CelLynx Group, Inc. - FORM 10-Q

Attached files

file	filename
EX-10.1 - ADDENDUM TO ASSSET PURCHASE AGREEMENT - CelLynx Group, Inc.	cellynx_10q-ex1001.htm
EX-32.2 - CERTIFICATION - CelLynx Group, Inc.	cellynx_10q-ex3202.htm
EX-31.1 - CERTIFICATION - CelLynx Group, Inc.	cellynx_10q-ex3101.htm
EX-31.2 - CERTIFICATION - CelLynx Group, Inc.	cellynx_10q-ex3102.htm
EX-32.1 - CERTIFICATION - CelLynx Group, Inc.	cellynx_10q-ex3201.htm
EX-10.2 - ADDENDUM TO CREDIT AGREEMENT - CelLynx Group, Inc.	cellynx_10q-ex1002.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

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

Commission File No. 000-27147

CelLynx Group, Inc.

(Exact name of registrant as specified in it charter)

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

25910 Acero, Suite 370

Mission Viejo, California 92691

(Address of principal executive offices)

(949) 305-5290

(Registrant's telephone number, including area code)

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date: 188,929,177 issued and outstanding as of May 13, 2011.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	(Removed and Reserved)	30

Item 5.	Other Information	30

Item 6.	Exhibits	31

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

CELLYNX GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
	2011			2010
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	9,434		$	6,601
Accounts receivable		-			1,925
Inventory		30,212			30,212
Prepaids and other current assets		-			165,411
TOTAL CURRENT ASSETS		39,646			204,149

EQUIPMENT, net		4,682			6,087
INTANGIBLE ASSETS, net		117,831			117,772
TOTAL ASSETS	$	162,159		$	328,008

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	1,497,750		$	1,417,641
Accrued interest		40,300			36,054
Accrued derivative liabilities		413,043			204,139
Line of credit		80,000			20,000
Advances for asset purchase agreement		260,434

Convertible promissory notes, net of debt discount of $69,415 and $34,359 as of March 31, 2011 and September 30, 2010, respectively		325,441			277,997
TOTAL CURRENT LIABILITIES		2,616,968			1,955,831

TOTAL LIABILITIES		2,616,968			1,955,831

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; 188,929,177 and 171,752,572 shares issued and outstanding as of March 31, 2011 and September 30, 2010, respectively		188,929			171,752
Additional paid-in capital		14,009,000			13,511,988
Accumulated deficit		(16,652,738	)		(15,311,563	)
Total stockholders' deficit		(2,454,809	)		(1,627,823	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	162,159		$	328,008

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

CELLYNX GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	March 31, 2011			March 31, 2010			March 31, 2011			March 31, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Net Revenue	$	-		$	36,003		$	-		$	47,823
Cost of Revenue		-			24,281			-			33,840
Gross profit		-			11,722			-			13,983
Operating expenses
Research and development		-			24,767			-			47,371
General and administrative		473,913			1,821,428			1,129,684			2,587,708
Total operating expenses		473,913			1,846,195			1,129,684			2,635,079

Loss from operations		(473,913	)	$	(1,834,473	)	$	(1,129,684	)	$	(2,621,096	)
										$
Non-operating income (expense):
Interest and financing costs, net		(25,146	)		(34,019	)		(49,991	)		(81,898	)
Change in fair value of accrued beneficial conversion liability,		(521	)		-			(652	)		-
Change in fair value of accrued warrant liability		(82,948	)		-			(160,848	)		-
Total non-operating expense, net		(108,615	)		(34,019	)		(211,491	)		(81,898	)

Net loss	$	(582,528	)	$	(1,868,492	)	$	(1,341,175	)	$	(2,702,994	)


Weighted average shares outstanding - Basic and Diluted:		186,667,298			159,958,838			180,380,815			150,230,785


Earnings per share - Basic and Diluted:	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

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

CELLYNX GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended			Six Months Ended
	March 31, 2011			March 31, 2010
	(unaudited)			(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,341,175	)	$	(2,702,994	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,436			3,660
Warrants issued for services		-			327,087
Stock issued for services		228,015			347,691
Stock issued for interest expense		-			20,323
Stock compensation expense for options issued to employees and consultants		198,996			605,735
Change in fair value of accrued beneficial conversion liability		652			-
Change in fair value of accrued warrant liability		160,848			-
Amortization of debt discount		42,761			58,072
Changes in operating assets and liabilities:
Change in accounts receivable		1,925			(8,976	)
Change in inventory		-			(96,580	)
Change in other assets		165,411			15,750
Change in accounts payable, accrued expenses and accrued interest		91,120			102,808
Net cash used in operating activities		(449,011	)		(1,327,424	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets		(1,090	)		(12,224	)
Net cash used in investing activities		(1,090	)		(12,224	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of shareholder convertible notes		-			(41,000	)
Payment of convertible notes		-			(37,500	)
Proceeds from issuance of convertible notes, net		132,500			-
Proceeds from advances for asset purchase agreement		260,434			-
Proceeds from line of credit		60,000			-
Proceeds from issuance of common stock		-			1,499,001
Payment of offering costs associated with the sale of common stock		-			(33,300	)
Net cash provided by financing activities		452,934			1,387,201

