SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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| x | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2008
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 number: 000-27147
CELLYNX GROUP, INC.
(Exact name of registrant as specified in its charter)
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| Nevada | | 95-4705831 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
25910 Acero, Suite 370 Mission Viejo, California | | 92691 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number: (949) 305-5290
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
At March 31, 2008, the end of our second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $9,687,409 based on the closing price of $0.28 as reported on the Over-the-Counter Bulletin Board.
Number of shares of common stock outstanding as of December 19, 2008: 126,068,846.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 2008
| | | | | Page |
| PART I | | | | | |
| Item 1. | | Business | | 1 | |
| Item 1A. | | Risk Factors | | 11 | |
| Item 1B. | | Unresolved Staff Comments | | 11 | |
| Item 2. | | Properties | | 11 | |
| Item 3. | | Legal Proceedings | | 11 | |
| Item 4. | | Submission of Matters to a Vote of Security Holders | | 11 | |
| | | | | | |
| PART II | | | | | |
| Item 5. | | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | 12 | |
| Item 6. | | Selected Financial Data | | 13 | |
| Item 7. | | Management's Discussion and Analysis of Financial Condition and Results of Operations | | 13 | |
| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | 18 | |
| Item 8. | | Financial Statements and Supplementary Data | | 18 | |
| Item 9. | | Disagreements With Accountants on Accounting and Financial Disclosure | | 18 | |
| Item 9A. | | Controls and Procedures | | 18 | |
| Item 9B. | | Other Information | | 19 | |
| | | | | | |
| PART III | | | | | |
| Item 10. | | Directors, Executive Officers and Corporate Governance | | 20 | |
| Item 11. | | Executive Compensation | | 24 | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 27 | |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | 28 | |
| Item 14. | | Principal Accounting Fees and Services | | 29 | |
| | | | | | |
| PART IV | | | | | |
| Item 15. | | Exhibits, Financial Statement Schedules | | 30 | |
| Signatures | | | | | |
| | | | | | |
FORWARD LOOKING STATEMENTS AND CERTAIN TERMINOLOGY
Some of the statements made by us in this Annual Report on Form 10-K are forward-looking in nature, including but not limited to, statements relating to our future revenue, product development, demand, acceptance and market share, gross margins, levels of research and development, our management's plans and objectives for our current and future operations, and other statements that are not historical facts. Forward-looking statements include, but are not limited to, statements that are not historical facts, and statements including forms of the words "intend", "believe", "will", "may", "could", "expect", "anticipate", "plan", "possible", and similar terms. Actual results could differ materially from the results implied by the forward looking statements due to a variety of factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us include, but are not limited to:
| ● | our limited operational history; |
| ● | our ability to finance our activities and maintain our financial liquidity; |
| ● | our ability to attract and retain qualified, knowledgeable employees; |
| ● | the impact of general economic conditions on our business; |
| ● | the ability to bring our technology to commercialization; |
| ● | market acceptance of our products; |
● dependence on suppliers, third party manufacturers and other key vendors;
| ● | our ability to design and market new products successfully; |
| ● | our failure to acquire new customers in the future; |
| ● | continued enforceability of patent and trademark rights; |
| ● | deterioration of business and economic conditions in our markets; |
| ● | intensely competitive industry conditions with increasing price competition; and |
| ● | the rate of growth in the cellular amplifier market. |
In this document, the words "we," "our," "ours," "us," “CelLynx” and “Company” refer to CelLynx Group, Inc. and our subsidiary.
PART I
ITEM 1. BUSINESS
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 Nevada Sub as the surviving corporation. Upon completion of the Merger, the Company’s name was changed to NorPac Technologies, Inc. (“NorPac”).
The Company had originally been in the business of developing and marketing a proprietary technology for self-chilling beverage containers (the “Cool Can Technology”). However, the Company’s patents for the Cool Can Technology expired, and, as a result, the Company’s management decided to abandon the development of the Cool Can Technology and seek alternative business opportunities. To that end, as more fully explained below, on July 24, 2008, the Company closed a transaction with shareholders of CelLynx, Inc., a California corporation ("CelLynx-California"), by which it newly issued shares to the CelLynx-California shareholders in exchange for all outstanding shares of CelLynx-California. Through this transaction, the Company acquired a cellular amplifier 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, CelLynx Group, Inc., a Nevada corporation, into the Company and assuming the subsidiary’s name.
The Reverse Take-Over
On July 24, 2008, the Company closed a reverse take-over transaction by which it acquired a cellular amplifier business pursuant to a Share Exchange Agreement, as amended (the “Exchange Agreement”), by and among the Company, CelLynx, Inc., a California corporation (“CelLynx-California”), and twenty-three (23) CelLynx-California shareholders who, immediately prior to the closing of the transactions contemplated by the Exchange Agreement, collectively held 100% of CelLynx-California’s issued and outstanding shares of capital stock (the “CelLynx Owners”).
Prior to the closing, on July 23, 2008, the Company entered into a Regulation S Subscription Agreement (the “Subscription Agreement”) pursuant to which the Company agreed to issue and sell 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 (the “Investors”) for an aggregate purchase price of $1,575,000 (the “Financing”).
Prior to the closing, on July 22, 2008, CelLynx-California entered into a Master Global Marketing and Distribution Agreement (the “Distribution Agreement”) with Dollardex Group Corp., a company organized under the laws of Panama (“Dollardex”), whereby Dollardex shall act as CelLynx-California’s exclusive distributor of CelLynx-California’s products and related accessories in the following regions: Canada, South America, Europe, Middle East, China, India, Australia, Africa and South East Asia.
Immediately following the closing, on July 24, 2008, two of the new officers and directors, one of the new employees and one of the new non-officer directors of the Company entered into a Lock-Up Agreement (the “Lock-Up Agreement”) whereby they agreed not to transfer their Company shares for a period of 24 months following the closing of the reverse take-over transaction.
As a result of the closing of the reverse take-over transaction, the CelLynx Owners became our controlling shareholders, CelLynx-California became our wholly-owned subsidiary, and CelLynx-California’s business became our business.
The following is a brief description of the terms and conditions of the Exchange Agreement, Subscription Agreement and Distribution Agreement, and the transactions contemplated thereunder that are material to the Company.
Share Exchange
Under the Exchange Agreement, the Company was to acquire all of the equity interests of CelLynx-California in exchange for issuing restricted common stock to the CelLynx Owners in an aggregate amount equal to approximately 70% of the total issued and outstanding shares of common stock immediately after the closing of the reverse take-over, taking into account certain derivative shares held by certain CelLynx Owners and a CelLynx-California noteholder, but exclusive of the shares issued in the Financing and to certain CelLynx-California investors. As a result, the CelLynx Owners were to receive 77,970,956 shares of the Company’s common stock in exchange for 100% of CelLynx’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 and reserved in the Financing described below. Pursuant to the Exchange Agreement, in the event that there were 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 Owners 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 Owners would equal the total number of shares of common stock due to the CelLynx Owners under the Exchange Agreement. As a result, the Company issued to the CelLynx Owners 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 converts into common stock on a one-to-one ratio upon the authorized capital stock of the Company being increased to include not less than 150,000,000 shares of common stock.
On September 22, 2008, shareholders owning in the aggregate 26,441,554 shares of the Company’s common stock and 40,411,544 shares of the Company’s Series A Preferred Stock, outstanding as of September 10, 2008 (the “Record Date”), consented in writing to amend the Company’s articles of incorporation to increase the number of shares of the Company’s authorized common stock from 100,000,000 to 400,000,000. On October 8, 2008, the Company filed and mailed a Definitive Information Statement notifying its shareholders of this action and on November 7, 2008, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada to increase the number of authorized shares common stock of the Company from 100,000,000 to 400,000,000. As a result of filing the Amendment, the 45,516,034 shares of Series A Preferred Stock were automatically converted into 45,516,034 shares of common stock.
The Exchange Agreement also provided that all options, warrants and convertible notes to purchase or acquire shares of CelLynx-California be converted into options, warrants or convertible notes to purchase or acquire shares of the Company in the same proportion at which the CelLynx-California shares were converted into Company shares (the “Conversion Ratio”) under the Exchange Agreement. The exercise or conversion price for such options, warrants or convertible notes shall be the exercise price or conversion price of the CelLynx-California options, warrants or convertible notes divided by the Conversion Ratio. As a result, 750,000 CelLynx-California options with an exercise price of $0.018 per share were converted into 943,447 Company options with an exercise price of $0.014 per share; 375,000 CelLynx-California options with an exercise price of $0.02 per share were converted into 471,723 Company options with an exercise price of $0.016 per share; 23,394,133 CelLynx-California options with an exercise price of $0.09 per share were converted into 29,428,166 Company options at an exercise price of approximately $0.0715 per share; 18,330,544 CelLynx-California options with an exercise price of $0.099 per share were converted into 23,058,527 Company options with an exercise price of approximately $0.0787 per share, and, with the exception of the Palomar Note described below, $40,000 of CelLynx-California convertible notes with a conversion price of $0.01 per share were converted into $40,000 of Company convertible notes with a conversion price of approximately $0.0079 per share, and $20,000 of CelLynx-California convertible notes with a conversion price of $0.10 per share were converted into $20,000 of Company convertible notes with a conversion price of approximately $0.0795 per share. There were no CelLynx-California warrants issued and outstanding at the time of the closing of the Exchange Agreement.
In connection with the reverse take-over transaction, Palomar Ventures III, L.P. (“Palomar”), holder of a certain amended and restated convertible promissory note dated November 10, 2007 (the “Palomar Note”) executed by CelLynx-California in the principal amount of $262,356.16, is entitled to convert the Palomar Note into that number of shares of common stock of CelLynx-California such that immediately following the closing of the reverse take-over transaction, the Palomar Note would be convertible into 4.8% of the issued and outstanding common stock of the Company, exclusive of unvested options. As a result, the Palomar Note is convertible into 6,340,029 shares of the Company's common stock.
As a condition to closing the Exchange Agreement, John P. Thornton resigned as the Company’s President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer, and the following officers were appointed:
| | § | Daniel R. Ash, President, Chief Executive Officer, Chief Operating Officer and Secretary; |
| | § | Kevin Pickard, Chief Financial Officer and Treasurer, and |
| | § | Tareq Risheq, Chief Strategy Officer. |
In addition, Mr. Thornton agreed to resign as a director of the Company and Mr. Ash, Mr. Risheq, Norman W. Collins, and Robert J. Legendre were appointed directors of the Company. Mr. Ash’s appointment was effective immediately. The appointment of the other directors became effective on August 14, 2008, upon the Company’s compliance with the provisions of Section 14(f) of the Securities Act of 1933, as amended, and Rule 14(f)-1 thereunder.
On November 17, 2008, the Board of Directors of the Company appointed Mr. Legendre Executive Chairman of the Board to assist the Company’s Chief Executive Officer with strategy and execution of the Company’s manufacturing and supply chain operations, corporate development, capital markets and investor relations.
On December 12, 2008, Mr. Risheq resigned as the Company’s Chief Strategy Officer but remains a director.
$1,575,000 Financing
Under the Subscription Agreement, the Company issued 10,500,000 shares of its common stock and warrants (the “Warrants”) to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to the Investors for an aggregate purchase price of $1,575,000, or $0.15 per share, payable in cash and through the cancellation of debt. The proceeds from the Financing were allocated as follows: $100,000 to pay current obligations of NorPac, $225,000 as cancellation of current debt of NorPac and the remaining $1,250,000 for working capital. The Warrants expire on July 22, 2010 except in the event that at any time CelLynx has manufactured 25 or more of its mobile or home repeater units, then the Company may, at its option, accelerate the expiry of the Warrants by giving notice (“Notice of Acceleration”) to the holder thereof. If the holder does not exercise the Warrant within 30 days of the giving of the Notice of Acceleration, the Warrants will expire and the holder will have no further rights to acquire any shares of the Company under the Warrants.
Dollardex Distribution Agreement
Under the Distribution Agreement, Dollardex shall act as CelLynx’s exclusive distributor of the CelLynx’s 5BARz™ products and related accessories (the “Products”) in the following nine regions: Canada, South America, Europe, Middle East, China, India, Australia, Africa, and South East Asia (the “Territory”). The Distribution Agreement supersedes a prior Joint Venture Agreement, as amended, dated January 3, 2008 entered into between the parties.
In accordance with the terms of the Distribution Agreement, Dollardex will sell and distribute the Products directly to resellers (whether wholesales or retailers) or end users of the Products in the Territory as well as sell and distribute the Products to its agents in the Territory (the “Dealers”). The Dealers will be located and appointed by Dollardex but their appointment will be subject to CelLynx’s approval.
In accordance with the terms of the Distribution Agreement, CelLynx also granted Dollardex an exclusive non-transferrable license to use the tradenames, trademark, logos, and designations in or associated with the Products during the term of the Distribution Agreement in connection with the promotion and distribution of the Products in the Territory. The Distribution Agreement is otherwise subject to customary intellectual property protections, including, without limitation, all of the processes, know-how, and related material proprietary of CelLynx to manufacture the Products.
The term of the Distribution Agreement is perpetual though the Distribution Agreement may be terminated, in the event of, among other events, a material breach, upon a change of control of Dollardex, or by mutual agreement of the parties. The Distribution Agreement further provides that CelLynx shall have the exclusive right of first refusal to acquire Dollardex in the event that Dollardex considers such transaction. In addition, effective December 31, 2011, CelLynx shall have the option to acquire Dollardex in accordance with a certain appraisal method as further described in the Distribution Agreement.
In accordance with the terms of the Distribution Agreement, CelLynx and Dollardex, prior to Dollardex entering into a contractual relationship with a Dealer or commencing distribution of the Product in a given Territory, will develop a business plan for deployment of the distribution and marketing of the Products in the specific Territory. CelLynx will have approval rights over the business plan and Dollardex is obligated to conduct business and ensure that Dealers conduct their business substantially in accordance with the terms of the business plan.
As consideration for the rights granted under the Distribution Agreement, Dollardex will provide funding to the Company as follows: (i) $1,000,000 due and payable after the pilot production run for the first commercial Product is completed (the “Initial Roll Out”); (ii) $4,000,000 due and payable 90 days from the commencement of the Initial Roll Out; and (iii) $5,000,000 due and payable 180 days from the commencement of the Initial Roll Out. In addition, the parties agreed that the Company will sell products to Dollardex at 10% over cost of goods sold and Dollardex will pay the Company 50.1% of its Net Earning (as defined in the Distribution Agreement) on a quarterly basis with payments to be made within 45 days following the end of each quarter.
