CelLynx 10Q 2009 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File No. 000-27147

CelLynx Group, Inc.

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

Nevada		95-4705831
(State or other jurisdiction of incorporation or		(IRS Employer Identification
organization)		No.)

25910 Acero, Suite 370

Mission Viejo, California 92691

(Address of principal executive offices)

(949) 305-5290

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large Accelerated filer o	Non-Accelerated Filer o
Accelerated Filer o	Smaller Reporting Company x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date: 126,068,846 issued and outstanding as of February 17, 2009.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

CELLYNX GROUP, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
	2008			2008
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	27,716		$	599,024
Other current assets		6,862			6,862
Total current assets		34,578			605,886

EQUIPMENT, net		13,067			9,658
INTANGIBLE ASSETS, net		78,226			70,776
OTHER ASSETS		16,190			11,526
TOTAL ASSETS	$	142,061		$	697,846

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accrued liabilities	$	300,025		$	206,298
Accrued interest		15,731			12,507
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 $26,998 and $28,943		33,002			11,057
Total current liabilities		348,758			5,907,018

LONG TERM LIABILITIES
Convertible promissory note, net of debt discount of $212,264 and $241,067		50,092			21,289
Convertible stockholder notes, net of debt discount of $0 and $17,031		-			2,969
Total liabilities	$	398,850		$	5,931,276

STOCKHOLDERS' DEFICIT:
Series A Preferred Stock, $0.001 par value;100,000,000 shares authorized: nil and 45,516,034 shares issued and outstanding		-			45,516
Common stock, $0.001 par value, 400,000,000 authorized; 126,068,846 and 80,552,812 shares issued and outstanding		126,069			80,553
Additional paid in capital		8,304,133			2,335,949
Deficit accumulated during the development stage		(8,686,991	)		(7,695,448	)
Total stockholders' deficit		(256,789	)		(5,233,430	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	142,061		$	697,846


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 THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007 AND THE PERIOD

FROM OCTOBER 11, 2005 (DATE OF INCEPTION) TO DECEMBER 31, 2008



							For the period
							from October 11, 2005
	Three Months Ended			Three Months Ended			(date of inception) to
	December 31, 2008			December 31, 2007			December 31, 2008
	(unaudited)			(unaudited)			(unaudited)

Net Revenue	$	-		$	-		$	-

Cost of Revenue		-			-			-

Gross profit		-			-			-

Operating expenses
Research and development		151,527			-			751,352
General and administrative		621,813			176,759			5,754,839

Total operating expenses		773,340			176,759			6,506,191

Loss from operations	$	(773,340	)	$	(176,759	)	$	(6,506,191	)

Non-operating income (expense):
Interest income		961			-			7,253
Interest and financing costs		(51,003	)		(340,093	)		(995,588	)
Change in fair value of accrued beneficial conversion liability		251,410			(4,412	)		(900,582	)
Change in fair value of accrued warrant liability		(419,571	)		-			(291,883	)

Total non-operating (expense)		(218,203	)		(344,505	)		(2,180,800	)

Loss before provision for income taxes		(991,543	)		(521,264	)		(8,686,991	)

Provision for income taxes		-			-			-

Net loss	$	(991,543	)	$	(521,264	)	$	(8,686,991	)


Weighted average shares outstanding :
Basic		107,268,745			27,207,273			33,685,051
Diluted		107,268,745		��	27,207,273			33,685,051

Earnings per share:
Basic	$	(0.01	)	$	(0.02	)	$	(0.26	)
Diluted	$	(0.01	)	$	(0.02	)	$	(0.26	)



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 DECEMBER 31, 2008

														Deficit
														Accumulated
											Additional			During			Total
	Preferred Stock						Common Stock				Paid in			Development			Stockholders'
	Shares			Amount			Shares		Amount		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	)

Conversion of preferred shares to common shares upon the increase of authorized shares		(45,516,034	)		(45,516	)		45,516,034		45,516		-			-			-

Reclassify share based compensation liability to equity		-			-			-		-		2,701,572			-			2,701,572

