U.S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB/A
Amendment No. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTON 13 OR 15(d) OF THE EXCHANGE ACT for the
transition period from ___________________ to ________________________.
Commission File Number 0-9940
THE FINX GROUP, INC.
(Exact name of small business issuer as specified in its charter)
(Formerly known as Fingermatrix, Inc.
Delaware 13-2854686
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
249 Saw Mill River Road, Elmsford, NY 10523
(Address of principal executive offices) (Zip Code)
(914) 592-5930
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months, (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No ___
As of February 22, 2002, there were 45,636,090 shares of the par value
$.01 common stock outstanding.
Purpose of Amendment:
The 10QSB for the quarterly period ended March 31, 2001 is amended to include
the effects of financial statement adjustments that were made to the amended
10KSB for the year ended December 31, 2000 and to include the independent
accountant's review report.
Page 1
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders of
The Finx Group, Inc.
Elmsford, New York
We have reviewed the accompanying consolidated balance
sheet of The Finx Group, Inc. and its subsidiaries as of March 31, 2001
and the related consolidated statements of operations and cash flows for
the three month period ended March 31, 2001. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less
in scope than an audit conducted in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements referred to above for them to be in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the
Company has suffered a net loss of $1,186,000 for the three month period
ended March 31, 2001 and has a working capital deficiency of $8,102,000
and a capital deficiency of $7,747,000 as of March 31, 2001. Management's
plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments which
might arise from the outcome of these uncertainties.
We have not reviewed the accompanying consolidated
statements of operations or cash flows for the three months ended March
31, 2000 and give no assurance on them.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
February 1st, 2002
Page 2
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
-----------------------------------------------------------------------------------------------------------
Three months ended March 31, 2001 2000
-----------------------------------------------------------------------------------------------------------
Sales $ 477,000 $ 688,000
Cost of goods sold 288,000 328,000
-----------------------------------------------------------------------------------------------------------
189,000 360,000
Reserve for obsolete and slow moving inventory (125,000) --
-----------------------------------------------------------------------------------------------------------
Gross profit 64,000 360,000
Operating expenses 1,129,000 725,000
-----------------------------------------------------------------------------------------------------------
Operating loss (1,065,000) (365,000)
Other income 26,000 5,000
Interest expense and financing fees, related parties (98,000) (56,000)
Interest expense and financing fees, other (49,000) (38,000)
-----------------------------------------------------------------------------------------------------------
Net loss $ (1,186,000) $ (454,000)
-----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 11,522,108 2,000,000
-----------------------------------------------------------------------------------------------------------
Net loss per common share: Basic and diluted $ (0.10) $ (0.23)
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 3
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
-----------------------------------------------------------------------------------------------------------
As of March 31, 2001
-----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSSETS:
Cash $ 21,000
Accounts receivable, net 145,000
Inventories, net 1,160,000
Prepaid expense and other current assets 23,000
-----------------------------------------------------------------------------------------------------------
Total current assets 1,349,000
-----------------------------------------------------------------------------------------------------------
Property, Plant and Equipment and Software Costs:
Property, plant and equipment 2,537,000
Software costs 285,000
Less accumulated depreciation and amortization (2,506,000)
-----------------------------------------------------------------------------------------------------------
Net property plant and equipment 316,000
-----------------------------------------------------------------------------------------------------------
Other assets:
Security deposits 29,000
Patents, net 10,000
-----------------------------------------------------------------------------------------------------------
Total other assets 39,000
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,704,000
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,779,000
Accrued payroll 1,256,000
Accrued payroll taxes 790,000
Notes payable, related parties 4,719,000
Revolving line of credit 682,000
Customer deposits 77,000
Other current liabilities 148,000
-----------------------------------------------------------------------------------------------------------
Total current liabilities 9,451,000
-----------------------------------------------------------------------------------------------------------
CAPITAL DEFICIENCY
-----------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value; 1,000,000 shares authorized; 1,000
shares issued and outstanding