Lock-Up Agreement
Under the Lock-Up Agreement, Robert J. Legendre, Executive Chairman of the Board of Directors of the Company, Daniel R. Ash, Chief Executive Officer and a director of the Company, Tareq Risheq, Chief Strategy Officer and a director of the Company, and Anthony DeMarco, a senior employee of the Company, agreed not to transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in any other way encumber or dispose of, directly or indirectly and whether or not voluntarily, without express prior written consent of the Company, any common stock or options to purchase common stock of the Company for a period of 24 months.
The descriptions of the Exchange Agreement, Subscription Agreement, Warrants, Distribution Agreement, Palomar Note, and Lock-Up Agreement are qualified in their entirety by the contents of such agreements, which are attached to this report as Exhibits 2.1, 2.2, 2.3, 10.1, 10.2, 10.3, 10.4 and 10.8, respectively, and are incorporated herein by reference.
Recent Events
On October 27, 2008, the CelLynx’s Board of Directors approved a change of the Company’s fiscal year. CelLynx’s new fiscal year will begin on October 1 and end on September 30 of each year, and the change shall be applicable with the year ending September 30, 2008. The Company previously had a June 30 fiscal year end. The September 30 fiscal year end is also the fiscal year end of CelLynx-California.
On November 7, 2008, CelLynx filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada after shareholders approved a proposal to increase the number of authorized shares of common stock of the Company from 100,000,000 to 400,000,000 by written consent in lieu of a special meeting of shareholders. As a result of filing the Amendment, 45,516,034 shares of the Company’s Series A Preferred Stock automatically converted into 45,516,034 shares of the Company’s common stock. The Company now has 126,068,846 shares of common stock and no shares of Series A Preferred Stock issued and outstanding.
On November 17, 2008, CelLynx’s Board of Directors appointed Robert J. Legendre Executive Chairman of the Board to assist the Company’s Chief Executive Officer with strategy and execution of the Company’s manufacturing and supply chain operations, corporate development, capital markets and investor relations.
On November 24, 2008, CelLynx announced that it had successfully reached a key commercialization milestone with its manufacturing of the newly enhanced 5BARz™ Universal Unit. Initially envisioned as a plug-and-play mobile unit to be used in vehicles, this product has also proven highly effective for single-room coverage in a home or office. Accordingly, CelLynx plans to introduce the Universal Unit with a 110 volt power cord for indoor use, as well as with an accessory portable battery pack that can be used virtually anywhere a weak cellular signal exists. The Universal Unit contrasts with CelLynx’s 5BARz™ SOHO stationary table top unit which is designed to cover a 2,000 square foot home or office space.
Overview of CelLynx
CelLynx is developing and plans to produce and market a next generation of cell phone boosters (also known as repeaters or amplifiers) for the small office, home office (“SOHO”) and vehicle. This next generation product, CelLynx 5BARz™, is the first consumer-friendly, single-piece unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones being used indoors or in vehicles. CelLynx plans to develop its products for use in North America, Europe and Asia. The CelLynx product line is intended to be manufactured by contract manufacturers located in South East Asia. These manufacturers will allow CelLynx to capitalize on the full advantages of multiple manufacturing locations with a trained and experienced technical work force, state of the art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics. The marketing and sales functions will be handled in-house incorporating a multi-channel strategy that includes distribution partners, wireless service providers, retail outlets and international joint ventures.
The CelLynx Solution
Most SOHO cellular amplifiers currently on the market require a receiving tower or antenna, usually placed in an attic or on a rooftop, and a transmitting tower or antenna to be placed at least 35 feet from the other antenna with each connected to the amplifier by cable. CelLynx’s patent pending technology eliminates the need to distance the receiving and transmitting towers, allowing the two towers to be placed directly inside the booster, resulting in a more affordable, one piece unit sometimes referred to as ‘plug ‘n play’, i.e. requiring no installation other than plugging the unit into a power source.
| CelLynx has recently completed a prototype of the 5BARz SOHO Unit which delivers 45 decibel (dB) of gain in a Single Band PCS environment providing up to 1,500 square feet of indoor coverage. This unit measures 6.5 X 7.5 X 2.5 inches, weighs approximately one pound and does not require the installation of antennas or cables in order to function. In order to optimize marketability, CelLynx is developing an improved model which it expects to operate in a dual band, PCS and Cellular, environment delivering 65 dB of gain thereby allowing for coverage of 2,000 to 3,000 square feet. This dual band unit would work with all current wireless carriers in the U.S. and Canada except Nextel, which operates on its own frequency. The PCS network is generally used by the older carriers such as AT&T at 850MHz while the newer carriers such as T-Mobile operate on the Cellular network at 1900 MHz. Management is confident that all of the critical functions required for this dual band unit have been identified and that their engineering team has the capability to accomplish development leading to commercialization. | | |
We believe the CelLynx 5BARz product line, when commercialized, will also offer an advantage over other amplifiers such as the Femtocell architecture being developed by wireless service providers such as AT&T and Verizon. This Femtocell technology requires a small cellular base station which connects to the service provider’s network via a broadband such as DSL or cable. As such, Femtocell will be carrier specific and subject to a monthly subscription fee. CelLynx products, on the other hand, will be compatible with all wireless carriers in the U.S. and Canada (except Nextel), and will not require a broadband internet connection and will not entail a monthly service fee.
CelLynx has also developed a mobile 5BARz Universal Unit designed primarily for use in vehicles, or for single-room coverage in the home or office. In November, 2008, the Company announced it had manufactured 25 5BARz Universal Unit production samples, reaching a key commercialization milestone. The 5BARz Universal Unit is an adaptation of the 5BARz SOHO Unit described above. The unit will produce up to 45 dB of gain offering higher performance than the competition within the interior of a vehicle cabin or single room, while minimizing the signal degrading effects of cabling.
Initially envisioned as a plug ‘n play mobile unit to be used in vehicles with a 12 volt cigarette lighter power adapter, the 5BARz Universal Unit has also proven highly effective for single-room coverage in a home or office. Accordingly, the Company plans to introduce the 5BARz Universal Unit with a 110 volt power cord for indoor single-room use, as well as with an accessory portable battery pack that can be used virtually anywhere a weak signal exists. Using the 5BARz Universal Unit with Bluetooth® extends the effective coverage range to that of the Bluetooth® signal.
History and Development of CelLynx
CelLynx assembled a veteran engineering team with extensive cellular radio frequency (RF) experience headquartered in Sacramento, California. Within eight months, this team, with more than 80 years of combined experience in building RF products, developed working prototypes of an affordable consumer friendly single piece plug ‘n play booster with a minimum of 45dB of gain in both up and down paths. By late 2007, a pre-production prototype had been developed. At that time, CelLynx entered into a merger agreement with NorPac Technologies, Inc., a Nevada corporation trading on the Over The Counter Bulletin Board (OTC BB).
Since the closing of the reverse take-over July 24, 2008, CelLynx has continued the development of the 5BARz product line with both the 5BARz Universal Unit and 5BARz SOHO Unit on similar but separate development tracks. Concurrently, management is focusing on the manufacturing process and implementation of a sales and marketing plan to ensure the delivery of a quality low-cost product into the market place. In 2008, the Company has raised $2 million in equity capital, added executives to its board of directors and management team, and opened a new corporate headquarters in Mission Viejo, California while maintaining its R&D facility in El Dorado Hills, California.
The CelLynx 5BARz™ Product Line
5BARz SOHO Unit
The 5BARz SOHO Unit (small office, home office) is designed to eliminate cell phone weak spots in an area similar to the size of a single family home (2,000 to 3,000 square feet). Expected to retail at a competitive price of about $299, the 5BARz SOHO Unit is lightweight, aesthetically pleasing and designed to sit on a table near a window in the direction of the nearest cell tower. There is an indicator light to determine the best placement. This product requires no assembly: simply place the unit on a table and plug in the power chord. Product introduction is expected to occur in the first half of 2009 for the North American model. The European and Asian models are expected to be introduced in mid 2009.
5BARz Universal Unit
The 5BARz Universal Unit is designed to eliminate cell phone weak spots primarily while in a vehicle --moving or stationary -- as well as for single-room coverage in home, office or hotel.
For vehicles, simply place the unit on the dashboard and plug in the cigarette lighter power adapter/cradle for handheld cell phone use, or place the cell phone into the cradle for hands-free or Bluetooth® operation. This unit includes a Bluetooth® speaker phone with caller ID. CelLynx technology is designed to be superior to current vehicle solutions that require complex installation including roof top mounting of the antenna and, in some cases, a direct connection between the cell phone and the roof top antenna.
For single-room home, office, or hotel room coverage, simply place the unit near a window in the building, plug in the powerline and extend the antenna line for handheld cell phone operation. Place the cell phone in the cradle for best hands-free or Bluetooth® performance; use of a Bluetooth® device extends the effective coverage to that of the Bluetooth® range.
The Bluetooth® speaker phone with caller ID will offer the user the convenience of hands free phone conversation while driving, which is mandated by law in many areas including California, the nation’s largest automobile market. This product is also expected to retail at a competitive price of about $299 and to be introduced in North American in the first half of 2009. The European and Asian models are expected to be introduced mid-year 2009.
5BARz Product Launch
The 5BARz product launch schedule is coordinated with the marketing plan to first introduce the 5BARz SOHO Unit and 5BARz Universal Unit in the United States and Canada, operating at the Cellular and PCS frequencies (800/1900MHz). To allow for the marketing of the 5BARz products in Europe and Asia, new models will be subsequently launched that are designed to operate at the ETSI defined frequencies for GSM (900/1800MHz). The development requirement for the new models is primarily limited to the tuning of the U.S. based units for the change of frequency assignments, including replacement of frequency sensitive components such as band pass filters and antennas.
Industry Overview
Given the nature of the CelLynx product line, CelLynx is within the overall cellular telephone market as well as two sub-segments of that market, i.e. the in-building wireless systems marketplace and the vehicle amplifier marketplace.
The overall cellular telephone marketplace
Statistics from the 3GSM World Congress in Barcelona, Spain this year indicate that the number of worldwide mobile subscribers has surpassed the two billion mark and is predicted to reach three billion by the end of this year and four billion by 2011. Demand for cellular applications beyond voice, such as video, SMS, email and internet access have created a multi-billion dollar market for accessorial cellular network products such as CelLynx amplifiers. “Certain user segments have an almost insatiable appetite for connectivity and enhanced access to critical productivity applications while at work, at home and on the move,” according to Cliff Raskind, Strategy Analytics’ director of Wireless Strategies. These early adopters are already driving the market for products that will improve connectivity. Business users are twice as likely to carry a mobile phone as a notebook when away from their desk and are keenly interested in expanding email and internet access to the phone. This increase in bandwidth demand on the cellular network decreases signal strength and increases the need for CelLynx’s 5BARzÔ products.
In spite of the overall proliferation of cell phones, the carriers themselves are suffering from a high rate of customer defections sometimes referred to as churn. According to CITA, The Wireless Association, 40% of those customers switching networks are searching for a better signal. Considering that it costs the average carrier almost $400 to acquire a new subscriber, this global churn rate is the most serious problem affecting the cellular industry and CelLynx is directly addressing this problem through improving indoor and vehicle coverage while diminishing interference. It is also noteworthy that according to First Research, a D & B Company providing Industry Intelligence, 85% of the U.S. Wireless industry revenues are generated by the four major wireless companies, AT&T, Verizon, Sprint and T-Mobile. In the U.S. market, CelLynx will concentrate on adapting its products to the frequencies being used by those carriers, in particular the Dual Band 850/1900MHz. In the International market, CelLynx will focus on the Dual Band 900/1800MHz being used in Europe, Africa, Asia, Australia, New Zealand and most of South America.
CelLynx believes that all of the above market conditions indicate the potential for the success of the CelLynx 5BARz product line within the general cell phone market. The CelLynx products will seek to attract virtually all cell phone users including those who will come by the product through their cellular and Wi-MAX carriers, enterprise employers, government agencies or military service organizations.
The ‘In Building’ wireless systems marketplace
According to ABI Research, ‘In-building wireless systems, forecasted to exceed $15 billion in revenues in 2013, are a key enabler for delivering on the potential of cellular mobile services.’ Total Telecom, a leading communications periodical, reports that the role of the traditional office is no longer essential for day-to-day productivity as people increasingly work wherever the technology is available, generally at home if not in the office. The U.S. Department of Labor reports that over 20 million workers work at home and this does not include those who work out of a home office to conduct personal business or those who work at home to finish uncompleted tasks from their regular employment or use their home office for outside or after hours employment. More and more workers are adopting the trend toward work-life balance that results in them spending more time at home. These factors reinforce the need for improved signal in the Small Office Home Office. That need is expected to be met by the CelLynx 5BARz SOHO Unit.
The ‘In-Vehicle’ wireless systems marketplace
Three trends are noteworthy when discussing this sub sector: the growth of the number of motor vehicles on the road, the trend indicating the increased number of mobile workers and the trend toward legislation requiring hands free cell phone operation while driving.
According to Plunkett Research, Ltd. there were 806 million automobiles and light trucks on the roads of the world in 2007. That number is expected to increase to one billion by the year 2020. Not so surprisingly, predictions by Analyst House IDC indicate that the number of mobile workers is set to reach one billion by 2011. It is reasonable to assume that as the number of vehicles increase and the number of cell phones increase that the number of drivers using cell phones will also increase.
The National Council of Legislators estimate that 73 % of drivers use their cell phones in the car. That being the case, twenty states and dozens of municipalities have passed legislation requiring hands free cell phone usage while driving. Anticipating the continuation of this legislative trend, the CelLynx vehicular 5BARz Universal Unit is equipped with Bluetooth® for hands free, safe driving.
All of the above trends suggest the need for quality voice, data and media solutions in the mobile environment, and that the market for user friendly boosters such as the CelLynx 5BARz Universal Unit will follow these trends in both growth and application.
Sales and Marketing Strategy
In the US, CelLynx will deploy a multi-channel sales strategy seeking to include: Distribution Partners such as Celluphone, QDI or Advantage; Stocking Partners such as Tesco, Hutton & Brightstar; Cellular Carriers such as AT&T & Verizon; Corporate Accounts such as Accenture, IBM, Remax, Roadway & Hertz; Retail Outlets such as Radio Shack, Comp USA & Best Buy and Web based direct sales.
CelLynx will address the international market place through a Master Global Marketing, Distribution and Service Agreement between CelLynx and Dollardex Group Corp. (“DGC”). DGC intends to build an international marketing and distribution dealer network through its existing relationships in its licensed territories.
Operating and Manufacturing Strategy
CelLynx’s management and engineering teams have extensive experience working with top-tier off shore manufacturers. In fact, this collective team has successfully launched over 150 complex RF products in the past seven years using off shore manufacturers.
