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EXCEL - IDEA: XBRL DOCUMENT - CelLynx Group, Inc.Financial_Report.xls
EX-31.1 - SECTION 302 CERTIFICATION BY THE CORPORATION'S CHIEF EXECUTIVE OFFICER - CelLynx Group, Inc.exhibit_31-1.htm
EX-32.1 - SECTION 906 CERTIFICATION BY THE CORPORATION'S CHIEF EXECUTIVE OFFICER - CelLynx Group, Inc.exhibit_32-1.htm
EX-32.2 - SECTION 906 CERTIFICATION BY THE CORPORATION'S CHIEF FINANCIAL OFFICER - CelLynx Group, Inc.exhibit_32-2.htm
EX-31.2 - SECTION 302 CERTIFICATION BY THE CORPORATION'S CHIEF FINANCIAL OFFICER - CelLynx Group, Inc.exhibit_31-2.htm

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 DECEMBER 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 ¨     Accelerated filer ¨
  Non-accelerated filer ¨     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 1,457,498,001 shares outstanding as of February 14, 2013.

 

 

 

 
 

 

 

 

 

 

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 26
     
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) 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 36
     

 

 

 

 

 

 

 

 

 

2


 

 
 

 

Part I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CELLYNX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2012 AND SEPTEMBER 30, 2012
                 
       
        December 31,   September 30,
        2012    2012 
        (unaudited)      
ASSETS
CURRENT ASSETS:            
   Cash     $ 14    $ (284)
 TOTAL CURRENT ASSETS     14      (284)
                 
 EQUIPMENT, net     982      1,359 
 INTANGIBLE ASSETS, net     48,473      48,737 
 TOTAL ASSETS    $ 49,469    $ 49,812 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
 CURRENT LIABILITIES:            
   Accounts payable and accrued expenses   $ 1,999,475    $ 1,890,212 
   Accrued interest     143,788      69,346 
   Accrued derivative liabilities     367,530      1,487,568 
   Line of credit net of debt discount of $63,775     598,333      580,473 
   Convertible promissory notes, net of debt discount of $2,855 and $18,868 as of December 31, 2012 and September 30, 2012, respectively     406,501      390,488 
 TOTAL CURRENT LIABILITIES     3,515,627      4,418,087 
                 
 TOTAL LIABILITIES     3,515,627      4,418,087 
                 
 COMMITMENTS AND CONTINGENCIES (Note 10)            
                 
 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, 2,000,000,000 shares authorized; 1,457,498,001 shares issued and outstanding as of December  31, 2012 and September 30, 2012     1,457,498      1,457,498 
  Additional paid-in capital       13,170,581      13,170,581 
  Accumulated deficit     (16,294,237)     (17,196,354)
  Treasury stock     (459,000)     (450,000)
  Accumulated other comprehensive income     (1,341,000)     (1,350,000)
  Total stockholders’ deficit     $ (3,466,158)   $ (4,368,275)
  TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT    $ 49,469    $ 49,812 
                 
 The accompanying notes are an integral part of these consolidated financial statements.

 

3


 

 
 

 

 

CELLYNX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

 

 

      Three Months Ended  
      December 31, 2012  

December 31,

2011

 
      (unaudited)   (unaudited)  
               
Net Revenue $   $  
Cost of Revenue        
Gross profit        
Operating expenses            
  Research and development   39,000       
  General and administrative   138,312      155,504   
       Total operating expenses   177,312      155,504   
               
Loss from operations $ (177,312)   $ (155,504)  
               
Non-operating income (expense):            
  Interest and financing costs, net   (40,609)     (40,465)  
  Change in fair value of accrued beneficial conversion liability,   1,119,991      26,016   
  Change in fair value of accrued warrant and options liability   47      2,718   
  Gain on sale of intangible assets       2,950   
       Total non-operating income (expense), net   1,079,429      (8,781)  
               
Net income (loss) $ 902,116    $ (164,285)  
               
               
Weighted average shares outstanding            
  Basic   1,457,498,081    212,006,020   
  Diluted   2,000,000,000    212,006,020   
Loss per share :            
  Basic $ 0.0006    $ (0.0011)  
  Diluted   0.0005      (0.0011)  
               
                 

 

4


 

 
 

 

 

CELLYNX GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

 

 

   Three Months Ended
   December 31, 2012  December31,
2011
   (unaudited)  (unaudited)
       
Net Income  $902,116   $(164,285)
Other comprehensive income (loss)          
  Net unrealized gain on investment   9,000    —   
Comprehensive income (loss)  $911,116    (164,285)
           

 

 

 

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 THREE MONTHS ENDED DECEMBER 31, 2012 AND 2011