Common stock, $.01 par value; 50,000,000 shares authorized; 12,787,885
shares issued and outstanding 128,000
Additional paid-in capital 12,360,000
Accumulated deficit (20,235,000)
-----------------------------------------------------------------------------------------------------------
Total capital deficiency (7,747,000)
-----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIENCY $ 1,704,000
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 4
-----------------------------------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
-----------------------------------------------------------------------------------------------------------
Three Months ended March 31, 2001 2000
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - OPERATING ACTIVITIES:
-----------------------------------------------------------------------------------------------------------
Net loss $ (1,186,000) $ (454,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Reserve for obsolete and slow moving inventory 125,000 --
Depreciation and amortization 42,000 10,000
Bad debt expense 5,000 --
Other operating activities -- 2,000
Changes in assets and liabilities:
Inventories (164,000) (124,000)
Accounts receivable, net 113,000 77,000
Prepaid expense and other current assets (1,000) 12,000
Accounts payable 258,000 47,000
Accrued payroll 260,000 70,000
Accrued payroll taxes 244,000 --
Accrued interest expense, related parties 98,000 56,000
Customer deposits 5,000 7,000
Other current liabilities (76,000) 26,000
-----------------------------------------------------------------------------------------------------------
Net cash used for operating activities (277,000) (271,000)
-----------------------------------------------------------------------------------------------------------
CASH FLOWS - INVESTING ACTIVITIES:
-- --
CASH FLOWS - FINANCING ACTIVITIES:
Loans from related parties 625,000 302,000
Repayments on related party loans (348,000) (5,000)
Net advances (payments) under revolving lines of credit 5,000 (75,000)
Other financing activities 13,000 (13,000)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 295,000 209,000
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 18,000 (62,000)
Cash - Beginning of period 3,000 80,000
-----------------------------------------------------------------------------------------------------------
Cash - End of period $ 21,000 $ 18,000
-----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 34,000 $ 38,000
Income Taxes -- --
-----------------------------------------------------------------------------------------------------------
See Notes to Unaudited Consolidated Interim Financial Statements.
Page 5
--------------------------------------------------------------------------------
The Finx Group, Inc. and Subsidiaries
Footnotes to Unaudited Consolidated Interim Financial Statements
Three Months Ended March 31, 2001 and 2000
--------------------------------------------------------------------------------
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The
Finx Group, Inc. ("The Finx Group" or, the "Company") have been prepared in
accordance with Regulation S-B promulgated by the Securities and Exchange
Commission and do not include all of the information and footnotes required by
generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, these interim financial
statements include all adjustments necessary in order to make the financial
statements not misleading. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto of the Company
and management's discussion and analysis of financial condition and results of
operations included in the Annual Report on Form 10-KSB/A for the year ended
December 31, 2000. Certain reclassifications were made to prior year amounts to
conform to the current year presentation.
The accompanying unaudited interim consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization
of assets and the liquidation of liabilities in the normal course of business.
However, the Company has a history of net losses and as of March 31, 2001 has a
working capital deficiency of $8.1 million and capital deficiency of $7.7
million. Since April of 1999 the Company has relied on financial support from
its controlling stockholder, The Trinity Group-I, Inc. ("Trinity") and other
related parties. 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, 2000 Form 10-KSB/A.
3. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share reflect the amount of earnings or loss
for the period available to each share of common stock outstanding during the
reporting period. Diluted earnings (loss) per share reflects basic earnings
(loss) per share, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could be
issued upon the exercise or conversion of outstanding securities into common
stock. The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an anti-dilutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share).
The dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings (loss) per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon the exercise of options and warrants in computing
diluted earnings (loss) per share. It assumes that any proceeds would be used to
purchase common stock at the average market price of the common stock during the
period. For the three months ended March 31, 2001 and 2000, all of the Company's
potential common shares were anti-dilutive and a dual presentation of earnings
(loss) per share is not presented. As of March 31, 2001, the Company had
outstanding, approximately 1.5 million warrants to purchase shares of common
stock at prices ranging from $0.01 to $10. Such warrants may dilute earnings per
share in the future.