Given their expertise in this area they have become acutely aware of the advantages of partnering with a reputable contract manufacturer (CM). In this case, CelLynx will immediately leverage manufacturing practices at minimal cost. In fact, the team has identified several CM candidates in Southeast Asia. Once a CM is selected, CelLynx will immediately benefit from multiple manufacturing locations with a trained and experienced technical work force, state of the art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics.
An additional benefit to CelLynx is that the CM to be selected will have facilities in California which will produce the first 200 units in coordination with the Company’s engineering team. Once the team has approved these initial mass production units, the manufacturing plan will be developed for one of the CM’s Southeast Asia facilities. The 200 units scheduled for availability in the second quarter of 2009 will then be used for UL testing and product demonstrations.
Competition by Market Segment
The SOHO or residential wireless amplifier competitors; Most of the companies in this industry do not offer plug ‘n play single-unit solutions such as CelLynx. In fact, companies such as Wilson, Wi-Ex and CellAntenna, offer two-piece, ‘cable connected amplifier-to-antenna’ solutions requiring complex installation enabled only by tech savvy users or professional installers and at considerably higher prices than CelLynx.
The mobile vehicle market competitors; A few companies such as Digital Antenna and Richardson (Call Capture) are focused on the vehicle market and others such as Wilson are entering that market. Again, however, these vehicle solutions require complex installation including roof top mounting of antenna and, in some cases, a direct connection between the cell phone and the roof top antenna.
The Wireless enterprise solution providers as competitors; While the equipment manufacturers in the enterprise market such as Wilson, EMS Wireless and Radioframe Networks are attempting to enter the SOHO/residential market, their products are engineered for commercial enterprises requiring complex installation and as a result are expensive as compared to the CelLynx solution.
While each of the above competitors has solutions for certain market segments such as large buildings and warehouses, there is no dominant market leader in the SOHO and Vehicle segments of the Market. CelLynx believes that the total indoor and vehicle cell signal amplification market, now exceeding $300 million annually, could experience continued growth through the commercialization of products such as those being offered by CelLynx. As compared to the current products in the marketplace, CelLynx’s key sustainable competitive advantage is in its patent pending technology providing for compact, plug ‘n play, consumer friendly and affordable product lines. An overview of the competition is shown below.
Intellectual Property
CelLynx has trademark protection for the brand name “5BARz” and has applied for trademark protection for its sales slogan, “Turning Weak Spots into Sweet Spots.” CelLynx has the following patent applications pending:
The CelLynx Technology
The plug ‘n play aspects of the CelLynx cellular booster demanded complex algorithms and intuitive interfaces. Further complicating the challenge, the booster required a full duplex linear amplifier providing up to 45db of gain in both RX and TX paths and directional antennae with one inch of separation and 70db of isolation between them. It further required an active feed-forward cancellation in both the RX and TX links with real time correction and an active Automatic Gain Control for both links running in sync with the active feed-forward cancellation. Typically, a repeater simply boosts off the air cell phone signals so operating performance of a repeater can be related to the amount of boost reliability delivered by the repeater.
System gain is the measure of boost in decibels or dB. The major obstacles to reliable gain in a repeater are isolation and linearity. Linearity is a function of the amplification in the active portion of the repeater. Generally, the amplifiers in a repeater are designed to operate class A and the usable output power is de-rated from the maximum output power by 10dB or 90% below the saturated output of the amplifier. Isolation is the measure of separation of the input from the output of the repeater. If the separation is less than the system gain, the result will be similar to the feedback screech heard when a microphone is placed too close to a loud speaker. In practice, isolation has proven to be the Achilles heel of repeaters because unlike linearity, improvements in isolation have proven to be costly and unmanageable.
Traditionally the low tech approaches to achieving the isolation necessary for adequate repeater performance includes vertical and horizontal spacing of the two antennae, as with a speaker and microphone. In most cases this horizontal spacing requires approximately ten times the distance of vertical spacing. CelLynx has used a high tech approach to deal with the real world environment resulting in a superior product delivering high performance. Not only did the team meet the challenge, but in the process they developed a user friendly, affordable unit that is protected by five pending patents.
Government Regulation and Probability of Affecting Business
Our products are subject to Federal Communications Commission (FCC) and Underwriter Laboratories (UL) certifications. We will submit samples of our products to both agencies according to our product development process. We do not anticipate any difficulty in obtaining these certifications for our products.
In addition, because we plan to market and sell our products in other countries, importation and exportation regulations may impact our activities. A breach of these laws or regulations may result in the imposition of penalties or fines, suspension or revocation of licenses. We are not currently involved in any such judicial or administrative proceedings and believe that we are in compliance with all applicable regulations. Although it is impossible to predict with certainty the effect that additional importation and exportation requirements and other regulations may have on future earnings and operations, we are presently unaware of any future regulations that may have a material effect on our financial position, but cannot rule out the possibility.
Compliance with Environmental Laws
CelLynx is not required to comply with any environmental laws that are particular to the cellular amplifier industry. However, it is company policy to be as environmentally conscience in every aspect of our operations.
Employees
CelLynx has approximately seven (7) full-time employees. In addition, we have hired several consultants to assist with development of our cellular amplifier units. CelLynx is not affiliated with any union or collective bargaining agreement. There have been no adverse labor incidents or work stoppages in the history of CelLynx. Management believes that its relationship with our employees is good.
Corporate Information
CelLynx’s principal executive offices are located at 25910 Acero, Suite 370, Mission Viejo, California 92691. CelLynx’s main telephone number is (949) 305-5290, and our website address is www.CelLynx.com. Information provided on our website, however, is not part of this report and is not incorporated herein.
ITEM 1A. RISK FACTORS
CelLynx is a “smaller reporting company” as that term is defined in Rule 12b-2 of the Securities Exchange Act, and, accordingly, is not required to provide the information required by this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
CelLynx is a “smaller reporting company” as that term is defined in Rule 12b-2 of the Securities Exchange Act, and, accordingly, is not required to provide the information required by this item.
ITEM 2. PROPERTIES
We also lease office space in El Dorado Hills, California at 5047 Robert J Mathews Parkway, Suite 400, El Dorado Hills, California 95762. This facility is used for research, development and engineering. The facility is approximately 1,570 square feet. The lease has a one-year term that expires February 21, 2009 and the monthly base rent is $2,198.
We believe that the foregoing facilities are sufficient for our operational needs.
We are not currently involved in any material legal proceedings, nor have we been involved in any such proceedings that have had or may have a significant effect on the Company. We are not aware of any other material legal proceedings pending against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 22, 2008, shareholders owning in the aggregate 26,441,554 shares of the Company’s common stock and 40,411,544 shares of the Company’s Series A Preferred Stock, outstanding as of September 10, 2008 (the “Record Date”), consented in writing to amend the Company’s articles of incorporation to increase the number of shares of the Company’s authorized common stock from 100,000,000 to 400,000,000. On October 8, 2008, the Company filed and mailed a Definitive Information Statement notifying its shareholders of this action and on November 7, 2008, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada to increase the number of authorized shares common stock of the Company from 100,000,000 to 400,000,000. As a result of filing the Amendment, 45,516,034 shares of Series A Preferred Stock were automatically converted into 45,516,034 shares of common stock.
Market Information
The Company’s common stock, par value $0.001 per share, is traded on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "CYNX." The following table sets forth, for each quarter within the last two fiscal years, the reported high and low bid quotations for the Company’s common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.
| QUARTER | HIGH ($) | LOW ($) |
| 1st Quarter 2007 | $0.62 | $0.25 |
| 2nd Quarter 2007 | $0.65 | $0.28 |
| 3rd Quarter 2007 | $0.31 | $0.11 |
| 4th Quarter 2007 | $0.19 | $0.12 |
| 1st Quarter 2008 | $0.23 | $0.12 |
| 2nd Quarter 2008 | $0.35 | $0.18 |
| 3rd Quarter 2008 | $0.28 | $0.18 |
| 4th Quarter 2008 | $0.26 | $0.12 |
Holders
As of December 19, 2008, there were approximately 192 shareholders of record of our common stock based upon the shareholder list provided by our transfer agent. Our transfer agent is Signature Stock Transfer located at 2632 Coachlight Court, Plano, Texas 75093, and their telephone number is (972) 612-4120.
Dividends
We have not declared any dividends on our common stock since our inception. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law. There are no dividend restrictions that limit our ability to pay dividends on our common stock in our Articles of Incorporation or Bylaws. Chapter 78 of the Nevada Revised Statutes (the “NRS”), does provide certain limitations on our ability to declare dividends. Section 78.288 of Chapter 78 of the NRS prohibits us from declaring dividends where, after giving effect to the distribution of the dividend:
| (a) | we would not be able to pay our debts as they become due in the usual course of business; or |
| | |
| (b) | except as may be allowed by our Articles of Incorporation, our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders who may have preferential rights and whose preferential rights are superior to those receiving the distribution. |
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
Sales of Unregistered Securities
There were no unregistered sales of securities during the period covered by this report that were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Not applicable.
| Management’s Discussion and Analysis or Plan of Operation. |
FORWARD LOOKING STATEMENTS
The following discussion and analysis of our results of operations and financial condition for the years ended September 30, 2008 and 2007 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.
Overview
On July 24, 2008, we acquired all of the outstanding shares of CelLynx-California in exchange for the issuance by us of 32,454,922 restricted shares of our common stock to the CelLynx Owners, which represented approximately 40.3% of our-issued and outstanding common stock (including the shares issued in the Financing), and 45,516,034 restricted shares of our Preferred Stock, which automatically convert into 45,516,034 shares of our common stock upon the filing of a Certificate of Amendment to the our Articles of Incorporation increasing the number of authorized common stock to at least 150,000,000 shares. As a result of this reverse merger transaction, CelLynx-California became our wholly owned subsidiary, and then we acquired the business and operations of CelLynx-California.
Just prior to the closing of the share exchange transaction, on July 23, 2008, we raised $1,575,000 in a private placement by issuing 10,500,000 shares of our common stock and warrants to purchase 10,500,000 shares of our common stock at an exercise price of $0.20 per share to investors. See Item 1.01 of our Form 8-K filed on July 30, 2008 for additional details regarding this equity financing.
We have not generated any revenue since the commencement of our operations on October 11, 2005. We have financed our operations primarily through proceeds from the issuance of common stock. At this time, we believe that our current cash position will not be sufficient to meet our anticipated cash needs beyond January 2009. We will need to raise additional capital in order to remain operational beyond this point.
If we are unable to raise additional capital in January 2009, we will be required to severely reduce, or even cease, our operations.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 3 to our financial statements attached hereto as Exhibit 99.1, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:
Fair Value of Financial Instruments
On January 1, 2008, CelLynx adopted SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value 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 are defined as follows:
| | · | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) 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. |
We analyze all financial instruments with features of both liabilities and equity under SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”
Our share-based compensation liability is carried at fair value totaling $2,714,724, as of September 30, 2008. We used Level 2 inputs for its valuation methodology for the share-based compensation liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions. We recognized compensation expense of $2,625,106 for the year ended September 30, 2008.
Our accrued beneficial conversion liability is carried at fair value totaling $2,358,439, as of September 30, 2008. We used Level 2 inputs for its valuation methodology for the accrued beneficial conversion liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions. We recognized a $1,151,992 loss on the change in the accrued beneficial conversion liability for the year ended September 30, 2008.
The Company’s accrued warrant liability is carried at fair value totaling $603,993, as of September 30, 2008. The Company used Level 2 inputs for its valuation methodology for the accrued warrant liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions. The Company recognized a $127,688 gain on the change in the accrued warrant liability for the year ended September 30, 2008.
We did not identify any other assets and liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.
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.
Income Taxes
Income taxes are provided based upon the liability method of accounting in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred income taxes are recognized for the tax effect of temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. Pursuant to SFAS No. 109, we are required to compute deferred income tax assets for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
We adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”, during 2007. 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 affect on our financial statements.
Stock-Based Compensation
We account for our stock-based compensation for employees in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment, an Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123." We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees. We use the Black-Scholes option pricing model to value the options issued.
Shares Issued for Services
From time to time, we issued stock for services. Since we were a private company, we used the most recent stock issuance price to determine the value of the services performed.
Patents and Trademarks
Acquired patents 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 cost for pending 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.
Plan of Operations
Overview
We are an early stage developer of patent pending technology that allows for the production of the next generation of cell phone boosters (also known as repeaters or amplifiers) for the small office, home office (SOHO) and vehicle. This next generation product, CelLynx 5BARz, is a single piece unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones being used indoors or in vehicles. We have recently completed a prototype SOHO unit which delivers 45 decibel (dB) of gain in a Single Band PCS environment providing up to 1,500 square feet of indoor coverage. This unit measures 6.5 X 7.5 X 2.5 inches, weighs approximately one pound and does not require the installation of antennas or cables in order to function. Most SOHO cellular amplifiers currently on the market require a receiving tower or antenna, usually placed in an attic or on a rooftop, and a transmitting tower or antenna to be placed at least 35 feet from the other antenna with each connected to the amplifier by cable. Our patent pending technology eliminates the need to distance the receiving and transmitting towers, allowing the two towers to be placed directly inside the amplifier, resulting in a more affordable, one piece unit sometimes referred to as ‘plug ‘n play’, i.e. requiring no installation other than plugging the unit into a power source. In order to optimize marketability, we are developing an improved model which it expects to operate in a dual band, PCS and Cellular, environment delivering 65 dB of gain thereby allowing for coverage of 2,500 to 3,000 square feet. This dual band unit would work with all current wireless carriers except Nextel which operates on its own frequency. The PCS network is generally used by the older carriers such as AT&T at 850MHz while the newer carriers such as T-Mobile operate on the Cellular network at 1900 MHz. Management is confident that all of the critical functions required for this dual band unit have been identified and that their engineering team has the capability to accomplish development leading to commercialization.
We have also developed a mobile unit designed primarily for use in vehicles, or for single-room coverage in the home or office. The mobile is an adaptation of the SOHO Unit described above. The unit will produce up to 45 dB of gain offering higher performance than the competition within the interior of a vehicle cabin or single room, while minimizing the signal degrading effects of cabling. Initially envisioned as a plug ‘n play mobile unit to be used in vehicles with a 12 volt cigarette lighter power adapter, the 5BARz Universal Unit has also proven highly effective for single-room coverage in a home or office. Accordingly, we plan to introduce the 5BARz Universal Unit with a 110 volt power cord for indoor single-room use, as well as with an accessory portable battery pack that can be used virtually anywhere a weak signal exists. Using the 5BARz Universal Unit with Bluetooth® extends the effective coverage range to that of the Bluetooth® signal.
Our product line is expected to be manufactured by contract manufacturers located in South East Asia. These manufacturers allow us to capitalize on the full advantages of multiple manufacturing locations with a trained and experienced technical work force, state of the art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics. The marketing and sales functions will be handled in house incorporating a multi-channel strategy that includes distribution partners, wireless service providers, retail outlets and international joint ventures.
