Attached files

file filename
EX-31.1 - CERTIFICATION - CelLynx Group, Inc.cellynx_10k-ex3101.htm
EX-32.2 - CERTIFICATION - CelLynx Group, Inc.cellynx_10k-ex3202.htm
EX-31.2 - CERTIFICATION - CelLynx Group, Inc.cellynx_10k-ex3102.htm
EX-32.1 - CERTIFICATION - CelLynx Group, Inc.cellynx_10k-ex3201.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2010
 
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)
 
     
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o  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, 2010, the end of our second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $16,975,138  based on the closing price of $0.16 as reported on the Over-the-Counter Bulletin Board.

Number of shares of common stock outstanding as of January 14, 2011: 185,165,210.

 
 
 
 
 
 
 
 
 

 
 
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 2010

     
Page
PART I
       
Item 1.
 
Business
1
 
Item 1A.
 
Risk Factors
  14
 
Item 1B.
 
Unresolved Staff Comments
  14
 
Item 2.
 
Properties
  15
 
Item 3.
 
Legal Proceedings
  15
 
Item 4.
 
(Removed and Reserved.)
  15
 
         
PART II
       
Item 5.
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  15
 
Item 6.
 
Selected Financial Data
  18
 
Item 7.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
  18
 
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
  25
 
Item 8.
 
Financial Statements and Supplementary Data
  25
 
Item 9.
 
Disagreements With Accountants on Accounting and Financial Disclosure
25
 
Item 9A.
 
Controls and Procedures
27
 
Item 9B.
 
Other Information
28
 
         
PART III
       
Item 10.
 
Directors, Executive Officers and Corporate Governance
  28
 
Item 11.
 
Executive Compensation
32
 
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  35
 
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
  37
 
Item 14.
 
Principal Accounting Fees and Services
  37
 
         
PART IV
       
Item 15.
 
Exhibits, Financial Statement Schedules
  38
 
         
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.  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 was 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.  

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.  These Lock-Up Agreements expired in July 2010.

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.
 
 
1

 
 
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.
 
 
 
 
 
 
 
2

 
 
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.  Mr. Legendre subsequently resigned on May 4, 2009.

On December 12, 2008, Mr. Risheq resigned as the Company’s Chief Strategy Officer but remained 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.
 
Lock-Up Agreements
 
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 Lock-Up Agreements expired in July 2010.
 
 
 
3

 
 
FY 2010 Events

Ingram Micro Agreement

In November 2009, we signed an agreement with Ingram Micro Inc. to distribute the line of mobile phone boosters.  This agreement accelerates CelLynx Group’s go-to-market channel strategy and expands the reach of its product distribution to include all 50 states, D.C., U.S. Territories & Possessions, as well as Military Bases and U.S. embassies abroad.  Ingram Micro Inc. is the world’s largest technology distributor and a leading technology sales, marketing and logistics company.  It offers a broad array of solutions and services to more than 170,000 resellers by distributing and marketing hundreds of thousands of IT products worldwide from more than 1,500 vendors.  We expect to distribute our product through online distributors and traditional retailers.

Dollardex Master Global Marketing and Distribution Agreement

On April 21, 2010, the Company entered into a Master Global Marketing and Distribution Agreement (the “M&D Agreement”) with Dollardex, Corp. a Panama corporation (“Dollardex”).

Pursuant to the M&D Agreement, the Company appointed Dollardex as the independent, exclusive distributor of the Company’s products, specifically the 5BARz™ and all related accessories, if any, and any and all future products of the Company (the “Products”), in and limited to the following nine (9) regions: Canada, South America, Europe, Middle East, China, India, Australia, Africa, and South East Asia or those countries which may be expanded from time to time by mutual agreement by the Parties to include other countries (the “Territory”).  The term of the M&D Agreement was perpetual, although the agreement could be terminated pursuant to the terms of the M&D Agreement.

Amendment of M&D Agreement

On June 14, 2010, the Company, and Dollardex entered into Amendment No. 1 (the “Amendment”) to the M&D Agreement dated April 21, 2010.

Pursuant to Amendment No. 1, the Company and Dollardex agreed to grant an additional termination right to the Company.  In addition to those rights listed in the original M&D Agreement, the Company and Dolladex agreed that in the event that Dollardex fails to provide by July 10, 2010, the payments required to be provided by May 31, 2010 (the “May Payment”), and July 1, 2010 (the “July Payment”), as originally provided in the M&D Agreement, the Company shall have the right to immediately terminate the M&D Agreement.

Change in Management

On July 15, 2010, at a meeting of the Company’s Board of Directors, Donald A. Wright resigned as Chairman of the Company’s Board of Directors.  At the time of his resignation, Mr. Wright was also serving as Chairman of the Company’s Compensation and Corporate Governance Committee.

Additionally, Tareq Risheq resigned as a member of the Company’s Board of Directors.  At the time of his resignation, Mr. Risheq was serving as members of the following committees of the Company’s Board: Audit Committee and Compensation and Corporate Governance Committee.

In connection with Mr. Wright’s resignation from the Board, the Board appointed Malcolm P. Burke to the Board of Directors.  The Board will determine to which committees, if any, Mr. Burke will be appointed.

Following Mr. Burke’s appointment to the Board, the Board appointed Norman W. Collins as the Chairman of the Board.  Mr. Collins has served as a member of the Company’s Board of Directors since July 2008.
 
 
4

 
 
Additionally at the meeting, Daniel Ash resigned from the position of CEO of the Company.  Following his removal as CEO, Mr. Ash resigned as a director of the Company.  Mr. Ash has served as the Company’s CEO and as a director of the Company since July 2008.   It is the Company’s understanding that Mr. Ash resigned from the Board because he felt (i) that it was inappropriate for a majority of directors to seek to appoint a new director without delaying the vote in order to allow him time to investigate the background and qualifications of the proposed new director, (ii) that Messrs. Collins, Yaretz and Burke were representing the interests of Dollardex, Inc., rather than the interests of all shareholders, which those directors expressly deny, and (iii) that the Board acted contrary to a December 2009 resolution of the Board, which the Company expressly denies.  A copy of a letter from Mr. Ash setting forth his views was attached as an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on July 21, 2010.

The Board also appointed Mr. Collins to be the interim CEO of the Company.  The Company will disclose the terms of Mr. Collins’s compensation arrangements as CEO once they have been finalized.  The Board also appointed a committee to begin a search for a new CEO.  The members of the Committee are Dwayne Yaretz and Norman Collins.

Asher Enterprises Agreement

On July 22, 2010, the Company, entered into a Securities Purchase Agreement (the “SPA”) with Asher Enterprises, Inc. a Delaware corporation (“Asher”), in connection with the purchase by Asher of a Convertible Promissory Note (the “Note”).  The Company received the proceeds of the sale on July 30, 2010.

Pursuant to the Note, Asher loaned to the Company the principal amount of $50,000.  The Note bears interest at a rate of 8%, and due on April 21, 2011 (the “Due Date”).   Asher may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price (the “Conversion Price”) which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion.  Asher is prohibited under the Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then-outstanding common stock.  No registration rights were granted in connection with the purchase of the Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Note, the Company may not incur additional debt without Asher’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed Asher; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Note.

The Company has the right to pre-pay the Note during the first 120 days following the date of the Note by paying to Asher 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

Pursuant to the SPA, the Company agreed to grant to Asher a right of first refusal for any subsequent transactions occurring during the twelve month period following the Closing Date, which was July 21, 2010.  The right of first refusal does not apply to any transactions in excess of $250,000, or to any future transactions between the Company and Dollardex Corp.

In the above transaction, the Note was issued to an accredited investor pursuant to the exemption from registration provided by Section 4(2) of the  Securities Act of 1933, as amended, and rules promulgated pursuant thereto.  Additionally, the underlying shares of common stock, if any, issued upon conversion of the Note will be issued pursuant to the exemption from registration provided by Section 4(2) of the  Securities Act of 1933, as amended, and rules promulgated pursuant thereto.  All certificates for such shares will contain the appropriate legends restricting their transferability absent registration or applicable exemption.  The accredited investor received information concerning the Company and had the ability to ask questions about the Company.
 
 
5

 

Recent Developments

Line of Credit Agreement and Related Agreements; Further Amendment of M&D Agreement

On October 5, 2010, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”), and an Amended and Restated Master Global Marketing and Distribution Agreement (the “Amendment No. 2”) with Dollardex.