Page 6
4. Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" established standards for the
reporting of information about operating segments and defines operating segments
as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision maker is Lewis S. Schiller, the Company's Chief
Executive Officer, who evaluates the Company's businesses based upon the
separate financial statements and information of the underlying subsidiaries of
the Company. Based on the above evaluation, the Company has identified seven
reportable business segments as follows: (1) Electro-Mechanical and
Electro-Optical Products, which is an operating business segment reflecting the
activities of Sequential Electronic Systems, Inc. ("Sequential"); (2)
Specialized Vending Machines and Avionics Equipment, which is an operating
business segment reflecting the activities of S-Tech, Inc. ("S-Tech"); (3)
Fingerprint Identification Technologies, which is a development stage business
segment reflecting the activities of FMX Corp. ("FMX"); (4) Secured Entrance
Systems, which is a development stage business segment reflecting the activities
of Secured Portal Systems, Inc. ("SPS"), (5) Internet Marketing, which is a
development stage business reflecting the activities of Starnet365.com, Inc.
("Starnet365.com"), (6) Web Based Development Solutions, which is a development
stage business reflecting the activities of Biz Chase, Inc. and (7) Application
Service Provider, which is an operating business segment reflecting the
operations of Shopclue.com. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies.
There are intersegment consulting fees and intersegment advances and
related interest charges, all of which are eliminated in the consolidated
financial statements.
-------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001 2000
-------------------------------------------------------------------------------------------------------------
Revenues:
Electro-Mechanical and Electro- Optical Products $ 325,000 $ 645,000
Specialized Vending Machines and Avionics Equipment 85,000 43,000
Internet Marketing 58,000 --
Application Service Provider 9,000 --
-------------------------------------------------------------------------------------------------------------
477,000 688,000
Corporate consulting fees 225,000 --
Intersegment consulting fees (225,000 ) --
-------------------------------------------------------------------------------------------------------------
Total revenues $ 477,000 $ 688,000
-------------------------------------------------------------------------------------------------------------
Operating loss:
Electro-Mechanical and Electro- Optical Products $ (182,000) $ 147,000
Specialized Vending Machines and Avionics Equipment 10,000 (54,000)
Fingerprint Identification Technologies (110,000) (52,000)
Secured Entrance Systems (71,000) (66,000)
Internet Marketing (466,000) --
Web Based Development Solutions (332,000) --
Application Service Provider (1,000) --
-------------------------------------------------------------------------------------------------------------
(1,152,000 (25,000)
Corporate costs and expenses 87,000 (340,000)
-------------------------------------------------------------------------------------------------------------
Total operating loss $ (1,065,000) $ (365,000)
-------------------------------------------------------------------------------------------------------------
Page 7
-------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001 2000
-------------------------------------------------------------------------------------------------------------
Interest expense:
Electro-Mechanical and Electro- Optical Products $ 70,000 $ 69,000
Specialized Vending Machines and Avionics Equipment 9,000 13,000
Fingerprint Identification Technologies 10,000 5,000
Secured Entrance Systems 5,000 2,000
Internet Marketing 16,000 --
Web Based Development Solutions 32,000 --
-------------------------------------------------------------------------------------------------------------
142,000 89,000
Corporate costs and expenses 22,000 12,000
Intersegment charges (17,000) (7,000)
-------------------------------------------------------------------------------------------------------------
Total interest expense $ 147,000 $ 94,000
-------------------------------------------------------------------------------------------------------------
Net income (loss):
Electro-Mechanical and Electro- Optical Products $ (222,000) $ 84,000
Specialized Vending Machines and Avionics Equipment -- (67,000)
Fingerprint Identification Technologies (120,000) (57,000)
Secured Entrance Systems (77,000) (68,000)
Internet Marketing (472,000) --
Web Based Development Solutions (364,000) --
Application Service Provider 2,000 --
-------------------------------------------------------------------------------------------------------------
(1,253,000) (108,000)
Corporate costs and expenses 67,000 (346,000)
-------------------------------------------------------------------------------------------------------------
Total net loss $ (1,186,000) $ (454,000)
-------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Electro-Mechanical and Electro- Optical Products $ 1,000 $ 5,000
Internet Marketing 13,000 --
Web Based Development Solutions 19,000 --
Application Service Provider 2,000 --
-------------------------------------------------------------------------------------------------------------
35,000 5,000
Corporate 7,000 5,000
-------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 42,000 $ 10,000
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
-------------------------------------------------------------------------------------------------------------
Assets:
Electro-Mechanical and Electro- Optical Products $ 1,796,000 $ 1,827,000
Specialized Vending Machines and Avionics Equipment 450,000 372,000
Fingerprint Identification Technologies 10,000 10,000
Secured Entrance Systems -- --
Internet Marketing 293,000 274,000
Web Based Development Solutions 1,078,000 1,080,000
Application Service Provider 174,000 207,000
-------------------------------------------------------------------------------------------------------------
3,801,000 3,770,000
Corporate 12,722,000 12,505,000
Intersegment investments (12,906,000) (12,906,000)
Intersegment advances (1,913,000) (1,564,000)
-------------------------------------------------------------------------------------------------------------
Total assets $ 1,704,000 $ 1,805,000
-------------------------------------------------------------------------------------------------------------
Page 8
5. Subsequent Event
Related Party Debt Conversion
On May 7, 2001, Trinity converted $1.5 million of related party debt
into 7,500,000 shares of Common Stock, representing $.20 a share, the fair
market value of the Common Stock on May 7, 2001. On May 7, 2001, Trinity
converted an additional $2 million of related party debt into shares of a newly
created series of Preferred Stock which carry certain conversion and redemption
rights.