NET INCREASE IN CASH		2,833			47,553

CASH, BEGINNING OF PERIOD		6,601			6,776

CASH, END OF PERIOD	$	9,434		$	54,329

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING:
Conversion of convertible note payable to common stock	$	55,000		$	140,823
Issuance of common stock for prepaid services	$	-		$	353,426

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

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Note 1 - Organization

The unaudited consolidated financial statements have been prepared by CelLynx Group, Inc., formerly known as NorPac Technologies, Inc. (hereinafter referred to as “CelLynx” or the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results for the six months ended March 31, 2011, are not necessarily indicative of the results to be expected for the full year ending September 30, 2011.

Organization and Line of Business

The Company was originally incorporated under the laws of the State of Minnesota on April 1, 1998.

On July 23, 2008, prior to the closing of a Share Exchange Agreement (described below), the Company entered into a Regulation S Subscription Agreement pursuant to which the Company issued 10,500,000 shares of its common stock and warrants to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to non-U.S. persons for an aggregate purchase price of $1,575,000.

On July 24, 2008, the Company entered into a Share Exchange Agreement, as amended, with CelLynx, Inc., a California corporation ("CelLynx-California"), and twenty-three CelLynx-California shareholders who, immediately prior to the closing of the transaction, collectively held 100% of CelLynx-California’s issued and outstanding shares of capital stock. As a result, the CelLynx-California shareholders were to receive 77,970,956 shares of the Company’s common stock in exchange for 100%, or 61,983,580 shares, of CelLynx-California’s common stock. However, the Company had only 41,402,110 authorized, unissued and unreserved shares of common stock available, after taking into account the shares of common stock issued in the July 23, 2008, financing described above. Pursuant to the Share Exchange Agreement, in the event that there was an insufficient number of authorized but unissued and unreserved common stock to complete the transaction, the Company was to issue all of the available authorized but unissued and unreserved common stock to the CelLynx-California shareholders in a pro rata manner and then establish a class of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and issue that number of shares of Series A Preferred Stock such that the common stock underlying the Series A Preferred Stock plus the common stock actually issued to the CelLynx-California shareholders would equal the total number of shares of common stock due to the CelLynx-California shareholders under the Share Exchange Agreement. As a result, the Company issued to the CelLynx-California shareholders an aggregate of 32,454,922 shares of common stock and 45,516,034 shares of Series A Preferred Stock. The Series A Preferred Stock automatically would convert into common stock on a one-to-one ratio upon the authorized capital stock of the Company being increased to include not less than 150,000,000 shares of common stock.

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

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

The exchange of shares with CelLynx-California was accounted for as a reverse acquisition under the purchase method of accounting because the shareholders of CelLynx-California obtained control of the Company. On August 5, 2008, NorPac Technologies, Inc., changed its name to CelLynx Group, Inc. Accordingly, the merger of CelLynx-California into the Company was recorded as a recapitalization of CelLynx-California, with CelLynx-California being treated as the continuing entity. The historical financial statements presented are the financial statements of CelLynx-California. The Share Exchange Agreement has been treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of the reverse merger transaction, the net assets of the legal acquirer CelLynx Group, Inc., were $1,248,748.

As a result of the reverse merger transactions described above, the historical financial statements presented are those of CelLynx-California, the operating entity. Each CelLynx-California shareholder received 1.2579292 shares of stock in the Company for each share of CelLynx-California capital stock. All shares and per-share information have been retroactively restated for all periods presented to reflect the reverse merger transaction.

On October 27, 2008, the Board of Directors approved a change of the Company’s fiscal year end from June 30 to September 30 to correspond to the fiscal year of CelLynx-California. The fiscal year end change was effective for the year ended September 30, 2008.

The Company develops and manufactures cellular network extenders which enable users to improve stronger signals and better reception.