Material Impact of Known Events on Liquidity
There are no known events that are expected to have a material impact on our short-term or long-term liquidity.
Results of Operations
During the year ended September 30, 2008, we incurred $308,906 of research and development expenses compared to $81,218 incurred during the year ended September 30, 2007. Research and development expenses relate to our ongoing development and testing of our cell phone boosters. Our research and development costs were higher in 2008 compared to 2007 due to increase in personnel costs, consultant costs and materials. We expect our research and development costs to increase as we continue to grow and develop our products.
During the year ended September 30, 2008, we incurred $4,397,131 of general and administrative expenses, compared to $254,650 incurred during the year ended September 30, 2007. The increase is due to an increase in compensation expense related to options of $2,625,106, an increase in professional fees of approximately $750,000, and an increase in salaries of approximately $600,000
During the year ended September 30, 2008, we incurred $1,952,499 of non-operating expense, compared to $10,375 incurred during the year ended September 30, 2007. The increase is due to an increase in the fair value of the accrued beneficial conversion feature of $1,151,992, an increase in interest and financing costs of $921,845 and a gain on the change in the fair value of the accrued warrant liability of $127,688. The increase in interest and financing costs of $921,845 is related to the recording the fair value of the conversion feature for the convertible promissory notes.
Financial Condition
As of September 30, 2008, we had a working capital deficit of $5,301,132, which includes a share-based compensation liability of $2,714,724, an accrued beneficial conversion liability of $2,358,439 and an accrued warrant liability of $603,993. These liabilities will be reclassified to equity in the first quarter ending December 31, 2008 because as of November 7, 2008, we increased our authorized shares to 400,000,000 which will provide sufficient shares to cover the potential conversion of the options and the convertible promissory notes.
For the year ended September 30, 2008 and 2007 and for the period from October 11, 2005 (Date of Inception) to September 30, 2008, we incurred net losses of $6,658,536, $346,243 and $7,695,448, respectively. As of September 30, 2008 and 2007, we have a deficit accumulated during the development stage of $7,695,448 and $1,036,912, respectively.
The report of our independent registered public accounting firm for the fiscal year ended September 30, 2008 states that due to our net operating cash flow deficits and the deficit accumulated during the development stage, there is a substantial doubt about our ability to continue as a going concern.
Capital Resources
We have financed our operations primarily through proceeds from the issuance of common stock. From January to June 2008, we received approximately $750,000 in equity financing. In July 2008, we also received proceeds of $1,575,000 from a private placement financing transaction. We believe that our current cash, anticipated cash flow from operations, and net proceeds from the private placement financing will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for only the next month. We will need to raise additional capital in order to remain operational beyond this point. We believe we will raise an additional $2,100,000 by the Investors exercising the warrants they were issued in the private placement financing transaction referenced above; however, the Investors are under no obligation to exercise their warrants and there can be no assurances that they will exercise their warrants. We also believe we will receive an additional $10,000,000 from the Distribution Agreement we entered into with Dollardex, however, this funding is contingent on our meeting certain milestones and there can be no assurances that we will meet those milestones. If we receive these funds, we believe we will have sufficient capital to meet our needs for the foreseeable future. If these funds do not materialize, we will need to seek additional financing elsewhere. In addition, we may require additional cash due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue. To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or loans, issuance of common stock or a combination of the foregoing. We currently do not have any binding commitments for, or readily available sources of, additional financing. We cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to continue our operations, either now or in the future.
Contractual Obligations and Off-Balance Sheet Arrangements
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.
The following table summarizes our contractual obligations as of September 30, 2008, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
| | | | | | Less than | | | | |
| Contractual Obligation | | Total | | | 1 year | | | 1-3 years | |
| Note payable | | $ | 262,356 | | | $ | - | | | $ | 262,356 | |
| Stockholder notes | | | 60,000 | | | | 40,000 | | | | 20,000 | |
| Operating lease | | | 97,140 | | | | 69,156 | | | | 27,984 | |
| Total Contractual Obligations | | $ | 419,496 | | | $ | 109,156 | | | $ | 310,340 | |
| | | | | | | | | | | | | |
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
The financial statements are listed in the Index to Financial Statements on page F-1.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
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 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) our disclosure controls and procedures are not effective.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such terms are defined in Rules 13(a) – 15(f) promulgated under the Securities Exchange Act of 1934, as amended. The purpose of an internal control system is to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than consequential.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2008 and this assessment identified the following material weaknesses in the company’s internal control over financial reporting:
| o | A system of internal controls (including policies and procedures) has neither been designed nor implemented. |
| o | A formal, internal accounting system has not been implemented. |
| o | Appropriate technology systems to ensure reliability of information and record-keeping have not been acquired. |
| o | Segregation of duties in the handling of cash, cash receipts, and cash disbursements is not formalized. |
It is Management’s opinion that the above weaknesses exist due to the small size of operating staff and the current R&D phase of operations (e.g., no current sales activity).
In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Because of the material weaknesses described in the preceding paragraph, Management believes that, as of June 30, 2008, the Company’s internal control over financial reporting was not effective based on those criteria.
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Changes in Internal Controls
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 year ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our international control over financial reporting.
None.
Previous Executive Officers and Directors
Prior to the reverse take-over transaction that closed on July 24, 2008, John P. Thornton was the Chief Executive Officer, President, Chief Financial Officer, Secretary, Treasurer and sole Director of the Company.
| Name of Director | Age | Position |
| | | |
| John P. Thornton | 74 | Chief Executive Officer, Chief Financial Officer, President, Secretary, Treasurer and Director |
John P. Thornton – Chief Executive Officer, Chief Financial Officer, President, Secretary, Treasurer and Director
Effective April 18, 2006, John P. Thornton was appointed as a member of our board of directors. Mr. Thornton was appointed as our Chief Executive Officer, Chief Financial Officer, President, Secretary and Treasurer as of June 7, 2006. Mr. Thornton has been a self-employed businessman and consultant in the securities industry in the Vancouver, British Columbia area since 1986. During the past five years, Mr. Thornton served as a director of several U.S. and Canadian public companies listed on TSX Venture Exchange, Canadian Venture Exchange, and Over-the-Counter Bulletin Board (“OTCBB”) including:
| · | Bonaventure Enterprises Inc., TSX Venture Exchange; |
| · | Consolidated Odyssey Exploration Inc., TSX Venture Exchange; |
| · | Caesar’s Explorations Inc., Canadian Venture Exchange; |
| · | Goldnev Resources Inc., TSX Venture Exchange; |
| · | Knightsbridge Resources Inc., OTCBB; |
| · | Fairchild International Corp., OTCBB; and |
| · | Patch International Inc., OTCBB. |
In connection with the reverse take-over, Mr. Thornton resigned as our Chief Executive Officer, President, Chief Financial Officer, Secretary and Treasurer effective July 24, 2008, and as a director effective August 21, 2008.
Current Executive Officers and Directors
Our current directors and executive officers, their ages, their respective offices and positions, and their respective dates of election or appointment are as follows:
| Name | | Age | | Position | | Date of Appointment |
| Daniel R. Ash | | 47 | | President, Chief Executive Officer, Chief Operating Officer, Secretary and Director | | July 24, 2008 |
| Tareq Risheq | | 44 | | Chief Strategy Officer and Director (1) | | July 24, 2008 |
| Kevin Pickard | | 44 | | Chief Financial Officer and Treasurer | | July 24, 2008 |
| Robert J. Legendre | | 51 | | Executive Chairman of the Board | | July 24, 2008 |
| Norman W. Collins | | 69 | | Director | | July 24, 2008 |
| (1) | Tareq Risheq resigned as Chief Strategy Officer on December 12, 2008. Mr. Risheq remains a director of the Company. |
Daniel R. Ash – President, Chief Executive Officer, Chief Operating Officer, Secretary and Director
Daniel R. Ash currently serves as a Director, President and Chief Executive Officer. Since July of 2006 he has devoted his full time efforts to the development of CelLynx and its products. Mr. Ash has more than 20 years experience in the wireless industry with senior management roles in new product development, engineering, off-shore manufacturing and global operations.
From 1999 to 2006 Mr. Ash held senior positions at Powerwave Technologies, a manufacturer of RF amplifiers and antennae, and was instrumental in its growth from $200M to more than $800M annual revenues. From 1991 to 1999, Mr. Ash held senior positions with Hewlett Packard and was responsible for the transfer of RF cell phone amplifier modules to high volume production in Malaysia ramping production to over one million amplifiers per month.
Early in his career, Mr. Ash worked in the electronic defense industry for Teledyne Microwave and Narda Microwave. He worked on several missile projects and was considered by many to be one of the industry experts in millimeter wave electronics.
Tareq Risheq – Chief Strategy Officer and Director
Tareq Risheq currently serves as Director and Chief Strategy Officer. He has over 20 years experience in the Consumer Electronics and Information Technology industries. Mr. Risheq founded Simpliciti Corporation, where, from 2002 to 2004, he took a PDA product from concept to volume manufacturing and nationwide distribution to major retailers. Simpliciti was featured in the Wall Street Journal as well as most of the other national media outlets. Mr. Risheq also established a direct sales organization in Saudi Arabia and grew that firm to $30M in revenues within three years. He holds a Bachelor of Science degree in Business/Management from Bradley University. Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008. Mr. Risheq remains a director.
Kevin Pickard – Chief Financial Officer and Treasurer
Since 1998, Mr. Pickard has been a principal officer and owner of Pickard & Green CPAs (formerly Pickard & Company, CPA’s, P.C.), an accounting firm formed by Mr. Pickard that specializes in providing SEC accounting and other management consulting services for small to medium sized companies, including preparing required SEC filings for public companies, due diligence on potential acquisitions, preparing projections and business plans, assisting with restructuring of companies, and positioning companies for initial public offerings. Mr. Pickard also currently serves as the interim President for Universal Guardian Holding, Inc., a company that trades on the Pink Sheets, and as interim CFO for Signalife, Inc., a company that trades on the American Stock Exchange. Mr. Pickard was a Partner with Singer Lewak Greenbaum & Goldstein, LLP, from 1996 to 1998, where he co-managed the firm’s securities practice group. Mr. Pickard also spent over nine years with Coopers & Lybrand, L.L.P. (currently PricewaterhouseCoopers, LLP), where he focused on the auditing companies in the insurance, high-tech and manufacturing industries. Mr. Pickard holds Bachelors of Science and Masters degrees in Accounting from Brigham Young University.
Robert J. Legendre – Executive Chairman of the Board
Robert J. Legendre brings 25 years of global experience in all aspects of operations management including supply chain management, global operations, captive and contracted offshore manufacturing, NPI management, research & development, engineering development, and sales & marketing. Mr. Legendre held several senior level positions including Sr. Vice President of Global Operations and President of Asia & America’s Strategic Business Unit for Powerwave Technologies. He has also held senior management positions in operations and supply chain with Infocus Corporation, Pemstar Corporation and Western Digital, where he managed operations and supply chain in many global locations including Puerto Rico, Singapore and Malaysia. Mr. Legendre has a Bachelor of Science degree in Business from LaSalle University.
Norman W. Collins – Director
Norman W. Collins, Sr. is an independent Director who was appointed upon the completion of the merger between CelLynx, Inc. and NorPac. Since June of 2003, Mr. Collins has been Director and President of Collins & Associates, a Delaware corporation providing consulting services to corporations as well as legal services in the form of Mediation and Arbitration of corporate disputes. He is admitted to the Tennessee Bar and is a Certified Mediator and Arbitrator in Georgia and a Certified Mediator in North Carolina and the District of Columbia. Between 2003 and 2007 Mr. Collins also served as the Executive Director of the Living Memorial Tree Foundation, a New York non-profit organization dedicated to the creation of a memorial to the victims of 9/11. Since May of 2006, Mr. Collins has also served as Director and CEO of Upgrade International, a Washington technology corporation. Prior positions include Director and CEO of several non-reporting companies either in the development stage or with revenues exceeding $30 Million.
Mr. Collins holds a Bachelor of Science degree in Business Administration from Trine University and a Juris Doctor degree from Michigan State University, College of Law.
Family Relationships
There are no family relationships among our directors and executive officers.
Involvement in Certain Legal Proceedings
Except as provided below, none of our directors or executive officers has, during the past five years:
| | (a) | Has had a petition under the federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; |
| | (b) | Been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| | (c) | · Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; · Engaging in any type of business practice; or · Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; |
| | | |
| | (d) | Been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph I(i) above, or to be associated with persons engaged in any such activity; |
| | | |
| | (e) | Been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; and |
| | | |
| | (f) | Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated. |
In January 2008, Mr. Pickard became interim President of Universal Guardian Holding, Inc. (“UGH”) to assist the Board of Directors in disposing of UGH’s assets to repay UGH’s bondholders. UGH was not successful in selling its assets and on June 23, 2008, the Board of Directors elected to voluntarily file for Chapter 7 bankruptcy protection.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of the copies of such forms furnished to the Company, or written representations that no reports were required, we believe that for the fiscal year ended September 30, 2008, beneficial owners complied with Section 16(a) filing requirements applicable to them.
Code of Ethics
We have not adopted a code of ethics, but we plan on adopting a code of ethics that applies to all directors, officers, and employees, including our Chief Executive Officer and Chief Financial Officer, and members of the board of directors in the near future.
Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.
Board Committees; Director Independence
In November 2008, our board of directors appointed Robert J. Legendre and Norman W. Collins to serve as members of our audit committee, although neither qualifies as an “audit committee financial expert.” Our board of directors has yet to appoint a compensation committee. The functions ordinarily handled by a compensation committee are currently handled by our entire board of directors. Our board of directors intends, however, to review our governance structure and institute board committees as necessary and advisable in the future to facilitate the management of our business.
Our board of directors consists of one independent director, Mr. Norman W. Collins, and three non-independent directors. We have determined independence in accordance with definitions and criteria applicable under the NASDAQ rules.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Summary of Compensation
Executive Compensation
The following summary compensation table reflects all compensation for fiscal years 2007 and 2008 received by our predecessor’s principal executive officer and two most highly compensated executive officers whose salary exceeded $100,000.
Summary Compensation Table – Predecessor
Name and Principal Position | | | Year | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Nonqualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
John P. Thornton, Former President, CEO, CFO, Secretary and Treasurer | | | 2008 | | 12,000 | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 12,000 | |
| | | | 2007 | | 12,000 | | | -- | | | -- | | | -- | | | -- | | | -- | | | -- | | | 12,000 | |
The following summary compensation table reflects all compensation for fiscal years 2007 and 2008 received by CelLynx’s principal executive officer and two most highly compensated executive officers whose salary exceeded $100,000.