In July 2001, Carol Schiller, the wife of Lewis S. Schiller, loaned the
Company $100,000. In payment of the loan, the Company issued to Ms. Schiller,
1,000,000 shares of restricted common stock. The value of the restricted shares
approximated the fair value of the loan.
Acquisition of Granite Technologies, Inc.
On September 19, 2001, the Company consummated its acquisition (the
"Acquisition") of Granite Technologies, Inc. ("Granite") through its newly
created and wholly owned subsidiary, Granite Technology Acquisition Corp.
pursuant to the terms of a Stock Purchase Agreement dated as of September 19,
2001, as amended, the Company purchased 95.87% of Granite's common stock from
such holders of the Granite's common stock (the "Selling Shareholders") upon the
issuance of 3,000,000 shares of its unregistered Common Stock (the "Acquisition
Shares"). Granite has two significant proprietary software packages which have
wide application in the retail and financial markets. Granite's principal
products are the SmartCAT application Framework and the SmartCAT IO Subsystem.
SmartCAT is a set of JAVA middleware that provides both the client (kiosk) and
server (central system mainframe) platform for rapid development of self-service
applications over the Internet. SmartCAT IO Subsystem, also a set of JAVA
applications, provides powerful but simple-to-use interfaces to serial devices
found in kiosks and in various retail delivery applications, such as
point-of-sale and bank branch automation. It may be used together with the
SmartCAT Application Framework or with other applications such as Eontec's
BankFrame to deliver complete client specific solutions.
Of the Selling Shareholders, Grazyna B. Wnuk, the Company's Corporate
Secretary, a Director and Vice-President, received 124,031 Acquisition Shares
for her ownership interest in Granite; and immediate family members of Lewis S.
Schiller, the Company's Chairman of the Board, a Director and Chief Executive
Officer, received 397,934 Acquisition Shares for their ownership interest in
Granite. In accordance with the terms of the Stock Purchase Agreement, the
Selling Shareholders hold certain demand and "piggyback" registration rights
with respect to the Acquisition Shares received by them in connection with the
Acquisition on terms specified in the Stock Purchase Agreement
On September 15, 2001 the Company and Granite Technology Acquisition
Corp. entered into a Settlement and Release Agreement with Rock Partners Ltd.,
SSMI Corp. and Bruno Kordich. Pursuant to the Settlement and Release Agreement
(i) the Company received 250,000 shares, or 4.13%, of Granite's common stock
then owned by Rock Partners Ltd. and SSMI Corp.; (ii) the Company and Granite
received a General Release and a Dismissal with Prejudice on any past disputes
by and among Granite and Rock Partners Ltd., SSMI Corp. and Bruno Kordich; (iii)
all past agreements between Granite and Rock Partners Ltd., SSMI Corp. and Bruno
Kordich became void and cancelled; (iv) Rock Partners Ltd., SSMI Corp. and Bruno
Kordich received 542,636 shares of the Company's Common Stock in consideration
for (i), (ii) and (iii); (v) the Company and Granite acknowledged outstanding
notes and liabilities in the aggregate of $77,000 for which payments will begin
in January of 2002 at $10,000 per month; and (vi) the Company issued 160,000
shares of the Company's Common Stock in consideration for all remaining claims
aggregating $80,000.