Fair value of share based compensations for employees and consultants		-			-			-		-		122,867			-			122,867

Reclassify beneficial conversion liability to equity		-			-			-		-		2,120,181			-			2,120,181

Reclassify warrant liability to equity		-			-			-		-		1,023,564			-			1,023,564

Net loss		-			-			-		-		-			(991,543	)		(991,543	)

Balance, December 31, 2008 (unaudited)		-		$	-			126,068,846	$	126,069	$	8,304,133		$	(8,686,991	)	$	(256,789	)


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 THREE MONTHS ENDED DECEMBER 31, 2008 AND 2007 AND THE PERIOD
FROM OCTOBER 11, 2005 (DATE OF INCEPTION) TO DECEMBER 31, 2008

							For the period
							from October 11, 2005
	Three Months Ended			Three Months Ended			(date of inception) to
	'December 31, 2008			December 31, 2007			December 31, 2008
	(unaudited)			(unaudited)			(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(991,543	)	$	(521,264	)	$	(8,686,991	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,159			-			4,256
Stock issued for services		-			-			1,009,669
Stock compensation expense for options issued to employees and consultants		122,867			97,257			2,764,625
Change in fair value of accrued beneficial conversion liability		(251,410	)		4,412			900,582
Change in fair value of accrued warrant liability		419,571			-			291,883
Non cash financing costs		-			328,630			833,321
Amortization of debt discount		47,779			8,508			133,864
Changes in operating assets and liabilities:								-
Change in other assets		(4,664	)		-			(23,052	)
Change in accrued liabilities		96,951			61,086			326,746
Net cash used in operating activities	$	(559,290	)	$	(21,371	)	$	(2,445,097	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment		(4,263	)		-			(16,409	)
Increase in intangible assets		(7,755	)		-			(79,140	)
Net cash acquired in merger with Norpac Technologies, Inc.		-			-			1,250,114
Net cash provided by (used in) investing activities	$	(12,018	)	$	-		$	1,154,565

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable		-			19,000			250,000
Proceeds from issuance of common stock		-			-			1,008,248
Proceeds from stockholders note payable		-			-			60,000
Net cash provided by financing activities	$	-		$	19,000		$	1,318,248

NET (DECREASE) INCREASE IN CASH		(571,308	)		(2,371	)		27,716

CASH, BEGINNING OF PERIOD		599,024			2,371			-

CASH, END OF PERIOD	$	27,716		$	-		$	27,716

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
Reclassify share- based compensation liability to additional paid-in capital	$	2,701,572	$	-	$	2,701,572
Reclassify accrued beneficial conversion liability to additional paid-in capital	$	2,120,181	$	-	$	2,120,181
Reclassify accrued warrant liability to additional paid-in capital	$	1,023,564	$	-	$	1,023,564

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

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

Note 1 - Organization and Basis of Presentation

Organization and Line of Business

CelLynx Group, Inc. formerly known as NorPac Technologies, Inc. (hereinafter referred to as “CelLynx” or the “Company”) was originally incorporated under the laws of the State of Minnesota on April 1, 1998.

On July 23, 2008, prior to the closing of 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.

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

The exchange of shares with CelLynx-California was accounted for as a reverse acquisition under the purchase method of accounting 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 Consolidated Financial Statements

(unaudited)

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 share 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 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 December 31, 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 three months ended December 31, 2008 and for the period from October 11, 2005 (Date of Inception) to December 31, 2008, the Company incurred net losses of $991,543 and $8,686,991, respectively. As of December 31, 2008 and September 30, 2008, the Company has a deficit accumulated during the development stage of $8,686,991 and $7,695,448, 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.

Note 2 - Summary of Significant Accounting Policies

Concentration of Credit Risk

Cash includes deposits 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 United States. As of December 31, 2008 and September 30, 2008, the Company had deposits in excess of federally insured limits totaling $0 and $399,204, 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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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 December 31, 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.

