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 ENDEDDecember 31,
2009





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





Commission
File No. 000-27147




CelLynx Group,
      Inc.(Exact name of small
      business issuer as specified in it
charter)


Nevada
            
            95-4705831(State
      or other jurisdiction of incorporation or
            
            (IRS
      Employer Identificationorganization)
            
            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 xNo 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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period than 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 oAccelerated 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 oNo 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: 161,809,820
issued and outstanding as of February 12, 2009.














TABLE OF
CONTENTS





PagePART I
      FINANCIAL
      INFORMATION
            3Item
      1.
            Financial
      Statements
            3Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            22Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            26Item
      4.
            Controls
      and Procedures
            27PART
      IIOTHER
      INFORMATIONItem
      1.
            Legal
      Proceedings
            27Item
      1A.
            Risk
      Factors
            27Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            27Item
      3.
            Defaults
      Upon Senior Securities
            27Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            27Item
      5.
            Other
      Information
            28Item
      6.
            Exhibits
            28




2


Part
I – FINANCIAL INFORMATION





Item
1.Financial
Statements





CELLYNX
GROUP, INC.


CONSOLIDATED
BALANCE SHEETS




December
      31,
            
            
            September
      30,2009
            
            
            2009(unaudited)ASSETSCURRENT
      ASSETS:Cash
            
            $
            28,316
            
            
            $
            6,776Accounts
      receivable
            
            
            6,171
            
            
            
            -Inventory
            
            
            43,554
            
            
            
            16,316Prepaids
      and the other current assets
            
            
            114,713
            
            
            
            15,750TOTAL
      CURRENT ASSETS
            
            
            192,754
            
            
            
            38,842EQUIPMENT,
      net
            
            
            10,031
            
            
            
            11,359INTANGIBLE
      ASSETS, net
            
            
            104,072
            
            
            
            97,180OTHER
      ASSETS
            
            
            16,190
            
            
            
            16,190TOTAL
      ASSETS
            
            $
            323,047
            
            
            $
            163,571LIABILITIES AND
      STOCKHOLDERS' DEFICITCURRENT
      LIABILITIES:Accounts
      payable and accrued expenses
            
            $
            977,522
            
            
            $
            832,634Accrued
      interest
            
            
            46,325
            
            
            
            28,334Convertible
      stockholder notes, net of debt discount of $0 and $1,092as
      of December 31, 2009 and September 30, 2009, respectively
            
            
            103,000
            
            
            
            101,908Convertible
      promissory notes, net of debt discount of $97,992 and $0as
      of December 31, 2009 and September 30, 2009, respectively
            
            
            264,364
            
            
            
            100,000TOTAL
      CURRENT LIABILITIES
            
            
            1,391,211
            
            
            
            1,062,876LONG
      TERM LIABILITIES:Convertible
      promissory note, net of debt discount
    of  $126,795as
      of September 30, 2009
            
            
            -
            
            
            
            135,561TOTAL
      LIABILITIES
            
            
            1,391,211
            
            
            
            1,198,437COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      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; 146,418,790
      and137,379,397
      shares issued and outstanding as of December 31, 2009 andSeptember
      30, 2009, respectively
            
            
            146,419
            
            
            
            137,379Additional
      paid-in capital
            
            
            11,294,129
            
            
            
            10,501,965Accumulated
      deficit
            
            
            (12,508,712
            )
            
            
            (11,674,210
            )Total
      stockholders' deficit
            
            
            (1,068,164
            )
            
            
            (1,034,866
            )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            323,047
            
            
            $
            163,571







3





CELLYNX
GROUP, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS




Three
      Months Ended
              
              
              Three
      Months EndedDecember
      31, 2009
              
              
              December
      31,2008(unaudited)
              
              
              (unaudited)Net
      Revenue
              
              $
              11,820
              
              
              $
              -Cost
      of Revenue
              
              
              9,559
              
              
              
              -Gross
      profit
              
              
              2,261
              
              
              
              -Operating
      expensesResearch
      and development
              
              
              22,604
              
              
              
              151,527General
      and administrative
              
              
              766,280
              
              
              
              621,813Total
      operating expenses
              
              
              788,884
              
              
              