 

 

 

                   
          2012   2011
            (unaudited)     (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:          
  Net loss   $ 902,116    $ (164,285)  
  Adjustments to reconcile net loss to net cash used in operating activities:            
    Depreciation and amortization     641      839   
    Stock issued for services         39,809   
    Change in fair value of accrued beneficial conversion liability     (1,119,991)     (26,016)  
    Change in fair value of accrued warrant and option liability     (47)     (2,718)  
    Amortization of debt discount     40,609      25,379   
  Changes in operating assets and liabilities:            
    Change in other assets         20,090   
    Change in accounts payable, accrued expenses and interest     170,573      101,213   
  Net  cash used in operating activities     (6,099)     (5,689)  
               
CASH FLOWS FROM INVESTING ACTIVITIES:            
    Investment in intangible assets         (3,436)  
  Net cash used in investing activities         (3,436)  
                   
CASH FLOWS FROM FINANCING ACTIVITIES:            
    Proceeds from line of credit     6,397      9,114   
  Net cash provided by financing activities     6,397      9,114   
                   
NET INCREASE (DECREASE) IN CASH     298      (11)  
                   
CASH, BEGINNING OF PERIOD     (284)     178   
                   
CASH, END OF PERIOD    $ 14    $ 167   
                   
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
  Cash paid for interest   $   $ -   
  Cash paid for income taxes   $   $ -   
                   
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING:            
  Conversion of convertible note payable to common stock   $   $ 34,500   

 

 

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

 

 

 

 

 

 

6


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(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 months ended December 31, 2012, are not necessarily indicative of the results to be expected for the full year ending September 30, 2013.

 

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.

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

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.

  

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.

 

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 to 2,000,000,000.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

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 months ended December 31, 2012, the Company incurred a net loss from operations of $177,312. As of December 31, 2012, the Company had an accumulated deficit of $16,294,237. Further, as of December 31, 2012 and September 30, 2012, the Company had negative working capital of $3,515,613 and $4,418,370, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(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 December 31, 2012, 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.

 

 

 

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(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 December 31, 2012 and September 30, 2012, there was no significant impairment of its long -lived assets.

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

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.

 

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 & option liability is carried at fair value totaling $8,281 and $8,364, as of December 31, 2012 and September 30, 2012, respectively. The Company’s conversion option liability is carried at fair value totaling $359,015 and $1,479,204 as of December 31, 2012 and September 30, 2012, 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:

 

December 31, 2012
Annual dividend yield
Expected life (years) 0.55 – 5.0
Risk-free interest rate 0.45% - 0.81%
Expected volatility 183%

 

 

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(Unaudited)

 

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

 

   

Fair Value

As of

December 31, 2012

Fair Value Measurements at

December 31, 2012

Using Fair Value Hierarchy

 
Liabilities   Level 1   Level 2 Level 3  
Warrant & option  liability $ 8,515 $ 8,515    
Conversion option liability $ 359,015 $ 359,015    
Total accrued derivative liabilities $ 367,530 $ 367,530    

 

 

For the three months ended December 31, 2012, the Company recognized a gain (loss) of $47 for the change in the fair value of accrued option and warrant liability and the Company recognized a gain of $1,119,990 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.

 

 

 

 

 

 

 

 

 

 

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

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 months ended December 31, 2012 and 2011.

 

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.

 

 

 

 

 

 

 

 

 

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CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

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 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.

15


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

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 December 31, 2012 and September 30, 2012:

 

   December 31,
2012
  September 30,
2012
Office furniture and equipment  $9,879   $9,879 
Computer equipment   8,930    8,930 
   $18,809   $18,809 
Accumulated depreciation   (17,827)   (17,450)
Equipment, net  $982   $1,359 

 

 

The Company recorded depreciation expense of $377 for the three ended December 31, 2012 and 2011.

 

 

 

 

 

 

 

 

 

16


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(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. On March 29, 2012, the Company sold a 60% interest in their patents to 5BARz International Inc. The balances below reflect the residual balance at cost.

 

Intangible assets consist of the following:

 

   December 31, 2012  September 30,  2012
Patents  $46,862   $46,862 
Trademarks   4,995    4,995 
Licensing rights   4,214    4,214 
    56,071    56,071 
Accumulated Amortization   (7,597)   (7,334)
Intangibles, net  $48,474   $48,737 
           

 

Amortization on patents 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. Amortization expense of $264

was charged on intangible assets for the three months ended December 31, 2012 and 2011.

 

Note 5 Convertible Promissory Notes

 

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, Mr. Dwayne Yaretz (“Holder”), in connection with the purchase of a Convertible Promissory Note (the Note).