Summary Compensation Table – CelLynx
| Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ( $) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Non-qualified Deferred Compensation Earnings ($) | | All Other Comp -ensation ( $) | | Total ($) |
| Daniel R. Ash, President, Chief Executive Officer, Chief Operating Officer Secretary and Director | | 2008 | | | 170,000 | | -- | | | -- | | 217,671 | (2) | | -- | | -- | | | -- | | 387,671 |
| | | 2007 | | | 30,000 | | -- | | | 63,333 | (1) | -- | | | -- | | -- | | | -- | | 93,333 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Tareq Risheq, Chief Strategy Officer and Director (3) | | 2008 | | | 108,000 | | -- | | | -- | | 159,330 | (2) | | -- | | -- | | | -- | | 267,330 |
| | | 2007 | | | 30,000 | | -- | | | 63,333 | (1) | -- | | | -- | | -- | | | -- | | 93,333 |
| (1) | | The value of the stock award was determined based on the fair market value of the services performed. |
| | | |
| (2) | | The Company used the Black-Scholes option-pricing model to value the options. The assumptions used in calculating the fair value of options granted are as follows: Expected life (years): 2.5 – 3.5 Risk-free interest rate: 2.37% -- 4.05% Expected volatility: 100% Expected dividend yield: 0% |
| | | |
| (3) | | Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008. |
Outstanding Equity Awards
The following table sets forth certain information concerning stock and granted to our named executive officers.
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
| |
| OPTION AWARDS | | STOCK AWARDS |
| Name | | Number of securities underlying unexercised options (#) Exercisable | | Number of securities underlying unexercised options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities underlying unexercised unearned options (#) | | Option exercise price ($) | | Option expiration date | | Number of shares or units of stock that have not vested (#) | | Market value of shares or units of stock that have not vested ($) | | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#) | | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) |
| Daniel R. Ash (1) | | | — | | 4,587,979 | | — | | $ | 0.0787 | | 10/01/2012 | | | | | | | | |
| Daniel R. Ash (2) | | | 349,426 | | — | | — | | $ | 0.0787 | | 04/21/2013 | | | | | | | | |
| Daniel R. Ash (1) | | | — | | 8,475,233 | | — | | $ | 0.0787 | | 05/20/2013 | | | | | | | | |
| Tareq Risheq (1) | | | — | | 4,587,979 | | — | | $ | 0.0787 | | 10/01/2012 | | | | | | | | |
| Tareq Risheq (2) | | | 349,426 | | — | | — | | $ | 0.0787 | | 04/21/2013 | | | | | | | | |
| Tareq Risheq (1) | | | — | | 4,708,484 | | — | | $ | 0.0787 | | 05/20/2013 | | | | | | | | |
_______________________
| | Option vests 33.3% after one year, with the remaining 66.7% to vest evenly over the remaining months. |
| (2) | | Option fully vested after 90 days of the grant date of April 21, 2008. |
Retirement Plans
We currently have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified defined contribution plans and nonqualified defined contribution plans.
Potential Payments upon Termination or Change-in-Control
Except as described below under “Employment Agreements,” we currently have no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to a named executive officer at, following, or in connection with any termination, including without limitation resignation, severance, retirement or a constructive termination of a named executive officer, or a change in control of the registrant or a change in the named executive officer’s responsibilities, with respect to each named executive officer.
Employment Agreements
On October 1, 2007, the Board of Directors of CelLynx-California approved the following compensation packages for Daniel R. Ash and Tareq Risheq:
| | Annual Base Salary: | $200,000 |
| | | |
| | Bonus Plan: | Participation in the CelLynx Bonus Plan can amount up to 30% of the annual base salary, but is conditioned upon achievement of the goals and objectives of the then current plan, including those related to overall company performance. |
| | Fringe Benefits: | Fifteen paid vacation days per year. Ten paid holidays per year. Health insurance with hospital coverage. |
| | Stock Options: | 3% of the current outstanding common stock based the fair market value on the date of hire of $0.10 per share. The options vest over three years with 33.3% vesting after the first year and monthly vesting thereafter of 1/24th of the remaining 66.6%. |
| | Severance: | If employment is terminated without cause, Mr. Ash and Mr. Tareq will receive six months pay. |
| | Acquisition: | If CelLynx-California is acquired, all outstanding stock options will become fully vested. |
The Board of Directors of CelLynx-California amended this compensation package on May 20, 2008 to provide for an annual salary of $170,000 for Mr. Ash and $108,000 for Mr. Risheq. Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008 and is no longer entitled to this compensation.
On July 22, 2008, CelLynx-California entered into a consulting agreement (the “Consulting Agreement”) with Kevin Pickard whereby Mr. Pickard agreed to serve as the Company’s interim Chief Financial Officer for a period beginning on the date of the Consulting Agreement and ending on the earlier of (i) the date that the Company retains a permanent Chief Financial Officer, (ii) the 90th day after the closing of the reverse take-over transaction contemplated by the Exchange Agreement, or (iii) the date which the Company notifies Mr. Pickard that he has been terminated in writing, and which notification may occur at any time for any reason. As an inducement to enter into the Consulting Agreement, CelLynx-California granted Mr. Pickard 100,000 shares of CelLynx-California common stock and $5,000 in cash. The CelLynx-California common stock were converted into 62,896 shares of the Company's common stock and 62,897 shares of the Company's Series A Preferred Stock upon the closing of the reverse take-over transaction. The Series A Preferred Stock automatically converted into 62,897 shares of the Company’s common stock upon the filing of a Certificate of Amendment to the Company’s Articles of Incorporation increasing the number of authorized common stock from 100,000,000 to 400,000,000 on November 7, 2008.
Director Compensation
On July 15, 2008, CelLynx-California entered into an agreement with Mr. Norman W. Collins that granted Mr. Collins a stock option to purchase 610,000 shares of CelLynx-California’s common stock at an exercise price of $0.09 per share that vests 25% per year so long as Mr. Collins remains a director of CelLynx. Upon the closing of the Exchange Agreement, this option was exchanged for an option to purchase 767,337 shares of the Company's common stock at an exercise price of $0.0715 per share.
Other than as described above, we do not pay any compensation to members of our board of directors for their service on the board. However, we intend to review and consider future proposals regarding board compensation.
Securities Authorized for Issuance under Equity Compensation Plans
Set forth in the table below is information regarding awards made through compensation plans or arrangements through September 30, 2008, the most recently completed fiscal year.
| Equity Compensation Plan Information |
| | | | | | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted- average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | -- | | $ | -- | | -- |
| Equity compensation plans not approved by security holders | 53,901,899 | | $ | $0.073 | | 21,098,101 |
| Total | 53,901,899 | | | | | 21,098,101 |
Security Ownership of Certain Beneficial Owners and Management
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name. Unless otherwise indicated, the address of each beneficial owner listed below is 25910 Acero, Suite 370, Mission Viejo, California 92691. The percentage of class beneficially owned set forth below is based on 126,068,846 shares outstanding as of December 19, 2008.
| Name and Position | | Number of Shares of Common Stock Beneficially Owned (1) | | | Percent of Shares of Common Stock Beneficially Owned (2) | |
| Daniel R. Ash, President, Chief Executive Officer, Chief Operating Officer, Secretary and Director (3) | | | 32,864,326 | | | | 25.2 | % |
| Tareq Risheq, Chief Strategy Officer and Director (4) | | | 32,864,326 | | | | 25.2 | % |
| Kevin Pickard, Chief Financial Officer and Treasurer | | | 382,970 | | | | * | |
| Robert J. Legendre, Chairman of the Board | | | -- | | | | * | |
| Norman W. Collins, Director | | | 490,793 | | | | * | |
| All Executive Officers and Directors as a Group (5 persons) | | | 66,602,415 | | | | 49.3 | % |
________________
* Less than 1%
| (1) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding. |
| (2) | Percentage based upon 126,068,846 issued and outstanding shares of the Company’s capital stock. |
| (3) | Includes 28,345,452 shares of common stock, options to purchase 1,877,223 shares of common stock at an exercise price of $0.0787 per share, a $20,000 note convertible into 2,515,858 shares of common stock at a conversion price of $0.0079 per share and a $10,000 note convertible into 125,793 shares of common stock at a conversion price of $0.0795 per share. |
| | |
| (4) | Includes 28,345,452 shares of common stock, options to purchase 1,877,223 shares of common stock at an exercise price of $0.0787 per share, a $20,000 note convertible into 2,515,858 shares of common stock at a conversion price of $0.0079 per share and a $10,000 note convertible into 125,793 shares of common stock at a conversion price of $0.0795 per share. Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008 but remains a director of the Company. |
Share Exchange Agreement
On July 24, 2008, in a reverse take-over transaction, we acquired a cellular amplifier business based in California by executing the Exchange Agreement by and among the Company, CelLynx-California, and the CelLynx Owners.
Under the Exchange Agreement, on the Closing Date, we acquired all of the issued and outstanding shares of CelLynx-California through the issuance of 32,454,922 restricted shares of our common stock and 45,516,034 restricted shares of our Series A Preferred Stock to the CelLynx Owners. Immediately prior to the exchange transaction, we had 37,597,890 shares of common stock issued and outstanding and no shares of Series A Preferred Stock issued and outstanding. Immediately after the issuance of the shares to the CelLynx Owners, we had 80,552,812 shares of common stock issued and outstanding (including the shares issued in the Financing) and 45,516,034 shares of Series A Preferred Stock issued and outstanding. The Series A Preferred Stock automatically converted into common stock upon the filing of a Certificate of Amendment to our Articles of Incorporation increasing the number of authorized common stock from 100,000,000 to 400,000,000. As a result of this exchange transaction, the CelLynx Owners became our controlling shareholders and CelLynx-California became our wholly owned subsidiary. In connection with CelLynx-California becoming our wholly owned subsidiary, we acquired the business and operations of CelLynx-California, which has become our principal business.
Related Party Transactions of CelLynx
On October 1, 2007, CelLynx-California granted to Robert J. Legendre, the Company’s current Executive Chairman of the Board, options to purchase 9,725,991 shares of CelLynx-California’s common stock at an exercise price of $0.09 per share in exchange for executive management services rendered as a consultant. Upon the closing of the Exchange Agreement, this option was exchanged for an option to purchase 12,234,608 shares of the Company’s common stock at an exercise price of $0.0715 per share.
On March 27, 2007, CelLynx-California entered into a two-year convertible promissory note with Daniel R. Ash, the Company’s current Chief Executive Officer and a director, and Tareq Risheq, currently a director of the Company, in the amount of $20,000 each in exchange for cash leant to CelLynx-California. The unpaid principal balance accrues interest at a rate of 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. The note and accrued interest is convertible into CelLynx-California common stock at a conversion rate of $0.01 per share. Upon the closing of the Exchange Agreement, these notes were exchanged for notes of the Company at a conversion rate $0.0079 per share.
On October 25, 2007, CelLynx-California entered into a two-year convertible promissory note with Mssrs. Ash and Risheq in the amount of $10,000 each in exchange for cash leant to CelLynx-California. The unpaid principal balance accrues interest at a rate of 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. The note and accrued interest is convertible into CelLynx-California common stock at a conversion rate of $0.10 per share. Upon the closing of the Exchange Agreement, these notes were exchanged for notes of the Company at a conversion rate $0.0795 per share.
On February 12, 2008, CelLynx-California entered into a Stock Purchase Agreement with Norman Collins, currently a director of the Company, under which CelLynx-California issued an aggregate of 1,111,111 shares of common stock in exchange for an investment of $100,000. Pursuant to the Stock Purchase Agreement, 100,000 shares were delivered to Mr. Collins and 1,011,111 shares were held in escrow and automatically cancelled upon the closing of the Exchange Agreement. The remaining 100,000 shares were converted into 125,793 shares of the Company.
On July 15, 2008, CelLynx-California entered into an agreement with Mr. Collins that granted Mr. Collins a stock option to purchase 610,000 shares of CelLynx-California’s common stock at an exercise price of $0.09 per share that vests 25% per year so long as Mr. Collins remains a director of CelLynx. Upon the closing of the Exchange Agreement, this option was exchanged for an option to purchase 767,337 shares of the Company’s common stock at an exercise price of $0.0715 per share.
Other than the transactions described above, there were no transactions or proposed transactions since the beginning of CelLynx’s last fiscal year in which CelLynx was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of CelLynx’s total assets at year-end for the last three completed fiscal years, and in which any related person had or will have a direct or indirect material interest.
Director Independence
One of our directors – Norman W. Collins – is an independent director as that term is defined under NASDAQ Rules and Regulations.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees billed for the two most recently completed fiscal years ended September 30, 2008 and 2007 for professional services rendered by the principal accountant for the audit of the Corporation’s annual financial statements and review of the financial statements included our quarterly reports and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
| | Year Ended September 30, 2008 | Year Ended September 30, 2007 |
| Audit Fees | $35,000 | $60,000 |
| Audit Related Fees | - | - |
| Tax Fees | - | - |
| All Other Fees | - | - |
| Total | $35,000 | $60,000 |
Fees for audit services include fees associated with the annual audit and the review of documents filed with the Securities and Exchange Commission. Audit-related fees principally include fees reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees. Tax fees included tax compliance, tax advice and tax planning work.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements
A list of the financial statements of the Company filed as part of this Report can be found in the Index to Financial Statements on page F-1.
