UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1999
Commission File Number 0-9940
FINGERMATRIX, INC.
(Exact name of registrant as specified in its charter)
New York 13-2854686
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification Number)
249 Saw Mill River Road, Elmsford, New York 10523
(Address of principal executive offices) (Zip Code)
(914) 592-5930
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
Number of common shares outstanding as of November 12, 1999: 20,000,000
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Fingermatrix, Inc. and Subsidiaries
Index
Page
----
Part I: - Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations
- Unaudited - Three and Nine Months Ended
September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets
- September 30, 1999 and December 31, 1998 4-5
Condensed Consolidated Statements of Cash Flows
- Unaudited - Nine Months Ended September 30, 1999
and 1998 6-7
Notes to Unaudited Condensed Financial Statements 8-13
Item 2. Management's Discussion and Analysis of
the Financial Condition and Results of Operations 14-16
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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Fingermatrix, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 556,455 $ 601,855 $ 1,658,990 $ 2,317,492
Cost of sales 312,806 331,047 1,056,609 1,351,314
------------- ------------- ------------- -------------
Gross profit 243,649 270,808 602,381 966,178
------------- ------------- ------------- -------------
Costs and expenses:
Selling, general and administrative expense 298,038 355,940 974,031 821,655
Interest and financing fees 82,992 39,251 183,949 92,547
Depreciation and amortization 33,212 13,402 68,706 47,708
Compensation expense from issuance of stock 26,000 -- 455,468 --
------------- ------------- ------------- -------------
Total costs and expenses 440,242 408,593 1,682,154 961,910
------------- ------------- ------------- -------------
Net income (loss) $ (196,593) $ (137,785) $ (1,079,773) $ 4,268
============= ============= ============= =============
Basic and diluted earnings (loss) per
common shar $ (0.01) $ (0.02) $ (0.07) $ 0.00
============= ============= ============= =============
Weighted average number of common shares
20,000,000 9,429,400 15,469,742 9,429,400
========== ============= ============= =============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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Fingermatrix, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
1999 December 31,
Unaudited 1998
--------- ----
Assets:
Cash and cash equivalents $ 24,842 $ 13,717
Inventories, net 2,495,100 2,236,257
Accounts receivable, net 349,881 291,096
Other current assets 20,022 38,876
------------ ------------
Total current assets 2,889,845 2,579,946
------------ ------------
Furniture, fixtures and equipment, net 96,401 69,622
------------ ------------
Other assets:
Patents, net 90,729 --
Other assets 29,200 23,955
------------ ------------
Total other assets 119,929 23,955
------------ ------------
Total assets $ 3,106,175 $ 2,673,523
============ ============
See notes to unaudited condensed consolidated financial statements.
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Fingermatrix, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30,
1999 December 31,
Unaudited 1998
--------- ----
Liabilities and shareholders' equity:
Liabilities:
Loan payable, related party $ 864,061 $ 357,746
Revolving line of credit 728,588 466,814
Accounts payable trade 348,720 128,430
Accrued expenses 334,509 355,187
Note payable 40,000 --
Current portion of capitalized lease
obligations 15,560 17,117
------------ ------------
Current liabilities 2,331,438 1,325,294
Capitalized lease obligations -- 3,848
------------ ------------
Total liabilities 2,331,438 1,329,142
------------ ------------
Shareholders' equity:
Preferred stock, at par 1,003 --
Additional paid-in capital, preferred stock 1,130,199 --
Common stock, at par (par value $0.01, 20,000,000 shares authorized and
20,000,000 and 9,429,400 shares issued and outstanding as of September 30,
1999 and December 31, 1998, respectively) 200,000 94,294
Additional paid-in-capital, common stock 7,049,308 7,776,087
Accumulated deficit (7,605,773) (6,526,000)
------------ ------------
Total shareholders' equity 774,737 1,344,381
------------ ------------
Total liabilities and shareholders' equity $ 3,106,175 $ 2,673,523
============ ============
See notes to unaudited condensed consolidated financial statements.