Line of Credit Agreement

Pursuant to the Line of Credit Agreement, Dollardex agreed to establish a revolving line of credit (the “Credit Line”) for the Company in the principal amount of two million five hundred thousand dollars ($2,500,000) (the “Credit Limit”) which indebtedness will be evidenced by and repaid in accordance with the terms of one or more a promissory notes for the amount of the Credit Limit (each a “Promissory Note”).  All sums advanced on the Credit Line or pursuant to the terms of the Line of Credit Agreement (each an “Advance”) shall become part of the principal of the applicable Promissory Note.

Dollardex agreed to make funds available under the Credit Line on the following schedule:

 
(i) 
$200,000 on or before January 30, 2011;
 
(ii) 
$300,000 on or before January 30, 2011;
 
(iii) 
$1,000,000 on or before February 28, 2011; and
 
(iv) 
$1,000,000 on or before March 31, 2011.

The Company and Dollardex agreed that upon the funding of the first $200,000, Dollardex would have the right, but not the obligation, to purchase 50% of the Intellectual Property (the “Purchased Assets”) of the Company, for $1,500,000 (the “Purchase Price”), pursuant to the terms of an asset purchase agreement (the “Asset Purchase Agreement”).  The payment dates for the Purchased Assets would be the same as the first three advance dates listed above.  If Dollardex exercises that right, the first $1,500,000 advanced under the Credit Line would be deemed to be the purchase price paid for the Purchased Assets, and the funds so paid will not be treated as advances under the Credit Line; provided, however, that if Dollardex exercises its right to require the Company to sell the Purchased Assets, but fails to make the required payments, the Purchased Assets will revert to the Company, and any amount of the Purchase Price paid will be treated as an advance under the Credit Line.

Pursuant to the Line of Credit Agreement, event of default (each, an “Event of Default”) include the following:

 
(a)
Failure to pay any principal or interest hereunder within ten (10) days after the same becomes due.
 
(b)
Any representation or warranty made by CelLynx in the Line of Credit Agreement or in connection with any borrowing or request for an advance hereunder, or in any certificate, financial statement, or other statement furnished by CelLynx to Dollardex is untrue in any material respect at the time when made.
 
(c)
Default by CelLynx in the observance or performance of any other covenant or agreement contained in the Line of Credit Agreement, other than a default constituting a separate and distinct event of default under the Line of Credit Agreement.
 
(d)
Default by CelLynx in the observance or performance of any other covenant or agreement contained in any other document or agreement made and given in connection with the Line of Credit Agreement, other than a default constituting a separate and distinct event of default under the Line of Credit Agreement, and the continuance of the same unremedied for a period of thirty (30) days after notice thereof is given to CelLynx.
 
(e)
Any of the documents executed and delivered in connection herewith for any reason ceases to be valid or in full force and effect or the validity or enforceability of which is challenged or disputed by any signer thereof, other than Dollardex.
 
(f)
CelLynx shall default in the payment of principal or interest on any other obligation for borrowed money other than hereunder, or defaults in the payment of the deferred purchase price of property beyond the period of grace, if any, provided with respect thereto, or defaults in the performance or observance of any obligation or in any agreement relating thereto, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to the stated maturity.
 
 
 
6

 
 
 
(g)
Filing by CelLynx of a voluntary petition in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended or under any other insolvency act or law, state or federal, now or hereafter existing.
 
(h)
Filing of an involuntary petition against CelLynx in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, and the continuance thereof for sixty (60) days undismissed, unbonded, or undischarged.
 
(i)
All or any substantial part of the property of CelLynx shall be condemned, seized, or otherwise appropriated, or custody or control of such property is assumed by any governmental agency or any court of competent jurisdiction, and is retained for a period of thirty (30) days.

Upon the occurrence of an Event of Default as defined above, Dollardex may declare the entire unpaid principal balance, together with accrued interest thereon, to be immediately due and payable without presentment, demand, protest, or other notice of any kind.  Additionally, Dollardex may suspend or terminate any obligation it may have hereunder to make additional Advances.

As security for all obligations of the Company to Dollardex, the Company granted to Dollardex security interests in the Collateral.  The grant of the security interest is evidenced by and subject to the terms of the Security Agreement (the “Security Agreement”), and such other such security agreements, financing statements, pledges, collateral assignments and other documents and instruments as Dollardex reasonably requires, all in form and substance satisfactory to Dollardex.

The Company granted to Dollardex a first priority security interest in all of the assets and property of the Company of every kind and description, tangible or intangible, wherever located, whether now owned or hereafter acquired, including, without limitation, the assets and properties listed in the Security Agreement (collectively, the “Collateral”).

Amended and Restated Master Global Marketing and Distribution Agreement

Additionally, on October 5, 2010, the Company entered into the Amendment No. 2 with Dollardex.

As described above and by way of background, CelLynx and Dollardex had previously entered into a certain Joint Venture Agreement pursuant to which CelLynx granted to Dollardex and certain JV Companies (as defined therein) exclusive distribution rights of Dollardex’s products in a designated territories (the “JV Agreement”), which JV Agreement was terminated pursuant to an agreement made on July 22, 2008 (the “July Agreement”).  Additionally, on April 21, 2010, CelLynx and Dollardex entered into a Master Global Marketing and Distribution Agreement, which amended the July Agreement, and which was subsequently amended as of June 14, 2010, and July 15, 2010 (collectively, the “Original MGMD Agreement”) .

The Amendment No. 2 terminated the Original MGMD Agreement and all obligations of the parties thereunder.  Additionally, pursuant to the Amendment No. 2, CelLynx appointed Dollardex, and Dollardex accepted such appointment, as the independent, exclusive distributor of the Products (defined as The Road Warrior, The @Home unit and any other product using the 5BARz™ Trademark including all related accessories, if any, and any and all future products of CelLynx) in the Territory (defined as all countries worldwide including the U.S.).

In consideration for the appointment as exclusive distributor, Dollardex agreed to pay to CelLynx a fee (the “Marketing and Distribution Fee”) amounting to 50% of Dollardex’s Net Earnings (defined as mean the total net earnings, as defined under U.S. generally accepted accounting principles, before taxes, of Dollardex from sales, licensing and other income relating directly or indirectly to the Products in the Territory).  The Marketing and Distribution Fee will be paid on a quarterly basis, payable in cash or immediately available funds and shall be due and payable not later than 45 days following the end of each calendar quarter of the year. CelLynx will have the right to audit the books and records of Dollardex to insure that the Dollardex’s obligations to make the Marketing and Distribution Fee are being met.
 

 
 
7

 
 
Assignment of Agreements from Dollardex to 5BARZ International,, Inc.

On December 30, 2010, the Company entered into an agreement (the “Assignment Agreement”) with Dollardex and 5BARZ International, Inc. (“5BARZ”), pursuant to which the Company agreed to an assignment from Dollardex to 5BARZ of four agreements between the Company and Dollardex.

Pursuant to the Assignment Agreement, Dollardex assigned all its right, title, and interest in the Amendment No. 2, the Asset Purchase Agreement, the Line of Credit Agreement, and the Security Agreement to 5BARZ in exchange for 14,600,000 shares of common stock of 5BARZ and a promissory note in the amount of $370,000.

The Company’s consent was required pursuant to Amendment No. 2.
 
Cancellation of Options and Issuance of Shares to Daniel Ash

On December 14, 2010, the Board of Directors approved the cancellation of 13,412,638 options that were previously granted to Daniel Ash, the former CEO and Director of the Company, and agreed instead to issue to Mr. Ash 13,412,638 shares of the Company's common stock.  Consequently, that number of shares was issued to Mr. Ash on January 13, 2011.

 
BUSINESS

Overview of CelLynx

CelLynx develops and markets the next generation of cell phone signal network extenders as distinguished from cell phone boosters, 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 being  manufactured by contract manufacturers located in South East Asia.   These manufacturers allows 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 by 5BARz International in accordance with the Dollardex assignment of the M & D Agreement referred to above.

  The CelLynx Solution
 
Most Indoor or Vehicular cellular signal enhancers 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 unit, 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.
 
 
 
 
8

 
 
We believe the CelLynx 5BARz product line, when commercialized, will also offer an advantage over  traditional 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 branded as The Road Warrior  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  Road Warrior Unit has also proven highly effective for single-room coverage in a home or office. Accordingly, the Company has introduced the 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 first product, The Road Warrior, has passed FCC Certification and in July 2009, we ordered 220 units from our manufacturer in the Philippines and have since followed up with orders exceeding 16,000 units.  The company expects to start receiving delivery of those units during the first quarter of 2011.

