PINX:CYNX CelLynx Group Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549  

 

Form 10-Q  

 

(Mark One)  
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
   
  For the Quarterly Period Ended March 31, 2012  
 
OR  
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

 

For the transition period from ______________ to ______________

 

Commission File No. 000-27147

 

CelLynx Group, Inc.

(Exact name of small business issuer as specified in its charter)

 

NEVADA

(State or other jurisdiction of

incorporation or organization)

 

95-4705831

(I.R.S. Employer

Identification No.)

 

4014 Calle Isabella, San Clemente, California 92672

(Address of principal executive offices)

 

(949) 305-5290

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer  o            Non-Accelerated Filer  o 

Accelerated Filer  o         Smaller Reporting Company x  

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date: The total shares outstanding for this company is 1,031,634,657 shares outstanding as of May 8, 2012.

 

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TABLE OF CONTENTS

PART I FINANCIAL INFORMATION 3
     
Item 1. Financial Statements 3
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
     
Item 4. Controls and Procedures 33
     
PART II OTHER INFORMATION 34
     
Item 1. Legal Proceedings 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Defaults Upon Senior Securities 34
     
Item 4. (Removed and Reserved) 34
     
Item 5. Other Information 34
     
Item 6. Exhibits 35
     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Part I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

 

CELLYNX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2012 AND SEPTEMBER 30, 2011
             
    March 31,   September 30,
    2012   2011
    (unaudited)    
ASSETS
CURRENT ASSETS:            
   Cash      $               3,246    $                     178
   Accounts receivable                        -                         -  
   Other receivable                   1,200,651
   Investment in 5Barz - current                400,000                       -  
   Prepaids and other current assets                          -                20,090
 TOTAL CURRENT ASSETS                403,246           1,220,919
             
 EQUIPMENT, net                   2,113                2,900
 INTANGIBLE ASSETS, net                  44,718              53,967
   Investment in 5Barz - long termt            1,400,000                          -  
 TOTAL ASSETS     $              1,850,076    $              1,277,786
             
 LIABILITIES AND STOCKHOLDERS' DEFICIT 
             
 CURRENT LIABILITIES:             
   Accounts payable and accrued expenses     $       1,752,628    $     1,622,307
   Accrued interest                58,808             51,692
   Accrued derivative liabilities                  102,286
   Deferred gain                1,200,651
   Line of credit  net of debt discount of $126,861             459,664           241,038
   Convertible promissory notes, net of debt discount of $20,180 and $29,533             
       as of March 31, 2012 and September 30, 2011, respectively              403,076           379,823
 TOTAL CURRENT LIABILITIES          2,674,177          3,597,797
             
  BCF liability         5,856,633      
  Warrant liability                3,442      
 TOTAL LIABILITIES        8,534,252     3,597,797
             
 COMMITMENTS AND CONTINGENCIES             
             
 STOCKHOLDERS' DEFICIT:             
   Series A preferred stock, $0.001 par value; 100,000,000 shares authorized;               
       nil shares issued and outstanding                              -                              -  
   Common stock, $0.001 par value, 1000,000,000 shares authorized;  690,165,000 and 195,991,082        
       shares issued and outstanding as of March 31, 2012 and September 30, 2011, respectively                 690,165                    195,991
   Additional paid-in capital      13,823,314         14,113,270
   Accumulated deficit      (21,197,656)       (16,629,272)
       Total stockholders' deficit     $    (6,684,177)    $      (2,320,011)
   TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT         1,850,076       1,277,786
             

 The accompanying notes are an integral part of these consolidated financial statements. 

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CELLYNX GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
                         
    Three Months Ended   Six Months Ended
    March 31, 2012   March 31, 2011   March 31, 2012   March 31, 2011
    (unaudited)   (unaudited)   (unaudited)   (unaudited)
                         
Net Revenue    $        -    $        -    $        -    $       -
Cost of Revenue           -           -           -          -
Gross profit           -           -           -          -
Operating expenses                        
  Research and development           -           -           -          -
  General and administrative         218,109         473,913         373,238             1,129,684
        Total operating expenses         218,109         473,913         373,238             1,129,684
                         
Loss from operations    $     (218,109)    $     (473,913)    $     (373,238)            (1,129,684)
                         
Non-operating income (expense):                        
  Interest and financing costs, net          (51,291)          (25,146)          (92,131)        (49,991)
  Change in fair value of accrued beneficial conversion liability,             (5,621,028)     (521)             (5,595,012)            (652)
  Change in fair value of accrued warrant liability           0          (82,948)             2,718     (160,848)
  Gain on settlement of debt             3,766                   3,766      
  Gain on sale of intangible assets       1,482,563           -       1,485,513          -
        Total non-operating income (expense), net             (4,185,990)        (108,615)             (4,195,146)     (211,491)
                         
Net loss    $          (4,404,099)    $     (582,528)    $          (4,568,384)    $         (1,341,175)
                         
                         
Weighted average shares outstanding - Basic and Diluted:                      
  Basic and Diluted           211,946,779           186,667,298           267,598,489          180,380,815
                         
Loss per share - Basic and Diluted:                        
  Basic and Diluted    $          (0.02)    $          (0.00)    $          (0.02)    $        (0.01)
                         

 

 The accompanying notes are an integral part of these consolidated financial statements. 

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CELLYNX GROUP, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2012 AND 2011
             
    2012   2011
    (unaudited)   (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:            
  Net loss    $        (4,568,384)    $  (1,341,175)
  Adjustments to reconcile net loss to net cash used in operating activities:            
      Depreciation and amortization            4,571     2,436
      Warrants issued for services           -      
      Stock issued for services           -     228,015
      Note payable issued for services          50,000      
      Stock compensation expense for options issued to employees and consultants        79,618     198,996
      Change in fair value of accrued beneficial conversion liability     5,595,012     652
      Change in fair value of accrued warrant liability          (2,718)     160,848
      Amortization of debt discount          92,131     42,761
      Gain on sale of intangibles           (1,485,513)      
      Gain on settlement of debt          (3,766)      
  Changes in operating assets and liabilities:            
      Change in accounts receivable           -     1,925
      Change in inventory           -      
      Change in other assets          20,090     165,411
      Change in accounts payable, accrued expenses and accrued interest        119,921     91,120
  Net cash used in operating activities         (99,038)     (449,011)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
      Purchase of intangible assets           (1,090)
  Net cash used in investing activities           -     (1,090)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
      Payments of shareholders convertible notes            
      Payments of  convertible notes            
      Proceeds from issuance of convertible notes          15,000     132,500
      Proceeds from issuance of common stock            
      Proceeds from advances for asset purchase agreement           -     260,434
      Proceeds from line of credit          87,106     60,000
  Net cash provided by financing activities        102,106     452,934
             
NET DECREASE IN CASH            3,068     2,833
             
CASH, BEGINNING OF PERIOD       178     6,601
             
CASH, END OF PERIOD    $         3,246    $  9,434
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
  Cash paid for interest    $      -      $  0
  Cash paid for income taxes    $      -      $  0
             
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING:      
  Conversion of convertible note payable to common stock    $       52,700    $  55,000
             

 

 The accompanying notes are an integral part of these consolidated financial statements. 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 1 – Organization and Basis of Presentation

 

The unaudited consolidated financial statements have been prepared by CelLynx Group, Inc., formerly known as NorPac Technologies, Inc. (hereinafter referred to as “CelLynx” or the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results for the three and six months ended March 31, 2012, are not necessarily indicative of the results to be expected for the full year ending September 30, 2012.