 

Pursuant to the Note, the Company received the principal amount of $50,000. The Note bears interest at a rate of 8%, and was due on January 5, 2012. 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. Holder is prohibited under the Note from converting amounts if principal and interest that would result in Holder receiving shares, which when combined with shares of the Company’s common stock held, would result in Holder owning 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.

 

17


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

 

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 had the right to pre-pay the Note during the first 180 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.

 

The Company determined that the Note contained a beneficial conversion feature because the conversion rate is a factor less than the share price. The note and accrued interest of $56,970 remain outstanding at December 31, 2012.

 

Convertible Promissory Note Issued January 5, 2012 – Former Related Party

 

On January 5, 2012, the Company entered into a Securities Purchase Agreement (the “SPA”) with its former CFO, in the name of Pickard & Green, CPA’s (“Holder”), in connection with the purchase of a Convertible Promissory Note (the Note).

 

Pursuant to the Note, the Company received the principal amount of $50,000, by way of settlement of certain debts owed by the Company to Holder. The Note bears interest at a rate of 8%, and is due on July 3, 2012. 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 to be the amount obtained by dividing the amount to be converted by the conversion price which is the lesser of $0.0013 per share or 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. Holder is prohibited under the Note from converting amounts if principal and interest that would result in Holder receiving shares, which when combined with shares of the Company’s common stock held, would result in Holder owning 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 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.

 

 

18


 
 

 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

 

 

The Company has the right to pre-pay the Note during the first 180 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.

 

The Company determined that the Note contained a beneficial conversion feature because the conversion rate is a factor less than the share price. At December 31, 2012, $53,956 of principle plus accrued interest remains outstanding.

 

Convertible Promissory Note Issued May 24, 2012

 

On May 24, 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 $37,500. The May 2012 note bears interest at a rate of 8%, and is due on February 7, 2013. Pursuant to the terms of the note, the principle and accrued interest may be converted into shares of the Company’s common stock, with the number of shares issuable calculated at a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 51% 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 note from converting amounts if principal and interest that would result in Holder receiving shares, which when combined with shares of the Company’s common stock held at the time, would result in Holder owning more than 4.99% of the Company’s then- outstanding common stock.

 

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 had the right to pre-pay the Note during the first 180 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.

 

The Company determined that the Note contained a beneficial conversion feature because the conversion rate is a factor less than the share price. At December 31, 2012, $39,316 of principle plus accrued interest remains outstanding.

 

 

 

19


 
 

 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

 

 Convertible Promissory Note Issued September 12, 2012

 

On September 12, 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 $12,500. The September 2012 note bears interest at a rate of 8%, and is due on June 12, 2013. Pursuant to the terms of the note, the principle and accrued interest may be converted into shares of the Company’s common stock, with the number of shares issuable calculated at a variable rate calculated by dividing the amount to be converted by the conversion price which is equal to 51% 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 note from converting amounts if principal and interest that would result in Holder receiving shares, which when combined with shares of the Company’s common stock held at the time, would result in Holder owning more than 4.99% of the Company’s then- outstanding common stock.

 

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 had the right to pre-pay the Note during the first 180 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.

 

 The Company determined that the Note contained a beneficial conversion feature because the conversion rate is a factor less than the share price. At December 31, 2012, $12,801 of principle plus accrued interest remains outstanding.

 

Convertible promissory notes

 

The Company recorded interest expense relating to each of the four convertible promissory notes referred to above of $3,025 and $5,973 for the three months ended December 31, 2012 and 2011, respectively.

 

The Company amortized $40,609 and $25,379 of the debt discount for the three months ended December 31, 2012 and 2011, respectively.

 

 

 

 

20


 
 

 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

 

 

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

 

  

   December 31,  September 30,
   2012  2012
           
Issued August 2006, through December 31, 2012  $597,356   $597,356 
Less: Amounts repaid   (15,000)   (15,000)
Less amounts converted   (173,000)   (170,000)
Less: Debt discount   (2,855)   (21,868)
Convertible promissory notes, net  $406,501   $390,488 


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 $106 and $106 for the three months ended December 31, 2012, and 2011, respectively.

 

 

 

 

21


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

Note 7 - Consulting Agreement

  

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 warrants expired December 1, 2012.

 

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 which 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 $710,776 has been advanced as of June 30, 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.

 

22


 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

Note 9 – Stockholder’s Equity

 

 

During the three months ended December 31, 2012, the Company issued Nil (0) shares and for 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 convertible notes payable.

 

 

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.

  

The Company calculated a fair value of options and warrants outstanding of $8,281 utilizing the Black Scholes model and recorded as a liability in the accompanying consolidated balance sheet.