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 Road Warrior Unit and 5BARz SOHO Unit now referred to as the @Home 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 @Home  Unit
 
The 5BARz  @Home Unit  for the small office, or 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 will take place in the first half of 2011 for the North American model with the European and Asian models following shortly thereafter are expected to be introduced in mid 2010.

5BARz Road Warrior Unit

The 5BARz Universal Unit is designed to eliminate cell phone weak spots primarily while in a vehicle or water vessel  --moving or stationary -- as well as for single-room coverage in home, office or hotel.
 
 
9

 
 
For vehicles and vessels, 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 adapter 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 adaptor 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. 

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 /marine 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 the end of  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 the  CelLynx  Network Extenders. “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 5BARz 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 a portion  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.
 
 
 
 
10

 

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 @Home 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 the end of  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
 
CelLynx will address the  US and International market place through  the Master Global Marketing, Distribution  Agreement recently assigned toi 5BARz International.

Additionally, In November 2009, we signed an agreement with Ingram Micro Inc. to distribute the Road Warrior line.  This agreement accelerates CelLynx Group’s go-to-market channel strategy and expands the reach of its product distribution to include all 50 states, the District of Columbia, U.S. Territories and Possessions, as well as Military Bases and U.S. embassies abroad.  Ingram Micro Inc. is the world’s largest technology distributor and a leading technology sales, marketing and logistics company.  It offers a broad array of solutions and services to more than 170,000 resellers by distributing and marketing hundreds of thousands of IT products worldwide from more than 1,500 vendors.  We expect to distribute our product through online distributors and traditional retailers.

Operating and Manufacturing Strategy

CelLynx’s management and engineering team has extensive experience working with top-tier off shore manufacturers. 

Given their expertise in this area, they have become aware of the advantages of partnering with a reputable contract manufacturer (“CM”).  In this case, CelLynx will immediately leverage manufacturing practices at minimal cost, providing immediate benefits 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.
 
 
 
11

 
 
CelLynx has selected a CM in the Philippines which produced the first 220 units in coordination with the Company’s engineering team.  The first initial mass production  units were used for UL testing, product demonstrations, and remaining FCC approved units were sold as initial sales.
 
Competition by Market Segment

The  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, most of 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  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.


Competitive Matrix
Wi-Ex
CellAntenna
JD TECK
Wilson
CelLynx
 
YX500-PCS
CAE50PCS
JD 55-PR
PCS 60dB
   
Claimed Coverage
2,500 sq. ft
3,000 sq ft
1,200 sq ft
2,500 sq ft
2,500 sq ft
   
Open area
Open area
   
Adaptive/AGC
Yes
No
No
Yes
Yes
   
Freq./Carrier
Specific
No
No
No
No
No
   
Maximum System
Gain
55dB
50dB
55dB
60dB
70dB
   
Cable Length/Type
35’ RG6
33’ RG6
33’ RG6
Buy separately
None Required
   
Market
Consumer
Industrial
Industrial
Industrial
Consumer
   
Distribution
Direct
Direct
Direct
Distributors
Direct
   
 
Master VAR
(Online
(3rd Party)
Master VAR
Master VAR
Distributors
   
 
Retail
   
Online
(3rd Party)
Online
   
 
Online
(3rd Party)
           
Price (MSRP)
$299.99
$499.99
$395.00
Various
$299.00
   
Installation:
Recommended
Yes
Yes
Yes
None Required
   
Price
$150.00
>$300
$250
Various
   
External Antennae
1
2
2
2
0
   
 
 
 
12

 
 
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:

Matter ID
 
Title
 
Matter Type
 
Serial Number
 
Status
101710.0001 P CT
 
Cell Phone Signal Booster
 
Patent – P CT
 
P CT/US07/060827
 
Pending
                 
101710.0001 US
 
Cell Phone Signal Booster
 
Patent – US
 
11/625331
 
Pending
                 
101710.0001 US2
 
Dual Cancellation Loop Wireless Repeater
 
Patent – US
 
12/106468
 
Pending
                 
101710.0002 PRO
 
Method to Remotely Enable and Disable the Operation of a Wireless Repeater
 
Patent – Provisional
 
61/018765
 
Pending
                 
101710.0003 PRO
 
Method to Integrate a Wireless Repeater into the Wireless System for Control and Monitoring
 
Patent – Provisional
 
61/018892
 
Pending
                 
101710.0004 PRO
 
Method for a Wireless System Home Base Station
 
Patent – Provisional
 
61/019097
 
Pending
                 
101710.0005 PRO
 
Dual Loop Active and Passive Repeater Antenna Isolation Improvement
 
Patent – Provisional
 
61/045662
 
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.
 
 
13

 

Government Regulation and Probability of Affecting Business

Our products are subject to Federal Communications Commission (“FCC”) and Underwriter Laboratories (“UL”) certifications.  We  have submitted samples of our products to both agencies according to our product development process, and these certifications have been granted.

In WT Docket # 10.4, the Wireless Bureau of the FCC is seeking comments on petitions regarding the use of signal boosters and other signal amplifier techniques used with wireless services.  The Company has submitted reply comments differentiating itself from the rest of the industry due to its patent-pending low power emission technology which makes its Signal Extenders transparent to cellular networks.  In other words, we believe that our technology does not interfere with the network signals.  The Company feels that its differentiation from the booster industry will be accepted by the FCC, although there can be no guarantee of such acceptance.

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 environmentally conscience in every aspect of its operations.

Employees/Contractors/consultants

CelLynx had approximately six (6) full-time employees during 2009 and early 2010  but it has found that engineers and soft ware designers prefer to work as independent contractors and therefore, the company has switched to that business model for talent.   In addition, we have hired several consultants to assist with development of our product.   CelLynx is not affiliated with any union or collective bargaining agreement .   While the employees were laid off in 2010,  there have been no adverse labor incidents in the history of CelLynx. Management believes that its relationship with its current contractors and consultants 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.
 
 
14

 

ITEM 2. PROPERTIES

We lease office space in Mission Viejo, California at 25910 Acero, Suite 370, Mission Viejo, California 92691.  The facility is our primary operating offices and headquarters.  The facility is approximately 2,120 square feet.  The lease has a two-year term that expires in April 2012, and the monthly base rent is $3,170.

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 expires March 31, 2012 and the monthly base rent is $1,962.  

We believe that the foregoing facilities are sufficient for our operational needs.

We do not anticipate investing in real estate or interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in real estate activities. We currently have no formal investment policy, and we do not intend to undertake investments in real estate as a part of our normal operations.

ITEM 3. LEGAL PROCEEDINGS

Dolphinshire L.P., v. CelLynx Group, Inc., and Does 1-10, Superior Court of California, Orange County, Case No. 00388787.  On July 12, 2010, plaintiff brought suit against the Company for unlawful detainer pursuant to a lease agreement, seeking an unspecified amount of damages not to exceed $25,000.  The Company has engaged in settlement negotiations with the plaintiff.
 
The Company is aware of formal as well as informal claims for back wages made by several former employees and expects to satisfy those claims in the normal course of business.
  
ITEM 4. (Removed and Reserved).

PART II
 
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
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 ($)
LOW ($)
 
Quarter Ended December 31, 2008
$0.22
$0.15
 
Quarter Ended March 31, 2009
$0.17
$0.09
 
Quarter Ended June 30, 2009
$0.33
$0.09
 
Quarter Ended September 30, 2009
$0.27
$0.17
 
Quarter Ended December 31, 2009
$0.24
$0.06
 
Quarter Ended March 31, 2010
$0.25
$0.12
 
Quarter Ended June 30, 2010
$0.16
$0.04
 
Quarter Ended September 30, 2010
$0.06
$0.02
 
Quarter Ended December 31, 2010
$0.05
$0.02
 
 
 
15

 
 
Holders
 
As of January ____, 2011, there were approximately _______ 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.
  
Recent Sales of Unregistered Securities

FY 2009

During the three months ended September 30, 2009, the Company issued 3,060,000 shares of the Company’s common stock for proceeds of $334,500.  The Company also issued 298,181 shares for services rendered to the Company valued at $45,599.

In each issuance discussed above, the shares of common stock were issued without registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations promulgated thereunder

FY 2010

Debentures

As noted above in the discussion of the original M&D Agreement entered into on April 29, 2010, in the event that certain of the Company’s products were not completed and operable in the appropriate markets by the agreed dates set forth above, Dollardex would have had the right to convert such license payments listed above into prepayments for Convertible Debentures (the “Debentures”) of the Company.  No Debentures were issued, and the provisions relating to the Debentures were removed in Amendment No. 2.