Exhibits
INDEX TO EXHIBITS
Exhibit Number | | Description |
| | | |
| 2.1 | | Share Exchange Agreement by and among the Company, CelLynx-California and the CelLynx Owners dated January 3, 2008 (1) |
| | | |
| 2.2 | | Amendment Agreement to Share Exchange Agreement between the Company and CelLynx-California dated May 20, 2008 (2) |
| | | |
| 2.3 | | Waiver of Conditions Precedent * |
| | | |
| 3.1 | | Articles of Incorporation of CelLynx Group, Inc. (3) |
| | | |
| 3.2 | | Articles of Merger of CelLynx Group, Inc. (4) |
| | | |
| 3.3 | | Bylaws of CelLynx Group, Inc. (4) |
| | | |
| 3.4 | | Certificate of Designation of CelLynx Group, Inc. (5) |
| | | |
| 3.5 | | Articles of Merger of CelLynx Group, Inc. (8) |
| | | |
| 3.6 | | Certificate of Amendment to Articles of Incorporation of CelLynx Group, Inc. (9) |
| | | |
| 10.1 | | Form of Subscription Agreement dated July 23, 2008 (6) |
| | | |
| 10.2 | | Form of Warrant dated July 23, 2008 (6) |
| | | |
| 10.3 | | Master Global Marketing and Distribution Agreement between CelLynx and Dollardex Group Corp. dated July 22, 2008 (7) |
| | | |
| 10.4 | | Palomar Ventures III, LP Amended and Restated Subordinated Convertible Promissory Note dated November 10, 2007 (7) |
| | | |
| 10.5 | | Lease Agreement between CelLynx-California and CSS Properties, LLC dated February 21, 2008 (7) |
| | | |
| 10.6 | | CelLynx-California 2007 Stock Incentive Plan (7) |
| | | |
| 10.7 | | Amendment No. 1 to CelLynx-California 2007 Stock Incentive Plan (7) |
| | | |
| 10.8 | | Form of Lock-Up Agreement dated July 22, 2008 (7) |
| | | |
| 10.9 | | Norman W. Collins Offer Letter dated July 15, 2008 (7) |
| | | |
| 10.10 | | Kevin Pickard Consulting Agreement dated July 22, 2008 (7) |
| | | |
| 10.11 | | Convertible Promissory Note between CelLynx-California and Daniel Ash dated March 27, 2007 (7) |
| | | |
| 10.12 | | Convertible Promissory Note between CelLynx-California and Tareq Risheq dated March 27, 2007 (7) |
| | | |
| 10.13 | | Convertible Promissory Note between CelLynx-California and Daniel Ash dated October 25, 2007 (7) |
| | | |
| 10.14 | | Convertible Promissory Note between CelLynx-California and Tareq Risheq dated October 25, 2007 (7) |
| | | |
| 10.15 | | Incentive Stock Option Agreement between CelLynx-California and Daniel Ash dated October 1, 2007 (7) |
| | | |
| 10.16 | | Incentive Stock Option Agreement between CelLynx-California and Tareq Risheq dated October 1, 2007 (7) |
| 10.17 | | Incentive Stock Option Agreement between CelLynx-California and Robert Legendre dated October 1, 2007 (7) |
| | | |
| 10.18 | | Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated October 1, 2007 (7) |
| | | |
| 10.19 | | Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated October 1, 2007 (7) |
| | | |
| 10.20 | | Non-Qualified Stock Option Agreement between CelLynx-California and Robert Legendre dated October 1, 2007 (7) |
| | | |
| 10.21 | | Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated April 21, 2008 (7) |
| | | |
| 10.22 | | Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated April 21, 2008 (7) |
| | | |
| 10.23 | | Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated May 20, 2008 (7) |
| | | |
| 10.24 | | Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated May 20, 2008 (7) |
| | | |
| 10.25 | | Non-Qualified Option Agreement between CelLynx-California and Norman Collins dated July 20, 2008 (7) |
| | | |
| 10.26 | | Stock Purchase Agreement between CelLynx-California and Norman Collins dated February 12, 2008 (7) |
| | | |
| 10.27 | | Lease Agreement between CelLynx and Dolphinshire, L.P. dated August 26, 2008 * |
| | | |
| 17.1 | | Letter of Resignation from John P. Thornton to the Board of Directors (7) |
| | | |
| 21.1 | | List of Subsidiaries (7) |
| | | |
| 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 * |
__________________
| (1) | Filed on January 9, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (2) | Filed on May 27, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (3) | Filed as an exhibit to our Registration Statement on Form 10SB originally filed on August 26, 1999, as amended, an incorporated herein by reference. |
| (4) | Filed as an exhibit to our Quarterly Report on Form 10-QSB for the fiscal period ended September 30, 2003, and incorporated herein by reference. |
| (5) | Filed on July 15, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (6) | Filed on July 23, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (7) | Filed on July 30, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (8) | Filed on August 8, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
| (9) | Filed on November 21, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference. |
INDEX TO FINANCIAL STATEMENTS
| | PAGE | |
| FINANCIAL STATEMENTS | | |
| | | |
| Report of Independent Registered Public Accounting Firm | | F-2 | |
| | | | |
| Balance Sheets as of September 30, 2008 and September 30, 2007 | | F-3 | |
| | | | |
| Statements of Operations and Comprehensive Loss for the years ended September 30, 2008, 2007 and the period from inception (October 11, 2005) through September 30, 2008 | | F-4 | |
| | | | |
| Statements of Cash Flows for the years ended September 30, 2008, 2007 and the period from inception (October 11, 2005) through September 30, 2008 | | F-5 | |
| | | | |
| Statements of Stockholders' Equity (Deficit) for the years ended September 30, 2008, 2007 and the period from inception (October 11, 2005) through September 30, 2008 | | F-6 | |
| | | | |
| Notes to financial statements | | F-7 | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
CelLynx Group, Inc.
Mission Viejo, California
We have audited the accompanying consolidated balance sheets of CelLynx Group, Inc. (formerly Norpac Technologies, Inc.) (a development stage company) as of September 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended and for the period from October 11, 2005 (date of inception) to September 30, 2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CelLynx Group, Inc. (a development stage company) as of September 30, 2008 and 2007, and the results of operations and cash flows for the years then ended and for the period from October 11, 2005 (date of inception) to September 30, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has net operating cash flow deficits and a deficit accumulated during the development stage. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
December 19, 2008
| CELLYNX GROUP, INC. | |
| (A Development Stage Company) | |
| CONSOLIDATED BALANCE SHEETS | |
| AS OF SEPTEMBER 30, 2008 AND 2007 | |
| | | | | | | |
| | | September 30, | | | September 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash | | $ | 599,024 | | | $ | 2,371 | |
| Other current assets | | | 6,862 | | | | - | |
| Total current assets | | | 605,886 | | | | 2,371 | |
| | | | | | | | | |
| EQUIPMENT, net | | | 9,658 | | | | 755 | |
| INTANGIBLE ASSETS, net | | | 70,776 | | | | 28,406 | |
| OTHER ASSETS | | | 11,526 | | | | - | |
| TOTAL ASSETS | | $ | 697,846 | | | $ | 31,532 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accrued liabilities | | | 206,298 | | | | 37,569 | |
| Note payable | | | - | | | | 250,000 | |
| Accrued interest | | | 12,507 | | | | 12,192 | |
| Share-based compensation liability | | | 2,714,724 | | | | - | |
| Accrued beneficial conversion liability | | | 2,358,439 | | | | - | |
| Accrued warrant liability | | | 603,993 | | | | - | |
| Convertible stockholder notes, net of debt discount of $28,943 and $0 | | | 11,057 | | | | - | |
| Total current liabilities | | | 5,907,018 | | | | 299,761 | |
| | | | | | | | | |
| LONG TERM LIABILITIES | | | | | | | | |
| Stockholder notes | | | - | | | | 52,400 | |
| Convertible promissory note, net of debt discount of $241,067 and $0 | | | 21,289 | | | | - | |
| Convertible stockholder notes, net of debt discount of $17,031 and $0 | | | 2,969 | | | | - | |
| Total liabilities | | | 5,931,276 | | | | 352,161 | |
| | | | | | | | | |
| STOCKHOLDERS' DEFICIT: | | | | | | | | |
| Series A Preferred Stock, $0.001 par value;100,000,000 shares authorized: | | | | | | | | |
| 45,516,034 and 41,107,396 shares issued and outstanding | | | 45,516 | | | | 41,107 | |
| Common stock, $0.001 par value, 100,000,000 authorized; 80,552,812 and | | | | | | | | |
| 27,153,988 shares issued and outstanding | | | 80,553 | | | | 27,154 | |
| Additional paid in capital | | | 2,335,949 | | | | 648,022 | |
| Deficit accumulated during the development stage | | | (7,695,448 | ) | | | (1,036,912 | ) |
| Total stockholders' deficit | | | (5,233,430 | ) | | | (320,629 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | | $ | 697,846 | | | $ | 31,532 | |
| | | | | | | | | |
| | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | | | | | |
| CELLYNX GROUP, INC. | |
| (A Development Stage Company) | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 AND THE PERIOD | |
| FROM OCTOBER 11, 2005 (DATE OF INCEPTION) TO SEPTEMBER 30, 2008 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | For the period from | |
| | | | | | | | | October 11, 2005 | |
| | | Year Ended | | | Year Ended | | | (date of inception) | |
| | | September 30, 2008 | | | September 30, 2007 | | | to September 30, 2008 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net Revenue | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
| Cost of Revenue | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Gross profit | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | |
| Research and development | | | 308,906 | | | | 81,218 | | | | 599,825 | |
| General and administrative | | | 4,397,131 | | | | 254,650 | | | | 5,133,026 | |
| Total operating expenses | | | 4,706,037 | | | | 335,868 | | | | 5,732,851 | |
| | | | | | | | | | | | | |
| Loss from operations | | | (4,706,037 | ) | | | (335,868 | ) | | | (5,732,851 | ) |
| | | | | | | | | | | | | |
| Non-operating income (expense): | | | | | | | | | | | | |
| Interest income | | | 4,198 | | | | 173 | | | | 6,292 | |
| Interest and financing costs | | | (932,393 | ) | | | (10,548 | ) | | | (944,585 | ) |
| Change in fair value of accrued beneficial conversion feature | | | (1,151,992 | ) | | | - | | | | (1,151,992 | ) |
| Change in fair value of accrued warrant liability | | | 127,688 | | | | - | | | | 127,688 | |
| Total non-operating (expense) income | | | (1,952,499 | ) | | | (10,375 | ) | | | (1,962,597 | ) |
| Loss before provision for income taxes | | | (6,658,536 | ) | | | (346,243 | ) | | | (7,695,448 | ) |
| | | | | | | | | | | | | |
| Provision for income taxes | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Net loss | | $ | (6,658,536 | ) | | $ | (346,243 | ) | | $ | (7,695,448 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Weighted average shares outstanding : | | | | | | | | | | | | |
| Basic | | | 40,407,479 | | | | 23,823,351 | | | | 27,445,697 | |
| Diluted | | | 40,407,479 | | | | 23,823,351 | | | | 27,445,697 | |
| | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | |
| Basic | | $ | (0.16 | ) | | $ | (0.01 | ) | | $ | (0.28 | ) |
| Diluted | | $ | (0.16 | ) | | $ | (0.01 | ) | | $ | (0.28 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | | | | | |
| CELLYNX GROUP, INC. |
| (A Development Stage Company) |
| CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT |
| FOR PERIOD FROM OCTOBER 11, 2005 (DATE OF INCEPTION) TO SEPTEMBER 30, 2008 |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | | | | | | During | | | Total | |
| | | Preferred Stock | | | Common Stock | | | Additional Paid | | Development | | Stockholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | in Capital | | Stage | | | Deficit | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance, October 11, 2005 (Date of Inception) | | | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for cash | | | 28,120,280 | | | | 28,120 | | | | 18,800,734 | | | | 18,801 | | | | 215,043 | | | | - | | | | 261,964 | |
| Shares issued for services | | | 2,222,540 | | | | 2,223 | | | | 1,523,576 | | | | 1,523 | | | | 294,054 | | | | - | | | | 297,800 | |
| Options issues to employees and non employees | | | - | | | | - | | | | - | | | | - | | | | 16,652 | | | | - | | | | 16,652 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (690,669 | ) | | | (690,669 | ) |
| Balance, September 30, 2006 | | | 30,342,820 | | | $ | 30,343 | | | | 20,324,310 | | | | 20,324 | | | | 525,749 | | | | (690,669 | ) | | | (114,253 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for services | | | 10,764,576 | | | | 10,764 | | | | 6,829,678 | | | | 6,830 | | | | 122,273 | | | | - | | | | 139,867 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (346,243 | ) | | | (346,243 | ) |
| Balance, September 30, 2007 | | | 41,107,396 | | | $ | 41,107 | | | | 27,153,988 | | | | 27,154 | | | | 648,022 | | | | (1,036,912 | ) | | | (320,629 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares issued for cash | | | - | | | | - | | | | 938,897 | | | | 939 | | | | 745,345 | | | | - | | | | 746,284 | |
| Shares issued for services | | | 4,408,638 | | | | 4,409 | | | | 4,362,037 | | | | 4,362 | | | | 563,231 | | | | - | | | | 572,002 | |
Fair value of stock options reclassified to share-based compensation liability | | | - | | | | - | | | | - | | | | - | | | | (89,618 | ) | | | - | | | | (89,618 | ) |
| Shares issued in merger with Norpac Technologies, Inc. | | | - | | | | - | | | | 48,097,890 | | | | 48,098 | | | | 1,200,650 | | | | | | | | 1,248,748 | |
| Fair value of warrants transferred to liability | | | - | | | | - | | | | - | | | | - | | | | (731,681 | ) | | | - | | | | (731,681 | ) |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | (6,658,536 | ) | | | (6,658,536 | ) |
| Balance, September 30, 2008 | | | 45,516,034 | | | $ | 45,516 | | | | 80,552,812 | | | $ | 80,553 | | | $ | 2,335,949 | | | $ | (7,695,448 | ) | | $ | (5,233,430 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effective July 24, 2008, the Company effected a 1.2579 for 1 forward stock split of the authorized, issued and outstanding common stock, without a change to the par value. All share amounts have been retroactively adjusted for all periods presented | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effective July 24, 2008, the Company issued Series A Preferred Stock on a pro rata basis to the shareholders of CelLynx, Inc. All share amounts have been retroactively adjusted for all periods presented | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | |
| CELLYNX GROUP, INC. | |
| (A Development Stage Company) | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |
| FOR THE YEARS ENDED SEPTEMBER 30, 2008 AND 2007 AND THE PERIOD | |
| FROM OCTOBER 11, 2005 (DATE OF INCEPTION) TO SEPTEMBER 30, 2008 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | For the period | |
| | | | | | | | | from October 11, 2005 | |
| | | Year Ended | | | Year Ended | | | (date of inception) | |
| | | September 30, 2008 | | | September 30, 2007 | | | to September 30, 2008 | |
| | | | | | | | | | |
| | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net loss | | $ | (6,658,536 | ) | | $ | (346,243 | ) | | $ | (7,695,448 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | | | | | |
| used in operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 2,278 | | | | 504 | | | | 3,097 | |
| Stock issued for services | | | 572,002 | | | | 139,867 | | | | 1,009,669 | |
| Stock compensation expense for options issued to employees | | | 2,625,106 | | | | - | | | | 2,641,758 | |
| Change in fair value of accrued beneficial conversion feature | | | 1,151,992 | | | | - | | | | 1,151,992 | |
| Change in fair value of accrued warrant liability | | | (127,688 | ) | | | - | | | | (127,688 | ) |
| Non cash financing costs | | | 833,321 | | | | - | | | | 833,321 | |
| Amortization of debt discount | | | 86,085 | | | | - | | | | 86,085 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Change in other assets | | | (18,388 | ) | | | - | | | | (18,388 | ) |
| Change in accrued liabilities | | | 167,363 | | | | 6,832 | | | | 204,932 | |
| Change in accrued interest | | | 12,671 | | | | 10,548 | | | | 24,863 | |
| Net cash used in operating activities | | | (1,353,794 | ) | | | (188,492 | ) | | | (1,885,807 | ) |
| | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
| Purchase of equipment | | | (10,572 | ) | | | - | | | | (12,146 | ) |
| Increase in intangible assets | | | (42,979 | ) | | | (13,704 | ) | | | (71,385 | ) |
| Net cash acquired in merger with Norpac Technologies, Inc. | | | 1,250,114 | | | | - | | | | 1,250,114 | |
| Net cash provided by (used in) investing activities | | | 1,196,563 | | | | (13,704 | ) | | | 1,166,583 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
| Proceeds from notes payable | | | - | | | | - | | | | 250,000 | |
| Proceeds from issuance of common stock | | | 746,284 | | | | - | | | | 1,008,248 | |
| Proceeds from stockholders note payable | | | 7,600 | | | | 52,400 | | | | 60,000 | |
| Net cash provided by financing activities | | | 753,884 | | | | 52,400 | | | | 1,318,248 | |
| | | | | | | | | | | | | |
| NET (DECREASE) INCREASE IN CASH | | | 596,653 | | | | (149,796 | ) | | | 599,024 | |
| | | | | | | | | | | | | |
| CASH, BEGINNING OF PERIOD | | | 2,371 | | | | 152,167 | | | | - | |
| | | | | | | | | | | | | |
| CASH, END OF PERIOD | | $ | 599,024 | | | $ | 2,371 | | | $ | 599,024 | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | |
| Interest paid | | $ | - | | | $ | - | | | $ | - | |
| Income taxes paid | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING: | | | | | | | | | |
| Increase in convertible promissory note for interest payable | | $ | 12,356 | | | $ | - | | | $ | 12,356 | |
| | | | | | | | | | | | | |
| The accompanying notes are an integral part of these consolidated financial statements | | | | | | | | | |
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Note 1 - Organization and Basis of Presentation
Organization and Line of Business
On July 23, 2008, prior to the closing of the 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 (23) 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 capital stock 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 were 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 converts 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.