Based on the fair value of the consideration paid, the Company recorded
a purchase price in excess of net assets acquired of approximately $2 million
which will be expensed as part of acquired in-process research and development
expense on the date of acquisition (see Note 6).
Page 9
2001 Employee Stock Option Plan
The Company's Board of Directors approved the 2001 Employee Stock
Option Plan. The purpose of the 2001 Employee Stock Option Plan is to secure
long-term relationships for the Company and its stockholders, from the benefits
arising from capital stock ownership by the Company's Consultants, Advisors,
Employees and Directors, who can help in the company's growth and success and to
provide an effective means of compensation for such persons and entities
providing services to the Company in lieu of cash payments therefor. The 2001
Employee Stock Option Plan, as amended provides for the issuance of up to
17,000,000 shares of the Company's Common Stock. During 2001, the Company
registered all 17,000,000 shares of Common Stock which are the subject of the
2001 Employee Stock Option Plan on Form S-8's. As of December, the Company had
received approximately $1.5 million of proceeds from the exercise of such
options and holds notes receivable on approximately $268,000 for exercise
proceeds owed to the Company. Such funds have been used primarily to fund the
Trans Global Acquisition.
Letter of Intent for Acquisition of Trans Global Services, Inc.
On November 11, 2001, the Company entered into a binding letter of
intent to acquire an equity interest in Trans Global Services, Inc. ("Trans
Global"). Pursuant to the letter of intent, the Company would receive 5,000,000
shares of Trans Global's common stock in exchange for 2,500,000 shares of the
Company's common stock. In addition, the Company would purchase preferred
equity, convertible into a maximum of 3,000,000 shares of Trans Global's common
stock, for $1 million. Further, the letter of intent requires immediate election
of the Company's appointees to the Trans Global board of directors including the
appointment of Lewis S. Schiller as Trans Global's Chairman of the Board, after
which, the Company's appointees would represent a majority of the Trans Global
board of directors. Lewis S. Schiller is the Chief Executive Officer and
Chairman of the Board of the Company (see Note 6.)
6. Pro Forma Financial Information
The following pro forma unaudited results assume the acquisitions of
Granite and Trans Global had occurred at the beginning of the three month
periods ended March 31, 2001 and 2000.
Three Months Ended March 31,
2001 2000
---- ----
Sales $ 7,163,000 $ 7,195,000
Net Loss $ (1,714,000) $ (901,000)
Net Loss per Share $ (0.09) $ (0.09)
The pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the acquisition been
effective at the beginning of the indicated periods or of the future results of
operations.
Page 10
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, 2000 Form 10-KSB/A and
include, without limitation: the Company's history of losses and cash flow
deficits; need for additional financing to fund our present and proposed
business activities; dependence on present executive officers and key personnel
to manage our present and proposed business operations and our ability to
integrate new officers and key personnel; dependence upon an exclusive
distribution agreement for the future operations of SPS; dependence upon patent
protection for the proposed activities of FMX; threat that technological change
could render certain of our products and proposed products obsolete or
non-competitive; inability to predict market acceptance for our proposed
products; intense competition of the business in which we intend to engage;
threat that E-commerce products and services may become subject to government
regulation; the risks relating to legal proceedings, as well as other risks
referenced from time to time in the Company's filings with the SEC. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
As more fully disclosed in the footnotes to the unaudited interim
financial statements, The Finx Group has seven identifiable business segments.
The operations of each of the business segments is discussed separately as
follows:
Electro-Mechanical and Electro-Optical Products
The Electro-Mechanical and Electro-Optical Products segment comprises
the activities of Sequential, which is primarily engaged in the design,
manufacture and assembly of precision electro-mechanical and electro-optical
products and devices for sale to commercial and governmental customers
throughout the United States. Among such products and devices are optical
encoders, encoded motors and limit programmers. Sequential's revenues decreased
$320,000,or 49.6%, from $645,000 for three months ended March 31, 2000 (the
"2000 1st Quarter") to $325,000 for the three months ended March 31, 2001 (the
"2001 1st Quarter"). Sequential's 2001 1st Quarter gross profit was $1,000 after
a deduction of $125,000 for a reserve for obsolete and slow moving inventory.