In December 2009 and January 2010, the Company conducted a private placement of units (the “Units”).  Each Unit consisted of 16,667 shares of the Company’s common stock, par value $0.9001 per share (the “Common Stock”) and a warrant (the “Warrant”) to purchase up to an additional 16,667 shares of Common Stock, with an exercise price of $0.20 per share.  Thirteen investors purchased Units in the Unit Offering.  In connection with the offering of the Units, the Company granted re-sale registration rights to the investors.  The Company filed a registration statement on Form S-1 on March 10, 2010, which was declared effective on March 22, 2010.
 
 
16

 
 
The Unit Offering was made without registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations promulgated thereunder.
 
On January 8, 2010, the Company issued 280,112 shares of common stock for legal services valued at $67,227.

On January 15, 2010, the Company entered into a consulting agreement with Seahawk Capital Partners, Inc.  The Company issued 1,000,000 shares of Company restricted stock and 2,000,000 warrants upon signing of agreement.  In addition, the Company agreed to issue an additional 50,000 shares of restricted Company stock per month for the term of the agreement.

On February 10, 2010, the Company issued 190,000 shares of the Company’s restricted commons stock to unrelated parties in connection with an agreement entered into on June 30, 2009, to provide the Company capital introduction services.  The Company agreed to pay 3.33 shares of common stock for every dollar raised.

On March 10, 2010, the Company issued 2.5 million shares of common stock for a one year consulting agreement with an unrelated party.  As additional compensation, the Company issued 2,500,000 million warrants with an exercise price of $0.001 which may only be exercised after June 9, 2010, and subject to the terms and conditions of the warrant agreement.

On March 31, 2010, the Company entered into a subscription agreement with an unrelated party and issued 980,000 shares of $0.001 par value common stock for $0.10 per share with 980,000 detachable warrants.  The warrants have an exercise price of $0.25 and expire on December 31, 2012.

During the six months ended March 31, 2010, the Company issued 1,945,486 shares of common stock for consulting services.

During the three months ended March 31, 2010, the Company had issued 6,290,792 of common stock as part of the conversion of convertible notes settled during the period.

During the six months ended March 31, 2010, the Company issued 2,000,000 shares of $0.001 par value common stock for $0.10 per share with 2,000,000 detachable warrants.  The warrants have an exercise price of $0.10 and expire on April 1, 2012.

During the six months ended March 31, 2010, the Company issued 11,516,757 shares of $0.001 par value common stock for $0.06 per share with 11,516,757 detachable warrants.  The warrants have an exercise price of $0.20 and expire on December 1, 2012.

During the six months ended March 31, 2010, the Company entered into subscription agreements and issued 8,500,000 shares of $0.001 par value common stock for $0.06 per share with 8,500,000 detachable warrants.  The warrants have an exercise price of $0.20 and expire on December 31, 2012.

On April 12, 2010, the Company entered into a subscription agreement with an unrelated party and issued 450,000 shares of $0.001 par value common stock for $0.10 per share with 450,000 detachable warrants.  The warrants have an exercise price of $0.25 and expire on April 12, 2013.

In each issuance discussed above, the shares of common stock were issued without registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations promulgated thereunder.

Asher Enterprises

On July 22, 2010, the Company entered into a Securities Purchase Agreement (the “SPA”) with Asher Enterprises, Inc. a Delaware corporation (“Asher”), in connection with the purchase by Asher of a Convertible Promissory Note (the “Note”).  The Company received the proceeds of the sale on July 30, 2010.
 
 
17

 
 
Pursuant to the Note, Asher loaned to the Company the principal amount of $50,000.  The Note bears interest at a rate of 8%, and due on April 21, 2011 (the “Due Date”).   Asher may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price (the “Conversion Price”) which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion.  Asher is prohibited under the Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then-outstanding common stock.  No registration rights were granted in connection with the purchase of the Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.

Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Note, the Company may not incur additional debt without Asher’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed Asher; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Note.

The Company has the right to pre-pay the Note during the first 120 days following the date of the Note by paying to Asher 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

As of the date of this Report, the Company had issued to Asher no shares of the Company’s common stock in connection with the SPA and the Note.

In the above transaction, the Note was issued to an accredited investor pursuant to the exemption from registration provided by Section 4(2) of the  Securities Act of 1933, as amended, and rules promulgated pursuant thereto.  Additionally, the underlying shares of common stock, if any, issued upon conversion of the Note will be issued pursuant to the exemption from registration provided by Section 4(2) of the  Securities Act of 1933, as amended, and rules promulgated pursuant thereto.  All certificates for such shares will contain the appropriate legends restricting their transferability absent registration or applicable exemption.  The accredited investor received information concerning the Company and had the ability to ask questions about the Company.

Repurchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.  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-K, unless the context requires otherwise, “we” or “us” or the “Company” or “CelLynx” means CelLynx Group, Inc., and our subsidiary.
 
 
18

 

Plan of Operations

Overview

We are a producer of the next generation of cellular network extenders for the small office, home office  and vehicle/marine markets.  This next generation product line, CelLynx 5BARz™, uses our patent-pending technology to create a single-piece, plug ‘n play unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones and other cellular devices being used indoors or in vehicles.

Our first product, The Road Warrior, has passed FCC Certification, and in July 2009, we  commenced the ordering of production units.

We have recently completed a prototype of the @Home Unit which  will eventually deliver 70 decibel (dB) of gain in a Single Band PCS environment providing up to 2,500 square feet of indoor coverage.  We plan to commercialize this technology, with production and distribution scheduled to begin, in the third calendar quarter of 2011. 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 small office home office (“SOHO”) cellular network extenders 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 is designed to eliminate 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 is expected 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 believes that all of the critical functions required for this dual-band unit have been identified and that we have the capability to complete development leading to commercialization.

Our product line is being manufactured by contract manufacturers located in the Philippines, with whom CelLynx has established manufacturing and supply chain relationships.  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 by 5BARz International, Inc., in accordance with the M&D Agreement discussed below, incorporating a multi-channel strategy that includes distribution partners, wireless service providers, retail outlets and international joint ventures.

M&D Agreement; Dollardex; 5BARz International, Inc.

On April 29, 2010, we entered into a new master global marketing and distribution agreement (the “2010 Agreement”) that amended the prior agreement dated July 22, 2008, with Dollardex.  Under the 2010 Agreement, Dollardex proposed to establish a distribution network of our line of products in the territories, as defined, as well as to assist the international dealers in the promotion and marketing of our products.  As consideration for exclusive licenses, the Company would receive an aggregate of $11 million, payable to the Company from May 2010 to April 2011.  The funding was subject to terms and condition, as set forth in the 2010 Agreement.  Both parties could terminate the agreement in the event of breach or default and subject to certain conditions allowing for a cure of default.

On June 14, 2010, the Company and Dollardex entered into Amendment No. 1 (the “Amendment”) to the 2010 Agreement.  Pursuant to Amendment No. 1, the Company and Dollardex agreed to grant an additional termination right to the Company.
 
 
 
19

 
 
On August 15, 2010 the Company and Dollardex agreed to a further amendment of the 2010 Agreement (“Amendment No. 2”).  Pursuant to Amendment No. 2, Dollardex and the Company agreed that its Board of Directors would conduct a “Technology and Business” review of the Company and its products to provide Dollardex with specific information relating to product milestones, budgets and use of funds as well as other business and technical information.  Also pursuant to Amendment No. 2, and in further consideration for the funding to be provided by Dollardex,  the Company agreed to appoint Dollardex as the Company’s independent and exclusive distributor of the Company’s products throughout the world including the United States.

Line of Credit Agreement and Related Agreements; Further Amendment of M&D Agreement

Subsequently, on October 5, 2010, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”), and an Amended and Restated Master Global Marketing and Distribution Agreement (the “A&R Agreement”) with Dollardex.

Line of Credit Agreement

Pursuant to the Line of Credit Agreement, Dollardex agreed to establish a revolving line of credit (the “Credit Line”) for the Company in the principal amount of two million five hundred thousand dollars ($2,500,000) (the “Credit Limit”) which indebtedness will be evidenced by and repaid in accordance with the terms of one or more a promissory notes for the amount of the Credit Limit (each a “Promissory Note”).  All sums advanced on the Credit Line or pursuant to the terms of the Line of Credit Agreement (each an “Advance”) shall become part of the principal of the applicable Promissory Note.