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Fingermatrix, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Nine Months Ended September 30,
1999 1998
---- ----
Net income (loss) $ (1,079,773) $ 4,268
Adjustments to reconcile net income (loss)
to net cash used in operations:
Compensation expense from issuance of stock 455,468 --
Depreciation and amortization expense 68,706 47,708
Changes in assets and liabilities:
(Increase) decrease in assets:
Inventories, net (258,843) (28,106)
Accounts receivable, net (58,785) (173,870)
Other current assets 18,854 (67,084)
Increase (decrease) in liabilities:
Accounts payable trade 127,858 (392,293)
Accrued expenses (16,418) 129,907
------------ ----------
Net cash used in operating activities (742,933) (479,470)
------------ ----------
Cash flows from investing activities:
Increase in other assets (3,626) (29)
Capital expenditures -- (15,441)
------------ -----------
Net cash used in investing activities (3,626) (15,470)
------------ -----------
Cash flows from financing activities:
Advances from related party 506,315 239,783
Net advances on revolving line of credit 261,774 350,127
Payments on capitalized lease obligations (5,405) (32,565)
Repayments of notes payable (5,000) --
------------ ------------
Net cash provided by financing activities 757,684 557,345
------------ ------------
Net increase in cash and cash equivalents 11,125 62,405
Cash and cash equivalents at beginning of period 13,717 15,906
------------ ------------
Cash and cash equivalents at end of period $ 24,842 $ 78,311
============ ============
See notes to unaudited condensed consolidated financial statements.
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Fingermatrix, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
Nine Months Ended September 30,
1999 1998
---- ----
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 140,300 $ 54,565
============ ==========
Income taxes -- --
============ ==========
Supplemental Disclosure of Investing and Financing Activities:
During the nine months ended September 30, 1999, the Company
consummated a share exchange. The share exchange transaction is accounted for as
a reverse acquisition, with SES Acquisition being the surviving company for
accounting purposes. In accounting for the reverse acquisition, the equity of
SES Acquisition, as the surviving company, and Fingermatrix, as the acquired
company, has been recapitalized and the financial statements reflect the results
of operations of the Company and SES Acquisition from the date of the reverse
acquisition forward. The financial statements prior to the date of the reverse
merger reflect the financial position and results of operations of SES
Acquisition. As a result of the transaction, as of April 28, 1999 the
predecessor company's assets and liabilities for which there is no cash flow
impact were consolidated into the balance sheet, including $90,000 furniture,
fixtures and equipment, $97,833 of net capitalized patent costs, $274,166 of
accounts payable trade, $108,803 of accrued expenses and $425,000 of
subordinated debt.
During the nine months ended September 30, 1999, the Company
extinguished certain obligations with no cash flow impact. On April 28, 1999
certain creditors of the Company accepted 6,346 shares of the Series A Preferred
Stock in exchange for their aggregate debt of $648,366. The 6,346 Series A
Preferred shares, are convertible into 4,714,443 common shares of the Company
and using the Black-Scholes option valuation formula, the value of such shares
was determined to be approximately $1.1 million, resulting in $429,468 of
compensation expense from issuance of the stock. On July 20, 1999, the Company
settled amounts owed to the former landlord of the Company by making cash
payments of $70,000, issuing a note payable for $45,000 and issuing 268 Series A
Preferred shares. The 268 Series A Preferred shares are convertible into
approximately 200,000 common shares of the Company's common stock and using the
Black-Scholes option valuation formula, the value of such shares was determined
to be approximately $46,000. The total consideration given to the landlord,
which includes the calculated value of the Series A Preferred shares, exceeded
the amounts owed to the former landlord by approximately $26,000. All of such
excess is attributed to the valuation of the Series A Preferred shares and was
recorded as compensation expense from the issuance of stock.
See notes to unaudited condensed consolidated financial statements.