Going Concern and Exiting Development Stage

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary equity and debt financing to continue operations and to generate sustainable revenue. There is no guarantee that the Company will be able to raise adequate equity or debt financing or generate profitable operations. For the three and six months ended March 31, 2011, the Company incurred a net loss of $582,528 and $1,341,175, respectively. As of March 31, 2011, the Company had an accumulated deficit of $16,652,738. Further, as of March 31, 2011 and September 30, 2010, the Company had negative working capital of $2,577,322 and $1,751,682, respectively, and had negative cash flows from operations of approximately $449,011 and 1,327,424 for the six months ended March 31, 2011 and 2010, respectively. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management intends to raise additional funds through equity or debt financing and to generate cash from the sale of the Company’s products and from license fees as further described below.

The Company was in the development stage through June 30, 2009. In July 2009, the Company received the first 220 units of the Company’s cellular network extender, The Road Warrior, from its manufacturer. As of July 2009, the Company was fully operational and as such was no longer considered a development stage company. During the period that the Company was considered a development stage company, the Company incurred accumulated losses of approximately $10,948,625.

Recent Developments

Through March 31, 2011 the Company has received $260,434 from Dollardex/5BARz applicable to the Asset Purchase Agreement and an additional $85,000 since March 31, 2011. The Company has also received $80,000 applicable to the Line of Credit Agreement through March 31, 2011 and an additional $13,500 since March 31, 2011. All of these funds have been received directly or as payments made to third parties on the Company’s behalf.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Additionally, as of May 12, 2011, the Company and 5BARz have entered into an addendum to the Line of Credit Agreement which sets out a new schedule of payments for the remaining balance of $2,206,500 as follows:

(i)	$160,000 on or before June 30, 2011;

(ii)	$240,000 on or before August 31, 2011;

(iii)

$500,000 on or before October 31, 2011; and

(iv)	$1,306,500 on or before December 1, 2011.

Further, as of May 12, 2011 the Company and 5BARz have entered into an addendum to the Asset Purchase Agreement which sets out a new payment date for the balance of $1,154,566 to be paid on or before September 30, 2011

There is no assurance that the Company will receive the entire amount of funding provided in the Line of Credit Agreement or the Asset Purchase Agreement. As of May 12, 2011, no units had been sold through 5 Barz; consequently, the Company had not received any of the licensing fees under this agreement.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of CelLynx Group, Inc., and its 100% wholly-owned subsidiary, CelLynx, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

Cash

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Inventory

Inventory consists of finished goods ready for sale and is valued at the lower of cost (determined on a first-in, first-out basis) or market. The Company reviews its reserves for slow moving and obsolete inventories. As of March 31, 2011 and September 30, 2010, the Company believes that no reserve was necessary.

Accounts Receivable

The Company maintains reserves for potential credit losses for accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded based on the Company’s historical collection history. Receivables are written off when they are determined to be uncollectible. As of March 31, 2011 and September 30, 2010, the Company determined that allowance for bad debt was not necessary.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk

Cash includes deposits in accounts maintained at financial institutions. Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. As of March 31, 2011 and September 30, 2010, the Company did not have any deposits in excess of federally-insured limits. To date, the Company has not experienced any losses in such accounts.

Equipment

Equipment is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives. The useful life and depreciation method are reviewed periodically to ensure that the depreciation method and period are consistent with the anticipated pattern of future economic benefits. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. The useful life of the equipment is being depreciated over three years.

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 March 31, 2011 and September 30, 2010, there was no significant impairment of its long-lived assets.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

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.

Fair Value of Financial Instruments

ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, accounts payable, and other current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of the valuation hierarchy are defined as follows:

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

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

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

The Company’s warrant liability is carried at fair value totaling $334,704 and $173,856, as of March 31, 2011 and September 30, 2010, respectively. The Company’s conversion option liability is carried at fair value totaling $78,339 and $30,283 as of March 31, 2011 and September 30, 2010, respectively. The Company used Level 2 inputs for its valuation methodology for the warrant liability and conversion option liability as their fair values were determined by using the Black-Scholes option pricing model using the following assumptions:

March 31, 2011
Annual dividend yield		-
Expected life (years)		1.00 – 3.95
Risk-free interest rate		0.3% - 1.60%
Expected volatility		145%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants and conversion options. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion options. We have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and conversion options. The risk-free interest rate is based on U.S. Treasury securities with maturity terms similar to the expected remaining term of the warrants and conversion options.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

At March 31, 2011, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

	Fair Value		Fair Value Measurements at
	As of		March 31, 2011
	March 31, 2011		Using Fair Value Hierarchy
Liabilities			Level 1	Level 2		Level 3
Warrant liability	$	334,704		$	334,704
Conversion option liability		78,339			78,339
Total accrued derivative liabilities	$	413,043		$	413,043

For the three and six months ended March 31, 2011, the Company recognized a loss of $83,469 and $161,500 for the change in the fair value of accrued warrant liability and the change in fair value of accrued beneficial conversion liability, respectively. For the three and six months ended March 31, 2010, the Company recognized $0 for the change in the fair value of accrued warrant liability and the change in fair value of accrued beneficial conversion liability.