Dollardex agreed to make funds available under the Credit Line on the following schedule:

(i) 
$200,000 on or before January 30, 2011;
(ii) 
$300,000 on or before January 30, 2011;
(iii) 
$1,000,000 on or before February 28, 2011; and
(iv) 
$1,000,000 on or before March 31, 2011.

The Company and Dollardex agreed that upon the funding of the first $200,000, Dollardex would have the right, but not the obligation, to purchase 50% of the Intellectual Property (the “Purchased Assets”) of the Company, for $1,500,000 (the “Purchase Price”), pursuant to the terms of an asset purchase agreement (the “Asset Purchase Agreement”).  The payment dates for the Purchased Assets would be the same as the first three advance dates listed above.  If Dollardex exercises that right, the first $1,500,000 advanced under the Credit Line would be deemed to be the purchase price paid for the Purchased Assets, and the funds so paid will not be treated as advances under the Credit Line; provided, however, that if Dollardex exercises its right to require the Company to sell the Purchased Assets, but fails to make the required payments, the Purchased Assets will revert to the Company, and any amount of the Purchase Price paid will be treated as an advance under the Credit Line.

Upon the occurrence of an Event of Default as defined in the Line of Credit Agreement, Dollardex may declare the entire unpaid principal balance, together with accrued interest thereon, to be immediately due and payable without presentment, demand, protest, or other notice of any kind.  Additionally, Dollardex may suspend or terminate any obligation it may have hereunder to make additional Advances.

As security for all obligations of the Company to Dollardex, the Company granted to Dollardex security interests in the Collateral.  The grant of the security interest is evidenced by and subject to the terms of the Security Agreement (the “Security Agreement”), and such other such security agreements, financing statements, pledges, collateral assignments and other documents and instruments as Dollardex reasonably requires, all in form and substance satisfactory to Dollardex.

The Company granted to Dollardex a first priority security interest in all of the assets and property of the Company of every kind and description, tangible or intangible, wherever located, whether now owned or hereafter acquired, including, without limitation, the assets and properties listed in the Security Agreement (collectively, the “Collateral”).
 
 
20

 
 
Amended and Restated Master Global Marketing and Distribution Agreement

Additionally, on October 5, 2010, the Company entered into the A&R Agreement with Dollardex.  The A&R Agreement terminated the Original MGMD Agreement and all obligations of the parties thereunder.  Additionally, pursuant to the A&R Agreement, CelLynx appointed Dollardex, and Dollardex accepted such appointment, as the independent, exclusive distributor of the Products (defined as The Road Warrior, The @Home unit and any other product using the 5BARz™ Trademark including all related accessories, if any, and any and all future products of CelLynx) in the Territory (defined as all countries worldwide including the U.S.).

In consideration for the appointment as exclusive distributor, Dollardex agreed to pay to CelLynx a fee (the “Marketing and Distribution Fee”) amounting to 50% of Dollardex’s Net Earnings (defined as mean the total net earnings, as defined under U.S. generally accepted accounting principles, before taxes, of Dollardex from sales, licensing and other income relating directly or indirectly to the Products in the Territory).  The Marketing and Distribution Fee will be paid on a quarterly basis, payable in cash or immediately available funds and shall be due and payable not later than 45 days following the end of each calendar quarter of the year. CelLynx will have the right to audit the books and records of Dollardex to insure that the Dollardex’s obligations to make the Marketing and Distribution Fee are being met.

Assignment of Agreements from Dollardex to 5BARZ International,, Inc.

On December 30, 2010, the Company entered into an agreement (the “Assignment Agreement”) with Dollardex and 5BARZ International, Inc. (“5BARZ”), pursuant to which the Company agreed to an assignment from Dollardex to 5BARZ of four agreements between the Company and Dollardex.

Pursuant to the Assignment Agreement, Dollardex assigned all its right, title, and interest in the A&R Agreement, the Asset Purchase Agreement, the Line of Credit Agreement, and the Security Agreement to 5BARZ in exchange for 14,600,000 shares of common stock of 5BARZ and a promissory note in the amount of $370,000.  The Company’s consent was required pursuant to the A&R Agreement.

There is no assurance that the Company will receive the entire amount of funding provided in the Line of Credit Agreement. As of January 12, 2011, the Company had not received any of the licensing fees under this agreement.

Results of Operations

Comparison of years ended September 30, 2010 and 2009

   
Year ended September 30,
             
   
2010
   
2009
   
$ Change
   
% Change
 
REVENUE
  $ 89,867     $ 10,373     $ 79,494       766.4%  
                                 
COST OF REVENUE
    59,758       7,554       52,204       691.1%  
                                 
GROSS PROFIT
    30,109       2,819       27,290       968.1%  
                                 
OPERATING EXPENSES
    4,031,357       3,635,153       396,204       10.9%  
                                 
NON OPERATING INCOME (EXPENSES)
    363,895       (346,428 )     710,323       -205.0%  
                                 
NET LOSS
  $ (3,637,353 )   $ (3,978,762 )   $ 341,409       -8.6%  


 
 
 
21

 

Revenue and Cost of Revenue

During the year ended September 30, 2010, we generated net $89,867 compared to $10,373 for the year ended September 30, 2009.  The increase in revenue is due to the increase in the sales of the 5BARz units.  We began our initial sales in July 2009.  The September 30, 2010, year ended cost of revenues was $59,758, compared to $7,554 for the year ended September 30, 2009, resulting in a gross profit of $30,109 and $2,819, respectively.    Gross profit was 34% and 27% for the years ended September 30, 2010 and 2009, respectively.  The increase in gross profit is due to the increase in selling price.

Operating Expenses

Total operating expenses incurred for the year ended September 30, 2010, was $4,031,357 compared to $3,635,153 for the year ended September 30, 2009, which increased by $396,204.  The increase was due to a net increase in professional fees and marketing fees to promote our 5BARz product and gain market share.  

Non-Operating Income and Expenses

Total non-operating income incurred for the year ended September 30, 2010, was $363,895 compared to a non-operating expense of $346,428 for the year ended September 30, 2009, for a change of $710,323.  The change was due primarily to the change in the accrued beneficial conversion liability and the accrued warrant liability.  During the years ended September 30, 2010 and 2009, we recognized a gain on the change in fair value of the accrued conversion liability of $59,046 and $251,410, respectively, During the years ended September 30, 2010 and 2009, we recognized a gain on the change in fair value of the accrued warrant liability of $461,681 compared to a loss of $419,571, respectively.

Liquidity and Capital Resources

Financial Condition

As of September 30, 2010, we had cash of $6,601, and we had a working capital deficit of $1,751,682 compared to cash of $6,776 and a working capital deficit of $1,024,034 as of September 30, 2009.  The increase in working capital deficit is due the increase in current liabilities which is primarily comprised of accounts payable and convertible notes.

During the year ended September 30, 2010, cash used in operating activities was $1,452,510.  Cash used in operating activities consisted of a net loss of $3,637,353 increased by the change in fair value of accrued beneficial conversion liability of $59,046 and the change in fair value of accrued warrant liability of $461,681, offset by non-cash expenses of $347,692 for stock issued for services, $327,087 for warrants issued for services, $1,060,170 for stock-based compensation, $122,893 for the amortization of debt discount, a decrease in other assets of $219,954, and an increase of $615,727 for change in accounts payable and accrued expenses.

We used $22,865 for the purchase of intangible assets for the year ended September 30, 2010, compared to $26,489 for the purchase of equipment and intangible assets for the year ended September 30, 2009.

Cash provided by financing activities was $1,475,200 for the year ended September 30, 2010, compared to $856,000 for the year ended September 30, 2009. We received $1,544,450, less offering costs of $33,750 associated with the common stock, for the year ended September 30, 2010. We received $50,000 less cost of $3,000 related to the issuance of a convertible note and we paid $82,500 on convertible promissory notes.  We have financed our operations primarily through proceeds from the issuance and sale of common stock. 

We anticipate raising an additional $1 million during the next three months through private equity offerings and through draws on the Equity Line, although there is no guarantee that such funds will be available.  There is no assurance that the Company will be able to raise the entire amount. We believe that our current cash, anticipated cash flows 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.  
 
