Stock - 16,000,000
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Diluted 580,429,830 144,770,656
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Income (loss) per shares of common stock - basic:
Income (loss) from continuing operations ($0.00)* $0.03
Gain on disposal of discontinued segments - 0.03
Income (loss) from operations of discontinued segments - 0.00*
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Net income (loss) ($0.00)* $0.06
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Income (loss) per share of common stock - diluted:
Income (loss) from continuing operations ($0.00)* $0.01
Gain on disposal of discontinued segments - 0.01
Income (loss) from operations of discontinued segments - 0.00*
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Net income (loss) ($0.00)* $0.02
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See Notes to Unaudited Consolidated Interim Financial Statements.
* less than $.005
Page 3
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The Finx Group, Inc. and Subsidiaries
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Unaudited Consolidated Statements of Operations
Nine months ended September 30, 2003 2002
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Revenues $ 32,000 $ -
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Operating expenses 1,472,000 2,217,000
Compensation expense from stock grants and the issuance of
stock options and stock purchase warrants 3,037,000 171,000
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Total operating expenses 4,509,000 2,388,000
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Operating loss (4,477,000) (2,388,000)
Other income (expense) 1,000 -
Interest expense, related parties (80,000) (59,000)
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Loss from continuing operations (4,556,000) (2,447,000)
Gain (loss) on disposal of discontinued segments (9,000) 1,330,000
Income (loss) from operations of discontinued segments 13,000 (382,000)
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Net loss $ (4,552,000) $ (1,499,000)
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Loss allocated to common stock- basic and diluted:
Loss from continuing operations $ (4,556,000) $ (2,447,000)
Less dividends on preferred shares (96,000) (122,000)
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Loss from continuing operations attributable to common
stockholders (4,652,000) (2,569,000)
Gain (loss) on disposal of discontinued segments (9,000) 1,330,000
Income (loss) from operations of discontinued segments 13,000 (382,000)
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Net loss available to common stockholders $ (4,648,000) $ (1,621,000)
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Weighted average shares outstanding 353,536,399 47,018,653
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Loss per common share - basic and diluted:
Loss from continuing operations ($0.01) ($0.05)
Gain (loss) from disposal of discontinued operations (0.00)* 0.03
Income (loss) from operations of discontinued segments 0.00* (0.01)
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Net loss ($0.01) ($0.03)
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See Notes to Unaudited Consolidated Interim Financial Statements.
* less than $.005
Page 4
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
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As of September 30, 2003
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ASSETS
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Prepaid expense $ 9,000
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Total current assets 9,000
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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 -
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Other assets:
Exclusive license agreement, net (see Note 4) 2,688,000
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TOTAL ASSETS $ 2,697,000
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LIABILITIES AND CAPITAL DEFICIENCY
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CURRENT LIABILITIES:
Accounts payable $ 1,212,000
Accrued payroll and payroll taxes, executive officers 2,547,000
Notes payable executive officers, including interest 1,516,000
Notes payable, related parties, including accrued interest 297,000
Other current liabilities 447,000
Current liabilities of discontinued segments (see Note 8) 1,211,000
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Total current liabilities 7,230,000
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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 September 30, 2003 1,554,000
Common stock, $.01 par value; 750,000,000 shares
authorized; 742,715,948 shares issued and
outstanding as of September 30, 2003 7,427,000
Additional paid-in capital, common stock 26,631,000
Accumulated deficit (40,145,000)
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Capital deficiency (4,533,000)
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TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 2,697,000
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 5
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The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
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Nine Months Ended September 30, 2003 2002
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CASH FLOWS - OPERATING ACTIVITIES:
Loss from continuing operations $ (4,556,000) $ (2,447,000)
Gain (loss) on disposal of discontinued segments (9,000) 1,330,000
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(4,565,000) (1,117,000)
Adjustments to reconcile loss from continuing operations to
net cash - continuing operations:
Depreciation and amortization 184,000 101,000
Non cash expense from stock grants and the issuance of
stock options and stock purchase warrants 3,037,000 171,000
(Gain) loss on disposal of discontinued segments 9,000 (1,330,000)
Other operating adjustments - 102,000
Changes in assets and liabilities:
Prepaid expense (9,000) -
Other assets - 3,000
Accounts payable (87,000) 485,000
Accrued payroll 579,000 513,000
Accrued interest expense, related parties 80,000 59,000
Other current liabilities (24,000) (16,000)
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Net cash-continuing operations (796,000) (1,029,000)
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Income (loss) from discontinued operations 13,000 (382,000)
Adjustments to reconcile loss from operations of discontinued
segments to net cash - discontinued operations:
Depreciation and amortization - 15,000
Non cash expense from the issuance of stock options - 28,000
Reserve for obsolete and slow moving inventory - 117,000
Impairment charge - 191,000
Bad debt expense - 14,000
Net change in other assets and liabilities (15,000) 162,000
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Net cash-discontinued operations (2,000) 145,000
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Net cash - operating activities (798,000) (884,000)
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CASH FLOWS - INVESTING ACTIVITIES:
Other investing activities - (44,000)
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Net cash - investing activities - (44,000)
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CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 668,000 130,000
Repayments on related party loans (222,000) (76,000)
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 798,000 928,000
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Net change in cash - -
Cash - Beginning of period - -
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Cash - End of period $ - $ -
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ -
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Income Taxes $ - $ -
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See Notes to Unaudited Consolidated Interim Financial Statements.