 

Organization and Line of Business

 

CelLynx Group, Inc. (the “Company”) was originally incorporated under the laws of the State of Minnesota on April 1, 1998.

 

On July 23, 2008, prior to the closing of a Share Exchange Agreement (described below), the Company entered into a Regulation S Subscription Agreement pursuant to which the Company issued 10,500,000 shares of its common stock and warrants to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to non-U.S. persons for an aggregate purchase price of $1,575,000.

 

On July 24, 2008, the Company entered into a Share Exchange Agreement, as amended, with CelLynx, Inc., a California corporation ("CelLynx- California"), and twenty-three CelLynx-California shareholders who, immediately prior to the closing of the transaction, collectively held 100% of CelLynx-California’s issued and outstanding shares of capital stock. As a result, the CelLynx-California shareholders were to receive 77,970,956 shares of the Company’s common stock in exchange for 100%, or 61,983,580 shares, of CelLynx-California’s common stock. However, the Company had only 41,402,110 authorized, unissued and unreserved shares of common stock available, after taking into account the shares of common stock issued in the July 23, 2008, financing described above. Pursuant to the Share Exchange Agreement, in the event that there was an insufficient number of authorized but unissued and unreserved common stock to complete the transaction, the Company was to issue all of the available authorized but unissued and unreserved common stock to the CelLynx-California shareholders in a pro rata manner and then establish a class of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and issue that number of shares of Series A Preferred Stock such that the common stock underlying the Series A Preferred Stock plus the common stock actually issued to the CelLynx- California shareholders would equal the total number of shares of common stock due to the CelLynx-California shareholders under the Share Exchange Agreement. As a result, the Company issued to the CelLynx-California shareholders an aggregate of 32,454,922 shares of common stock and 45,516,034 shares of Series A Preferred Stock. The Series A Preferred Stock automatically would convert into common stock on a one-to-one ratio upon the authorized capital stock of the Company being increased to include not less than 150,000,000 shares of common stock.

 

On November 7, 2008, the Company amended the Articles of Incorporation to increase the number of authorized shares to 400,000,000 and converted the 45,516,034 shares of Series A Preferred Stock into 45,516,034 shares of the Company’s common stock.

 

On March 23, 2012, the Company amended the Articles of Incorporation to increase the number of authorized shares to 1,000,000,000. On May 7, 2012 the Company amended the Articles of Incorporation to increase the number of authorized shares authorized shares to 2,000,000,000.

 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

The exchange of shares with CelLynx-California was accounted for as a reverse acquisition under the purchase method of accounting because the shareholders of CelLynx-California obtained control of the Company. On August 5, 2008, NorPac Technologies, Inc. changed its name to CelLynx Group, Inc. Accordingly the merger of CelLynx-California into the Company was recorded as a recapitalization of CelLynx-California, with CelLynx-California being treated as the continuing entity. The historical financial statements presented are the financial statements of CelLynx-California. The Share Exchange Agreement has been treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of the reverse merger transaction, the net assets of the legal acquirer CelLynx Group, Inc. were $1,248,748.

 

As a result of the reverse merger transactions described above, the historical financial statements presented are those of CelLynx-California, the operating entity. Each CelLynx-California shareholder received 1.2579292 shares of stock in the Company for each share of CelLynx- California capital stock. All shares and per-share information have been retroactively restated for all periods presented to reflect the reverse merger transaction.

 

On October 27, 2008, the Board of Directors approved a change of the Company’s fiscal year end from June 30 to September 30 to correspond to the fiscal year of CelLynx-California. The fiscal year end change was effective for the year ended September 30, 2008.

 

The Company develops and manufactures cellular network extenders which enable users to obtain stronger signals and better reception.

 

 

Going Concern and Exiting Development Stage

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary equity and debt financing to continue operations and to generate sustainable revenue. There is no guarantee that the Company will be able to raise adequate equity or debt financing or generate profitable operations. For the three and six months ended March 31, 2012, the Company incurred a net loss of $4,404,099 and $4,568,384, respectively. As of March 31, 2012, the Company had an accumulated deficit of $21,197,656. Further, as of March 31, 2012 and September 30, 2011, the Company had negative working capital of $2,270,931 and $2,376,878, respectively, and had negative cash flows from operations of $99,038 and $449,011 for the six months ended March 31, 2012 and 2011, respectively. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management intends to raise additional funds through equity or debt financing and to generate cash from the sale of the Company’s products and from license fees as further described below.

 

The Company was in the development stage through June 30, 2009. In July 2009, the Company received the first 220 units of the Company’s cellular network extender, The Road Warrior, from its manufacturer. As of July 2009, the Company was fully operational and as such was longer considered a development stage company. During the period that the Company was considered a development stage company, the Company incurred accumulated losses of approximately $10,948,625.

 

 

 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

 

Note 2 Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of CelLynx Group, Inc., and its 100% wholly -owned subsidiary, CelLynx, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

 

Cash

 

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

 

Inventory

 

Inventory consists of finished goods ready for sale and is valued at the lower of cost (determined on a first-in, first-out basis) or market. The Company reviews its reserves for slow moving and obsolete inventories. As of September 30, 2011, the Company wrote off its entire inventory balance.

 

Accounts Receivable

 

The Company maintains reserves for potential credit losses for accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded based on the Company’s historical collection history. Receivables are written off when they are determined to be uncollectible. As of March 31, 2012 and September 30, 2011, the Company determined that allowance for bad debt was not necessary.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentration of Credit Risk

 

Cash includes deposits in accounts maintained at financial institutions. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. As of March 31, 2012 and September 30, 2011, the Company did not have any deposits in excess of federally-insured limits. To date, the Company has not experienced any losses in such accounts.

 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Equipment

 

Equipment is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives. The useful life and depreciation method are reviewed periodically to ensure that the depreciation method and period are consistent with the anticipated pattern of future economic benefits. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. The useful life of the equipment is being depreciated over three years.

 

Intangible Assets

 

Acquired patents, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.

 

Capitalized costs for patents are amortized on a straight-line basis over the remaining twenty-year legal life of each patent after the costs have been incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively. The licensing right is amortized on a straight-line basis over a period of 10 years.

 

Impairment or Disposal of Long- lived Assets

 

The Company applies the provisions of Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long -lived assets. ASC 360 requires impairment losses to be recorded on long - lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long -lived assets. Loss on long -lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of March 31, 2012 and September 30, 2011, there was no significant impairment of its long -lived assets.

 

Revenue Recognition

 

The Company's revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition.” Revenue is recognized at the date of shipment to customers, and when the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.