 
22

 

Going Concern

This Annual Report on Form 10-K for the year ended September 30, 2010, our independent auditors included an explanatory paragraph in its report relating to our consolidated financial statements for the years ended September 30, 2010 and 2009, which states that we have incurred negative cash flows from operations since inception, and expect to incur additional losses in the future and have a substantial accumulated deficit. These conditions give rise to substantial doubt about our ability to continue as a going concern. Our ability to expand operations and generate additional revenue and our ability to obtain additional funding will determine our ability to continue as a going concern. Our condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We have prepared our consolidated financial statements assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2010, we had an accumulated deficit of $15,311,563, negative cash flows from operations since inception, and expect to incur additional losses in the future as we continue to develop and grow our business. We have funded our losses primarily through the sale of common stock and warrants in private placements; borrowings from related parties and other investors; and revenue provided by the sales of our 5BARz unit. The further development of our business will require capital.  Our operating expenses will consume a material amount of our cash resources.

Our current cash levels, together with the cash flows we generate from operating activities, are not sufficient to enable us to execute our business strategy. We require additional financing to execute our business strategy and to satisfy our near-term working capital requirements. In the event that we cannot obtain additional funds on a timely basis or our operations do not generate sufficient cash flow, we may be forced to curtail or cease our activities, which would likely result in the loss to investors of all or a substantial portion of their investment. We are actively seeking to raise additional capital through the sale of shares of our capital stock to institutional investors and through strategic investments. If management deems necessary, we might also seek additional loans from related parties. However, there can be no assurance that we will be able to consummate any of these transactions, or that these transactions will be consummated on a timely basis or on terms favorable to us.

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, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

Contractual obligations
 
Total
   
Less than
1 year
   
1-3 years
 
Note Payable
  $ 312,356     $ 312,356     $ -  
Operating lease
    85,230       46,275       38,955  
    $ 397,586     $ 358,631     $ 38,955  
 
 
 
 
23

 
 
Off-Balance Sheet Arrangements

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. 

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

Intangible Assets

Acquired patents, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.

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

Impairment or Disposal of Long-lived Assets

The Company applies the provisions of Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of September 30, 2010 and 2009, there was no significant impairment of its long-lived assets.

Revenue Recognition

The Company's revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition.”  Revenue is recognized at the date of shipment to customers, and when the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.
 
 
24

 

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  Penalties and interest incurred relate to underpayment of income tax are classified as income tax expense in the period incurred.  No significant penalties or interest relating to income taxes have been incurred during the years ended September 30, 2010 and 2009.

Stock Based Compensation

The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are listed in the Index to Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
       
January 2010

As previously reported by the Company in a Current Report on Form 8-K filed on January 7, 2010, on January 4, 2010, the Company was notified that, effective January 1, 2010, certain partners of Moore Stephens Wurth Frazer and Torbet, LLP (“MSWFT”) and Frost, PLLC (“Frost”) formed Frazer Frost, LLP (“Frazer Frost”), a new partnership. Pursuant to the terms of a combination agreement by and among MSWFT, Frazer Frost and Frost (the “Combination Agreement”), each of MSWFT and Frost contributed all of their assets and certain of their liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s engagement letter with the Company and becoming the Company’s new independent accounting firm.  Frazer Frost is registered with the Public Company Accounting and Oversight Board (PCAOB).

The Company had engaged MSWFT on October 29, 2008.  The audit report of MSWFT on the Company’s financial statements for the fiscal year ended September 30, 2008, did not contain an adverse opinion or a disclaimer of opinion, other than for a going concern, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
 
 
 
25

 
 
Since the engagement of MSWFT on October 29, 2008, and through January 1, 2010, the Company did not consult with Frazer Frost on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company’s financial statements, and Frazer Frost did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

Since the engagement of MSWFT on October 29, 2008, and through the date of this Current Report, there were: (i) no disagreements between the Company and MSWFT on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of MSWFT, would have caused MSWFT to make reference to the subject matter of the disagreement in their reports on the Company’s financial statements for such years, and (ii) no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

The Company’s Board of Directors approved the engagement of Frazer Frost as the Company’s independent auditor.

The Company provided MSWFT a copy of the disclosures in the Form 8-K and requested that MSWFT furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not MSWFT agrees with the Company’s statements in this Item 4.01(a). A copy of the letter dated January 7, 2010, furnished by MSWFT in response to that request was filed as Exhibit 16.1 to the January 7, 2010, Form 8-K.
 
December 2010
 
As disclosed in a Current Report filed with the Commission on December 27, 2010, on December 21, 2010, and acting upon a decision to change accountants recommended and approved by the Board of Directors, the Company dismissed Frazer Frost, which had audited the financial statements of the Company for the fiscal years ending September 30, 2009 and 2008.
 
Since the engagement of Frazer Frost, the Company did not consult Frazer Frost regarding either: (i) the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
 
Frazer Frost’s report on the Company’s financial statements for the years ended September 30, 2009 and 2008, did not contain any adverse opinion or disclaimer of opinion and was not qualified as to audit scope or accounting principles; however, such year-end report did contain a modification paragraph that expressed substantial doubt about the Company’s ability to continue as a going concern.
 
From January 1, 2010, the date of engagement of Frazer Frost, through December 21, 2010, the date of the Company’s dismissal of Frazer Frost, (i) there were no disagreements between the Company and Frazer Frost on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Frazer Frost, would have caused Frazer Frost to make reference to the subject matter of the disagreement in connection with its reports and (ii) there were no “reportable events,” as described in Item 304(a)(1)(iv) of Regulation S-K of the Securities Exchange Act of 1934, as amended.
 
The Company has authorized without limitation Frazer Frost, its former accountant, to respond fully to the inquiries of the successor accountant concerning any matter falling within the scope of the successor accountant's services to be provided to the Company.
 
The Company is not aware of any issues that had not been resolved to the satisfaction of Frazer Frost, prior to the Company’s dismissal of Frazer Frost on December 21, 2010.
 
 
26

 
 
Additionally, on December 21, 2010, and acting upon a decision to change accountants recommended and approved by the Company’s Board of Directors, the Company engaged Gruber & Company, LLC (“Gruber & Company”), to audit the Company’s financial statements beginning with the fiscal year ended September 30, 2010.
 
During the Company’s two most recent fiscal years, and any subsequent interim period prior to engaging the Gruber & Company, neither the Company nor anyone acting on its behalf consulted Gruber & Company (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Registrant's financial statements; (iii) any matter that was the subject of a disagreement between the Company and Frazer Frost, or (iv) any other matter.
 
The Company requested Gruber & Company to review the disclosure required by this Item 4.01 before it was filed with the Commission and provided Gruber & Company the opportunity to furnish the Company with a letter addressed to the Commission containing any new information, clarification of the Company’s expression of its views, or the respects in which it does not agree with the statements made by the Company in the Current Report filed with the Commission on December 27, 2010. The newly engaged accountant indicated to the Company that no such letter would be issued.

ITEM 9A. 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 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 were effective as of the date of the evaluation.

 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, 2010, and this assessment identified the following material weaknesses in the company’s internal control over financial reporting:

 
-
A system of internal controls (including policies and procedures) has neither been designed nor implemented.
 
 
 
27

 
 
 
A formal, internal accounting system has not been implemented.

 
-
Appropriate technology systems to ensure reliability of information and record-keeping have not been acquired.

 
-
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 phase of operations.
  
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 September 30, 2009, 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, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
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
Norman W. Collins
 
71
 
Chief Executive Officer, Chairman of the Board
 
July 21, 2010
Kevin Pickard
 
47
 
Chief Financial Officer and Treasurer (1)
 
July 24, 2008
Dwayne Yaretz
 
49
 
Director
 
December 19, 2009
Malcolm P. Burke
 
66
 
Director
 
July 21, 2010

(1)
Mr. Pickard is an outside consultant providing services commonly provided by a Chief Financial Officer and Treasurer.
 
 
 
28

 

Norman W. Collins – Chief Executive Officer, Chairman of the Board
 
Norman W. Collins, Sr. became the Company’s Chief Executive Officer and Chairman of the Board on July 21, 2010.   Before that, he was 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.
 
Kevin Pickard – Chief Financial Officer and Treasurer(Outside Consultant)
 
Since 1998, Mr. Pickard has been a principal officer and owner of Pickard & Green CPAs (formerly Pickard & Company, CPAs, 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 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.