 

The following table summarizes information with respect to warrants outstanding;

 

 

 

Number of

Shares

 

Weighted Average

Exercise Price

Weighted Average

Contractual Life

 

Aggregate

Intrinsic Value

Outstanding at September. 30, 2012 32,454,757   $ 0.27 .88       
Granted                
Expired 28,524,757     -        
Exercised                
Outstanding at December 31, 2012 3,930,000   $  0.08 .67   $  0
Exercisable at December 31, 2012 3,930,000   $ 0.08 .67   $  0

 

 

 

 

 

23


 

 
 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

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

 

  

Options outstanding  
                     
                  Weighted  
            Weighted     Average  
      Number     Average     Remaining  
Range of     Outstanding as of     Exercise     Contractual Life  
Exercise Price     December 31, 2011     Price     (Years)  
                     
$ 0.0008       6,400,000       0.0008       2.45  
$ 0.013        580,000       0.013       2.17  
          6,980,000                  

 

 

 

 

Note 10 – Commitments and Contingencies 

 

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, 2011, 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.

 

24


 
 

 

 

 

 

CELLYNX GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2012

(Unaudited)

 

 

Note 10 – Commitments and Contingencies 

 

Litigation - Continued

 

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.

 

On October 12, 2012 the Depository Trust Company placed a Deposit Transfer Restriction, known as a “DTC Chill” on the securities of the Company. The Company has disputed that restriction and is in the process of responding to enquiries from the Depository Trust Company, and is in the process of compiling information and documentation related to those enquiries.

 

Note 11 – Subsequent Events

 

The Company has no reportable subsequent events required to be reported in the accompanying financial statements.

 

 

 

 

 

 

25


 
 

 

 

 

 

 

 

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

 

CelLynx Group, Inc. (“CelLynx” or the “Company”) is in the business of the development of a line of cellular network infrastructure devices for use in the small office, home and mobile market places.  This next generation cellular network extender, branded as 5BARz™ incorporates a patented technology to create a highly engineered, 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. The technology is held under joint ownership with the Company’s parent, 5BARz International Inc. (“5BARz”), and is being commercialized by 5BARz.

 

The Company’s initial product, the Road Warrior, won the prestigious 2010 innovation of the year award at CES (the largest consumer electronics show in the world) for achievements in product design and engineering. The Road Warrior, has passed FCC Certification, and has been produced in limited quantities to date by a contract manufacturer in the Philippines.

 

The market opportunity for the 5BARz technology represents some 5.4 billion cell phone subscribers worldwide serviced by 900 cellular network operators. These cellular network operators represent the Company’s primary point of entry to the Global marketplace.

 

 

26


 
 

 

 

The CelLynx business opportunity represents a significant step forward in the deployment of micro-cell technology, referred to as a ‘cellular network infrastructure device” in the industry. A step that management believes will significantly improve the functionality of cellular networks by managing cellular signal within the vicinity of the user.  This technology facilitates cellular usage in areas where structures, create “cellular shadows” or weak spots within metropolitan areas, and highly congested areas such as freeways, and also serves to amplify cellular signal as users move away from cellular towers in urban areas.  The market potential of the technology is far reaching.

 

Corporate Background

CelLynx Group, Inc. (“CelLynx” or the “Company”) was originally incorporated under the laws of the State of Minnesota on April 1, 1998, under the name “Cool Can Technologies, Inc.” Effective July 12, 2004, the Company merged (the “Merger”) with NorPac Technologies, Inc., its wholly owned subsidiary (“Nevada Sub”), for the purpose of reincorporating the Company in Nevada. The Merger was completed effective July 12, 2004, with the Nevada Sub as the surviving corporation. Upon completion of the Merger, the Company’s name was changed to NorPac Technologies, Inc. (“NorPac”). On July 24, 2008, the Company closed another transaction with shareholders of CelLynx, Inc., a California corporation, in which it issued shares to the CelLynx Inc. shareholders in exchange for all of the outstanding shares of CelLynx Inc. Through this transaction, the Company acquired the cellular network extender business as its wholly owned subsidiary. This transaction has been considered a "reverse take-over" for accounting purposes.

 

Effective August 5, 2008, the Company changed its name to CelLynx Group, Inc. by merging another wholly owned subsidiary into the Company and assuming the subsidiary’s name. On October 27, 2008, the Company’s Board of Directors approved a change of the Company’s fiscal year to September 30, 2008.

 

On March 27, 2012 5BARz International Inc. acquired a 60% controlling interest in CelLynx Group, Inc.

 

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 will 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.