Page 6
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The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three and Nine Months Ended September 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 "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 Company has not generated any revenue from its principal business
activity. The Company's primary source of future revenues, if any, is expected
to be derived from its exclusive license agreement with GIL Security Systems,
Inc. ("GIL"). GIL, a subsidiary of Georal International, Ltd., holds world-wide
rights related to the intellectual property related to the GIL security systems
pursuant to a license from 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
license gives the Company distribution rights for the sale of all of the Georal
security products, including all models of the GIL-2001 security door, to a
broad range of customers (see Note 4).
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 generated only nominal revenue from continuing
operations and has a history of net losses and as of September 30, 2003 has a
working capital deficiency of $7.2 million and a capital deficiency of $4.5
million. During 2003 and 2002 the Company was dependent on financial support
from its controlling stockholder, Trinity Group-I, Inc. ("Trinity"), and other
related parties. In addition, during 2003 and 2002, the Company 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, the Company can give no assurances such financing will be
consummated, that the terms of any financing will be reasonable or that the
amount raised will be adequate to meet the Company's current and ongoing
obligations. The continuation of the Company as a going concern is dependent
upon its ability both to obtain financing and to generate revenue and income
from the sale of portals (see Note 4). 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.
Page 7
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 September 30, 2003, management expects
those assets related to its continuing operations to be fully recoverable.
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. Supplemental Disclosure of Non Cash Investing and Financing Activities
For the Nine Months Ended September 30, 2002
--------------------------------------------
On various dates during the nine months ended September 30, 2003, the
company issued stock options, stock purchase warrants and stock grants resulting
in non cash stock compensation expense of $3,037,000 (see Note 7).
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
For the Nine Months Ended September 30, 2003
--------------------------------------------
On various dates during the nine months ended September 30, 2002, the
company issued stock options and stock purchase warrants resulting in non cash
stock compensation expense of $171,000 (see Note 7).
On February 21, 2002, the Company issued 40,000 shares of its series D
preferred stock, convertible into 4,000,000 shares of 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 common stock, in consideration for two
amendments to the Company's exclusive licensing agreement with GIL Security
Systems, Inc. These shares were issued to the sole stockholder of GIL Security
Systems, Inc. Using the Black-Scholes option valuation formula, the two series
of convertible preferred stock were valued at an aggregate of $1,100,000.
Page 8
On April 8, 2002, the Company entered into a settlement agreement with
a creditor pursuant to which the Company settled a $17,000 obligation by the
issuance of 353,844 shares of common stock valued at $17,000
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 a broad range of customers. The Georal security products' include all models
of the Georal 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, and certain corporations. 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, in September 1999, the Company issued to
Alan J. Risi preferred shares which were converted into 1,049,874 shares of
common stock in July of 2002.