Dwayne Yaretz –  Director

Mr. Yaretz been involved with numerous privately held companies in various industry sectors to capitalize, manage growth strategies and operate as going concerns in North America over the past 26 years. Internationally, Mr. Yaretz has acted as Vice-President for Asia Power Engineering and China Power Corporation, both Honk Kong based companies specializing in design, construction and operations in the energy co-generation sector in the Peoples’ Republic of China.  Since 1996 Mr. Yaretz has acted for several public companies in various capacities. Mr. Yaretz has served as a Director, Corporate Secretary, CFO as well a President and CEO of several private and public companies, including two Capital Pool Companies that have successfully completed Qualifying Transactions by way of an IPO.  Currently, Mr. Yaretz in President of Griffin Corporate Concepts, a consulting firm focused on partnering with companies that are positioned for high growth potential in international markets.  Mr. Yaretz is currently a Director of Cantronic Systems Inc., a Tier 1 TSX.V listed company and Benzai Capital Ltd., a Capital Pool Company listed on the TSX.V.  In addition, Mr. Yaretz is also a Director of PAKIT Inc., a technology company and leading designer, developer and supplier of cellulose fiber moulding equipment to the packaging industry.

Malcolm P. Burke

Mr. Burke was appointed a director on July 21, 2010, and brings a wealth of both business and financial experience to the Company.  Prior to founding Primary Capital Group in 1986, Mr. Burke was a senior advisor and shareholder in Royal LePage Realty, Canada’s largest real estate brokerage firm where he managed the firm’s investment division.  Upon founding the Primary Capital Group, he continued to provide private equity and strategic financial advice to promising early stage and high growth ventures in the natural resource, oil and gas and technology fields.  In the process, he has been responsible for raising capital for private and public companies including many early stage and start up companies. He has been the President and Director of Primary Capital Group since 1988 and has also served as a director of a number of public companies listed on the TSX, NASDAQ and American Stock Exchange and the AIM Market in the UK.  Mr. Burke is a resident of West Vancouver, BC, and is 66 years of age.
 
 
29

 

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)          Been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 
-
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.

 
 
30

 
 
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 except as set forth below, for the fiscal year ended September 30, 2010, beneficial owners complied with Section 16(a) filing requirements applicable to them:

 
Mr. Collins received options in December 2010 for which a Form 4 has not yet been filed; and
 
-
Mr. Pickard received options in December 2010 for which a Form 4 has not yet been filed.
 
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 Norman W. Collins to serve as a member of our audit committee, although he did not qualify at the time as an “audit committee financial expert.”  Subsequently, in July 2010, in connection with the changes in management discussed in this Report, the audit committee and the Compensation and Corporate Governance Committee were dissolved. Subsequently, on August 23, 2010, the Audit Committee was reorganized with Mr. Collins as Chair, and Messrs. Yaretz and Burke as members. The Compensation and Corporate Governance Committee was also reorganized with Mr. Yaretz as the Chair and Messrs. Collins and Burke as members.
 
Our board of directors consists of two independent directors, Mr. Yaretz and Mr. Burke, and one non-independent director, Mr. Collins. We have determined independence in accordance with definitions and criteria applicable under the NASDAQ rules.
 
The Board has determined that we do not have an audit committee financial expert serving on the Board of Directors.

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. 

Compensation Committee Report

The Compensation and Corporate Governance Committee and Management have reviewed and discussed the Executive Compensation section set forth below, and the Compensation and Corporate Governance Committee recommended that the Executive Compensation discussion set forth below be included in the Annual Report.
 
Dwayne Yaretz, Chair       Norman W. Collins       Malcolm P. Burke
 
 
31

 

ITEM 11. EXECUTIVE COMPENSATION

Summary of Compensation

Executive Compensation
 
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
 
                             
Non-
qualified
         
                         
Non-Equity
 
Deferred
         
               
Stock
  Option    
Incentive Plan
 
Compensation
 
All Other
     
       
Salary
 
Bonus
 
Awards
  Awards    
Compensation
 
Earnings
 
Compensation
 
Total
 
Name and Principal Position
 
Year
 
($)
 
($)
 
($)
  ($)    
($)
 
($)
 
( $)
 
($)
 
Daniel R. Ash, President,  Former Chief Executive Officer, Former
 
2010
    150,385     -     -   -       -     -     -   150,385  
                                                     
Chief Operating Officer, Former Secretary, and Director (1)
 
2009
    170,000     -     -   -       -     -     -   170,000  
                                                     
Tareq Risheq, Former Chief Strategy Officer and Director (2) (3)
 
2009
    -     -     -   -       -     -     -   -  
   
2010
    -     -     -   117,201   (4)     -     -     -   117,201  
                                                     
Norm Collins, Chief Executive officer and Director (5) (6)
 
2009
    -     -     -   -       -     -     -   -  
   
2010
    85,000     -         70,009    (4)     -     -     -   155,009  
                                                     
Kevin Pickard, Chief Financial Officer (7)
 
2009
    40,000     -     -   -       -     -     -   40,000  
   
2010
    110,000     -     -   -       -     -     -   110,000  

(1) 
Mr. Ash relinquished his positions with the Company on July 15, 2010.
(2) 
Mr. Risheq resigned from the Company’s Board of Directors on July 15, 2010.
(3) 
Mr. Risheq received these options while serving as a Director of the Company.
(4) 
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): 
3
  Risk-free interest rate:  2.28%
  Expected volatility:    145%
  Expected dividend yield:  0%
 
(5) 
Mr. Collins was appointed as the Company’s Chief Executive Officer on July 15, 2010.
(6) 
Mr. Collins received these options while serving as a Director of the Company.  Of the $85,000 Salary listed, Mr. Collins has received $10,000, and the Company has accrued the remaining $75,000.
(7) 
Of the $110,000 compensation listed for 2010, Mr. Pickard has received $40,000, and the Company has accrued the remaining $70,000.

 
32

 

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)(2)
    4,538,768       4,211       -     $ 0.0787  
10/1/2012
               
Daniel R. Ash (3)
    349,426       -       -     $ 0.0787  
4/21/2013
               
Daniel R. Ash (1)
    6,670,589       1,804,644       -     $ 0.0787  
5/20/2013
               
                                                   
Norm Collins (4)(5)
    675,000       -       -     $ 0.13  
3/4/2015
               
_______________________

(1)           Options vests 33.3% after one year, with the remaining 66.7% to vest evenly over the remaining months

(2)           Mr. Ash relinquished his positions with the Company on July 15, 2010.

(3)           Option fully vested after 90 days of the grant date of April 21, 2008

(4)           Options fully vested in September 2010.

(5)           Mr. Collins was appointed as the Company’s Chief Executive Officer on July 15, 2010.  The Options listed were issued to him on March 4, 2010, when he was serving as a Director.
 
 
 
33

 

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 1/24 th  of the remaining 66.6%.
 
Severance:
If employment is terminated without cause, Mr. Ash 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 as of that date was no longer entitled to this compensation.

Mr. Ash relinquished his positions with the Company on July 15, 2010, and as of that date, he was no longer entitled to this compensation.

Additionally, on July 15, 2010, Mr. Risheq resigned his position as a Director of the Company.  In connection with his prior service as an officer of the Company, he sought severance in the amount of approximately $60,000, which the Company agreed to pay.
 
 
34

 
 
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 shares 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.  On November 1, 2008, the Company entered into an updated agreement with Mr. Pickard’s accounting firm that provides for monthly cash compensation of $5,000 per month and the issuance of 350,000 shares of the Company’s common stock.  In January, 2010, the Company entered into another  updated agreement with Mr. Pickard’s accounting firm that provides for monthly cash compensation of $10,000 per month, which was increased to $15,000 per month effective September 1, 2010.

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.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
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, 2010, 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
      33,188,050     $ --       41,811,950  
Total
      33,188,050               41,811,950  
 
 
 
35

 
 
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 185,165,210 shares outstanding as of January 14, 2011.

 
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)
   
37,855,024
     
19.45%
 
Kevin Pickard, Chief Financial Officer and Treasurer (4)
   
 1,382,970
     
*
 
Tareq Risheq, Director (5)
   
32,487,103
     
17.30%
 
Norman W. Collins, Director (6)
   
3,583,130
     
1.90%
 
Dwayne Yaretz, Director
   
998,400
     
*
 
Malcolm P. Burke, Director
   
-
     
*
 
All Executive Officers and Directors as a Group (4 persons)
   
5,964,500
     
3.15%
 
________________
* 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 185,165,210 issued and outstanding shares of the Company’s capital stock.
 