Sequential's margin prior to the inventory reserve was 126,000, or 38.8% of
sales. Sequential's 2000 1st Quarter gross profit was $352,000, or 54.7% of
sales. Sequential's decline in revenue is primarily attributed to its inability
to pay for the materials necessary to build the products included in its
backlog. This inability to manufacture product has resulted in excessive
downtime and idle capacity resulting in significantly reduced margins.
Sequential's operating expenses decreased $22,000, or 10.7% from $205,000 for
the 2000 1st Quarter to $183,000 for the 2001 1st Quarter. As a result of the
above, Sequential's operating results decreased by $329,000, or 224%, from
operating income of $147,000 for the 2000 1st Quarter to an operating loss of
$182,000 for the 2001 1st Quarter. During the 2001 1st Quarter, Sequential's
operating expense included $45,000 of management fees charged by The Finx Group.
Page 11
Specialized Vending and Avionics Equipment
The Specialized Vending and Avionics Equipment comprises the activities
of S-Tech, which designs and manufactures two specialized product lines
consisting of specialized vending machines and avionics equipment. "Specialized
Vending" is an industry term used to describe a vending product that utilizes
electronic circuitry and/or computer software. Among the vending machines
manufactured by S-Tech are prepaid telephone debit card machines, bill payment
kiosks, information kiosks, and stamp vending machines. S-Tech's revenues for
the 2001 1st Quarter increased $42,000,or 97.7%, from $43,000 for the 2000 1st
Quarter to $85,000 for the 2001 1st Quarter. S-Tech's gross profit was $28,000,
or 33.3% of sales, for the 2001 1st Quarter and was $8,000, or 18.6% of sales,
for the 2000 1st Quarter. S-Tech's gross profit for the 2000 1st Quarter was
negatively impacted as a result of non-variable overhead costs being allocated
to a relatively minimal sales volume. S-Tech's operating expenses decreased
$43,000, or 69.4% from $62,000 for the 2000 1st Quarter to $19,000 for the 2001
1st Quarter. As a result of the above, S-Tech's operating income (loss) improved
$64,000 from an operating loss of $54,000 for the 2000 1st Quarter to operating
income of $10,000 for the 2001 1st Quarter.
Fingerprint Identification Technologies
The Fingerprint Identification Technologies segment comprises the
activities of FMX, which was formed in 1996 to continue with the development of
products and systems utilizing a proprietary and patented electronic fingerprint
identification technology originally conceived by Fingermatrix. The fingerprint
identification technology being developed and utilized by FMX is a fingerprint
identification scanning technology utilized for a variety of access control and
law enforcement purposes. Applications for this technology include access
control systems for banks, airports and industrial and government facilities,
voter registration and electoral anti-fraud systems, welfare and social program
identification systems, immigration control, suspect booking, prisoner and
detainee movement and release control systems, and sensitive employment
authorization systems. FMX did not have any revenues or gross profits for the
2001 and 2000 1st Quarters. FMX incurred operating expenses of $110,000 for the
2001 1st Quarter and $52,000 for the 2000 1st Quarter and therefore its
operating losses, increased $58,000 when comparing the 2001 1st Quarter to the
2000 1st Quarter. During the 2001 1st Quarter, FMX's operating expense included
$45,000 of management fees charged by The Finx Group.
Secured Entrance Systems
The Secured Entrance Systems segment comprises the activities of
Secured Portals. Secured Portal's proposed activities consist of the marketing
and distribution of the Georal Security Systems to both those customers for
which it has exclusive distribution rights and to others as to which it has
non-exclusive rights to distribute the Georal Security Systems. Many of the
customers to whom Secured Portals will seek to market the Georal Security
Systems will be domestic and foreign government purchasers as well as commercial
users. In March 2001, the Georal Security System passed preliminary U.S. State
Department forced entry ballistics tests. Subsequent to March 31, the systems
received final certification for possible procurement for use in U.S. embassies,
consulates and other governmental installations both in the U.S. and abroad.
Secured Portals did not have any revenues or gross profits during the 2001 and
2000 1st Quarters. Secured Portals operating expenses, and therefore its net
operating loss increased $5,000, or 7.6%, from $66,000 for the 2000 1st Quarter
to $71,000 for the 2001 1st Quarter. During the 2001 1st Quarter, Secured
Portal's operating expense included $45,000 of management fees charged by The
Finx Group.