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 to expand the categories of customers for which the Company has the
exclusive marketing right to include all financial institutions around the world
with the Company also receiving a right of first refusal to be the exclusive
distributor for sales to any governmental body which the Company does not have
exclusive marketing rights. As consideration for the amendment entered into on
February 21, 2002, the Company issued to Alan Risi 40,000 shares of series D 2%
convertible preferred stock that was converted into 4,000,000 million shares of
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 additional exclusive world wide sales and marketing
rights. 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 which were converted into 6,000,000 shares of common stock. On
September 9, 2002, the Georal license was further expanded to provide the
Company with additional exclusive marketing rights. As consideration for this
amendment, the Company issued to Alan Risi 100,000 shares of its series C
preferred stock which were converted into 10,000,000 shares of common stock. On
October 16, 2002, the Company issued to Alan Risi an additional 250,000 shares
of its series C preferred stock for an amendment to the Georal license which
provided the Company with participation rights in certain maintenance revenue
generated by Georal and 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.
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, and Trinity, the Company's largest stockholder
which is wholly owned by Mr. Schiller, agreed to defer, until January 1, 2004,
payment of accrued interest on notes payable to Trinity and payment of accrued
dividends on preferred stock held by Trinity. As of September 30, 2003, 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 allocated to the common stock for the
respective periods. The weighted average number of shares of common stock
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 shares of common stock used in the calculation of diluted per
share amounts is adjusted for the dilutive effects of
Page 9
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 for the nine
months ended September 30, 2003, 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. Such
warrants, options, and shares of convertible preferred stock may dilute earnings
per share in the future (see Notes 7, 10, and 11.).
7. Stock-based Compensation
On January 2, 2003, the Company issued to a non-affiliated consultant,
a warrant to purchase 5,000,000 shares of common stock at an exercise price of
$.04 per share resulting in stock compensation expense 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 non-affiliated consultants,
stock options to purchase 17,604,168 shares of common stock at an exercise price
of $.02 per share resulting in stock compensation expense 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 non-affiliated consultant
a warrant to purchase 2,200,000 shares of common stock at an exercise price of
$.04 per share and warrant to purchase 2,800,000 shares of common stock at an
exercise price of $.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
compensation expense resulting from the issuance of such warrants was $46,000.
On March 17, 2003, the Company granted 100,000,000 shares of common
stock of which 85,000,002 shares were issued to non-affiliated consultants,
resulting in stock compensation expense of $425,000, and 14,999,998 shares were
issued to Grazyna B. Wnuk, the Company's vice-president and a director,
resulting in stock compensation expense of $75,000.
On June 1, 2003, the Company issued to a non-affiliated consultant, a
warrant to purchase 100,000,000 shares of common stock at an exercise price of
$.01 per share resulting in stock compensation expense 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 at an exercise price of
$.01 per share resulting in stock compensation expense of $135,000. The fair
value of the Company's common stock at the date of issuance of the warrant was
$.006 per share.
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
non-affiliated consultants, resulting in stock compensation expense of $594,000,
10,000,000 shares were issued to Lewis S. Schiller, resulting in stock
compensation expense of $51,000, and 12,000,000 shares were issued to Grazyna B.
Wnuk, resulting in stock compensation expense of $61,000.
On August 27, 2003 the Company issued 47,499,000 shares of its common
stock pursuant to stock grant rights of which 37,499,000 were issued to
non-affiliated consultants resulting in stock compensation expense of $109,000
and 10,000,000 shares of Common Stock was issued to Lewis S. Schiller, resulting
in stock compensation expense of $29,000.
In April 2002, the Company issued options and warrants to purchase an
aggregate of 5,300,000 shares of common stock to non-affiliated consultants,
resulting in stock compensation expense of $157,000.
Page 10
In April of 2002, the Company (a) issued to Lewis S. Schiller, its
chief executive officer a director and controlling shareholder, 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 (b) 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, these 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 provided for cashless exercise provisions
which required the Company to calculate stock compensation expense on the
underlying shares for each reporting period that the warrants or any portion
thereof were outstanding. As of June 30, 2002, the fair value per share was
greater than the exercise price and the resulting stock compensation expense of
$2,010,000 was charged to operations in the second quarter of 2002. As of
September 30, 2002, the fair value per share was less than the exercise price
and as a result the $2,010,000 stock compensation expense charged in the second
quarter of 2002 was reversed in the third quarter of 2002. On October 31, 2002,
Lewis S. Schiller and Grazyna B. Wnuk agreed to remove the cashless exercise
provisions from these warrants and as a result there will be no future stock
compensation expense related to such warrants.
