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CELLYNX GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis ("MD&A") is intended to help
the reader understand the results of operations and financial condition of
CelLynx Group, Inc. and is provided as a supplement to, and should be read in
conjunction with, our financial statements and the accompanying Notes to
Financial Statements.
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-K, unless the context requires otherwise, "we" or "us" or the "Company"
or "CelLynx" means CelLynx Group, Inc., and our subsidiary.
Overview and Outlook
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.
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.
The Company will generate revenue through license revenues from 5BARz
International Inc. Pursuant to the March 27, 2012 agreements with 5BARz
International Inc., more fully disclosed in section I herein, a royalty interest
equal to 50% of the net income earned from the sale of product incorporating the
5BARz technology will be payable. That royalty payment will be further divided
on the basis of the ownership of the technology such that CelLynx Group Inc.
will be entitled to 40% of that royalty stream as CelLynx Group Inc. holds a 40%
interest in the underlying technology.
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CelLynx Group Inc. will obtain required funding through the line of credit
facility with 5BARz outlined herein. To date, 5BARz International Inc. has
converted proceeds under the line of credit facility sufficient to obtain and
maintain a 60% equity interest in CelLynx Group, Inc. It is the expectation of
the Companies that this relationship will be maintained.
The Company has experienced significant downward pressure on its stock price as
the result of conversions and sales of stock as disclosed herein, through
convertible promissory note facilities. Once funded, the Company will not have a
need to access further dilutive arrangements and existing convertible notes are
expected to be settled.
Industry trends
The wireless industry is growing at unprecedented rates and is becoming an
integral part of peoples lifestyles worldwide. Management of the Company
maintain the position that once completed the 5BARz product line will play a
very important role, in improving the user experience for wireless products by
improving signal quality in the immediate vicinity of the user. The Company is
working with cellular network operators to achieve an integration of their
products once completed.
Economic Conditions, Challenges and Risks
The Company has undergone an extended period through which economic conditions
have made it very difficult to source working capital for emerging technology
Companies. Management is cautiously optimistic that era is beginning to change
and that the ground work completed in the past years will yield near term rapid
developments once sufficient operating capital is available. However the Company
recognizes that it is participating in a very competitive environment and the
challenges facing the Company in expanding into geographically diverse markets
present a significant risk profile to the Company in achieving its business
objectives.
On October 17, 2012, the Company announced that Mr. Norm Collins the CEO,
Chairman, Director and sole Management had recently passed away and that Mr.
Dwayne Yaretz would assume the role of Chief Executive Officer and Chief
Financial Officer. Mr. Dwayne Yaretz and Mr. Malcolm Burke will remain
Directors of the Company.
New Management and the Board are working diligently to review historical matters
with the goal to ameliorate the Company's financial matters and strategies,
taking into account the current business environment. As well, the Company will
be working, on a collaborative basis, with 5BARz to best exploit the potential
of our technology.
Results of Operations
Comparison of years ended September 30, 2012 and 2011
Year ended September 30,
2012 2011 $ Change % Change
REVENUE $ - $ $ 0.0%
COST OF REVENUE - 0.0%
GROSS PROFIT - 0.0%
OPERATING EXPENSES 623,985 1,595,975 (971,990 ) -60.9%
NON OPERATING INCOME 56,903 278,266 (221,363 ) -79.5%
NET LOSS $ (567,082 ) $ (1,317,709 ) $ (750,627) -56.9%
Revenue and Cost of Revenue
During the year ended September 30, 2012 and 2011, the Company generated no
revenue.
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Operating Expenses
Total operating expenses incurred for the year ended September 30, 2012 were
$623,985 compared to $1,595,975 for the year ended September 30, 2011, which
decreased by $971,990. The significant decrease was due to a significant
decrease in salaries, wages and consulting fees as well as facilities costs as
both the engineering facilities and corporate offices were closed.
Non-Operating Income and Expenses
Total non-operating income generated for the year ended September 30, 2012 was
$56,903 compared to $278,266 for the year ended September 30, 2011 which was a
decrease of $221,363. The difference was due to the increase in the beneficial
conversion liability arising from the conversion of the 5BARz debt to a
derivative security, offset by the gain on the sale of intangible assets of
$1,485,513 during the period.
Liquidity and Capital Resources
Financial Condition
As of September 30, 2012, we had cash of ($284) and the Company had a working
capital deficit of $4,418,370 compared to cash of $178 and a working capital
deficit of $2,376,878 as of September 30, 2011. The decrease in working capital
deficit is due the elimination of an amount due from 5BARz International Inc. in
the amount of $1,200,651, which was paid in shares due to the amendment of the
agreement between the parties. In addition, the accrued derivative liability
increased some $1,385,282, due in the most part to the convertible debt issued
to 5BArz International Inc.
During the year ended September 30, 2012, cash used in operating activities was
$310,913. Cash used in operating activities consisted of a net loss of $567,082
adjusted for non-cash gain on the sale of intangible assets of $1,485,513 and
the change in fair value of accrued beneficial conversion liability of
$1,190,295 and increase in accounts payable of $285,558
Cash provided by financing activities was $310,451 for the year ended September
30, 2012, compared to $386,038 for the year ended September 30, 2011. During the
year ended September 30, 2012, the Company received $65,000 from the proceeds of
convertible debentures and $276,033 from the line of credit. During the year
ended September 30, 2011, the Company received $165,000 from convertible notes,
and $221,038 from the line of credit. We have financed our operations from
convertible notes and from our line of credit with 5BARz International Inc.
We anticipate raising an additional $1.4 million during the next six months
through the Line of Credit Agreement, although there is no guarantee that such
funds will be available. There is no assurance that we will be able to raise the
entire amount.
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 September
30, 2012, we had an accumulated deficit of $17,196,353, 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.
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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.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include
future estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our financial position, results of operations, and cash flows. he following
table summarizes our contractual obligations as of September 30, 2012, and the
effect these obligations are expected to have on our liquidity and cash flows in
future periods.
Less than
Contractual obligations Total 1 year 1-3 years
Notes Payable $ 390,488 $ 390,488 $ -
Line of credit 668,844 - 668,844
Off-Balance Sheet Arrangements
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.
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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 September 30, 2012 and 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.
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 years ended September 30, 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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