 

The gain on sale of intangibles is fully reflected as income in the period of sale as the sale proceeds were fully paid at the date of sale, March 29, 2012.

 

 

 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

 

Fair Value of Financial Instruments

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, accounts payable, and other current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of the valuation hierarchy are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company’s warrant liability is carried at fair value totaling $3,442 and $6,160, as of March 31, 2012 and September 30, 2011, respectively. The Company’s conversion option liability is carried at fair value totaling $5,856,633 and $96,126 as of March 31, 2012 and September 30, 2011, respectively. The Company used Level 2 inputs for its valuation methodology for the warrant liability and conversion option liability as their fair values were determined by using the Black-Scholes option pricing model using the following assumptions:

 

March 31, 2012
Annual dividend yield
Expected life (years) 0.75 – 3.70
Risk-free interest rate 0.01% - 0.81%
Expected volatility 145%

 

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants and conversion options. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion options. We have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and conversion options. The risk-free interest rate is based on U.S. Treasury securities with maturity terms similar to the expected remaining term of the warrants and conversion options.

 

At March 31, 2012, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

 

 

 

 

 

 

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CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

 

   

Fair Value

   As of

March 31, 2012

Fair Value Measurements at

March 31, 2012

Using Fair Value Hierarchy

Liabilities     Level 1   Level 2 Level 3  
Warrant liability $ 3,442   $  3,442    
Conversion option liability $  5,856,633   $  5,856,633    
Total accrued derivative liabilities $ 5,860,075   $ 5,860,075    
               
               

 

For the three and six months ended March 31, 2012, the Company recognized a gain of $0 and $2,718 for the change in the fair value of accrued warrant liability and the Company recognized a gain of $26,016 and a loss of $5,621,028 for the change in fair value of accrued beneficial conversion liability, respectively.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the three and six months ended March 31, 2012 and 2011.

 

 

 

 

 

 

11


 

 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Basic and Diluted Net Loss Per Share

 

The Company reports loss per share in accordance with the ASC Topic 260, “Earnings Per Share.” Basic earnings-per-share is based upon the weighted average number of common shares outstanding. Diluted earnings-per-share is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Diluted net loss-per-share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. Due to the net loss for the three and six months ended March 31, 2012 and 2011, none of the potential dilutive securities have been included in the calculation of dilutive earning per share because their effect would be anti-dilutive.

 

Stock - Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option -pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/seller market transaction.

 

The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013.

In September 2011, the FASB issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to

12


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is no less than its carrying amount, the two-step goodwill impairment test is not required. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for annual periods beginning after December 15, 2011. In December 2011, the FASB issued a deferral of certain portion of this guidance.

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counter-party credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance is effective for annual periods beginning after December 15, 2011.

 

Note 3 Equipment

 

Equipment consisted of the following at March 31, 2012 and September 30, 2011:

 

 

March 31,

2012

 

September 30,

2011

Office furniture and equipment $ 9,879   $ 9,879
Computer equipment         8,930
  $ 9,879   $ 18,809
Accumulated depreciation   (7,766)     (15,909)
Equipment, net $ 2,113   $ 2,900

 

 

The Company recorded depreciation expense of $1,045 and $1,405 for the three and six months ended March 31, 2012, respectively, and $208 and $579 for the three and six months ended March 31, 2010, respectively.

 

 

 

 

 

 

13


 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4 – Intangible Assets

 

The Company incurred legal costs in acquiring patent and trademark rights. These costs are projected to generate future positive cash flows in the near term and have been capitalized to intangible assets in the period incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively.

 

Intangible assets consist of the following:

 

    March 31, 2012   September 30, 2011
Patents   $ 42,318   $ 49,586
Trademarks     4,994     6,243
Licensing rights     4,214     4,214
      51,526     60,043
Accumulated Amortization     (6,809)     (6,076)
Intangibles, net   $ 44,717   $ 53,967

 

Amortization on the sale of intangibles will be calculated from the date that the patents are issued and that the Company commences its initial substantive revenue based upon those intangible assets.

 

Note 5 Convertible Promissory Notes

 

Convertible Promissory Note Issued February 22, 2011

 

On February 22, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated entity (the “Holder”), in connection with the purchase by the Holder of a Convertible Promissory Note (the “February 2011 Note”).

 

Pursuant to the February 2012 Note, the Holder loaned to the Company the principal amount of $40,000. The February 2011 Note bears interest at a rate of 8%, and is due on November 17, 2011. The Holder may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. The Company recorded a $23,492 debt discount related to the beneficial conversion feature. The loan was fully repaid on November 17, 2011.

 

Convertible Promissory Note Issued March 10, 2011

 

On March 10, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated entity (the “Holder”), in connection with the purchase by the Holder of a Convertible Promissory Note (the “March 2011 Note”).

 

 

 

 

 

 

 

14


 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Pursuant to the March 2011 Note, the Holder loaned to the Company the principal amount of $42,500. The March 2011 Note bears interest at a rate of 8%, and was due on December 7, 2011. Subject to a revision of that note agreement dated January 6, 2012, the Holder may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined as the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. The Holder is prohibited under the March 2011 Note from converting amounts if principal and interest that would result in The Holder receiving shares, which when combined with shares of the Company’s common stock held by The Holder, would result in The Holder holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the March 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144. The loan was repaid in full via conversion by April 12, 2012.

 

Convertible Promissory Note Issued May 18, 2011

 

 

On May 18, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated holder, in connection with the purchase by Holder of a Convertible Promissory Note in the principle amount of $32,500. The May 2011 Note bears interest at a rate of 8%, and is due on February 23, 2012. Pursuant to the terms of a January 6, 2012 amendment agreement between the Company and holder, the note may be converted into shares of the Company’s common stock, with the number of shares issuable determined to be the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Asher is prohibited under the Asher May 2011 Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the Asher May 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144. At the date of issuance of this report, $1,000 plus interest remains outstanding on this note.

 

Convertible Promissory Note Issued January 10, 2012

 

On January 10, 2012, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated holder, in connection with the purchase by Holder of a Convertible Promissory Note in the principle amount of $15,000. The January 2012 note bears interest at a rate of 8%, and is due on October 10, 2012. Pursuant to the terms of a January 6, 2012 amendment agreement between the Company and holder, the note may be converted into shares of the Company’s common stock, with the number of shares issuable determined to be the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Asher is prohibited under the Asher May 2011 Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the Asher May 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

 

Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Note, the Company may not incur additional debt without Holder’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed holder; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Note.

 

15


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

The Company has the right to pre-pay the Note during the first 120 days following the date of the Note by paying to Holder 150% of the then- outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

 

Pursuant to the SPA, the Company agreed to grant to Asher a right of first refusal for any subsequent transactions occurring during the twelve month period following the Closing Date, which was defined as May 23, 2011. The right of first refusal does not apply to any transactions in excess of $250,000.