Internet Marketing
Internet Marketing reflects the activities of Starnet365.com.
Starnet365.com is an Internet multi-level marketing company whose most
significant product is the Qode engine, a web based software component
comprising the largest UPC coded data base, which pays commissions and which
enables its users to comparative shop in excess of 7 million products related to
the UPC codes. Starnet365.com also sells a series of on-line training programs
consisting of a series of integrated "Earn While You Learn", on-line training
programs that are intended to teach marketing and recruiting techniques as well
as certain tax
Page 12
and legal aspects of running a home-based business. Starnet365.com also markets
replicated web sites, which Starnet365.com intends to load with non-branded
merchandise, enabling individuals quickly and inexpensively to own their own
on-line E-Commerce website. In addition, Starnet365.com generates revenues from
web site enrollment fees, monthly web hosting fees, and transaction processing
fees related to the sale of merchandise on the websites. During the 2001 1st
Quarter, Starnet36.com generated revenues of $58,000 resulting in gross profits
of $25,000, or 43.1%. Operating expenses of Starnet 365.com for the 2001 1st
Quarter were $492,000 which included $59,000 of research and development related
to web design and development, $59,000 of selling expense, primarily promotional
allowances and commissions on product sales, $45,000 of management fees charged
by The Finx Group and $329,000 of other operating costs. As a result of the
above, Starnet365.com incurred an operating loss of $466,000 for the 2001 1st
Quarter. Starnet365.com was established in April 2000 and therefore did not have
any operating activity during the 2000 1st Quarter.
Application Service Provider
Application Service Provider reflects the activities of Shopclue.com.
Shopclue.com is an Application Service Provider that enables small- and
medium-sized businesses to establish an advanced online presence rapidly and
inexpensively using Shopclue.com's software through its interactive Internet
mall known as Retail Drive. The software used by Shopclue.com allows its
customers to create, edit and maintain advanced, interactive websites without
having any prior knowledge of web-based programming languages. Shopclue.com's
Retail Drive interactive website is presently utilized by more than 350
merchants. The consolidated statement of operations for the 2000 1st Quarter
does not include Shopclue.com's operating activities which was prior to the date
of acquisition. During the 2001 1st Quarter, Shopclue.com's total revenues were
$9,000. Shopclue.com's total operating expense for the 2001 1st Quarter was
$10,000 resulting in an operating loss of $1,000.
Web Based Development Solutions
Web Based Development Solutions reflects the activities of Biz Chase.
Biz Chase has developed a wholesale web based development solution that provides
a simple, affordable and feature rich online solution for small businesses. In
March 2001, Bizchase granted a license to Starnet365.com giving Starnet365.com
the right to sell software developed by Bizchase to the multi-level marketing
industry. The Bizchase software was developed and also licensed to Retail Drive.
Revenues are generated through activation and hosting fees. Biz Chase was
organized and acquired in July 2000 and did not have any revenues or gross
profits during the 2000 1st Quarter. Biz Chase's operating expense, and
therefore its net operating loss for the 2001 1st Quarter was $332,000.
Operating expense included $45,000 of management fees charged by The Finx Group,
$19,000 of depreciation and amortization related to computer equipment and
software development costs and $268,000 of other general administrative costs, a
significant portions of which is the cost of software developers.
Corporate costs and expenses
Corporate costs and expenses comprise the expenses of The Finx Group,
the holding company. During the 2001,1st Quarter The Finx Group recorded
$225,000 of management fees charged to its subsidiaries. All of such management
fees are eliminated in the consolidated results of operations. The Finx Group's
operating expenses decreased by $202,000, or 59.4%, from $340,000 for the 2000
1st Quarter to $129,000 for the 2001 1st Quarter. As of March 31, 2001, Mr.
Lewis S. Schiller and Ms. Grazyna B. Wnuk are owed an aggregate of $700,000 for
unpaid salaries of which $100,000 is included in both 2001 and 2000 1st Quarters
operating expenses. Other significant corporate costs incurred during the 2000
1st Quarter include $82,000 of consulting fees and $87,000 of legal and
accounting fees.