Accrued Warrant Liability and Accrued Beneficial Conversion Liability

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 recorded the fair value of all outstanding options, warrants, and beneficial conversion features as accrued liabilities at September 30, 2008 since the Company did not have enough authorized shares to satisfy the exercise of its outstanding, options, warrants, and the conversion of the convertible promissory notes. The Company reclassified the liabilities into additional paid-in capital on November 7, 2008 when the Company increased the number of authorized shares to 400,000,000.

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:

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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.

As of December 31, 2008, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

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.

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. For the three months ended December 31, 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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

	December 31, 2008		December 31, 2007
Options	$	53,949,863	$	26,842,766
Warrants		10,500,000		-
Total	$	64,449,863	$	26,842,766

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.

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

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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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.

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 an impact on the Company’s financial statements.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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 has not determined the effect of the application of EITF 07-5 on its consolidated financial statements.

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 three months ending December 31, 2008.

Note 3 - Equipment

Equipment consisted of the following at December 31, 2008 and September 30, 2008:

	December 31,			September 30,
	2008			2008
Office furniture & equipment	$	7,479		$	4,211
Computer equipment		8,930			7,935
		16,409			12,146
Accumulated depreciation		(3,342	)		(2,488	)
Equipment, net	$	13,067		$	9,658

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

The Company recorded depreciation expense of $854, $0 and $3,342, for the three months ended December 31, 2008 and 2007, and the period ended October 11, 2005 (date of inception) to December 31, 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:

	December 31,			September 30,
	2008			2008
Patents	$	66,953		$	59,198
Trademarks		12,187			12,187
		79,140			71,385
Accumulated amortization		(914	)		(609	)
Intangibles, net	$	78,226		$	70,776

The Company recorded amortization expense related to the trademarks of $305, $0 and $914, for the three months ended December 31, 2008 and 2007, and the period ended October 11, 2005 (date of inception) to December 31, 2008, respectively.

No amortization has been recorded for the patents as of December 31, 2008, as the patents have not been issued to the Company.

The following table summarizes the amortization over the next 5 years:

Year Ended September 30,		Amount
2009		4,179
2010		4,179
2011		4,179
2012		4,179

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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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.

On November 7, 2008, the Company increased the authorized number of shares to 400,000,000. The fair value of the beneficial conversion feature on November 7, 2008 was $1,049,955. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 2.01 years; (2) volatility of 100%; (3) risk free interest of 1.33% and (4) dividend rate of 0%. The Company reclassified this amount into additional paid-in capital.

The Company recorded interest expense related to the convertible promissory note of $2,616, $2,137 and $26,454 for the three months ended December 31, 2008 and 2007 and the period ended October 11, 2005 (date of inception) to December 31, 2008, respectively.

The Company amortized $28,803 of the debt discount for the three months ended December 31, 2008. As of December 31, 2008 the unamortized debt discount is $212,264.

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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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.

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.

On November 7, 2008, the Company increased the authorized number of shares to 400,000,000. The fair value of the beneficial conversion feature on November 7, 2008 was $1,035,683 and $34,543 for the two $20,000 notes and the two $10,000 notes, respectively. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life ranging between .38 and .96 years; (2) volatility of 100%; (3) risk free interest ranging between .83% and 1.20% and (4) dividend rate of 0%. The Company reclassified these amounts into additional paid-in capital.

The Company recorded interest expense related to the notes of $608, $818 and $3,768 for the three months ended December 31, 2008 and 2007 and the period ended October 11, 2005 (date of inception) to December 31, 2008, respectively.

The Company amortized $18,977 of the debt discount for the three months ended December 31, 2008. As of December 31, 2008 the unamortized debt discount is $26,998.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

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 options issuable under the Plan and outside the Plan.