 

Yaretz Convertible Promissory Note Issued April 5, 2011 – Related Party

 

On April 5, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with one of its directors, Dwayne Yaretz (“Yaretz”), in connection with the purchase by Yaretz of a Convertible Promissory Note (the “Yaretz Note”).

 

Pursuant to the Yaretz Note, Yaretz loaned to the Company the principal amount of $50,000. The Yaretz Note bears interest at a rate of 8%, and is due on January 5, 2012. Yaretz may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Yaretz is prohibited under the Yaretz Note from converting amounts if principal and interest that would result in Yaretz receiving shares, which when combined with shares of the Company’s common stock held by Yaretz, would result in Yaretz holding more than 4.99% of the Company’s then-outstanding common stock. No registration rights were granted in connection with the purchase of the Yaretz Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

 

Pursuant to the terms of the Yaretz Note, while there remains any unpaid amounts owing on the Yaretz Note, the Company may not incur additional debt without Yaretz’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed Yaretz; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Yaretz Note.

 

The Company has the right to pre-pay the Yaretz Note during the first 120 days following the date of the Yaretz Note by paying to Yaretz 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

 

The Company determined that the Yaretz Note contained a beneficial conversion feature because the conversion rate was less than the share price at the date of issuance. The Company recorded a $29,365 debt discount related to the beneficial conversion feature.

 

Convertible promissory notes

 

The Company recorded interest expense relating to the convertible promissory notes of $5,973 and $9,941 for the three and six months ended March 31, 2012, respectively and $3,584 and $6,010 for the three and six months ended March 31, 2011, respectively.

 

The Company amortized $22,609 and $47,988 of the debt discount for the three and six months ended March 31, 2012 respectively and $20,343 and $42,762 of the debt discount for the three and six months ended March 31, 2011, respectively.

 

The following table summarizes the convertible promissory notes at March 31, 2012 and September 30, 2011:

 

 

16


 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

    March 31,     September 30,  
    2012     2011  
             
Issued August 2006, amended November 2007   $ 262,356     $ 262,356  
Issued July 22, 2010     -       -  
Less: Debt discount     -       -  
Issued July 2010 through March 2012     288,600       220,000  
Less amounts converted     (127,700 )     (73,000
Less: Debt discount     (20,180 )     (29,533
Convertible promissory notes, net   $ 403,076     $ 379,823  

Note 6 License Agreement

 

On January 12, 2009, the Company entered into a Licensing Agreement with an unrelated party. The Licensing Agreement gives the Company the right to manufacture, have manufactured, use, import, and offer to sell, lease, distribute or otherwise exploit certain technology rights and intellectual rights. The License Agreement has a term of ten years. As consideration for the License Agreement, the Company issued 57,143 shares of its common stock and paid $1,000 in cash. The Company determined the fair value of the License Agreement to be $7,429 based on the market value of its common stock on the date of the agreement plus the $1,000, for a total acquisition cost of $8,429, which is included in the accompanying consolidated balance sheet.

 

The Company recorded amortization expense related to the licensing agreement of $105 and $210 for the three and six months ended March 31, 2012, and $211and $421 for the three and six months ended March 31, 2011, respectively.

 

Note 7 - Consulting Agreement

 

On March 31, 2009, the Company entered into a Consulting Agreement with an outside third party. In connection with this Consulting Agreement, the Company issued warrants to purchase 2,000,000 shares of its Common Stock. The exercise prices for the warrants are as follows:

Number of     Exercise
Warrants Issued     Price
            300,000     $0.10 per share
            500,000     $0.15 per share
            600,000     $0.20 per share
            600,000     $0.25 per share
          2,000,000      

17


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

The vesting schedule is as follows:

Number of  Warrants Issued     Exercise Price   Vesting Dates
                300,000   0.10 per share   Immediately
                500,000   0.15 per share   Immediately
                  50,000   0.20 per share   Immediately
                550,000   0.20 per share   At time of extension
                600,000   0.25 per share   March 31, 2010
             2,000,000        

 

On January 15, 2010, the Company entered into a consulting agreement with Seahawk Capital Partners, Inc. The Company issued 1,000,000 shares of Company restricted stock and 2,000,000 warrants upon signing of agreement. In addition, the Company agreed to issue an additional 50,000 shares of restricted Company stock.

 

The exercise prices of the warrants are as follows:

Number of  Warrants Issued     Exercise Price
                285,714   0.10 per share
                285,714   0.75 per share
                285,714   $ 01.5 per share
                285,714   2.00 per share
                285,714   3.00 per share
                285,714   3.50 per share
                285,716   4.00 per share
             2,000,000      

18


 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 8 5BARz International, Inc. Agreement

 

On December 31, 2010, the Company consented to the transfer of three agreements that they had entered into with Dollardex Group Corp. to 5BARz International, Inc. as follows;

 

(i) An “Amended and Restated Master Global Marketing and Distribution Agreement.”
(ii) An “Asset Purchase Agreement”
(iii) A “Revolving line of credit agreement and security agreement”.

 

These agreements with provide for the exclusive global marketing and distribution of the 5BARz line of products and related accessories and a 50% ownership interest in the 5BARz intellectual property. In addition, a revolving line of credit facility has been made available to Cellynx.

 

On March 29, 2012, the Company and 5BARz International, Inc. entered into an agreement which provided several amendments to the agreement referred to above. As a result of those amendments, the following arrangements between the Companies were established;

 

(iv) 5BARz International, Inc. acquired a 60% interest in the patents and trademarks held by Cellynx Group Inc., referred to as the “5BARz™” technology. That interest in the technology was acquired for proceeds comprised of 9,000,000 shares of the common stock of the Company, valued at the date of acquisition at $0.20 per share or $1,800,000 USD.  The acquisition agreement also clarified that the ownership interest in the intellectual property does represent that proportionate interest in income earned from the intellectual property.
(v) 5BARz International, Inc. agreed to make available to Cellynx Group, Inc., a revolving line of credit facility in the amount of $2.2 million dollars of which $636,606 has been advanced as of March 31, 2012.  This revolving line of credit facility expires on October 5, 2013.  Under the terms of the line of credit facility, the Company has the right to convert amounts due under the facility into common stock of Cellynx, at a conversion rate which is the lesser of a fixed conversion rate of $0.00015 per share or a variable rate which is calculated at 25% of the average lowest three closing bid prices of the Cellynx Group, Inc. common stock for a period which is ten (10) days prior to the date of conversion.  At March 31, 2012, the Company converted $78,500 of the amount due under the revolving line of credit facility for 350,000,000 shares of the capital stock of Cellynx Group, Inc.  As a result, Cellynx became a consolidated subsidiary of 5Barz International Inc., on March 29, 2012.

(vi) Pursuant to the Master Global Marketing and Distribution agreement between 5Barz International Inc. and Cellynx Group, Inc., 5BARz International, Inc. was obligated to pay to Cellynx Group, Inc., a royalty fee amounting to 50% of the Company’s Net Earnings. That fee would be paid on a quarterly basis, payable in cash or immediately available funds and shall be due and payable not later than 45 days following the end of each calendar quarter of the year.  The asset acquisition agreement amendment referred to herein specified that the royalties would be paid in relation to the ownership of the intellectual property.