In May 2002, the Company issued to Lewis S. Schiller an option to
purchase 1,500,000 shares of common stock at an exercise price of $.04 per share
resulting in stock compensation expense of $15,000.
The Company has elected to use the intrinsic value method of accounting
for stock options in accordance with APB Opinion No. 25 and related
interpretations 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. For the three months
ended September 30, 2003 and 2002 there were no differences between the
intrinsic value method and the fair value method. The Company's pro forma
information for the nine month periods ended September 30, 2003 and 2002 is as
follows:
Nine Months Ended September 30, 2003 2002
-----------------------------------------------------------------------------------------------------------
Net loss as reported $ (4,552,000) $ (1,499,000)
-----------------------------------------------------------------------------------------------------------
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 $ (4,552,000) $ (2,598,000)
-----------------------------------------------------------------------------------------------------------
Basic and diluted net loss per common share:
As reported (0.01) (0.03)
Pro forma under SFAS No. 123 (0.01) (0.05)
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8. Discontinued Operations
During 2002, the Company sold its operations which were not related to
the security systems business for nominal consideration. The discontinued
operations were conducted by the following subsidiaries: Sequential Electronic
Systems, Inc. ("Sequential"), S-Tech, Inc. ("S-Tech"), Granite Technologies,
Inc. ("Granite Technologies"), Shopclue.com, Inc. ("Shopclue"), Bizchase, Inc.
("Bizchase") and Starnet365.com, Inc. ("Starnet").
Except for the sale of Sequential and S-Tech, all of the discontinued
operations were sold to nonaffiliated parties. Sequential and S-Tech were sold
to a corporation owned by Lewis S. Schiller, the Company's president, chief
executive officer and controlling stockholder. Since the liabilities of the
subsidiaries that were transferred exceeded their respective assets, the Company
recognized, during the third quarter of 2002, a gain from the disposition of
discontinued operations of $1,330,000. The Company continues to have contingent
obligations relating to the discontinued operations, principally withholding tax
liabilities of an aggregate of $1,211,000, of which $550,000 related to the
operations of Sequential and
Page 11
S-Tech. In certain cases, the Company retained intellectual property rights;
however, those rights have been fully expensed.
On June 30, 2003, the Company transferred its 51.1% ownership in FMX
Corp. ("FMX") to Michael Schiller, who owned the remaining 49.9% of FMX. Michael
Schiller is the brother of Lewis S. Schiller; however, Lewis S. Schiller has no
direct or indirect equity interest in FMX. Since its inception, FMX has had no
operating activities and all but $25,000 of its liabilities was a note payable
to the Company. As a result of the disposal of FMX, the Company recorded a loss
on disposal of $9,000 during the second quarter of 2003.
The loss from operations of discontinued operations for the three
months ended September 30, 2003 and 2002 and the nine months ended September 30,
2003 and 2002 are summarized as follows:
Three Months Ended September 30, 2003 2002
-----------------------------------------------------------------------------------------------------------
Bizchase $ - $ (16,000)
Shopclue - (5,000)
Granite - (51,000)
Starnet - (3,000)
S-Tech - (20,000)
Sequential - 165,000
FMX - (56,000)
Less intercompany transactions - 160,000
-----------------------------------------------------------------------------------------------------------
Net income from operations of discontinued segments $ - $ 174,000
-----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
-----------------------------------------------------------------------------------------------------------
Bizchase $ - $ (46,000)
Shopclue - (26,000)
Granite - (149,000)
Starnet - (346,000)
S-Tech - (15,000)
Sequential - (199,000)
FMX (99,000) (170,000)
Less intercompany transactions 112,000 569,000
-----------------------------------------------------------------------------------------------------------
Net income (loss) from operations of discontinued segments $ 13,000 $ (382,000)
-----------------------------------------------------------------------------------------------------------
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 operating 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 12
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. 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 operating 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 September 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, and the plaintiff has received a judgment for $334,595, such amount having
been accrued on the Company's books, plus interest.
10. Related Party Transactions
From April 7, 2003 through August 4, 2003, Trinity entered into four
separate loan agreements pursuant to which it received loans of $335,000 from
nonaffiliated lenders. Substantially all of such funds were advanced by Trinity
to the Company. Pursuant to the loan agreements, Trinity pledged an aggregate of
5,747 shares of the Company's series B 8% voting redeemable convertible
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 September
3, 2003 each share of series B preferred stock was convertible into 47,619
shares of common stock. Trinity defaulted on all of such loans and the 5,747
shares of pledged series B preferred stock held by the lenders were converted
into 237,190,476 shares of common stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders.