(3)
Includes 28,345,452 shares of common stock, options to purchase 6,867,921 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)
Mr. Pickard is an outside consultant providing services commonly provided by a Chief Financial Officer and Treasurer.  This figure does not include 400,000 shares owned of record by Pickard & Green, CPAs, an entity in which Mr. Pickard is a partner.  Mr. Pickard disclaims beneficial ownership of such 400,000 shares.

(5)
Includes 29,845,452 shares of common stock, 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.

(6) 
Consisting of options to purchase 213,383 shares of the Company’s common stock.
 
 
36

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Director Independence

Two of our directors, Dwayne Yaretz and Malcolm Burke, are independent directors as that term is defined under NASDAQ Rules and Regulations.  However, because the Company’s stock trades on the OTC Bulletin Board, the Company is not required to have independent directors.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The aggregate fees billed for the two most recently completed fiscal years ended September 30, 2010 and 2009, 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,
2009
   
Year Ended
September 30,
2010
 
Audit Fees
 
$
81,000
   
$
94,400
 
Audit Related Fees
 
$
-
     
-
 
Tax Fees
   
-
     
-
 
All Other Fees
   
-
     
-
 
Total
 
$
81,000
   
$
94,400
 
 
            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.  

 
 
 
 
 
 
 
37

 
 
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)
 
 
38

 
 
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)
 
 
 
 
39

 
 
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 (11)
     
10.28
 
Securities Issuance Agreement executed on May 4, 2009 by and among the Registrant, Dollardex Group Corp. and the other parties listed therein (10)
     
17.1
 
Letter of Resignation from John P. Thornton to the Board of Directors (7)
     
17.2
 
Letter of Resignation from Daniel Ash dated July 16, 2010 (12)
     
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 *
__________________
 
* 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.
(10)
Filed on May 8, 2009, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
(11)
Filed on October 14, 2008, as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.
(12)
Filed on July 21, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.
 
 
 
40

 
 
CelLynx Group, Inc.
Consolidated Financial Statements
 

Contents
 
 
 
 
Page
Report of Independent Registered Public Accounting Firm
F-2
   
Report of Independent Registered Public Accounting Firm
F-3
   
Consolidated Balance Sheets as of September 30, 2010 and 2009
F-4
   
Consolidated Statements of Operations for the Years Ended September 30, 2010 and 2009
F-5
   
Consolidated Statements Of Stockholders’ Deficit for the Years Ended September 30, 2010 and 2009
F-6
   
Consolidated Statements of Cash Flows for the Years Ended September 30, 2010 and 2009
F-7
   
Notes To Financial Statements
F-8




 
 
 
 
 
 
F-1

 
 
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 sheet of CelLynx Group, Inc. and subsidiary (formerly Norpac Technologies, Inc.), as of September 30, 2010, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. 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 audit.

We conducted our audit 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 audit 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 as of September 30, 2010, and the results of operations and cash flows for the year then ended, 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 Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Gruber & Company, LLC
St Louis, Missouri
January 12, 2011

 
 
 
F-2

 
 
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 sheet of CelLynx Group, Inc.  and subsidiary (formerly Norpac Technologies, Inc.), as of September 30, 2009, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. 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 audit.

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 audit 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 as of September 30, 2009  and the results of operations and cash flows for the year then ended, 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/ Frazer Frost, LLP
(Successor entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)
Brea, California
January 13, 2010
 
 
 
 
F-3

 
 
CELLYNX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2010 AND 2009
 
   
2010
   
2009
 
             
ASSETS
CURRENT ASSETS:
           
 Cash
  $ 6,601     $ 6,776  
 Accounts receivable
    1,925       -  
 Inventory
    30,212       16,316  
 Prepaids and other current assets
    165,411       15,750  
TOTAL CURRENT ASSETS
    204,149       38,842  
                 
EQUIPMENT, net
    6,087       11,359  
INTANGIBLE ASSETS, net
    117,772       97,180  
OTHER ASSETS
    -       16,190  
TOTAL ASSETS
  $ 328,008     $ 163,571  
                 
 LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
CURRENT LIABILITIES:
               
Accounts payable and accrued expenses
  $ 1,437,641     $ 832,634  
Accrued interest
    36,054       28,334  
Accrued derivative liabilities
    204,139       -  
Convertible stockholder notes, net of debt discount of $1,092 as of September 30, 2009
    -       101,908  
Convertible promissory notes, net of debt discount of $34,359 and $0 as of September 30, 2010 and 2009, respectively
    277,997       100,000  
TOTAL CURRENT LIABILITIES
    1,955,831       1,062,876  
                 
LONG TERM LIABILITIES:
               
Convertible promissory note, net of debt discount of $126,795 as of September 30, 2009
    -       135,561  
TOTAL LIABILITIES
    1,955,831       1,198,437  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS' DEFICIT:
               
Series A preferred stock, $0.001 par value;100,000,000 shares authorized; nil shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 400,000,000 shares authorized; 171,752,572 and 137,379,397 shares issued and outstanding as of September 30, 2010 and 2009, respectively
    171,752       137,379  
 Additional paid-in capital
    13,511,988       10,501,965  
 Accumulated deficit
    (15,311,563 )     (11,674,210 )
 Total stockholders' deficit
    (1,627,823 )     (1,034,866 )
 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 328,008     $ 163,571  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 
 
CELLYNX GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
 
   
2010
   
2009
 
             
Net Revenue
  $ 89,867     $ 10,373  
                 
Cost of Revenue
    59,758       7,554  
                 
Gross profit
    30,109       2,819  
                 
Operating expenses:
               
Research and development
    67,514       340,995  
General and administrative
    3,963,843       3,294,158  
Total operating expenses
    4,031,357       3,635,153  
                 
Loss from operations
  $ (4,001,248 )   $ (3,632,334 )
                 
Non-operating income (expense):
               
Interest income
    9       961  
Interest and financing costs
    (156,841 )     (179,228 )
Change in fair value of accrued beneficial conversion liability
    59,046       251,410  
Change in fair value of accrued warrant liability
    461,681       (419,571 )
Total non-operating expense
    363,895       (346,428 )
                 
Loss before provision for income taxes
    (3,637,353 )     (3,978,762 )
                 
Provision for income taxes
    -       -  
Net loss
  $ (3,637,353 )   $ (3,978,762 )
                 
                 
Weighted average shares outstanding - Basic and Diluted:
    161,006,366       125,094,999  
                 
Loss per share - Basic and Diluted:
  $ (0.02 )   $ (0.03 )
 
 
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-5

 

CELLYNX GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
 
 
                                       
Total
 
   
Preferred Stock
         
Common Stock
         
Additional Paid-
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
in Capital
   
Deficit
   
Deficit
 
                                           
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 stock to common stock upon the
increase of authorized shares
    (45,516,034 )     (45,516 )     45,516,034       45,516       -       -       -  
Reclassification of share based compensation liability to equity
    -       -       -       -       2,701,572       -       2,701,572  
Fair value of share based compensation for employees and consultants
    -       -       -       -       690,353       -       690,353  
Reclassification of beneficial conversion liability to equity
    -       -       -       -       2,120,181       -       2,120,181  
Reclassification of warrant liability to equity
    -       -       -       -       1,023,564       -       1,023,564  
Issuance of common stock for the purchase of licensing rights
    -       -       57,143       57       7,372       -       7,429  
Issuance of common stock for promissory note
    -       -       37,500       38       4,208       -       4,246  
Issuance of warrants for consulting services
    -       -       -       -       118,382       -       118,382  
Issuance of common stock for accounting services
    -       -       400,000       400       71,600       -       72,000  
Issuance of common stock for consulting services
    -       -       3,970,908       3,971       722,628       -       726,599  
Issuance of common stock for cash
    -       -       6,845,000       6,844       706,156       -       713,000  
Net loss
    -       -       -       -       -       (3,978,762 )     (3,978,762 )
Balance, September 30, 2009
    -     $ -       137,379,397     $ 137,379     $ 10,501,965     $ (11,674,210 )   $ (1,034,866 )
                                                         
Conversion of convertible note payable to common stock
    -       -       6,290,792       6,291       134,532       -       140,823  
Stock based compensation for employees and consultants
    -       -       -       -       1,060,170       -       1,060,170  
Issuance of warrants for consulting services
    -       -       -       -       327,087       -       327,087  
Issuance of common stock for consulting services
    -       -       4,445,486       4,445       696,671       -       701,116  
Issuance of common stock for cash
    -       -       23,636,897       23,637       1,487,064       -       1,510,701  
Reclassification of beneficial conversion liability to equity
    -       -       -       -       (59,964 )     -