 

 

 

 

 

 

 

 

 

 

19


 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 9 – Stockholder’s Equity

 

On December 14, 2010, the Board of Directors approved the cancellation of 13,412,638 options that were previously granted to Daniel Ash, the former CEO and Director of the Company, and agreed instead to issue Mr. Ash 13,412,638 shares of the Company's common stock.

 

On January 31, 2011, the Company issued 534,759 shares of common stock pursuant to the conversion of $10,000 principal of the Asher Note. The conversion rate was $.0187.

 

On February 8, 2011, the Company issued 662,983 shares of common stock pursuant to the conversion of $12,000 principal of the Asher Note. The conversion rate was $.0181.

 

On February 22, 2011, the Company issued 609,756 shares of common stock pursuant to the conversion of $10,000 principal of the Asher Note. The conversion rate was $.0164.

 

On March 2, 2011, the Company issued 921,986 shares of common stock pursuant to the conversion of $13,000 principal of the Asher Note. The conversion rate was $.0141.

 

On March 10, 2011, the Company issued 1,034,483 shares of common stock pursuant to the conversion of $10,000 principal and $2,000 accrued interest of the Asher Note. The conversion rate was $.0097.

 

On March 24, 2011, the Company issued 633,333 shares of common stock to a consultant for services rendered. The shares were valued at $13,933 which was the fair market value of the shares on the date of grant.

 

On August 23, 2011, the Company issued 1,666,667 shares of common stock pursuant to the conversion of $8,000 principal of the Asher Note. The conversion rate was $.0048.

 

During the three months ended December 31, 2011, the Company issued 33,506,911 shares of common stock pursuant to the conversion of $34,500 principal of the Asher Note. The conversion rate was $.00103.

 

During the three months ended March 31, 2012, the Company issued 110,666,666 shares of common stock pursuant to the conversion of $16,600 principal of the Asher Note. The conversion rate was $. 0.00015.

 

 

Stock Options

 

On December 3, 2007, the Board of Directors adopted the 2007 Stock Incentive Plan (the “Plan”) of CelLynx, Inc. All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards under the Plan. The Plan is administered by the Board. The Board has authority to grant awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. Subject to certain adjustments, awards may be made under the Plan for up to 25,000,000 shares of common stock of the Company. The Board shall establish the exercise price at the time each option is granted. In July 2008, the Company amended the Plan to increase the number of awards available under the Plan from 25,000,000 to 75,000,000.

 

On December 14, 2010, the Company granted 1,000,000 options to the Chairman of the Board of Directors and 1,000,000 options to the acting Chief Financial Officer. The options vest immediately, are convertible at $0.02 per share and expire on the December 14, 2015. The Company calculated the value of the options using the Black-Scholes model using the following assumptions:

 

 

20

 

 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

March 31, 2012

 

Expected life (years) 5.00
Risk-free interest rate 2.08
Expected volatility 145%
Expected dividend yield 0%

 

The weighted average grant-date fair value was $0.015 per option.

 

The Company fair value of $30,324 was recorded as an expense in the accompanying consolidated statement of operations.

 

The following table summarizes information with respect to options outstanding under the Plan and outside the Plan.

 

 

Number of

Shares

 

Weighted Average

Exercise Price

Weighted Average

Contractual Life

 

Aggregate

Intrinsic Value

Outstanding at September. 30, 2011 21,775,412   $                 0.111        
Granted -                     -        
Cancelled -                     -        
Exercised                
Outstanding at March 31, 2012 21,775,412   $                 0.111 2.75   $                 0
Exercisable at March 31, 2012 19,041,494   $                 0.107 2.68   $                 0

 

The number and weighted average exercise prices of all options outstanding as of March 31, 2012, are as follows:

 

Options outstanding  
                     
                  Weighted  
            Weighted     Average  
      Number     Average     Remaining  
Range of     Outstanding as of     Exercise     Contractual Life  
Exercise Price     March 31, 2012     Price     (Years)  
                     
$ 0.014 - 0.05       3,415,170       0.018       3.93  
$ 0.06 - 0.100       4,506,184       0.074       1.95  
$ 0.110 - 0.150       9,555,457       0.125       2.73  
$ 0.160 - 0.200       2,556,961       0.172       3.46  
$ 0.210 - 0.260       1,741,640       0.217       2.57  
          21,775,412                  

 


 

 

21


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

 

The number and weighted average exercise prices of all options exercisable as of March 31, 2012, are as follows:

 

Options Exercisable  
                     
                  Weighted  
            Weighted     Average  
      Number     Average     Remaining  
Range of     Outstanding as of     Exercise     Contractual Life  
Exercise Price     March 31, 2012     Price     (Years)  
                     
$ 0.014 - 0.05       3,415,170       0.018       3.93  
$ 0.06 - 0.100       4,007,338       0.074       0.96  
$ 0.110 - 0.150       8,566,279       0.126       2.86  
$ 0.160 - 0.200       1,792,667       0.177       2.68  
$ 0.210 - 0.260       1,260,040       0.217       2.43  
          19,041,494                  

 

 

 

Warrants

 

The following table summarizes the warrant activity:

 

  Number of
Warrants

Weighted Average

Exercise Price

Average Remaining
Contractual Life
Aggregate
Intrinsic Value
Outstanding at September 30, 2011 36,114,757 $              0.12    
Granted    
Exercised    
Expired    
Outstanding at March 31, 2012 36,114,757 $              0.27 1.18 $              0
Exercisable at March 31, 2012w 36,114,757 $              0.27 1.18 $              0

 

 

Note 10 Commitments and Contingencies

 

Operating Leases

 

On March 5, 2010, the Company entered into an amended agreement to a lease dated February 21, 2008. The lease was renewed for two years and requires monthly payments of $1,962 commencing April 1, 2010 with a 4% increase of the base rent beginning on month thirteen, terminating on March 31, 2012, for office space for its El Dorado Hills, California, office.

22


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

On December 31, 2009, the Company entered into an amended agreement to a lease dated August 26, 2008. The lease was renewed for 25 months and requires monthly payments of $3,710 commencing on May 1, 2010 with a $106 increase of the base rent beginning on the fourteenth month, terminating on April 30, 2012, for office space for its Mission Viejo, California, office.

 

During the current fiscal year those lease facilities were vacated by the Company.

 

The Company recorded rent expense of $11,830 and $11,830 for three months and six months ended March 31, 2012 and $39,080 and $70,577 for three and six months ended March 31, 2011, respectively.

 

Litigation

 

As earlier reported in the Company’s Form 10K and 10Q, the Company was a Defendant in an action brought by Dophinshire L.P. regarding its office space in Mission Viejo, CA. That action has since been dismissed. Dolphinshire L.P., a California limited partnership v. CelLynx Group, Inc., a Nevada corporation and Does 1-10, Superior Court of California, Orange County, Case No. 00521213. On November 8, 2011, plaintiff brought suit against the Company for unlawful detainer of offices located at 25910 Acero, Suite 370, Mission Viejo, CA 92691 pursuant to a lease agreement, seeking an unspecified amount of damages not to exceed $25,000. The Company has engaged in settlement negotiations with the plaintiff and management expected to settle before eviction. The Company has since, by agreement, vacated the leased premises and continues to negotiate a payout of past due rent and penalties and has moved the general office to 4014 Calle Isabella, San Clemente, CA 92672.