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.

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. The adoption had no effect on the Company’s consolidated financial statements. Penalties and interest incurred related 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 three and six months ended March 31, 2011 and 2010.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Net Loss Per Share

The Company reports loss per share in accordance with the ASC Topic 260, “Earnings Per Share.” Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock warrants were converted or exercised. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, plus the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. Due to the net loss for the three and six months ended March 31, 2011 and 2010, none of the potential dilutive securities have been included in the calculation of dilutive earning per share because their effect would be anti-dilutive.

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.

The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/seller market transaction.

The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Issued Update (“ASU”) No. 2010-28—Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

In January 2010, the FASB issued ASU No. No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This ASU temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. Accordingly, the Company has not included the disclosures deferred by this ASU.

Note 3 – Equipment

Equipment consisted of the following at March 31, 2011 and September 30, 2010:

	March 31,			September 30,
	2011			2010
Office furniture and equipment	$	9,879		$	9,879
Computer equipment		8,930			8,930
		18,809			18,809
Accumulated depreciation		(14,127	)		(12,722	)
Equipment, net	$	4,682		$	6,087

The Company recorded depreciation expense of $1,045 and $1,405 for the three and six months ended March 31, 2011, respectively, and $1,301 and $2,629 for the three and six months ended March 31, 2010, respectively.

Note 4 – Intangible Assets

The Company incurred legal costs in acquiring patent and trademark rights. These costs are projected to generate future positive cash flows in the near term and have been capitalized to intangible assets in the period incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively.

Intangible assets consist of the following:

	March 31,			September 30,
	2011			2010
Patents	$	102,468		$	101,378
Trademarks		12,487			12,487
Licensing right		8,429			8,429
		123,384			122,294
Accumulated Amortization		(5,553	)		(4,522	)
Intangibles, net	$	117,831		$	117,772

The Company recorded amortization expense related to the trademarks of $305 and $610 for the three and six months ended March 31, 2011 respectively. The Company recorded amortization expense related to the trademarks of $305 and $610 for the three and six months ended March 31, 2010 respectively.

No amortization has been recorded for the patents as of March 31, 2011, as the patents have not been issued to the Company.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Note 5 – Convertible Promissory Notes

Convertible Promissory Note Issued August 15, 2006

On August 15, 2006, the Company issued a secured promissory note (the “August 2006 Note”) for $250,000 to an unrelated entity (the “Holder”). On November 10, 2007, the August 2006 Note was amended (the “Amended Note”). At the date of the amendment, the Company was obligated to pay to the Holder $262,356 which represented the principal and accrued interest, and the Holder was entitled to purchase shares of the Company’s securities pursuant to a Warrant to Purchase Common Stock dated August 15, 2006 (“August 2006 Warrant”). In contemplation of the completion of the reverse merger, the Company and the Holder reached an agreement whereby this Amended Note superseded the August 2006 Note and canceled the August 2006 Warrant. The principal amount of the Amended Note is $262,356, is unsecured and is convertible into 6,340,029 shares of common stock of the Company and bears interest at 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. All unpaid principal, together with the accrued but unpaid interest was due and payable upon the earlier of (i) November 9, 2010, at the written request of the Holder to the Company, or (ii) the occurrence of an event of default. At the date of amendment, the Company determined that the Amended Note had a beneficial conversion feature with a fair value of $767,047. The Company recorded a debt discount of $262,356 and expensed as financing costs the $504,691 of the beneficial conversion feature that exceeded the principal balance. The Company did not pay the note per the terms of the agreement and as of March 31, 2011, the total unpaid principal balance and accrued interest is $262,356 and $35,537, respectively.

Asher Convertible Promissory Note Issued July 22, 2010

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 “Asher Note”).

Pursuant to the Asher Note, Asher loaned to the Company the principal amount of $55,000. The Asher Note bears interest at a rate of 8%, and is due on April 21, 2011. 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 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.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

On various days during the three months ended March 31, 2011, Asher converted the $55,000 note for 3,763,967 shares of the Company’s common stock. See Note 8.