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Fingermatrix, Inc. and Subsidiaries
Footnotes to Unaudited Condensed Financial Statements
- --------------------------------------------------------------------------------
(1) Basis of Presentation - In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the consolidated
financial position of Fingermatrix, Inc. and its subsidiaries (the "Company") as
of September 30, 1999 and December 31, 1998, the statement of operations for the
three and nine months ended September 30, 1999 and 1998 and the statement of
cash flows for the nine months ended September 30, 1999 and 1998.
(2) Reverse Acquisition and Change of Control
On April 28, 1999, in a share exchange with The Trinity Group, Inc.
("Trinity"), a privately held Delaware corporation, the Company acquired all of
the issued and outstanding common and preferred shares of SES Acquisition Corp.
in exchange for 85% of the equity and voting power of the Company consisting of
10,571,607 shares of Common Stock and 93,654 shares of Series A 2% Voting
Convertible Redeemable Preferred Stock (the "Series A Preferred Stock").
Pursuant to the terms of the Agreement and Plan of Reorganization, the
shareholders of the Company prior to the share exchange retained 10% of the
ownership of the Company consisting of 9,428,393 shares of the Common Stock and
certain creditors of the Company received 6,346 shares of the Series A Preferred
Stock in exchange for their debt of $648,366, in the aggregate. The 6,346 Series
A Preferred shares, are convertible into 4,714,443 common shares of the Company
and using the Black-Scholes option valuation formula, the value of such shares
was determined to be approximately $1.1 million, resulting in $429,468 of
compensation expense from issuance of stock.
The Agreement and Plan of Reorganization required that SES Acquisition
Corp. and its subsidiaries have a minimum unaudited combined net worth of not
less than $1,500,000 at the time of the share exchange. The Agreement and Plan
of Reorganization also requires that, as soon as practicable, the Company call
and hold a Special Meeting of Stockholders to vote upon increasing the
authorized capital of the Company so as to permit the conversion of all of the
Series A Preferred Stock into common stock and, upon the completion of such
conversion, effecting a reverse split of the outstanding shares of the Common
Stock so that there will remain 5,000,000 shares of common stock outstanding and
no outstanding shares of the Series A Preferred Stock. Trinity owns a sufficient
number of shares of the Company to cause the adoption of these proposals whether
or not any other shareholder votes. The Company does not intend to solicit
proxies for such meeting.
SES Acquisition Corp.is the sole stockholder of Sequential Electronic
Systems, Inc. which designs and manufactures electro-optical products and
S-Tech, Inc. which designs and manufactures specialized vending machines and a
variety of avionics equipment. It also owns a 50.1% interest in FMX, Inc. which
is developing electronic fingerprint identification technology.
The share exchange transaction is accounted for as a reverse
acquisition, with SES Acquisition being the surviving company for accounting
purposes. In accounting for the reverse acquisition, the equity of SES
Acquisition, as the surviving company, and Fingermatrix, as the acquired
company, has been recapitalized and the financial statements reflect the results
of operations of the Company and SES Acquisition from the date of the reverse
acquisition forward.
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Fingermatrix, Inc. and Subsidiaries
Footnotes to Unaudited Condensed Financial Statements
- --------------------------------------------------------------------------------
The financial statements prior to the date of the reverse merger reflect the
financial position and results of operations of SES Acquisition.
(3) Change of Directors and Officers
Effective upon the closing of the share exchange the current directors
of the Company resigned and Messrs. Lewis S. Schiller, E. Gerald Kay and Joel
Brown were appointed to the Board of Directors of the Company. At such time the
officers of the Company also resigned and the Board of Directors appointed Lewis
S. Schiller as Chairman of the Board and Chief Executive Officer and Chief
Financial Officer, Fred Zivitofsky as President and Grace Wnuk as Vice President
and Secretary.
Mr. Lewis S. Schiller was appointed as Chairman of the Board, Chief
Executive Officer and Director of the Company on April 28, 1999. He also serves
as Chairman of the Board, Chief Executive Officer and as a director of Trinity,
SES Acquisition Corp. and its subsidiaries. For more than five years prior to
his resignation on April 2, 1998, Mr. Schiller was the Chairman of the Board,
Chief Executive Officer and a director of The Sagemark Companies, Ltd.