 

A similar action for past due rent has been filed as to its facility in El Dorado Hills, CA. CSS Properties, v. CelLynx Group, Inc., and Does 1-10, Superior Court of California, El Dorado County, Case No. PCU 2 0 110442. On October 12, 2010, plaintiff brought suit against the Company for unlawful detainer of offices located at 5047 Robert J Matthews Parkway, El Dorado Hills, CA 95762 pursuant to a lease agreement, seeking an unspecified amount of damages not to exceed $25,000. The Company has engaged in settlement negotiations with the plaintiff and management expected to settle before eviction. The Company has since, by agreement, vacated the leased premises and continues to negotiate a payout of past due rent and penalties.

 

As had been previously reported in the Company’s Form 10K and 10Q, the Company was facing claims for back wages by some of its former employees. Some of those claims have been partially paid and others were expected to be paid in the normal course of business or were to be otherwise defended. Those claims have now been incorporated into California Labor Commission awards in favor of those former employees. Those awards total approximately $312,986.45 depending on interest charges. The first award has been converted into a judgment in the amount of $118,224. Management had negotiated a monthly payment plan amounting to $10,000 per month commencing on February 1, 2012 and every month thereafter until the judgment has been satisfied. This agreement is now in the process of revision.

 

The Company has received a Cease Trading Order from the British Columbia Securities Commission (BCSC) alleging that the Company is in violation of the British Colombia reporting requirements. The BCSC has assumed that since two the Company's Directors are domiciled in BC that the company is controlled out of BC and therefore subject to its reporting requirements. The Company denies that premise and is appealing the issuance of the CTO.

 

Note 11 Subsequent Events

 

The Company has evaluated all subsequent events that occurred up to the time of the Company's issuance of its financial statements.

 

On May 7, 2012, the Company amended the Articles of Incorporation by increasing the authorized shares to a total of 2,000,000,000.

23


 

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward Looking Statements

 

Certain statements in the Management’s Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward -looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

As used in this Form 10-Q, unless the context requires otherwise, “we” or “us” or the “Company” or “CelLynx” means CelLynx Group, Inc., and our subsidiary.

 

Plan of Operations

 

We are a producer of the next generation of cellular network extenders for the small office, home office and vehicle/marine markets. This next generation product line, CelLynx 5BARz™, uses our patent-pending technology to create a single-piece, plug’n play unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones and other cellular devices being used indoors or in vehicles.

 

Our first product, The Road Warrior, has passed FCC Certification, and in July 2009, we commenced the ordering of production units.

 

While we have completed the first prototype of the @Home units which will eventually deliver 70 decibel (dB) of gain in a Single Band PCS environment providing up to 2500 square feet of indoor coverage, the completion of its development and its commercialization has been delayed so that resources can be allocated to the Road Warrior and its existing orders. As a result, the Road Warrior orders presently consisting of 16,000 units will be ready for shipment pending approval of COFETEL, The Mexican Federal Telecommunications Commission on the following schedule: The first 4,000 of those units will be shipped within 90 days of approval and the remaining 12,000 units will be shipped within 180 days thereafter.

 

Our @Home unit measures 6.5 x 7.5 x 2.5 inches, weighs approximately one pound and does not require the installation of antennas or cables in order to function. Most small office home office (“SOHO”) cellular network extenders currently on the market require a receiving tower or antenna, usually placed in an attic or on a rooftop, and a transmitting tower or antenna to be placed at least 35 feet from the other antenna with each connected to the amplifier by cable. Our patent pending technology is designed to eliminate the need to distance the receiving and transmitting towers, allowing the two towers to be placed directly inside the amplifier, resulting in a more affordable, one-piece unit sometimes referred to as ‘plug ’n play,’ i.e., requiring no installation other than plugging the unit into a power source. In order to optimize marketability, we are developing an improved model which is expected to operate in a dual band, PCS and Cellular, environment delivering 65 dB of gain, thereby allowing for coverage of 2,500 to 3,000 square feet. This dual-band unit would work with all current wireless carriers except Nextel, which operates on its own frequency. The PCS network is generally used by the older carriers such as AT&T at 850MHz, while the newer carriers such as T-Mobile operate on the cellular network at 1900 MHz. Management believes that all of the critical functions required for this dual-band unit have been identified and that we have the capability to complete development leading to commercialization.

 

Our Road Warrior product line is being manufactured by contract manufacturers located in the Philippines, with whom CelLynx has established manufacturing and supply chain relationships. These manufacturers allow us to capitalize on the full advantages of multiple manufacturing locations with a trained and experienced technical work force, state-of-the-art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics. The marketing and sales functions will be handled by 5BARz International, Inc., in accordance with the M&D Agreement discussed below, incorporating a multi-channel strategy that includes distribution partners, wireless service providers, retail outlets and international joint ventures.

 

 24


 

 
 

 

Agreement; 5BARz International, Inc.

 

On December 31, 2010, the Company consented to the transfer of three agreements that they had entered into with

Dollardex Group Corp. to 5BARz International, Inc. as follows;

 

(i)               An “Amended and Restated Master Global Marketing and Distribution Agreement.”

(ii)              An “Asset Purchase Agreement”

(iii)             A “Revolving line of credit agreement and security agreement”.

These agreements with provide for the exclusive global marketing and distribution of the 5BARz line of products and

related accessories and a 50% ownership interest in the 5BARz intellectual property. In addition, a revolving line

of credit facility has been made available to Cellynx.

 

On March 29, 2012, the Company and 5BARz International, Inc. entered into an agreement which provided several amendments to the agreement referred to above. As a result of those amendments, the following arrangements between the Companies were established;

 

(iv)             5BARz International, Inc. acquired a 60% interest in the patents and trademarks held by Cellynx Group Inc., referred to as the “5BARz™” technology. That interest in the technology was acquired for proceeds comprised of 9,000,000 shares of the common stock of the Company, valued at the date of acquisition at $0.20 per share or $1,800,000 USD. The acquisition agreement also clarified that the ownership interest in the intellectual property does represent that proportionate interest in income earned from the intellectual property.

 

(v)             5BARz International, Inc. agreed to make available to Cellynx Group, Inc. a revolving line of credit facility in the amount of $2.2 million dollars of which $636,606 has been advanced as of March 31, 2012. This revolving line of credit facility expires on October 5, 2013. Under the terms of the line of credit facility, the Company has the right to convert amounts due under the facility into common stock of Cellynx, at a conversion rate which is the lesser of a fixed conversion rate of $0.00015 per share or a variable rate which is calculated at 25% of the average lowest three closing bid prices of the Cellynx Group, Inc. common stock for a period which is ten (10) days prior to the date of conversion. At March 31, 2012, the Company converted $78,500 of the amount due under the revolving line of credit facility for 350,000,000 shares of the capital stock of Cellynx Group, Inc. As a result, Cellynx became a consolidated subsidiary of 5Barz International Inc., on March 29, 2012.