Asher Convertible Promissory Note Issued February 22, 2011

On February 22, 2011, 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 “Asher February 2011 Note”).

Pursuant to the Asher February 2011 Note, Asher loaned to the Company the principal amount of $40,000. The Asher February 2011 Note bears interest at a rate of 8%, and is due on November 17, 2011. 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 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 Asher February 2011 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 Asher 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 Asher February2011 Note, while there remains any unpaid amounts owing on the Asher February 2011 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 Asher Note.

The Company has the right to pre-pay the Asher February 2011 Note during the first 120 days following the date of the Asher February 2011 Note by paying to Asher 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

The Company determined that the Asher February 2011 Note contained a beneficial conversion feature because the conversion rate was less than the share price at the date of issuance. The Company recorded a $23,492 debt discount related to the beneficial conversion feature.

Asher Convertible Promissory Note Issued March 10, 2011

On March 10, 2011, 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 “Asher March 2011 Note”).

Pursuant to the Asher March 2011 Note, Asher loaned to the Company the principal amount of $42,500. The Asher March 2011 Note bears interest at a rate of 8%, and is due on December 7, 2011. 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 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 Asher March 2011 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 Asher March 2011 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 Asher March 2011 Note, while there remains any unpaid amounts owing on the Asher March 2011 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 Asher March 2011 Note.

The Company has the right to pre-pay the Asher March 2011 Note during the first 120 days following the date of the Asher March 2011 Note by paying to Asher 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.

The Company determined that the Asher March 2011 Note contained a beneficial conversion feature because the conversion rate was less than the share price at the date of issuance. The Company recorded a $24,960 debt discount related to the beneficial conversion feature.

Yaretz Convertible Promissory Note Issued April 5, 2011 – Related Party

On April 5, 2011, the Company entered into a Securities Purchase Agreement (the “SPA”) with one of its directors, Dwayne Yaretz (“Yaretz”), in connection with the purchase by Yartez of a Convertible Promissory Note (the “Yaretz Note”).

Pursuant to the Yartez Note, Yartez loaned to the Company the principal amount of $50,000. The Yartez Note bears interest at a rate of 8%, and is due on January 5, 2012. Yartez 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 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. Yartez is prohibited under the Yartez Note from converting amounts if principal and interest that would result in Yartez receiving shares, which when combined with shares of the Company’s common stock held by Yartez, would result in Yartez 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 Yartez 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 Yartez Note, while there remains any unpaid amounts owing on the Yartez Note, the Company may not incur additional debt without Yartez’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 Yartez; (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 Yartez Note.

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

The Company determined that the Yartez Note contained a beneficial conversion feature because the conversion rate was less than the share price at the date of issuance. The Company recorded a $29,365 debt discount related to the beneficial conversion feature.

The Company recorded interest expense relating to the convertible promissory notes of $3,584 and $6,010 for the three and six months ended March 31, 2011, respectively and $4,098 and $16,160 for the three and six months ended March 31, 2010, respectively.

The Company amortized $20,343 and $42,762 of the debt discount for the three and six months ended March 31, 2011 respectively and $28,177 and $56,979 of the debt discount for the three and six months ended March 31, 2010, respectively.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

The following table summarizes the convertible promissory notes at March 31, 2011 and September 30, 2010:

	March 31, 2011			September 30, 2010

Issued August 2006, amended November 2007	$	262,356		$	262,356
Issued July 22, 2010		-			50,000
Less: Debt discount		-			(34,359	)
Issued February through March 2011		132,500			-
Less: Debt discount		(69,415	)		-
Convertible promissory notes, net	$	325,441		$	277,997

Note 6 - License Agreement

On January 12, 2009, the Company entered into a Licensing Agreement with an unrelated party. The Licensing Agreement gives the Company the right to manufacture, have manufactured, use, import, and offer to sell, lease, distribute or otherwise exploit certain technology rights and intellectual rights. The License Agreement has a term of ten years. As consideration for the License Agreement, the Company issued 57,143 shares of its common stock and paid $1,000 in cash. The Company determined the fair value of the License Agreement to be $7,429 based on the market value of its common stock on the date of the agreement plus the $1,000, for a total acquisition cost of $8,429, which is included in the accompanying consolidated balance sheet.

The Company recorded amortization expense related to the licensing agreement of $211 and $421 for the three and six months ended March 31, 2011,respectively and $211 and $421 for the three and six months ended March 31, 2010, respectively.