	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 at September 30, 2007		1,415,170		$	0.015
Granted		52,486,693		$	0.075
Canceled		-
Exercised		-
Outstanding at Sepember 30, 2008		53,901,863		$	0.072
Granted		48,000		$	0.180
Canceled		-
Exercised		-
Outstanding at December 31, 2008, (unaudited)		53,949,863		$	0.074
Exercisable at December 31, 2008 (unaudited)		16,161,368		$	0.069	$	1,303,535

The number and weighted average exercise prices of all options outstanding as of December 31, 2008 are as follows:

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

Options outstanding

						Weighted
				Weighted		Average
		Number		Average		Remaining
Range of		Outsanding		Exercise		Contractual Life
Exercise Price		December 31, 2008		Price		(Years)

$	0.014		943,447	$	0.014		6.82
$	0.016		471,723	$	0.016		7.00
$	0.072		29,428,166	$	0.072		3.97
$	0.079		23,058,527	$	0.079		4.13
$	0.180		48,000	$	0.180		4.95
			53,949,863	$	0.074		4.12

Options Exercisable

						Weighted
				Weighted		Average
		Options		Average		Remaining
Range of		exercisable		Exercise		Contractual Life
Exercise Price		December 31, 2008		Price		(Years)

$	0.014		943,447	$	0.014		6.82
$	0.016		471,723	$	0.016		7.00
$	0.0720		9,302,907	$	0.072		3.86
$	0.079		5,442,091	$	0.079		3.93
$	0.180		1,200	$	0.180		4.95
			16,161,368		0.069		4.15

The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model are as follows:

	December 31, 2008		September 30, 2008
Expected life (years)	2.05 to 3.98		2.6 to 4.0
Risk-free interest rate	.76 % to 1%		1.9% to 4.1%
Expected volatility		1000/0		1000/0
Expected dividend yield		00/0		00/0

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

The weighted average grant-date fair value for the options granted during the three months ended December 31, 2008 and the year ended September 30, 2008 was $0.18 and $0.06, respectively.

The compensation expense related to the unvested options as of December 31, 2008 is $1,682,818 which will be recognized over the weighted average period of 2.17 years. Stock-based compensation expense to employees and non employees for the three months ended December 31, 2008, December 31, 2007 and the period ended October 11, 2005 (date of inception) to December 31, 2008, respectively was $122,867, $97,257 and $2,764,625, 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.

On November 7, 2008, the Company increased the authorized number of shares to 400,000,000. The fair value of the share-based compensation liability on November 7, 2008 was $2,701,572. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life ranging between 2.08 and 4.2 years; (2) volatility of 100%; (3) risk free interest ranging between 1.3% and 2.6% and (4) dividend rate of 0%. The Company reclassified this amount into additional paid-in capital.

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%.

On November 7, 2008, the Company increased the authorized number of shares to 400,000,000. The fair value of the accrued warrant liability on November 7, 2008 was $1,023,564. The fair value was computed using the Black-Scholes model under the following assumptions: (1) expected life of 1.7 years; (2) volatility of 100%; (3) risk free interest of 1.3% and (4) dividend rate of 0%. The Company reclassified this amount into additional paid-in capital.

Note 8 – Taxes

We have provided no current income taxes due to the losses incurred from October 11, 2005 (date of inception) through December 31, 2008. Net operating losses of approximately $2,474,661 at December 31, 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.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

A reconciliation of the statutory Federal income tax rate and the effective income tax rate for the three months ended December 31, 2008 and the year ended September 30, 2008 follows:

	December 31,			September 30,
	2008			2008
Statutory federal income tax rate		(0.34	)		(0.34	)
State income taxes (benefit), net of federal taxes		(0.06	)		(0.06	)
Equity instruments issued for compensation/services		0.05			0.19
Change in derivative liabilities		0.08			0.06
Non-cash financing costs		-			0.05
Valuation allowance		0.27			0.10
Effective income tax rate		-			-

Significant components of deferred tax assets and liabilities are as follows:

	December 31,			September 30,
	2008			2008
Deferred tax assets:
Net operating loss carryforwards	$	1,081,358		$	836,646
Valuation allowance		(1,081,358	)		(836,646	)
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 December 31, 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 $6,594, $0 and $33,874, for the three months ended December 31, 2008, and 2007 and for the period from October 11, 2005 (date of inception) to December 31, 2008, respectively.

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 recorded a rent expense of $14,092 for the three months ended December 31, 2008.

CelLynx Group, Inc.