The exchange of shares with CelLynx-California was accounted for as a reverse acquisition under the purchase method of accounting since 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 this transaction, the net assets of the legal acquirer (CelLynx Group, Inc. formerly NorPac Technologies, Inc.) were $1,248,748.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
As a result of the reverse merger transactions described above the historical financial statements presented are those of CelLynx-California, the operating entities. The CelLynx-California shareholder received 1.2579292 shares of stock in the Company for each shares of CelLynx-California capital stock. The consolidated statement of stockholders’ deficit and all shares and per share information have been retroactively restated for all periods presented to reflect the reverse merger transaction as took place on October 11, 2005.
On October 27, 2008, the Board of Directors approved a change of the Company’s fiscal year end from June 30 year end to September 30 to agree with the fiscal year of CelLynx-California. The fiscal year end change would be effective for the year ending September 30, 2008.
The Company develops and manufactures a cell phone signal amplifier. As of September 30, 2008, the Company has not commenced planned operations.
Development Stage Company and Going Concern
The Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting by Development Stage Enterprises". The Company is in the development stage since planned principal activities have not commenced and the Company has not generated any revenue. In a development stage company, management devotes most of its activities to developing a market for its products and services. These 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 and the ability of the Company to emerge from the development stage 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 year ended September 30, 2008 and 2007 and for the period from October 11, 2005 (Date of Inception) to September 30, 2008, the Company incurred net losses of $6,658,536, $346,243 and $7,695,448, respectively. As of September 30, 2008 and 2007, the Company has a deficit accumulated during the development stage of $7,695,448 and $1,036,912, respectively. These 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.
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% owned subsidiary, CelLynx, Inc. All intercompany accounts and transactions have been eliminated within the consolidation.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Note 2 - Summary of Significant Accounting Policies
Concentration of credit risk
Cash includes cash on hand in accounts maintained in the United States. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the Unites States. As of September 30, 2008 and 2007, the Company had deposits in excess of federally insured limits totaling $399,204 and $55,938, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.
Equipment
Equipment is stated 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.
Impairment or Disposal of Long-lived Assets
The Company applies the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. Based on its review, the Company believes that as of September 30, 2008 and 2007, there were no significant impairments of its long-lived assets.
Revenue Recognition
The Company's financial statements are prepared under the accrual method of accounting. Revenues will be recognized in the period the products are shipped.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Accrued Warrant Liability and Accrued Beneficial Conversion Feature
Pursuant to Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company has recorded the fair value of all outstanding options, warrants, and beneficial conversion features as accrued liabilities since the Company may not have enough authorized shares to satisfy the exercise of its outstanding, options, warrants, and the conversion of the convertible promissory notes.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value 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 are defined as follows:
| | · | Level 1 inputs to the valuation methodology are quoted prices (unadjusted) 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 analyzes all financial instruments with features of both liabilities and equity under SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”
The Company’s share-based compensation liability is carried at fair value totaling $2,714,724, as of September 30, 2008. The Company used Level 2 inputs for its valuation methodology for the share-based compensation liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions.
The Company recognized compensation expense of $2,625,106 for the year ended September 30, 2008.
The Company’s accrued beneficial conversion liability is carried at fair value totaling $2,358,439, as of September 30, 2008. The Company used Level 2 inputs for its valuation methodology for the accrued beneficial conversion liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
The Company recognized a $1,151,992 loss on the change in the accrued beneficial conversion liability for the year ended September 30, 2008.
The Company’s accrued warrant liability is carried at fair value totaling $603,993, as of September 30, 2008. The Company used Level 2 inputs for its valuation methodology for the accrued warrant liability, and the fair values is determined by using the Black Scholes option pricing model based on various assumptions.
The Company recognized a $127,688 gain on the change in the accrued warrant liability for the year ended September 30, 2008.
The following table summarizes the fair value of the Company’s financial instruments at September 30, 2008:
| | | Fair Value As of September 30, 2008 | | Fair Value Measurements at September 30, 2008 Using Fair Value Hierarchy |
| Liabilities | | | | Level 1 | | Level 2 | | Level 3 |
| Share-based compensation liability | | $ | 2,714,724 | | | | $ | 2,714,724 | | |
| Accrued beneficial conversion liability | | $ | 2,358,439 | | | | $ | 2,358,439 | | |
| Accrued warrant liability | | $ | 603,993 | | | | $ | 603,993 | | |
The Company did not identify any other assets and liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.
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.
Income Taxes
Income taxes are provided based upon the liability method of accounting in accordance with SFAS No. 109, “Accounting for Income Taxes”. Deferred income taxes are recognized for the tax effect of temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. Pursuant to SFAS No. 109 the Company is required to compute deferred income tax assets for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”, during 2007. 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 affect on the Company’s financial statements.
Net Loss Per Share
The Company reports loss per share in accordance with the provision of SFAS No. 128, “Earnings Per Share.” SFAS No. 128 requires presentation of basic and diluted losses per share in conjunction with the disclosure of the methodology used in computing such losses per share. Basic 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. 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. As of September 30, 2008 and 2007, the following potential dilutive shares were excluded from diluted loss per share for all periods presented because of their anti-dilutive effect.
| | | | | | | |
| | | September 30, 2008 | | | September 30, 2007 | |
| Options | | $ | 53,901,861 | | | $ | 1,415,170 | |
| Warrants | | | 10,500,000 | | | | - | |
| Convertible promissory note | | | 6,340,029 | | | | - | |
| Convertible shareholder notes | | | 5,630,424 | | | | - | |
| Total | | $ | 76,372,314 | | | $ | 1,415,170 | |
Stock-Based Compensation
The Company accounts for its stock-based compensation for employees in accordance with SFAS No. 123R, "Share-Based Payment, an Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123." 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.
Patents and Trademarks
Acquired patents 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.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Capitalized cost for pending 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.
Reclassification
Certain reclassifications have been made to the 2007 financial statements to conform to the 2008 financial statement presentation. These reclassifications had no effect on net loss or cash flows as previously reported.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.
In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. The Company does not expect the adoption of EITF 07-3 to have a significant impact on its results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting enterprise accounts for the acquisition of a business. SFAS No. 141 (Revised 2007) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”, which is an amendment of Accounting Research Bulletin (“ARB”) No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”), which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the effect of the application of SFAS 161 on its consolidated financial statements.
In April 2008, the FASB issued FSP SFAS 142-3 “Determination of the useful life of Intangible Assets,” which amends the factors a company should consider when developing renewal assumptions used to determine the useful life of an intangible asset. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. SFAS 142 requires companies to consider whether renewal can be completed without substantial cost or material modification of the existing terms and conditions associated with the asset. FSP SFAS 142-3 replaces the previous useful life criteria with a new requirement—that an entity consider its own historical experience in renewing similar arrangements. If historical experience does not exist, then the Company would consider market participant assumptions regarding renewal including 1) highest and best use of the asset by a market participant, and 2) adjustments for other entity-specific factors included in SFAS 142. The Company is currently evaluating the impact that adopting FSP SFAS No.142-3 will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement has no impact on the Company’s financial statements.
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have and impact on the Company’s financial statements.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
In June 2008, the FASB issued EITF No. 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. The Company believes adopting this statement will have a material impact on the consolidated financial statements because among other things, any option or warrant previously issued and all new issuances denominated in US dollars will be required to be carried as a liability and marked to market each reporting period.
In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”).” The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments,” and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted. Management is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the convertible notes and related warrants transactions.
On October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 became effective on October 10, 2008, and its adoption did not have a material impact on the financial position or results for the year ending September 30, 2008.
Equipment consisted of the following at September 30, 2008 and 2007:
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
| | | | | | | |
| | | September 30, | | | September 30, | |
| | | 2008 | | | 2007 | |
| Office furniture & equipment | | $ | 4,211 | | | $ | - | |
| Computer equipment | | | 7,935 | | | | 1,574 | |
| | | | 12,146 | | | | 1,574 | |
| Accumulated depreciation | | | (2,488 | ) | | | (819 | ) |
| Equipment, net | | $ | 9,658 | | | $ | 755 | |
The Company recorded depreciation expense of $1,669, $504 and $2,488, for the years ended September 30, 2008 and 2007, and the period ended October 11, 2005 (date of inception) to September 30, 2008, respectively.
Note 4 – Intangible Assets
The Company incurred legal costs in acquiring patent and trademark rights. These costs are projected to generate future positive cash flows in the near term and have been capitalized to intangible assets in the period incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively.
Intangible assets consist of the following:
| | | September 30, | | | September 30, | |
| | | 2008 | | | 2007 | |
| Patents | | $ | 59,198 | | | $ | 24,224 | |
| Trademarks | | | 12,187 | | | | 4,182 | |
| | | | 71,385 | | | | 28,406 | |
| Accumulated depreciation | | | (609 | ) | | | - | |
| Intangibles, net | | $ | 70,776 | | | $ | 28,406 | |
The Company recorded amortization expense related to the trademarks of $609, $0 and $609, for the years ended September 30, 2008 and 2007, and the period ended October 11, 2005 (date of inception) to September 30, 2008, respectively.
No amortization has been recorded for the patents as of September 30, 2008, as the patents have not been issued to the Company.
The following table summarizes the amortization over the next 5 years:
| Years ended September 30, | | Amount | |
| 2008 | | $ | 4,179 | |
| 2009 | | | 4,179 | |
| 2010 | | | 4,179 | |
| 2011 | | | 4,179 | |
| 2012 | | | 4,179 | |
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Note 5 – Convertible Promissory Note
On August 15, 2006, the Company issued a secured promissory note (the “August 2006 Note”) for $250,000 to an unrelated entity “Holder”. On November 10, 2007, the August 2006 Note was amended (the “Amended Note”). At the date of the amendment, the Company was obligated to pay to the Holder $262,356 which represented the principal and accrued interest and the Holder was entitled to purchase shares of the Company’s securities pursuant to a Warrant to Purchase Common Stock dated August 15, 2006 (“August 2006 Warrant”). In contemplation of the completion of the reverse merger, the Company and the holder reached an agreement whereby this Amended Note superseded the August 2006 Note and canceled the August 2006 Warrant. The principal amount of the Amended Note is $262,356, is unsecured and is convertible into 6,340,029 shares of common stock of the Company and bears interest at 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. All unpaid principal, together with any then accrued but unpaid interest, shall be due and payable upon the earlier of (i) November 9, 2010 at the written request of the holder to the Company, or (ii) when, upon or after the occurrence of an event of default.
The effective conversion rate based on the $262,356 principal amount and the 6,340,029 common shares that are received upon conversion is $0.0414 and the share price was $0.15. Therefore, the Company determined that the Amended Note contained a beneficial conversion feature. At the time the Amended Note was issued and the number of shares determined, the Company did not have enough authorized shares to satisfy the conversion of the Amended Note into common stock; therefore, the beneficial conversion feature is considered an embedded derivative which is required to be bifurcated from the host contract and accounted for separately. Pursuant to EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company has recorded the fair value of the beneficial conversion feature as an accrued beneficial conversion liability.
The fair value of the beneficial conversion feature was $767,047. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 2.3 years; (2) volatility of 100%; (3) risk free interest of 2.61% and (4) dividend rate of 0%. The Company recorded a discount on the convertible note up to the principal amount of $262,356 and expensed as financing costs the $504,691 of the beneficial conversion feature that exceeded the principal balance.
The Company recorded interest expense related to the convertible promissory note of $10,056, $10,000 and $21,056 for the years ended September 30, 2008 and 2007 and the period ended October 11, 2005 (date of inception) to September 30, 2008, respectively.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
The Company amortized $21,289 of the debt discount for the year ended September 30, 2008. As of September 30, 2008 the unamortized debt discount is $241,067.
Note 6 – Convertible Promissory Note - Related Party
On March 27, 2007, the Company issued convertible promissory notes to two stockholders of the Company. The principal of each convertible promissory note was $20,000 for a combined total of $40,000. The convertible promissory notes bear interest at 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days and mature on March 27, 2009. All or a portion of the outstanding principal amount and accrued interest was originally convertible at the option of the note holder at $0.01 per share (adjusted to reflect subsequent stock dividends, stock splits, combinations or recapitalizations). All unpaid principal, together with any then unpaid and accrued interest and any other amounts payable hereunder, shall be due and payable on the earlier of (i) that date which is two years after the issue date listed above, or (ii) when, upon or after the occurrence of an Event of Default as defined in the promissory note.
Subsequent to this convertible promissory note and prior to September 30, 2007, the stockholders advanced the Company an additional $6,200 each for a combined total of $12,400. The amount due under all notes to the stockholders at September 30, 2007 was $52,400.
On October 25, 2007, the Company issued convertible promissory notes to the above stockholders. Each note was for $10,000 which included the $6,200 that was previously advanced and an additional $3,800. The combined total for the two convertible promissory notes was $20,000. The promissory notes bear interest at 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days and mature on October 25, 2009.