              773,340Loss
      from operations
              
              
              (786,623
              )
              
              
              (773,340
              )Non-operating
      income (expense):Interest
      and financing costs, net
              
              
              (47,879
              )
              
              
              (50,042
              )Change
      in fair value of accrued beneficial conversion liability
              
              
              -
              
              
              
              251,410Change
      in fair value of accrued warrant liability
              
              
              -
              
              
              
              (419,571
              )Total
      non-operating expense, net
              
              
              (47,879
              )
              
              
              (218,203
              )Loss
      before provision for income taxes
              
              
              (834,502
              )
              
              
              (991,543
              )Provision
      for income taxes
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (834,502
              )
              
              $
              (991,543
              )Weighted
      average shares outstanding - Basic and Diluted:
              
              
              140,714,212
              
              
              
              107,268,745Earnings
      per share - Basic and Diluted:
              
              $
              (0.01
              )
              
              $
              (0.01
              )
   The
accompanying notes are an integral part of these consolidated financial
statements.


4





CELLYNX
GROUP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Three
      Months Ended
            
            
            Three
      Months EndedDecember
      31, 2009
            
            
            December
      31, 2008(unaudited)
            
            
            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (834,502
            )
            
            $
            (991,543
            )Adjustments
      to reconcile net loss to net cashused in operating
      activities:Depreciation
      and amortization
            
            
            1,844
            
            
            
            1,159Warrants
      issued for services
            
            
            13,822
            
            
            
            -Stock
      issued for services
            
            
            10,000
            
            
            
            -Stock
      compensation expense for options issued to employees and
      consultants
            
            
            170,182
            
            
            
            122,867Change
      in fair value of accrued beneficial conversion liability
            
            
            -
            
            
            
            (251,410
            )Change
      in fair value of accrued warrant liability
            
            
            -
            
            
            
            419,571Amortization
      of debt discount
            
            
            29,895
            
            
            
            47,779Changes
      in operating assets and liabilities:Change
      in accounts receivable
            
            
            (6,171
            )
            
            
            -Change
      in inventory
            
            
            (27,238
            )
            
            
            -Change
      in other assets
            
            
            13,062
            
            
            
            (4,664
            )Change
      in accounts payable, accrued expenses and accrued interest
            
            
            45,021
            
            
            
            96,951Net
      cash used in operating activities
            
            
            (584,085
            )
            
            
            (559,290
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
            
            
            -
            
            
            
            (4,263
            )Purchase
      of intangible assets
            
            
            (1,575
            )
            
            
            (7,755
            )Net
      cash used in investing activities
            
            
            (1,575
            )
            
            
            (12,018
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock
            
            
            618,000
            
            
            
            -Payment
      of offering costs associated with the sale of common
      stock
            
            
            (10,800
            )
            
            
            -Net
      cash provided by financing activities
            
            
            607,200
            
            
            
            -NET
      INCREASE (DECREASE) IN CASH
            
            
            21,540
            
            
            
            (571,308
            )CASH,
      BEGINNING OF PERIOD
            
            
            6,776
            
            
            
            599,024CASH,
      END OF PERIOD
            
            $
            28,316
            
            
            $
            27,716SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
            
            $
            -
            
            
            $
            -Cash
      paid for income taxes
            
            $
            -
            
            
            $
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING:Reclassification
      of share-based compensation liability to additional paid-in
      capital
            
            $
            -
            
            
            $
            2,701,572Reclassification
      of accrued beneficial conversion liability to additional paid-in
      capital
            
            $
            -
            
            
            $
            2,120,181Reclassification
      of accrued warrant liability to additional paid-in capital
            
            $
            -
            
            
            $
            1,023,564





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


5




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  Note
1 - Organization





The
unaudited consolidated financial statements have been prepared by CelLynx Group,
Inc. (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 three months ended December 31, 2009,
are not necessarily indicative of the results to be expected for the full year
ending September 30, 2010.





