10-Q/A 1 0001.txt FORM 10-Q/A - SEPTEMBER 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A Amendment No. 1 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 Purpose of Amendment: The prior quarterly filing for September 30, 1999 presented compensation expense from the issuance of securities for the extinguishment of subordinated debt as an operating expense and in order to conform to the 1999 year end audited financial statement presentation, such expense is reclassified as an extraordinary loss on debt extinguishment. As such Part I, Item 1. "Financial Statements" and Item 2., Management's Discussions and Analysis of Financial Condition and Results of Operations have been modified to reflect such change. -1- 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 -2- Fingermatrix, Inc. and Subsidiaries Condensed Consolidated Statements of Operations Unaudited
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- 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 ------------- ------------- ------------- ------------- Total costs and expenses 414,242 408,593 1,226,686 961,910 ------------- ------------- ------------- ------------- Income (loss) from operations (170,593) (137,785) (624,305) 4,268 Extraordinary loss on debt extinguishment (26,000) -- (455,468) -- ------------- ------------ ------------- -------------- Net income (loss) $ (196,593) $ (137,785) $ (1,079,773) $ 4,268 ============= ============= ============= ============= Basic and diluted earnings (loss) per common share Income (loss) from operations $ (0.01) $ (0.02) $ (0.04) $ 0.00 Extraordinary loss on debt extinguishment (0.00) -- (0.03) -- ------------- ------------ ------------- -------------- Net income (loss) $ (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 ============= ============= ============== =============
See notes to unaudited condensed consolidated financial statements. -3- 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. -4- 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. -5- 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: Extraordinary loss on debt extinguishment 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. -6- 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 extraordinary loss on debt extinguishment. 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 extraordinary loss on debt extinguishment. See notes to unaudited condensed consolidated financial statements. -7- 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 extraordinary loss on debt extinguishment. 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. -8- 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. -9- 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 extraordinary loss on debt extinguishment. (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, -10- Fingermatrix, Inc. and Subsidiaries Footnotes to Unaudited Condensed Financial Statements -------------------------------------------------------------------------------- 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. -11- 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. -12- 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. ............................. -13- 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 $455,468 of extraordinary loss on debt extinguishment. 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. -14- 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 quarter, costs and expenses 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, costs and expenses 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. Included in the 1999 3rd Quarter and the 1999 Nine Months were $26,000 and $455,468, respectively, of extraordinary loss on debt extinguishment. 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 extraordinary loss on debt extinguishment . 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 extraordinary loss on debt extinguishment. 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- 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- 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- 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 June 1, 2000 Lewis S. Schiller (Principal Executive and Accounting Officer) -18-