On October 1, 2007, the Company did not have enough authorized shares to satisfy the conversion of notes; therefore, the Company recorded an accrued conversion feature liability for the fair value of the conversion option for the two $20,000 convertible promissory notes on October 1, 2007 and the two $10,000 convertible promissory notes on October 25, 2007.
The fair value of the conversion feature for the two $20,000 notes was $368,630. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 1.49 years; (2) volatility of 100%; (3) risk free interest of 4.11% and (4) dividend rate of 0%. The Company recorded a discount on the convertible promissory notes up to the principal amount of $40,000 and expensed as financing costs the $328,630 of the fair value of the conversion feature that exceeded the principal balance.
The fair value of the beneficial conversion feature for the two $10,000 convertible promissory notes was $10,770. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 2 years; (2) volatility of 100%; (3) risk free interest of 3.74% and (4) dividend rate of 0%. The Company recorded a discount on the convertible promissory notes of $10,770.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Pursuant to the reverse merger transaction, $40,000 of CelLynx-California convertible notes with a conversion price of $0.01 per share were converted into $40,000 of the Company’s convertible notes with a conversion price of approximately $0.0079 per share, and $20,000 of CelLynx-California convertible notes with a conversion price of $0.10 per share were converted into $20,000 of the Company’s convertible notes with a conversion price of approximately $0.0795 per share. With the conversion of the notes, the Company expensed the unamortized debt discount at July 24, 2008. The fair value of the conversion liability at July 24, 2008 was $743,163. The change in value of the convertible promissory notes before the merger and at the merger date was $397,177, which was allocated $60,000 to discount on notes and $337,177 as change in the conversion liability.
The Company recorded interest expense related to the notes of $2,614, $548 and $3,162 for the years ended September 30, 2008 and 2007 and the period ended October 25, 2005 (date of inception) to September 30, 2008, respectively.
The Company amortized $64,796 of the debt discount for the year ended September 30, 2008. As of September 30, 2008 the unamortized debt discount is $45,974.
Note 7 – Stockholder’s Equity
Stock Options
On October 27, 2005 and December 31, 2005, the Company granted 3,773,788 and 1,886,894 stock options to two board of directors in consideration of the services to be rendered to the Company. The options vested equally every six months from the grant date. On August 26, 2006, both directors resigned from the Company and unvested options totaling 4,245,512 were forfeited.
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 will be administered by the Board. The Board shall have 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. During July 2008, the 2007 Company amended to increase the number of awards from 25,000,000 to 75,000,000.
The following table summarizes information with respect to common stock issuable under the Plan and outside the Plan.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
| | | Number of | | | Weighted Average | | | Aggregate |
| | | Shares | | | Exercise Price | | | Intrinsic Value |
| Outstanding, October 11, 2005 (date of inception) | | | - | | | | | | |
| Granted | | | 5,660,682 | | | $ | 0.015 | | | |
| Forfeited | | | (4,245,512 | ) | | | | | | |
| Exercised | | | - | | | | | | | |
| Outstanding, September 30, 2006 | | | 1,415,170 | | | $ | 0.015 | | | |
| Granted | | | - | | | | | | | |
| Canceled | | | - | | | | | | | |
| Exercised | | | - | | | | | | | |
| Outstanding, September 30, 2007 | | | 1,415,170 | | | $ | 0.015 | | | |
| Granted | | | 52,486,693 | | | $ | 0.075 | | | |
| Canceled | | | - | | | | | | | |
| Exercised | | | - | | | | | | | |
| Outstanding at September 30, 2008 | | | 53,901,863 | | | $ | 0.073 | | $ | 6,983,248 |
| Exercisable at September 30, 2008 | | | 9,658,677 | | | $ | 0.066 | | $ | 1,505,729 |
The number and weighted average exercise prices of all common shares outstanding as of September 30, 2008 are as follows:
| Options outstanding | |
| | | | | | | | | | | |
| | | | | | | | | | Weighted | |
| | | | | | | Weighted | | | Average | |
| | | | Number | | | Average | | | Remaining | |
| Range of | | | Outsanding | | | Exercise | | | Contractual Life | |
| Exercise Price | | | September 30, 2008 | | | Price | | | (Years) | |
| | | | | | | | | | | |
| $ | 0.014 | | | | 943,447 | | | $ | 0.014 | | | | 7.08 | |
| $ | 0.016 | | | | 471,723 | | | $ | 0.016 | | | | 7.25 | |
| $ | 0.0720 | | | | 29,428,166 | | | $ | 0.072 | | | | 4.22 | |
| $ | 0.079 | | | | 23,058,527 | | | $ | 0.079 | | | | 4.38 | |
| | | | | | 53,901,863 | | | $ | 0.073 | | | | 4.37 | |
| | | | | | | | | | | | | | | |
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
| Options Exercisable | |
| | | | | | | | | | | |
| | | | | | | | | | Weighted | |
| | | | | | | Weighted | | | Average | |
| | | | Options | | | Average | | | Remaining | |
| Range of | | | exercisable | | | Exercise | | | Contractual Life | |
| Exercise Price | | | September 30, 2008 | | | Price | | | (Years) | |
| | | | | | | | | | | |
| $ | 0.014 | | | | 943,447 | | | $ | 0.014 | | | | 7.08 | |
| $ | 0.016 | | | | 471,723 | | | $ | 0.016 | | | | 7.25 | |
| $ | 0.0720 | | | | 4,488,793 | | | $ | 0.072 | | | | 4.06 | |
| $ | 0.079 | | | | 3,754,714 | | | $ | 0.079 | | | | 4.11 | |
| | | | | | 9,658,677 | | | | 0.066 | | | | 4.53 | |
| | | | | | | | | | | | | | | |
The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model are as follows:
| | | September 30, 2008 | | September 30, 2007 |
| Expected life (years) | | 2.6 to 4.0 | | - |
| Risk-free interest rate | | 1.9% to 4.1% | | - |
| Expected volatility | | 100% | | - |
| Expected dividend yield | | 0% | | - |
The weighted average grant-date fair value for the options granted during the year ended September 30, 2008 and 2007 was $0.06 and $0, respectively.
The compensation expense related to the unvested options as of September 30, 2008 is $7,005,456 which will be recognized over the weighted average period of 2.39 years. Stock-based compensation expense to employees and non employees for the year ended September 30, 2008 and 2007 and the period ended October 11, 2005 (date of inception) to September 30, 2008, respectively was $2,625,106, $0 and $2,641,758, respectively.
The Company granted 17,020,485 options on October 1, 2007 which increased the total amount of potential outstanding shares over the authorized 60 million shares; therefore, the Company was required to report the potential exercise of the options as a liability. The options that were fully vested at the issuance of the options were valued at fair value on October 1, 2007 with the fair value of $89,618 being recorded as a liability and a corresponding reduction to additional paid in capital. As of September 30, 2008, the Company has an accrued share-based compensation liability of $2,714,724.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
Warrants
On July 23, 2008, the Company issued warrants to purchase 10,500,000 shares of its common stock at an exercise price of $0.20.
At the time the warrants were issued, the Company did not have enough authorized shares to satisfy the exercising of the warrants into common stock. Pursuant to Emerging Issues Task Force (“EITF”) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, the Company has recorded the fair value of the warrants as an accrued warrant liability.
The fair value of the warrant liability at the date of issuance was $731,681. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 2 years; (2) volatility of 100%; (3) risk free interest of 2.81% and (4) dividend rate of 0%.
The fair value of the accrued warrant liability at September 30, 2008 is $603,993. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of .32 years; (2) volatility of 100%; (3) risk free interest of 1.60% and (4) dividend rate of 0%. The Company recognized a $127,688 gain, on the change in the accrued warrant liability for the year ended September 30, 2008.
Note 8 – Taxes
We have provided no current income taxes due to the losses incurred from October 11, 2005 (date of inception) through September 30, 2008. Net operating losses of approximately $1,914,644 at September 30, 2008 are available for carryover. The net operating losses will expire from 2021 through 2023. We have provided a 100% valuation allowance for the deferred tax benefit resulting from the net operating loss carryover due to our limited operating history. In addressing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. When we demonstrate a history of profitable operation we will reduce our valuation allowance at that time.
A reconciliation of the statutory Federal income tax rate and the effective income tax rate for the years ended September 30, 2008 and 2007 follows:
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
| | September 30, | September 30, |
| | 2008 | | 2007 |
| Statutory federal income tax rate | -34% | | -34% |
| State income taxes (benefit), net of federal taxes | -6% | | -6% |
| Equity instruments issued for compensation/services | 19% | | 17% |
| Change in derivative liabilities | 6% | | 0% |
| Non-cash financing costs | 5% | | 0% |
| Valuation allowance | 10% | | 23% |
| Effective income tax rate | 0% | | 0% |
Significant components of deferred tax assets and liabilities are as follows:
| | | September 30, | | | September 30, | |
| | | 2008 | | | 2007 | |
| Deferred tax assets: | | | | | | |
| Net operating loss carryforwards | | $ | 836,646 | | | $ | 232,072 | |
| Valuation allowance | | | (836,646 | ) | | | (232,072 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
The Company adopted FIN No. 48 on January 1, 2007. There were no unrecognized tax benefits as of the date of adoption and there are no unrecognized tax benefits included in the balance sheet at September 30, 2008, that would, if recognized, affect the effective tax rate.
Note 9 – Operating Lease
On February 21, 2008, the Company entered into a one year lease for office space for its El Dorado Hills, California office. The lease requires monthly payments of $2,198. The Company recorded rent expense of $13,188 for the year ended September 30, 2008.
On August 26, 2008, the Company entered into an eighteen month lease for office space for its Mission Viejo, California office beginning on October 1, 2008 and expiring on March 31, 2010. The lease requires monthly payments of $4,664.
The Company expects to pay $69,156 and $27,984 during the years ended September 30, 2009 and 2010, respectively for the two leases.
Note 10 – Subsequent Events
On November 7, 2008, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada after shareholders approved a proposal to increase the number of authorized shares of Common Stock of the Company from 100,000,000 to 400,000,000 by written consent in lieu of a special meeting of shareholders.
CelLynx Group, Inc.
(A Development Stage Company)
Notes To Financial Statements
For the Years Ended September 30, 2008 and 2007 and
the Period From October 11, 2005 (Date of Inception) to September 30, 2008
As a result of filing the Amendment, 45,516,034 shares of the Company’s Series A Preferred Stock automatically converted into 45,516,034 shares of the Company’s Common Stock. The Company now has 126,068,846 shares of Common Stock and no shares of Series A Preferred Stock issued and outstanding.
As a result of the authorized shares being increased to 400,000,000, the Company will have sufficient shares for the exercise of options, the warrants and the conversion of the convertible promissory notes. Therefore, the Company will reclassify the fair value of the share-based compensation liability, the accrued warrant liability and the accrued beneficial conversion liability to equity on November 7, 2008.
Effective November 17, 2008, Board of Directors of appointed Robert J. Legendre as Executive Chairman of the Board to assist the Company’s Chief Executive Officer with strategy and execution of the Company’s manufacturing and supply chain operations, corporate development, capital markets and investor relations. On October 1, 2007, CelLynx, Inc., the Company’s wholly-owned subsidiary, granted to Mr. Legendre options to purchase 9,725,991 shares of CelLynx, Inc. Common Stock, at an exercise price of $0.09 per share, in exchange for executive management services rendered as a consultant. These options were subsequently exchanged for options to purchase 12,234,608 shares of the Company’s Common Stock at an exercise price of $0.0715 per share in connection with the merger between the Company and CelLynx, Inc. on July 24, 2008.
Note 11 – Restatement of Quarterly Data (unaudited)
On July 30, 2008, the Company filed an 8-K which included the financial statements of CelLynx-California through the six months ended March 31, 2008. The balance sheet, statement operations, statement of stockholders’ deficit, and statement of cash flows for the six months ended March 31, 2008 were unaudited. During the preparation of the financial statements for the year end September 30, 2008, the Company discovered that it did not properly record the conversion feature associated with the shareholder notes. On October 1, 2007, the Company did not have enough authorized shares to satisfy the conversion of the shareholder notes; therefore, the Company should have recorded an accrued conversion feature liability for the fair value of the conversion option for the two $20,000 convertible promissory notes on October 1, 2007 and the two $10,000 convertible promissory notes on October 25, 2007.
The following table shows the effect of the restatement for the period ended March 31, 2008:
| | | | | | | | | | | | For the Period From | |
| | | | | | | | | | | | October 11, 2005 | |
| | | | | | | | | | | | (date of inception) | |
| | | Previously | | | | | | March 31, 2008 | | | To March 31, 2008 | |
| | | Reported | | | Adjustment | | | Restated | | | Restated | |
| | | | | | | | | | | | | |
| Total assets | | $ | 143,734 | | | $ | - | | | $ | 143,734 | | | | - | |
| Current liabilities | | $ | 710,478 | | | $ | 342,313 | | | $ | 1,052,791 | | | | - | |
| Long term liabilities | | $ | 60,000 | | | $ | (35,036 | ) | | $ | 24,964 | | | | - | |
| Total liabilities | | $ | 770,478 | | | $ | 307,277 | | | $ | 1,077,755 | | | | - | |
| Stockholders deficit | | $ | (626,744 | ) | | $ | (307,277 | ) | | $ | (934,021 | ) | | | - | |
| Revenue | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Operating expenses | | $ | 722,052 | | | $ | - | | | $ | 722,052 | | | $ | 1,748,866 | |
| Loss from operations | | $ | (722,052 | ) | | $ | - | | | $ | (722,052 | ) | | $ | (1,748,866 | ) |
| Non-operating income (expense) | | $ | (4,349 | ) | | $ | (307,277 | ) | | $ | (311,626 | ) | | $ | (321,754 | ) |
| Net loss | | $ | (726,401 | ) | | $ | (307,277 | ) | | $ | (1,033,678 | ) | | $ | (2,070,590 | ) |
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | CELLYNX GROUP, INC. |
| | | |
| Dated: December 24, 2008 | By: | /s/ Daniel R. Ash
Daniel R. Ash, President, Chief Executive Officer and Chief Operating Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Name | | Position | | Date |
| | | | | |
/s/ Daniel R. Ash
Daniel R. Ash | | Director and Principal Executive Officer | | December 24, 2008 |
| | | | | |
/s/ Tareq Risheq
Tareq Risheq | | Director | | December 24, 2008 |
| | | | | |
/s/ Kevin Pickard
Kevin Pickard | | Principal Financial and Accounting Officer | | December 24, 2008 |
| | | | | |
/s/ Robert J. Legendre
Robert J. Legendre | | Executive Chairman of the Board | | December 24, 2008 |
| | | | | |
/s/ Norman W. Collins
Norman W. Collins | | Director | | December 24, 2008 |
