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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. 26 -------------------------------------------------------------------------------- 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. 27 -------------------------------------------------------------------------------- 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. 28 -------------------------------------------------------------------------------- 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. 29 -------------------------------------------------------------------------------- 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. 30 -------------------------------------------------------------------------------- |