In addition, during the nine months ended September 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.
Page 13
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
11. Subsequent Events
On October 14, 2003, the Company issued 7,000,000 shares of its common
stock pursuant to stock grant rights to a non-affiliated consultant, resulting
in stock compensation expense of $28,000.
On November 12, 2003, the Company entered into an agreement to issue
2,500,000 shares of its common stock, as soon as such stock becomes available,
in order to settle claims that have been made against the Company by a vendor of
a former acquisition target of the Company. If after one year from the date that
the 2,5000,000 shares of common stock are issued, the shares do not have a fair
market value of $50,000, then the Company has agreed to pay to the vendor an
amount calculated as $50,000 less the fair market value of the 2,500,000 shares
of common stock.
Page 14
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 "RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN THE COMPANY'S FORM 10-KSB,
AS AMENDED, FOR THE YEAR ENDED DECEMBER 31, 2002, INCLUDING, WITHOUT LIMITATION:
WE HAVE NOT GENERATED REVENUES; 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; OUR EXECUTIVE OFFICER
WILL RECEIVE A SIGNIFICANT BENEFIT IF WE GENERATE SIGNIFICANT CASH FLOW AND IF
WE SELL ANY OF OUR OPERATIONS AT A PROFIT; 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 SIGNIFICANT 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 HAVE NOT GENERATED REVENUE AND
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 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.
Page 15
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
Revenues
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 recognize that on our
own, we face competition from companies which have far greater financial
resources and personnel which is why we made the strategic decision to establish
our marketing channel relationships with large organizations, including Northrop
Grumman Mission Systems and Lock Martin Mission Systems. 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.
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
Page 16
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 nine months ended September 30, 2003, we
generated revenues of $20,000 and $32,000, respectively, from the contracts with
Virginia Commonwealth University and Florida International University.
Operating Expenses
For the three and nine month comparative periods ending September 30,
2003 and 2002 our significant operating expenses were executive payroll, and
marketing expense and professional fees.
Executive payroll is currently $723,000 annually and approximated
$193,000 and $175,000 for the respective three month periods ended September 30,
2003 and 2002 and was $579,000 and $513,000 for the respective nine month
periods ended September 30, 2003 and 2002. As of September 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 $1.8 million. As of September 30, 2003, $66,000
of salary owed to Grazyna B. Wnuk, our vice-president, has been paid and she is
owed cumulative salary of $672,000.
Expenses associated with our marketing, which currently are $1.1
million on an annual basis, represent consulting fees for the consultants who
perform such functions and approximated $354,000 and $263,000 for the respective
three month periods ended September 30, 2003 and 2002 and approximated $941,000
and $743,000 for the respective nine month periods ended September 30, 2003.
Professional fees for legal and accounting services currently
approximate $455,000 annually, and approximated $123,000 and $285,000,
respectively, for the three month periods ended September 30, 2003 and
approximated $320,000 and $380,000, respectively, for the nine month periods
ended September 30, 2003.
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 September 30, 2003 and 2002 was $61,000
and $26,000, respectively, and for the nine months ended September 30, 2003 was
$184,000 and $84,000, 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 nine months ended September 30,
2003, we issued an aggregate of 303,603,168 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 $1.6 million and $3.037 million, respectively, for the three and
nine months ended September 30, 2003 and $171,000 for nine months ended
September 30, 2002.
In 2002, we issued to Lewis S. Schiller and Grazyna B. Wnuk, warrants
to purchase 20,000,000 and 10,000,000 shares, respectively, at $0.043 per share,
the fair market value at date of issuance. The warrants provided for cashless
exercise provisions which required the calculation stock compensation expense on
the underlying shares for each reporting period that the warrants or any portion
thereof were outstanding. As of June 30, 2002, the fair value per share was
greater than the exercise price and the resulting stock compensation expense of
$2,010,000 was charged to operations in the second quarter of 2002. As of
September 30, 2002, the fair value per share was less than the exercise price
and as a result the $2,010,000 stock compensation expense charged in the second
quarter of 2002 was reversed in the third quarter of 2002. On October 31, 2002,
Lewis S. Schiller and Grazyna B. Wnuk agreed to remove the cashless exercise
provisions from these warrants and as a result there will be no future stock
compensation expense related to such warrants.