Note 7 - Consulting Agreement

On March 31, 2009, the Company entered into a Consulting Agreement with an outside third party. In connection with this Consulting Agreement, the Company issued warrants to purchase 2,000,000 shares of its Common Stock. The exercise prices for the warrants are as follows:

Number of		Exercise
Warrants Issued		Price
	300,000	$0.10 per share
	500,000	$0.15 per share
	600,000	$0.20 per share
	600,000	$0.25 per share
	2,000,000

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

The vesting schedule is as follows:

Number of	Exercise
Warrants Issued	Price	Vesting Dates
300,000	$0.10 per share	Immediately
500,000	$0.15 per share	Immediately
50,000	$0.20 per share	Immediately
550,000	$0.20 per share	At time of extension
600,000	$0.25 per share	March 31, 2010
2,000,000

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.

The exercise prices of the warrants are as follows:

Number of		Exercise
Warrants Issued		Price
285,714		$0.10 per share
285,714		$0.75 per share
285,714		$01.5 per share
285,714		$2.00 per share
285,714		$3.00 per share
285,714		$3.50 per share
285,716		$4.00 per share
2,000,000

Note 8 – Stockholder’s Equity

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 Mr. Ash 13,412,638 shares of the Company's common stock.

On January 31, 2011, the Company issued 534,759 shares of common stock pursuant to the conversion of $10,000 principal of the Asher Note. The conversion rate was $.0187.

On February 8, 2011, the Company issued 662,983 shares of common stock pursuant to the conversion of $12,000 principal of the Asher Note. The conversion rate was $.0181.

On February 22, 2011, the Company issued 609,756 shares of common stock pursuant to the conversion of $10,000 principal of the Asher Note. The conversion rate was $.0164.

On March 2, 2011, the Company issued 921,986 shares of common stock pursuant to the conversion of $13,000 principal of the Asher Note. The conversion rate was $.0141.

On March 10, 2011, the Company issued 1,034,483 shares of common stock pursuant to the conversion of $10,000 principal and $2,000 accrued interest of the Asher Note. The conversion rate was $.0097.

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Stock Options

On December 3, 2007, the Board of Directors adopted the 2007 Stock Incentive Plan (the “Plan”) of CelLynx, Inc. All of the Company’s employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock awards, or other stock-based awards under the Plan. The Plan is administered by the Board. The Board has authority to grant awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. Subject to certain adjustments, awards may be made under the Plan for up to 25,000,000 shares of common stock of the Company. The Board shall establish the exercise price at the time each option is granted. In July 2008, the Company amended the Plan to increase the number of awards available under the Plan from 25,000,000 to 75,000,000.

On December 14, 2010, the Company granted 1,000,000 options to the Chairman of the Board of Directors and 1,000,000 options to the acting Chief Financial Officer. The options vest immediately, are convertible at $0.02 per share and expire on the December 14, 2015. The Company calculated the value of the options using the Black-Scholes model using the following assumptions:

		December 31, 2010
Expected life (years)		5.00
Risk-free interest rate		2.08
Expected volatility		145%
Expected dividend yield		0%

The weighted average grant-date fair value was $0.015 per option. The Company fair value of $30,324 is recorded as an expense in the accompanying consolidated statement of operations.

The following table summarizes information with respect to options outstanding under the Plan and outside the Plan.

	Number of			Weighted Average		Weighted Average		Aggregate
	Shares			Exercise Price		Contractual Life		Intrinsic Value
Outstanding at September 30, 2010		33,188,050		$	0.103
Granted		2,000,000			0.020
Canceled		(13,412,638	)		0.079
Exercised		-
Outstanding at March 31, 2011		21,775,412		$	0.111		3.50	$	38,284
Exercisable at March 31, 2011		18,762,119		$	0.094		2.84	$	38,284

CELLYNX GROUP, INC AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(Unaudited)

Warrants

The following table summarizes the warrant activity:

			Weighted		Average
			Average		Remaining		Aggregate
	Number of		Exercise		Contractual		Intrinsic
	Warrants		Price		Life (in years)		Value
Outstanding, September 30, 2010		36,114,757	$	0.12			$	-
Granted		-		-
Exercised		-		-
Expired		-		-
Outstanding, March 31, 2011		36,114,757	$	0.27		1.68	$	70,000
Exercisable, March 31, 2011		36,114,757	$	0.27		1.68	$	70,000

Note 9 - Commitments and Contingencies

Operating Leases

On March 5, 2010, the Company entered into an amended agreement to a lease dated February 21, 2008. The lease was renewed for two years and requires monthly payments of $1,962 commencing April 1, 2010 with a 4% increase of the base rent beginning on month thirteen, terminating on March 31, 2012, for office space for its El Dorado Hills, California, office.