("Sagemark"), formerly Consolidated Technology Group Ltd., a public company, and
as, Chairman of the Board, Chief Executive Officer and a director of Sagemark's
public and privately-held subsidiaries.
Mr. Fred Zivitofsky was appointed President of the Company on April 28,
1999. From 1993 until August 1997 Mr. Zivitofsky served as Senior Vice President
and Chief Operating Officer of S-Tech, Inc., a wholly owned subsidiary of SES
Acquisition Corp. From August 1997 to date he has served as President of S-Tech,
Inc.
Ms. Grazyna B.Wnuk was appointed Vice President and Secretary of the
Company. For more than five years prior to her resignation on April 2, 1998, Ms.
Wnuk served as Secretary of Sagemark and all of its public and privately-held
subsidiaries.
Mr. E. Gerald Kay was appointed as a director of the Company on April
28, 1999. For more than five years prior to his resignation on April 2, 1998, he
served as a director of Sagemark and its public and certain of its
privately-held subsidiaries. Mr. Kay has also served as Chairman of the Board
and Chief Executive Officer of Chem International, Inc., a pharmaceutical
manufacturer, Manhattan Drug Co., Inc., a wholesaler of pharmaceutical products,
The Vitamin Factory, Inc., a chain of retail vitamin stores, and Connaught
Press, Inc., a publisher, for more than the past five years. From 1988 to 1990,
he was also President and a Director of The Rexall Group, Inc., a distributor of
Rexall brand products.
Mr. Joel Brown was appointed as a director of the Company on April 28,
1999. For more than five years prior to such date, Mr. Brown has been a private
investor.
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Fingermatrix, Inc. and Subsidiaries
Footnotes to Unaudited Condensed Financial Statements
- --------------------------------------------------------------------------------
(4) Settlement of Accrued Rent
During the period from October 1997 through April 28, 1999, wherein
operations of the Company were suspended, the landlord of the Company's then
leased premises, seized all furniture, fixtures and equipment of the Company for
nonpayment of rent. On July 20, 1999, the Company negotiated a settlement of the
unpaid rent which included the payment of $70,000 ($20,000 paid by Mr. Schiller,
$50,000 paid by SES Acquisition), issuance of a note payable in the amount of
$45,000 and issuance of 268 shares of Series A Preferred stock. The 268 Series A
Preferred shares are convertible into approximately 200,000 common shares of the
Company's common stock and using the Black-Scholes option valuation formula, the
value of such shares was determined to be approximately $46,000. The total
consideration given to the landlord, which includes the calculated value of the
Series A Preferred shares, exceeded the amounts owed to the former landlord by
approximately $26,000. All of such excess is attributed to the valuation of the
Series A Preferred shares and was recorded as compensation expense from the
issuance of stock.
(5) Share Exchange with GIL Security Systems, Inc.
On September 13, 1999, the Company issued to GIL Security Systems, Inc.
("GIL") 14,134 shares of its Series A Preferred Stock in payment of the purchase
price for 1,000,000 shares of the common stock of GIL pursuant to a Stock
Purchase Agreement between the Company and GIL. The Company's Series A Preferred
Stock issued to GIL is convertible into 10,498,735 shares of the Company's
common stock, at a conversion rate of 742.8 shares of common stock for each
share of Series A Preferred Stock. Such conversion is subject to and conditioned
upon a recapitalization of the Company pursuant to which the Company's
authorized capitalization will be increased to provide for, among other things,
the reservation of a sufficient number of shares of the Company's common stock
to accommodate any such conversion. The Company granted "piggy-back"
registration rights to GIL with respect to any shares of the Company's common
stock that are issued to GIL upon conversion of the Series A Preferred Stock
until such time as any of such shares become eligible for public sale under Rule
144(k) of the Securities Act of 1933, as amended (the "Securities Act").