 

 

 

 

 

27


 
 

 

 

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 $710,776 has been advanced as of June 30, 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.

 

As a result of the above agreements, 5BARz International Inc. and CelLynx Group, Inc. are working together to commercialize the 5BARz technology.

 

Change in Management

Mr. Norm Collins Sr., who has served as a Director on the CelLynx Group, Inc., Board of Directors since July 2008, and as the Chairman of the Board since July 2010, has recently passed away. As a result, the Company held a Board of Directors meeting on October 13, 2012 to formally end Mr. Collins term of service with the Company. At that date, in addition to his Directorship, Mr. Collins acted as the interim Chief Executive Officer for the Company as well as the Chief Financial Officer. Further, Mr. Collins served on a committee of the Board of Directors, to search for a new CEO for the Company. On October 17, 2012, the Company issued a press release announcing the fact that Mr. Norm Collins Sr. had passed away, and the loss of Mr. Collins as a valued director and officer of CelLynx Group, Inc.

 

On October 13, 2012 the Board of Directors of CelLynx Group, Inc. appointed Mr. Dwayne Yaretz as the Chief Executive Officer as well as the Chief Financial Officer for the Company. Mr. Yaretz has been a Director of CelLynx Group, Inc. since December 19, 2009.

 

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Results of Operations

 

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

 

 

Three months ended December 31,
      2012     2011  $ Change  % Change
REVENUE      $        $  
COST OF REVENUE                    
GROSS PROFIT                    
OPERATING EXPENSES
   Research and development
        39,000         —     39,000  100%
   General and administrative        138,312         155,504   (17,192)  (11)%
NON OPERATING INCOME (EXPENSE)        1,079,429         (8,781)  1,088,210  1,232%
NET INCOME (LOSS)       $902,116        $(164,285)  1,066,401  649.1%
                     

 

 

Operating Expenses

 

Total operating expenses incurred for the three months ended December 31, 2012 and 2011 were $177,312 and $155,504, respectively. This represents an increase of $21,808 . The increase was due to an increase in consulting fees for research and development costs associated with the development of an updated prototype for the next generation of the 5BARz network extender, in the amount of $39,000. In addition that increase in costs was offset by a decrease in general and administrative costs of $17,192, comprised of a reduction in consulting fees from the loss of Mr. Collins as the CEO of the Company.

 

Non Operating Income and Expenses

 

Total non-operating income (expenses) incurred for the three months ended December 31, 2012 and 2011 was $1,079,429 and (8,781), respectively; which was an increase of $1,088,210. The differences arise from the variations in the Beneficial Conversion Factor calculations related to the Company’s convertible debt position. The Company’s share price fell to a balance of $0.0002 by the end of the current period reducing the intrinsic value of the Companies convertible securities during the period, resulting in a decrease in the valuation of the beneficial conversion liability calculation.

 

 

 

 

 

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Liquidity and Capital Resources

 

Financial Condition

 

As of December 31, 2012, the Company had cash resources of $14, and a working capital deficit of $3,515,613 compared to cash of $(254) and a working capital deficit of $4,418,370 as of September 30, 2012, which was a increase in working capital of $902,757. This increase is comprised of the accrued derivative liability change in the amount of $1,120,038 which reflects the intrinsic value of convertible debt issued by the Company.

 

During the three months ended December 31, 2012, cash used in operating activities was $6,099 compared to $5,689 in the corresponding period of 2011. This increase in cash burn rate reflects the limited cash resources and operating levels in CelLynx Group, Inc. during the period.

 

The Company received $6,397 and $9,114 from financing activities for the three months ended December 31, 2012 and 2011 respectively, comprised of advances from 5BARz International Inc.

 

Going Concern

 

In our Annual Report on Form 10-K for the year ended September 30, 2012, our independent auditors included an explanatory paragraph in its report relating to our consolidated financial statements for the years ended September 30, 2012 and 2011, 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 December 31, 2012, we had an accumulated deficit of $16,294,237, 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.

 

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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.

 

 

 

 

 

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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 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 December 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 December 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 December 31, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

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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 Dolphinshire 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.

 

On October 12, 2012 the Depository Trust Company placed a Deposit Transfer Restriction, known as a “DTC Chill” on the securities of the Company. The Company has disputed that restriction and is in the process of responding to enquiries from the Depository Trust Company, and is in the process of compiling information and documentation related to those enquiries.

 

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.

 

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ITEM 4.

 

(REMOVED AND RESERVED)

 

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

 

 

 

 

 

 

 

 

 

 

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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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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: February 19, 2013  
  By: /s/ Dwayne Yaretz
              Dwayne Yaretz
              Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37