 

 

25


 
 

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

(vi)             Pursuant to the Master Global Marketing and Distribution agreement between 5Barz International Inc. and Cellynx Group, Inc., 5BARz International, Inc. was obligated to pay to Cellynx Group, Inc. a royalty fee amounting to 50% of the Company’s Net Earnings. That fee would be paid on a quarterly basis, payable in cash or immediately available funds and shall be due and payable not later than 45 days following the end of each calendar quarter of the year. The asset acquisition agreement amendment referred to herein specified that the royalties would be paid in relation to the ownership of the intellectual property.

 

Convertible Promissory Notes

 

Convertible Promissory Note Issued February 22, 2011

 

On February 22, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated entity (the “Holder”), in connection with the purchase by the Holder of a Convertible Promissory Note (the “February 2011 Note”).

 

Pursuant to the February 2012 Note, the Holder loaned to the Company the principal amount of $40,000. The February 2011 Note bears interest at a rate of 8%, and is due on November 17, 2011. The Holder may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. The Company recorded a $23,492 debt discount related to the beneficial conversion feature. The loan was fully repaid on November 17, 2011.

 

Convertible Promissory Note Issued March 10, 2011

 

On March 10, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated entity (the “Holder”), in connection with the purchase by the Holder of a Convertible Promissory Note (the “March 2011 Note”).

 

Pursuant to the March 2011 Note, the Holder loaned to the Company the principal amount of $42,500. The March 2011 Note bears interest at a rate of 8%, and was due on December 7, 2011. Subject to a revision of that note agreement dated January 6, 2012, the Holder may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined as the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. The Holder is prohibited under the March 2011 Note from converting amounts if principal and interest that would result in The Holder receiving shares, which when combined with shares of the Company’s common stock held by The Holder, would result in The Holder holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the March 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144. The loan was repaid in full via conversion by April 12, 2012.

 

 

 

 

 

26


 
 

 

Convertible Promissory Note Issued May 18, 2011

 

 

On May 18, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated holder, in connection with the purchase by Holder of a Convertible Promissory Note in the principle amount of $32,500. The May 2011 Note bears interest at a rate of 8%, and was due on February 23, 2012. Pursuant to the terms of a January 6, 2012 amendment agreement between the Company and holder, the note may be converted into shares of the Company’s common stock, with the number of shares issuable determined to be the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Asher is prohibited under the Asher May 2011 Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the Asher May 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144. At the date of issuance of this report, $1,000 plus interest remains outstanding on this note.

 

Convertible Promissory Note Issued January 10, 2012

 

On January 10, 2012, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unrelated holder, in connection with the purchase by Holder of a Convertible Promissory Note in the principle amount of $15,000. The January 2012 note bears interest at a rate of 8%, and is due on October 10, 2012. Pursuant to the terms of a January 6, 2012 amendment agreement between the Company and holder, the note may be converted into shares of the Company’s common stock, with the number of shares issuable determined to be the lesser of a fixed rate of $0.00015 per share or a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 25% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Asher is prohibited under the Asher May 2011 Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then- outstanding common stock. No registration rights were granted in connection with the purchase of the Asher May 2011 Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

 

Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Note, the Company may not incur additional debt without Holder’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed holder; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Note.

 

The Company has the right to pre-pay the Note during the first 120 days following the date of the Note by paying to Holder 150% of the then- outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

 

Pursuant to the SPA, the Company agreed to grant to Asher a right of first refusal for any subsequent transactions occurring during the twelve month period following the Closing Date, which was defined as May 23, 2011. The right of first refusal does not apply to any transactions in excess of $250,000.

 

 

27


 
 

At March 31, 2012 the Company had $13,400 due under the terms of the promissory notes described above.

 

At May 15, 2012 the Company had a principle balance of $16,000 due under the terms of the promissory notes described above, of which $1,000 was current due and $15,000 may be repaid by July 10, 2012.

 

Dwayne Yaretz Agreement

 

On April 5, 2011, CelLynx Group, Inc., (“the Company”), finalized a transaction pursuant to a Securities Purchase Agreement (the “SPA”) with one of its directors, Dwayne Yaretz, in connection with the purchase by Mr. Yaretz of a Convertible Promissory Note (the “Note”).

 

Pursuant to the Note, Mr. Yaretz loaned to the Company the principal amount of $50,000. The Note bears interest at a rate of 8%, and due on January 5, 2012 (the “Due Date”). Mr. Yaretz may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price (the “Conversion Price”) which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion. Mr. Yaretz is prohibited under the Note from converting amounts if principal and interest that would result in Mr. Yaretz receiving shares, which when combined with shares of the Company’s common stock held by Mr. Yaretz, would result in Mr. Yaretz holding more than 4.99% of the Company’s then-outstanding common stock. No registration rights were granted in connection with the purchase of the Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

 

Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Note, the Company may not incur additional debt without Mr. Yaretz’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed Mr. Yaretz; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Note.

 

The Company has the right to pre-pay the Note during the first 120 days following the date of the Note by paying to Mr. Yaretz 150% of the then outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

 

Pursuant to the SPA, the Company agreed to grant to Mr. Yaretz a right of first refusal for any subsequent transactions occurring during the twelve month period following the Closing Date, which was defined as April 5, 2011. The right of first refusal does not apply to any transactions in excess of $250,000.

 

By way of background, the SPA and the Note were on the same terms as those recently invested in by Asher Enterprises, Inc. a Delaware corporation (“Asher”), as disclosed in a Current Report filed with the Commission on March 17, 2011.

 

In the above transaction, the Note was issued to an accredited investor pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and rules promulgated pursuant thereto. Additionally, the underlying shares of common stock, if any, issued upon conversion of the Note will be issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and rules promulgated pursuant thereto. All certificates for such shares will contain the appropriate legends restricting their transferability absent registration or applicable exemption. The accredited investor received information concerning the Company and had the ability to ask questions about the Company.

 

 

28


 
 

These descriptions of the SPA and the Note are not complete, and are qualified in their entirety by reference to the SPA and the Note themselves, which are included in this filing as exhibits and which are incorporated herein by this reference.

 

The status of this transaction remains the same as of the date of this filing.

 

 

Results of Operations

 

Comparison of the three months ended March 31, 2012 and 2011

 

  Three months ended March 31,      

 

 

  2012     2011   $ Change % Change  
REVENUE $     $          
COST OF REVENUE                  
GROSS PROFIT                  
OPERATING EXPENSES   218,109     473,913   (255,804) 53.97 %
NON OPERATING INCOME (EXPENSES)   (4,185,990)     (108,615)   4,077,375 3,754 %
NET LOSS $ (4,404,099) (582,528)   3,521,571 604 %
                   

 

 

Revenue and Cost of Revenue

During the three months ended March 31, 2012 and 2011, we generated $0 and $0, respectively. Cost of revenues was $0 and $0, respectively, resulting in a gross profit of $0.