The Trinity Group, Inc., Carol Schiller and Grazyna Wnuk, holders of 5%
or more of the Company's outstanding common stock, agreed not to publicly sell
the shares of the Company's common stock owned by them unless and to the extent
that GIL publicly sells any of the shares of the Company's common stock acquired
by it upon conversion of the Series A Preferred Stock unless 50% or more of such
shares are registered under the Securities Act, or such shares become eligible
for public sale under Rule 144(k) under the Securities Act.
On September 13, 1999, Secured Portal Systems, Inc. ("SPS"), a newly
created, majority owned subsidiary of the Company, entered into an Exclusive
Distribution Agreement with GIL (the "Distribution Agreement") pursuant to which
SPS was engaged as the exclusive distributor for a certain secured entrance
system developed, manufactured and marketed by GIL (the "Security Systems") for
a term commencing as of September 1, 1999 and expiring on August 31, 2004. SPS
obtained the exclusive right to distribute the Security Systems to certain
categories of customers defined in the Distribution Agreement, including certain
agencies of the Federal Government, including U.S. embassies, U.S. courthouses
and U.S. government buildings,
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department stores and retail stores located in the United States, the Government
of Israel, NCR Corp., and Sun Microsystems.
A certain percentage of the shares of Series A Preferred Stock issued
to GIL under the Purchase Agreement are subject to redemption by the Company at
$0.0001 per share in the event that the Distribution Agreement is terminated
upon the written consent of SPS and GIL prior to the expiration of the term of
such Agreement. The number of shares of Series A Preferred Stock which is
subject to such redemption will be determined by reference to the number of
months elapsed during the term of the Distribution Agreement at the time, if
any, that the Distribution Agreement is terminated. GIL has a similar redemption
right with respect to the shares of GIL's common stock purchased by the Company
under the Purchase Agreement. The redemption price payable by GIL in such
circumstances is $0.0001 per share. In addition, in the event that the Company
does not complete its recapitalization by September 13, 2000, GIL has the right
to modify the distribution rights granted to SPS under the Distribution
Agreement from exclusive to non-exclusive for the remainder of the term of such
Agreement.
The Company holds a series of preferred stock of SPS, which entitles
the Company to elect a majority of SPS's board of directors
(6) Subsequent Events
Authorized Payments, Inc. Transaction
On October 22, 1999, the Company agreed to the terms of a proposed
transaction between the Company and its newly formed subsidiary, Authorized
Payments, Inc. ("API") and Joseph Randazza and Leslie Roth ("Mssrs. Randazza and
Roth"). The proposed transaction is subject to customary closing conditions and
is not binding to the parties. If the contemplated transaction is closed, the
Company would sell to Mssrs. Randazza and Roth 16,152 shares of the Series A
Preferred stock which are convertible into 11,997,705 shares of the Company's
common stock for a price to be agreed upon based upon a valuation opinion
performed by an investment banker to be selected by Mssrs. Randazza and Roth.
The purchase price for the Series A Preferred shares would be satisfied by a
cash payment equal to the par value of the preferred shares ($0.01 per share)
and the issuance of non-recourse promissory notes for the balance. The
promissory notes would be secured by a pledge of the Series A Preferred stock
(or the common shares if converted) and a 50% interest in two U.S. patent
applications which have been filed by Mr. Randazza. The notes would bear
interest at the rates provided for imputed interest under the Internal Revenue
Code and all interest and principle would be due in five years from date of
execution, subject to certain mandatory prepayment conditions.
Subject to certain precedent conditions, the Company would agree to
fund API with a minimum $350,000 loan. As consideration for the loan, the
Company would receive from API, a common stock purchase warrant to purchase
common shares of API at amounts to be mutually agreed upon between the Company
and API, but in no event would the shares of API purchasable by the Company
under said warrants exceed 49.9% of the outstanding common stock of API.