(A Development Stage Company)

Notes to Consolidated Financial Statements

(unaudited)

Note 10 – Subsequent Events

On January 6, 2009, the Company entered into a Note and Restricted Stock Purchase Agreement (the “Agreement”). Pursuant to the Agreement, the Company (i) issued an unsecured convertible promissory note (“Convertible Note”) in the principal amount of $100,000 which is convertible into the Company’s common stock at a conversion price of $0.20 per share, and (ii) issued 50,000 shares of the Company’s restricted stock. The Convertible Note is interest free and is due on January 30, 2009. The Convertible Note is currently in default.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

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

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

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 to investors at an exercise price of $0.20 per share. 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 February 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 February 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 consolidated 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 2 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

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

As of December 31, 2008, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Use of 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

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

Results of Operations for the Three Months Ended December 31, 2008 and 2007, respectively.

During the three months ended December 31, 2008, we incurred $151,527 of research and development expenses compared to $0 incurred during the three months ended December 31, 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 three months ended December 31, 2008, we incurred $621,813 of general and administrative expenses, compared to $176,759 incurred during the three months ended December 31, 2007. The increase is primarily due to an increase in salaries of approximately $193,000 an increase of payroll taxes of approximately $65,000, an increase in insurance expense of approximately $41,000, and an increase of rent expense of approximately $20,000.

During the three months ended December 31, 2008, we incurred $218,203 of non-operating expense, compared to $344,505 incurred during the three months ended December 31, 2007. The decrease is due to a gain on the change in the fair value of the accrued beneficial conversion liability of $251,410, and a loss on the change in the fair value of the accrued warrant liability of $419,571 and a decrease in interest and financing costs of $289,090. Interest and financing costs decreased because during the three months ended December 31, 2007, the Company recorded to financing costs the fair value of the beneficial conversion liability that exceeded the face amount of the convertible debt.

Financial Condition

As of December 31, 2008, we had a working capital deficit of $314,180, compared to $5,301,132 as of September 30, 2008 The decrease in working capital deficit is due to the reclassification of the share based compensation liability, accrued beneficial conversion liability and accrued warrant liability to additional paid-in capital on November 7, 2008, due to the increase of our authorized shares to 400,000,000 which provided sufficient shares to cover the potential conversion of the options, warrants and the convertible promissory notes.

For the three months ended December 31, 2008 and 2007 and for the period from October 11, 2005 (Date of Inception) to December 31, 2008, we incurred net losses of $991,543, $521,264 and $8,686,991, respectively. As of December 31, 2008 and 2007, we have a deficit accumulated during the development stage of $8,686,991 and $7,695,448, 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 in order to continue our operations, either now or in the future.

We raised $100,000 on January 6, 2009 through the issuance of an unsecured convertible promissory note and the issuance of 50,000 restricted shares of common stock. The promissory note is due on January 30, 2009 and is interest free. The note is currently in default.

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 December 31 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			60,000			-
Operating lease		69,960			55,968			13,992
Total Contractual Obligations	$	392,316		$	115,968		$	276,348

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 (the "Exchange Act") require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer ("CEO") and 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 he 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.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

Not applicable.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

(a)

None.

(b)	There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS

Exhibit

Number

Description

31.1		Section 302 Certification by the Corporation’s Chief Executive Officer *

31.2		Section 302 Certification by the Corporation’s Chief Financial Officer *

32.1		Section 906 Certification by the Corporation’s Chief Executive Officer *

32.2		Section 906 Certification by the Corporation’s Chief Financial Officer *

__________________

* Filed Herewith.

(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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CELLYNX GROUP, INC.
	(Registrant)

Date: February 23, 2009	By:	/s/ Daniel R. Ash
		Daniel R. Ash
		Chief Executive Officer

INDEX TO EXHIBITS

Exhibit

Number

Description

31.1		Section 302 Certification by the Corporation’s Chief Executive Officer *

31.2		Section 302 Certification by the Corporation’s Chief Financial Officer *

32.1		Section 906 Certification by the Corporation’s Chief Executive Officer *

32.2		Section 906 Certification by the Corporation’s Chief Financial Officer *

__________________

* Filed Herewith.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

CelLynx Inactive 10-Q2009 Q1 Quarterly report

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