Page 17
We incur interest expense at an annual rate of 9% on related party
notes payable. For the three month periods ended September 30, 2003 and 2002,
such interest was $80,000 and $59,000, respectively, and for the nine month
periods ended June 30, 2003 was $53,000 and $60,000, respectively. 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 a former director, and advances from family
members of Lewis S. Schiller. Total notes payable owed to related parties as of
September 30, 2003 approximated $1.1 million on which accrued and unpaid
interest approximates $753,000. 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 loss on disposal of $9,000 for the nine months ended September
30, 2003 and a gain on disposal of $1.3 million during the three and nine months
ended September 30, 2003. The income (loss) from the operations of discontinued
segments was $174,000 for the three months ended September 30, 2003 and was
$13,000 and ($382,000) for the respective nine month periods ended September 30,
2003 and 2002.
Financial Condition - Liquidity and Capital Resources
As of September 30, 2003, our working capital deficiency approximates
$7.2 million, representing an increase of $2.7 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, and Trinity, the Company's largest stockholder which is wholly
owned by Mr. Schiller, agreed to defer, until January 1, 2004, payment of
accrued interest on notes payable to Trinity and payment of accrued dividends on
preferred stock held by Trinity. Such amounts were presented as long-term
liabilities as of December 31, 2002. As of September 30, 2003, the remaining
deferral period is less than twelve months and such amounts are presented as
current liabilities. During the nine months ended September 30, 2003 we used
$796,000 for our continuing operating activities. Sources of funds for the nine
months ended September 30, 2003 were net advances from related parties of
$446,000 and proceeds from the exercise of stock options of $352,000.
Since April 1999, our primary source of funding has been Trinity. From
April 7, 2003 through August 4, 2003, Trinity entered into four separate loan
agreements pursuant to which it received loans of $335,000 from nonaffiliated
lenders. Substantially all of such funds were advanced by Trinity to the
Company. Pursuant to the loan agreements, Trinity pledged an aggregate of 5,747
shares of the Company's series B 8% voting redeemable convertible 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 September 3, 2003 each
share of series B preferred stock was convertible into 47,619 shares of common
stock. Trinity defaulted on all of such loans and the 5,747 shares of pledged
series B preferred stock held by the lenders were converted into 237,190,476
shares of common stock and were transferred to the lenders.
At the time of each of the loans to Trinity by the non-affiliated
lenders, Trinity lent the Company a substantial portion of the principal amount
of the loan at 9% interest. Trinity defaulted on its loans to the lenders as a
result of the Company's default on its loan to Trinity. When the lenders called
the note and foreclosed on the collateral, Trinity cancelled the Company's note
to it in exchange for shares of series B preferred stock equal to the number of
such shares as Trinity transferred to the lenders. As a result of the defaults
by the Company and Trinity, the Company issued to Trinity 5,747 shares of series
B preferred stock, which is the same number of shares as Trinity converted and
transferred to the lenders.
On March 17, 2003, the Company issued to Grazyna B. Wnuk, an officer
and director, 9,006,976 shares of its common stock in payment for expenses of
$34,000, which she paid on behalf of the Company, the approximate value of the
shares issued.
Pursuant to the terms of the September 30, 2002 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
Page 18
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 generated nominal revenues and we have a history of operating
losses As of September 30, 2003 have a working capital deficiency of $7.2
million and a capital deficiency of $4.5 million. Management is currently
seeking additional financing; however we can give no assurance that such
financing will be consummated or that any financing which we receive will be
adequate. Further, in view of our stock price, any financing is likely to result
in substantial dilution to our stockholders. Our continuation in business 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.
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 the end of the period covered by this
quarterly 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 19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The FINX GROUP, INC.
/S/______________ Chief Executive Officer and Director November 18, 2003
Lewis S. Schiller (Principal Executive and
Accounting Officer)
Page 20
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.
November 18, 2003
By /S/ Lewis S. Schiller
Chief Executive Officer
Page 21
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.
November 18, 2003
By /S/ Lewis S. Schiller
Chief Financial Officer
Page 22
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 September 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
November 18, 2003
Page 23