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Fingermatrix, Inc. and Subsidiaries
Footnotes to Unaudited Condensed Financial Statements
- --------------------------------------------------------------------------------
Simultaneously with the execution of the sale of the Series A Preferred
stock, the Company and Mssrs. Randazza and Roth would enter into a subscription
agreement whereby Mssrs. Randazza and Roth would purchase 46-2/3% and 23-1/3%,
respectively, of the shares of the common stock of API and the Company and Mr.
Schiller or his designees would purchase and aggregate of 30% of the shares of
the common stock of API. The price to be paid for the API shares by all
purchasing parties would be an amount equal to the par value of such shares,
payable in cash.
Simultaneously with the execution of the agreement, API would issue to
the Company a series of preferred stock, which would entitle the Company to
elect a majority of API's board of directors for so long as there is no default
to certain provisions of the contemplated agreement.
Effective upon the proposed closing of the transaction, Mssrs. Randazza
and Roth would become two of the four board members of API. Additionally, Mr.
Randazza would become the senior vice president and director of sales and
marketing of the Company, chief executive officer of SPS, see footnote (5)
above, and president of API. Mr. Roth would become the senior vice president of
technical services and operations of the Company and the vice president of API.
The Company and its subsidiaries and Mssrs. Randazza and Roth would enter into
five-year employment agreements.
(7) Accounting Policies - The significant accounting policies followed by
the Company are set forth in the footnotes to the December 31, 1998 financial
statements of Sequential Electronic Systems, Inc. and S-Tech Inc. which are
exhibits to the April 28, 1999 8-K, Amendment No. 1.
(8) Interim Results - The results of operations for the three and nine
months ended September 30, 1999 and 1998 are not necessarily indicative of the
results to be expected for the full year.
(9) Earnings (Loss) Per Common Share - Basic earnings (loss) per share
reflects the amount of income 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 result from the potential exercise or conversion of
securities into common stock. The computation of diluted earnings (loss) per
share does not assume conversion, exercise, or contingent issuance of securities
that would have an antidilutive effect on loss 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. The
treasury stock method recognizes the use of proceeds that could be obtained upon
the exercise of options and warrants and assumes that any such proceeds would be
used to purchase common stock at the average market price of the common stock
during the period. The dilutive effect of convertible securities and their
equivalents are reflected in dilutive earnings (loss) per share by application
of the if-converted method. Under the if-converted method, convertible
securities are assumed to have been converted into common shares at the
beginning of the period (or at time of issuance, if later) and any recorded
preferred dividends, interest or nondiscretionary adjustments related to the
convertible security are assumed to be reversed. As of September 30, 1999, the
Company does not have any dilutive items and therefore, a dual presentation of
loss per share is not presented.
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Fingermatrix, Inc. and Subsidiaries
Footnotes to Unaudited Condensed Financial Statements
- --------------------------------------------------------------------------------
Warrants to purchase 100,000 common shares at $0.01, 285,000 common shares at
$1.00 per share and 205,000 common shares at $2.00 per share, were outstanding
for the three and nine months ended September 30, 1999 and 1998. Convertible
preferred stock which is convertible into 84,988,502 shares of common stock was
outstanding as of September 30, 1999. None of the aforementioned potential
common shares were included in the computation of diluted loss per common share
because such inclusion would be antidilutive.
(10) Preferred B Stock
The Trinity Group holds all of the issued and outstanding Series B
Preferred stock, which allows The Trinity Group to elect a majority of the Board
of Directors of the Company.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Item 2. Management's Discussions and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements
Statements in this Form 10-Q that are not descriptions of historical
facts may be forward-looking statements that are subject to risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in this Form
10-Q and in other documents filed by the Company with the Securities and
Exchange Commission.