On December 31, 2009, the Company entered into an amended agreement to a lease dated August 26, 2008. The lease was renewed for 25 months and requires monthly payments of $3,710 commencing on May 1, 2010 with a $106 increase of the base rent beginning on the fourteenth month, terminating on April 30, 2012, for office space for its Mission Viejo, California, office.

The Company recorded rent expense of $39,080 and $70,577 for three and six months ended March 31, 2011 and $20,766 and $41,132 for three and six months ended March 31, 2010, respectively.

Litigation

The Company is subject to various legal matters in the ordinary course of business. After taking into consideration the Company’s legal counsels’ evaluation of these matters, the Company has determined that the resolution of these matters will not have a material adverse effect on the Company’s consolidated financial statements.

Note 10 – Subsequent Events

The Company has evaluated all subsequent events that occurred up to the time of the Company's issuance of its financial statements.

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

Forward Looking Statements

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

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

Plan of Operations

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., the assignee of the Dollardex Agreement, 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.

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”).

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.

(i)	$160,000 on or before June 30, 2011;

(ii)	$240,000 on or before August 31, 2011;

(iii)

$500,000 on or before October 31, 2011; and

(iv)	$1,306,500 on or before December 1, 2011.

As earlier reported in the Company’s Form 10K, the Company was a Defendant in an action brought by Dophinshire L.P. regarding its office space in Mission Viejo, CA. That action has since been dismissed.

Also, as had been reported in the Company’s Form 10K, the Company is facing claims for back wages by some of its former employees. Some of those claims have been partially paid and others will be paid in the normal course of business or will otherwise be defended.

Results of Operations

Comparison of the three months ended March 31, 2011 and 2010

	Three months ended March 31,
	2011			2010			$ Change			% Change

REVENUE	$	-		$	36,003		$	(36,003	)		-100.0	%

COST OF REVENUE		-			24,281			(24,281	)		-100.0	%

GROSS PROFIT		-			11,722			(11,722	)		-100.0	%

OPERATING EXPENSES		473,913			1,846,195			(1,372,282	)		-74.3	%

NON OPERATING INCOME (EXPENSES)		(108,615	)		(34,019	)		(74,596	)		219.3	%

NET LOSS	$	(582,528	)	$	(1,868,492	)	$	1,285,964			-68.8	%

Revenue and Cost of Revenue

During the three months ended March 31, 2011 and 2010, we generated $0 and $36,003, respectively, in revenue that arose from the initial sale of our 5Barz units which became sellable in July 2009. Cost of revenues was $0 and $24,281, respectively, resulting in a gross profit of $0 and $11,722, respectively.

Operating Expenses

Total operating expenses incurred for the three months ended March 31, 2011 were $473,913 compared to $1,846,195 for the six months ended March 31, 2010, which decreased by $1,372,282. The significant decrease was due to a significant decrease in salaries and wages. During the three months ended March 31, 2010, we recognized $193,162 of salaries and wages expense compared to $0 for the three months ended March 31, 2011, for a decrease of $193,162 or 100%. There was also a significant decrease in the options compensation expense. During the three months ended March 31, 2010, we recognized $435,552 of options compensation expense compared to $71,021 for the three months ended March 31, 2011, for a decrease of $364,531 or (84)%.

Non Operating Income and Expenses

Total non-operating expenses incurred for the three months ended March 31, 2011 was $108,615 compared to $34,019 for the three months ended March 31, 2010 which was an increase of $74,596. The difference was due to the increased fair value of warrants for the three months ended March 31, 2011.

Results of Operations

Comparison of the six months ended March 31, 2011 and 2010

	Six months ended March 31,
	2011			2010			$ Change			% Change

REVENUE	$	-		$	47,823		$	(47,823	)		100.0	%

COST OF REVENUE		-			33,840			(33,840	)		100.0	%

GROSS PROFIT		-			13,983			(13,983	)		100.0	%

OPERATING EXPENSES		1,129,684			2,635,079			(1,505,395	)		-57.1	%

NON OPERATING EXPENSES		(211,491	)		(81,898	)		(129,593	)		158.2	%

NET LOSS	$	(1,341,175	)	$	(2,702,994	)	$	1,361,819			-50.4	%

Revenue and Cost of Revenue

During the six months ended March 31, 2011 and 2010, we generated $0 and $47,823, respectively, in revenue that arose from the initial sale of our 5Barz units which became sellable in July 2009. Cost of revenues was $0 and $33,840, respectively, resulting in a gross profit of $0 and $13,983, respectively.