 

Operating Expenses

 

Total operating expenses incurred for the three and six months ended March 31, 2012 were $218,109 and $373,238, respectively, compared to $473,913 and $1,129,684 for the three and six months ended March 31, 2011, which decreased by $255,804 and $756,446. The decrease was due to a significant decrease in salaries and wages.

 

Non Operating Income and Expenses

 

Total non-operating income (expenses) incurred for the three months ended March 31, 2012 was $4,185,970 compared to $108,615 for the three months ended March 31, 2011 which was an increase of $4,077,375 or 3,754%. The difference was due to the increased in Beneficial Conversion Factor for the three months ended March 31, 2011.

29


 
 

Liquidity and Capital Resources

 

Financial Condition

 

As of March 31, 2012, we had cash of $3,246, and we had a working capital deficit of $2,270,931 compared to cash of $178 and a working capital deficit of $2,376,878 as of December 31, 2011, which was a decrease on working capital deficit of $105,947 or 4.4%.

 

During the six months ended March 31, 2012, cash used in operating activities was $99,038. During the period, the Company incurred a loss arising from the mark to market valuation of convertible features that were provided to the holders of convertible debt an January 6, 2012 as well as the convertible features provide to 5BARz International Inc. under the terms of the revolving line of credit agreement as amended on March 29, 2012. That expense item of $5.5 million was not a cash loss. In addition the gain on sale of intangibles were not a cash transaction as the sale proceeds were paid to Cellynx in share capital.

 

The Company received $102,106 from financing activities for the six months ended March 31, 2012, comprised of advances from 5BARz International Inc. of $87,106 and proceeds from other convertible debt in the amount of $15,000.

 

Going Concern

 

In our Annual Report on Form 10-K for the year ended September 30, 2011, our independent auditors included an explanatory paragraph in its report relating to our consolidated financial statements for the years ended September 30, 2011 and 2010, which states that we have incurred negative cash flows from operations since inception, and expect to incur additional losses in the future and have a substantial accumulated deficit. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our ability to expand operations and generate additional revenue and our ability to obtain additional funding will determine our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We have prepared our consolidated financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2012, we had an accumulated deficit of $21,197,656, negative cash flows from operations since inception, and expect to incur additional losses in the future as we continue to develop and grow our business. We have funded our losses primarily through the sale of common stock and warrants in private placements; borrowings from related parties and other investors; and revenue provided by the sales of our 5Barz unit. The further development of our business will require capital. Our operating expenses will consume a material amount of our cash resources.

 

Our current cash levels, together with the cash flows we generate from operating activities, are not sufficient to enable us to execute our business strategy. We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. In the event that we cannot obtain additional funds on a timely basis or our operations do not generate sufficient cash flow, we may be forced to curtail or cease our activities, which would likely result in the loss to investors of all or a substantial portion of their investment. We are actively seeking to raise additional capital through the sale of shares of our capital stock to institutional investors and through strategic investments. If management deems necessary, we might also seek additional loans from related parties. However, there can be no assurance that we will be able to consummate any of these transactions, or that these transactions will be consummated on a timely basis or on terms favorable to us.

 

30


 
 

Off-Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

 

Intangible Assets

 

Acquired patents, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.

 

Capitalized costs for patents are amortized on a straight-line basis over the remaining twenty-year legal life of each patent after the costs have been incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively. The licensing right is amortized on a straight-line basis over a period of 10 years.

 

Impairment or Disposal of Long- lived Assets

 

The Company applies the provisions of ASC Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long -lived assets. ASC 360 requires impairment losses to be recorded on long -lived assets used in operations when indicators of impairment are

 

31


 
 

present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long -lived assets. Loss on long -lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of March 31, 2012 and September 30, 2011, there was no significant impairment of its long -lived assets.

 

Revenue Recognition

 

The Company's revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition.” Revenue is recognized at the date of shipment to customers, and when the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.

 

The revenue earned on the sale of intangibles is realized at the time that proceeds are paid in full for that intellectual property comprised of shares in the capital stock of 5Barz International, Inc.

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred relate to underpayment of income tax are classified as income tax expense in the period incurred. No significant penalties or interest relating to income taxes have been incurred during the three months ended March 31, 2012 and 2011.

 

Stock Based Compensation

 

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.” ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Regulations under the Securities Exchange Act of 1934 (the "Exchange Act") require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer ("CEO") and a consultant providing services commonly provided by a Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of the Evaluation Date, our CEO and CFO believe that:

 

(i)our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

 

(ii)disclosure controls and procedures were effective as of the date of the evaluation

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

 

33


 

 
 

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As earlier reported in the Company’s Form 10K and 10Q, the Company was a Defendant in an action brought by Dophinshire L.P. regarding its office space in Mission Viejo, CA. That action has since been dismissed. However, a new action is in process and is currently being negotiated. Management expects to settle this action.

 

A similar action for past due rent has been filed as to its facility in El Dorado Hills, CA. This action too is being negotiated and Management expects to settle this action as well.

 

As had been previously reported in the Company’s Form 10K and 10Q, the Company was facing claims for back wages by some of its former employees. Some of those claims have been partially paid and others were expected to be paid in the normal course of business or were to be otherwise defended. Those claims have now been incorporated into California Labor Commission awards in favor of those former employees. Those awards total approximately $312,986.45 depending on interest charges. The first award has been converted into a judgment in the amount of $118,224. Management had negotiated a monthly payment plan amounting to $10,000 per month commencing on February 1, 2012 and every month thereafter until the judgment has been satisfied. This agreement is now in the process of revision.

 

The Company has received a Cease Trading Order from the British Columbia Securities Commission (BCSC) alleging that the Company is in violation of the British Colombia reporting requirements. The BCSC has assumed that since two the Company's Directors are domiciled in BC that the company is controlled out of BC and therefore subject to its reporting requirements. The Company denies that premise and is appealing the issuance of the CTO.

 

With the exception of the actions reported above, we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.

 

(REMOVED AND RESERVED)

 

ITEM 5. OTHER INFORMATION

 

None

 

34


 
 

 

ITEM 6. EXHIBITS

EXHIBIT INDEX

 

Exhibit

Number

 

Description

31.1 Section 302 Certification by the Corporation’s Chief Executive Officer *
31.2 Section 302 Certification by the Corporation’s Chief Financial Officer *
32.1 Section 906 Certification by the Corporation’s Chief Executive Officer *
32.2 Section 906 Certification by the Corporation’s Chief Financial Officer *

 

Exhibit

Number

 

Description

101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Label Linkbase Document
101.LAB XBRL Presentation Linkbase Document
101.PRE XBRL Definition Linkbase Document

 

35


 

 
 

 

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.

 

CELLYNX GROUP, INC.

(Registrant)

 

Date: May 21, 2012

By: /s/ Norman Collins

Norman Collins

Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

36


 

PINX:CYNX CelLynx Group Inc Quarterly Report 10-Q Filling

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