Reverse Acquisition
On April 28, 1999, in a share exchange with Trinity, the Company
acquired all of the issued and outstanding common and preferred shares of SES
Acquisition Corp. in exchange for 85% of the equity and voting power of the
Company consisting of 10,571,607 shares of Common Stock and 93,654 shares of
Series A Preferred Stock. The share exchange transaction is accounted for as a
reverse acquisition, with SES Acquisition being the surviving company for
accounting purposes. In accounting for the reverse acquisition, the equity of
SES Acquisition, as the surviving company, and Fingermatrix, as the acquired
company, has been recapitalized and the financial statements reflect the results
of operations of the Company and SES Acquisition from the date of the reverse
acquisition forward. The financial statements prior to the date of the reverse
merger reflect the financial position and results of operations of SES
Acquisition
SES Acquisition Corp. is the sole stockholder of Sequential Electronic
Systems, Inc. which designs and manufactures electro-optical products and
S-Tech, Inc. which designs and manufactures specialized vending machines and a
variety of avionics equipment. It also owns a 50.1% interest in FMX, Inc. which
is developing electronic fingerprint identification technology. The following
narrative discusses the operating activity of these subsidiaries. The only
significant operating activity not related to the Company's subsidiaries is the
compensation expense related to the issuance of the Company's stock.
Financial Condition - Liquidity and Capital Resources
As of September 30, 1999 ("September 1999") and December 31, 1998
("December 1998"), the Company had working capital of $558,407 and $1.3 million,
respectively. The decrease in working capital of $696,245 during the nine month
period ended September 30, 1999 is primarily the result of a $506,315 increase
in loans payable to a related party, a $261,774 increase in the revolving line
of credit and a $220,290 increase in accounts payable, all of which were
partially offset by a $258,843 increase in inventory. The changes in other
components of working capital were not significant and amounted to net increases
of $33,291. During the nine months ended September 30, 1999, the Company used
$742,933 of cash in operating activities and the only significant sources of
cash were advances from a related party of approximately $506,315 and advances
on the revolving line of credit of $261,774. As of September 30, 1999, the
Company's subsidiary S-Tech is delinquent on payment of payroll taxes
approximating $81,000. The Company has issued its preferred stock in order to
make its recent acquisitions, see footnotes (5) and (6) to the financial
statements and is aggressively pursuing various financing sources with which to
fund future operating activities.
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<PAGE>
Results of Operations
Comparing the three months ended September 30, 1999 and 1998 (the "1999
and 1998 3rd Quarters"), the Company's revenues decreased $45,400, or 8%, while
during the same time period gross profit decreased $27,159, or 10%. The gross
margin percentage for the 1999 and 1998 3rd Quarters was 44% and 45%
respectively. Comparing the nine months ended September 30, 1999 and 1998 (the
"1999 and 1998 Nine Months"), the Company's revenues decreased $658,502, or 28%,
while during the same time period gross profit decreased $363,797, or 38%. The
gross margin percentage for the 1999 and 1998 Nine Months was 36% and 42%
respectively.
Comparing the 1999 and 1998 3rd Quarters, total costs and expenses
increased $31,649, or 8%, and when comparing the 1999 and 1998 Nine Months
increased $720,244, or 75%. Included in the 1999 3rd Quarter and the 1999 Nine
Months were $26,000 and $455,468, respectively, of compensation expense from the
issuance of stock. On April 28, 1999 certain creditors of the Company accepted
6,346 shares of the Series A Preferred Stock in exchange for their aggregate
debt of $648,366. The 6,346 Series A Preferred shares, are convertible into
4,714,443 common shares of the Company and using the Black-Scholes option
valuation formula, the value of such shares was determined to be approximately
$1.1 million, resulting in $429,468 of compensation expense from issuance of the
stock. On July 20, 1999, the Company settled amounts owed to the former landlord
of the Company by making cash payments of $70,000, issuing a note payable for
$45,000 and issuing 268 Series A Preferred shares. The 268 Series A Preferred
shares are convertible into approximately 200,000 common shares of the Company's
common stock and using the Black-Scholes option valuation formula, the value of
such shares was determined to be approximately $46,000. The total consideration
given to the landlord, which includes the calculated value of the Series A
Preferred shares, exceeded the amounts owed to the former landlord by
approximately $26,000. All of such excess is attributed to the valuation of the
Series A Preferred shares and was recorded as compensation expense from the
issuance of stock.