Operating Expenses

Total operating expenses incurred for the six months ended March 31, 2011 were $1,129,684 compared to $2,635,079 for the six months ended March 31, 2010, which decreased by $1,505,395. The significant decrease was due to a significant decrease in salaries and wages. During the six months ended March 31, 2010, we recognized $385,582 of salaries and wages expense compared to $0 for the six months ended March 31, 2011, for a decrease of $385,582 or 100%. There was also a significant decrease in the options compensation expense. During the six months ended March 31, 2010, we recognized $605,735 of options compensation expense compared to $198,996 for the six months ended March 31, 2011, for a decrease of $406,739 or -67%.

Non Operating Income and Expenses

Total non-operating expenses incurred for the six months ended March 31, 2011 was $211,491 compared to $81,898 for the six months ended March 31, 2010 which was an increase of $129,593. The difference was due to the increased fair value of warrants for the six months ended March 31, 2011.

Liquidity and Capital Resources

Financial Condition

As of March 31, 2011, we had cash of $9,434, and we had a working capital deficit of $2,577,322 compared to cash of $6,601 and a working capital deficit of $1,751,682 as of December 31, 2010. 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 six months ended March 31, 2011, cash used in operating activities was $449,011. Cash used in operating activities consisted of a net loss of $1,341,175 offset by the change in fair value of accrued beneficial conversion liability of $160,848 and non-cash expenses of $427,011 for stock-based compensation, an increase in other assets of $165,411, and an increase of $91,120 for change in accounts payable and accrued expenses.

We used $1,090 for the purchase of intangible assets for the six months ended March 31, 2011, compared to $12,224 for the purchase of equipment and intangible assets for the six months ended March 31, 2010.

We received $452,934 provided by financing activities for the six months ended March 31, 2011, compared to $1,387,201 for the six months ended March 31, 2010.

We anticipate raising an additional $3.36 million during the next nine months through the Asset Purchase Agreements and Line of Credit Agreement, although there is no guarantee that such funds will be available. There is no assurance that we will be able to raise the entire amount.

Going Concern

In our Annual Report on Form 10-K for the year ended September 30, 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 March 31, 2011, we had an accumulated deficit of approximately $16,652,738, 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.

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

Impairment or Disposal of Long-lived Assets

The Company applies the provisions of 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 March 31, 2011 and December 31, 2010, there was no significant impairment of its long-lived assets.

Revenue Recognition

Income Taxes

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 six months ended March 31, 2011 and 2010.

Stock Based Compensation

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Regulations under the Securities Exchange Act of 1934 (the "Exchange Act") require public companies to maintain "disclosure controls and procedures," which are defined to mean a company's controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Our Chief Executive Officer ("CEO") and a consultant providing services commonly provided by a Chief Financial Officer ("CFO") carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on those evaluations, as of the Evaluation Date, our CEO and CFO believe that:

(i) our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure; and

(ii) our disclosure controls and procedures are not effective

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

On January 31, 2011, we issued 534,759 shares of common stock pursuant to the conversion of $10,000 principal of the Asher convertible note. The conversion rate was $.0187.

On February 8, 2011, we issued 662,983 shares of common stock pursuant to the conversion of $12,000 principal of the Asher convertible note. The conversion rate was $.0181.

On February 22, 2011, we issued 609,756 shares of common stock pursuant to the conversion of $10,000 principal of the Asher convertible note. The conversion rate was $.0164.

On March 2, 2011, we issued 921,986 shares of common stock pursuant to the conversion of $13,000 principal of the Asher convertible note. The conversion rate was $.0141.

On March 10, 2011, we issued 1,034,483 shares of common stock pursuant to the conversion of $10,000 principal and $2,000 accrued interest of the Asher convertible note. The conversion rate was $.0097.

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

(a)	On May 13, 2011, Kevin Pickard resigned as Chief Financial Officer. Mr. Pickard will work as a consultant to the Company and his firm will continue to provide accounting services to the Company. There were no disputes between Mr. Pickard and the Company.

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

ITEM 6. EXHIBITS

EXHIBIT INDEX

Exhibit Number				Description

10.1				Addendum to the Asset Purchase Agreement *

10.2				Addendum to the Line of Credit Agreement*

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.

SIGNATURES

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

	CELLYNX GROUP, INC.
	(Registrant)

Date: May 16, 2011	By:	/s/ Norman Collins
		Norman Collins
		Chief Executive Officer

CelLynx Group, Inc. - FORM 10-Q - May 16, 2011

Attached files

CelLynx Group, Inc. Reports