Page 13
Significant Non-Operating Components of Net Loss
Interest Expense and Financing Fees, Other
Interest expense and financing fees, other for the 2001 and 2000 1st
Quarters was $49,000 and $38,000, respectively. For 2001, $15,000 of such
interest represents accrued interest on delinquent payroll taxes. Interest
incurred under Sequential's line-of credit for 2001 and 2000 was $34,000 and
$38,000, respectively. On July 28, 1997, Sequential entered into a revolving
line of credit from FINOVA Capital Corporation, formerly United Credit
Corporation (the "FINOVA Line of Credit"). The FINOVA Line of Credit provides
for a borrowing base equal to the lesser of 80% of eligible accounts receivable
or $400,000, required payment of a 1% annual facility fee, a 1% monthly
commitment fee, against which monthly interest, exclusive of interest on any
over advances, is applied. The annual monthly interest rate on the FINOVA Line
of Credit is the greater of 18.5% or the prime rate in effect in New York City
plus 10%, and is payable monthly. The FINOVA Line of Credit is collateralized by
all of the assets of Sequential. Subsequent to December 31, 2000, the Company
determined that FINOVA declared bankruptcy and the Company is attempting to
establish a replacement line of credit. The Company has been notified that the
FINOVA line-of-credit will not be extended beyond November 30, 2001. Subsequent
to November 30, 2001, the Company utilized a cash collateral deposit provided by
Trinity to satisfy the balance owed under the line-of-credit and such funds are
now owed by the Company to Trinity.
Interest Expense and Factoring Fees, Related Parties
Interest expense and financing fees on related party notes increased
$42,000 from $56,000 for the 2000 1st Quarter to $98,000 for the 2001 1st
Quarter. The Company and its subsidiaries incur interest expense on advances
from Trinity, advances from Universal International, Inc., a company owned by
Grazyna Wnuk, an officer of the Company, a loan from E. Gerald Kay, a former
director, and advances from Blake Schiller and Carol Schiller, both immediate
family members of Lewis Schiller, an officer of the company. In addition S-Tech
incurs interest expense and factoring fees pursuant to a factoring agreement
with Trinity Factoring Corp., a financing company owned by Lewis Schiller. Total
outstanding advances from such related parties as of March 31, 2001, aggregated
$4.3 million. Interest accrued on such notes are generally calculated at 9% and
as of March 31, 2001 $430,000 of such interest remains unpaid.
Net Loss
As a result of the above, the Company incurred a consolidated net loss
of $1.186 million, or $.10 per common share, for the 2000 1st Quarter and
$454,000, or $.23 per common share, for the 2000 1st Quarter.
Financial Condition - Liquidity and Capital Resources
As of March 31, 2001 the Company had a working capital deficiency of
$8.1 million. Approximately $5.4 million of such deficiency relates to amounts
owed to related parties, including accrued and unpaid salaries of $700,000 owed
to Lewis S. Schiller and Grazyna B. Wnuk and $4.7 million owed to Trinity, its
controlling stockholder, and other related parties, for loans and advances made
to fund the operations of the Company. Subsequent to March 31, 2001, The Trinity
Group-I, Inc., ("Trinity") the Company's controlling shareholder, converted $1.5
million of related party debt into 7,500,000 shares of Common Stock,
representing $.20 a share, the fair market value of the Common Stock on May 7,
2001. Further, Trinity converted an additional $2 million of related party debt
into shares of a newly created series of Preferred Stock which carry certain
conversion and redemption rights. During the 4th quarter of 2001, the Company
received approximately $1.5 million of proceeds from the exercise of such
options and holds notes receivable on approximately $268,000 for exercise
proceeds owed to the Company.
During the 2001 1st Quarter, the Company used $277,000 for operating
activities and generated $295,000 from financing activities. As of March 31,
2001 the Company's subsidiaries are delinquent on payment of payroll taxes
approximating $750,000.
Page 14
The accompanying unaudited interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the liquidation of liabilities in the normal course of business. However,
the Company has a history of net losses and as of March 31, 2001 has a working
capital deficiency of $8.1 million and capital deficiency of $7.7 million. Since
April of 1999 the Company has relied on financial support from its controlling
stockholder, Trinity and other related parties. 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 financial statements do not include any adjustments that would
result should the Company be unable to continue as a going concern.
Page 15
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 February 22, 2002
Lewis S. Schiller (Principal Executive and Accounting Officer)
Page 16