Comparing the 1999 and 1998 3rd quarter, components of costs and
expenses, other than compensation expense from issuance of stock, increased in
the aggregate $5,649, or 1%, consisting of an increase in interest and financing
fees of $43,741 and an increase in depreciation and amortization of $19,810,
partially offset by a decrease in selling, general and administrative expense of
$57,902. Comparing the 1999 and 1998 Nine Months, components of costs and
expenses, other than compensation expense from issuance of stock, increased in
the aggregate $264,776, or 28%, of which $152,376 relates to selling general and
administrative expense, $91,402 relates to interest and financing costs and
$20,998 relates to depreciation and amortization.
As a result of the foregoing, the Company incurred net losses for the
1999 and 1998 3rd Quarters of $196,593, $0.01 per share, and $137,785, or $0.02
per share, respectively and incurred a net loss for the 1999 Nine Months of $1.1
million, or $0.07 per share and generated net income for the 1998 Nine Months of
$4,268, or $0.00 per share.
-15-
<PAGE>
Year 2000 Issues
Many existing computer programs use only two digits to identify a year
in a date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. This issue is referred to as the "Year 2000 Issue". The Company believes
that the Year 2000 Issue will not have a significant impact on the operations or
expenses of the Company. However, no assurance can be given that the Company
will not incur significant cost in addressing the Year 2000 Issue or that the
failure to adequately address the Year 2000.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Form of Agreement and Plan of Reorganization dated April 28, 1999
between the Registrant and The Trinity Group, Inc.1
(99.2) Form of Debt Exchange Agreement dated April 28, 1999 among the
Registrant and those parties whose names appear on Exhibit "A" to the
Agreement.1
(99.3) Form of Certificate of Amendment of the Certificate of Incorporation of
the Registrant dated April 28, 1999 containing the Statement of the
Powers, Designations, Preferences, Privileges, Rights and Restrictions
of the Registrant's Series A 2% Voting Convertible Redeemable Preferred
Stock.1
(99.4) Form of Exclusive Distribution Agreement dated September 13, 1999
between Secured Portal Systems, Inc. and GIL Security Systems, Inc. 2
(99.5) Form of Stock Purchase Agreement dated September 13, 1999 between the
Registrant and GIL Security Systems, Inc. 2
(27) Financial Data Schedule.3
(1) Filed as an exhibit to the Company's report on Form 8-K dated April 28,
1999, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's report on Form 8-K dated September
13, 1999, and incorporated herein by reference.
(3) Filed only with the SEC in electronic format.
(b) Reports on Form 8-K
Filed an 8-K dated September 13, 1999 disclosing the Exclusive Distribution
Agreement between Secured Portal Systems, Inc. and GIL Security Systems, Inc.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FINGERMATRIX, INC.
/S/______________ Chief Executive Officer and Director November 12, 1999
Lewis S. Schiller (Principal Executive and Accounting Officer)
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED
AS PART OF THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 24,842
<SECURITIES> 0
<RECEIVABLES> 349,881
<ALLOWANCES> 0
<INVENTORY> 2,495,100
<CURRENT-ASSETS> 2,889,845
<PP&E> 2,454,065
<DEPRECIATION> 2,357,664
<TOTAL-ASSETS> 3,106,175
<CURRENT-LIABILITIES> 2,331,438
<BONDS> 0
<COMMON> 200,000
0
1,003
<OTHER-SE> 573,734
<TOTAL-LIABILITY-AND-EQUITY> 3,106,175
<SALES> 1,658,990
<TOTAL-REVENUES> 1,658,990
<CGS> 1,056,609
<TOTAL-COSTS> 1,056,609
<OTHER-EXPENSES> 1,498,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,949
<INCOME-PRETAX> (1,079,773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,079,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,079,773)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