Organization and Line of
Business





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





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





On July
24, 2008, the Company entered into a Share Exchange Agreement, as amended, with
CelLynx, Inc. a California corporation ("CelLynx-California") and twenty-three
(23) CelLynx-California shareholders who, immediately prior to the closing of
the transaction collectively held 100% of CelLynx-California’s issued and
outstanding shares of capital stock.  As a result, the
CelLynx-California shareholders were to receive 77,970,956 shares of the
Company’s common stock in exchange for 100%, or 61,983,580 shares, of capital
stock of CelLynx-California’s common stock.  However, the Company had
only 41,402,110 authorized, unissued and unreserved shares of common stock
available, after taking into account the shares of common stock issued in the
July 23, 2008, financing described above.  Pursuant to the Share
Exchange Agreement, in the event that there 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.




6




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (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 this 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 agree with 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 a cell phone signal amplifier.





Going Concern and Exiting
Development Stage









The
Company was in the development stage through June 30, 2009.  In July
2009, the Company received the first 220 units 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.




7




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  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
within the 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.





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 December 31, 2009, the
Company did not record an allowance for bad debt.





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 in the United States. Certain financial
instruments, which subject the Company to concentration of credit risk, consist
of cash. The Company maintains balances at financial institutions which, from
time to time, may exceed Federal Deposit Insurance Corporation insured limits
for the banks located in the United States. As of December 31, 2009, and
September 30, 2009, the Company did not have any deposits in excess of federally
insured limits. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.





8





CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
 
 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 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 December 31, 2009, and September 30, 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.





Fair Value of Financial
Instruments





For
certain of the Company’s financial instruments, including cash, accounts
receivable, accounts payable, accrued liabilities and convertible debt, the
carrying amounts approximate their fair values due to their short maturities. In
addition, the Company has long-term debt with financial institutions. The
carrying amounts of the long-term liabilities approximate their fair values
based on current rates of interest for instruments with similar
characteristics.





9





CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  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 receivables and 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.





As of
December 31, 2009, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.





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.





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 months ended December 31, 2009 and 2008, none of the potential
dilutive securities have been included in the calculation of dilutive earning
per share because their effect would be anti-dilutive.





10




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  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 June
2008, FASB issued ASC Topic 815, “Derivatives and Hedging,” which provides a
two-step model to determine whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception in ASC 815-10-15-74. This standard is effective for financial
statements issued for fiscal years beginning after December 15,
2008.  This standard triggers liability accounting on all instruments
and embedded features exercisable at strike prices denominated in any currency
other than the functional currency of the operating entity.  The
adoption of this pronouncement did not have an impact on the Company’s
consolidated financial statements.





In
October 2009, the FASB issued an Accounting Standards Update
("ASU") regarding accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing.  This
ASU requires that at the date of issuance of the shares in a share-lending
arrangement entered into in contemplation of a convertible debt offering or
other financing, the shares issued shall be measured at fair value and be
recognized as an issuance cost, with an offset to additional paid-in capital.
Further, loaned shares are excluded from basic and diluted earnings per share
unless default of the share-lending arrangement occurs, at which time the loaned
shares would be included in the basic and diluted earnings-per-share
calculation.  This ASU is effective for fiscal years beginning on or
after December 15, 2009, and interim periods within those fiscal years for
arrangements outstanding as of the beginning of those fiscal years. The Company
is currently evaluating the impact of this ASU on its consolidated financial
statements.





11




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  On
December 15, 2009, the FASB issued ASU No. 2010-06 Fair Value Measurements and
Disclosures Topic 820 “Improving Disclosures about Fair Value
Measurements”.  This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial
reporting.  The adoption of this ASU will not have a material impact
on the Company’s consolidated financial statements.


Note
3 - Equipment





Equipment
consisted of the following at December 31, 2009, and September 30,
2009:





December
      31,
              
              
              September
      30,2009
              
              
              2009(unaudited)Office
      furniture and equipment
              
              $
              9,879
              
              
              $
              9,879Computer
      equipment
              
              
              8,930
              
              
              
              8,93018,809
              
              
              
              18,809Accumulated
      depreciation
              
              
              (8,778
              )
              
              
              (7,450
              )Equipment,
      net
              
              $
              10,031
              
              
              $
              11,359




The
Company recorded depreciation expense of $1,328 and $854, for the three months
ended December 31, 2009 and 2008, respectively.





Note
4 – Intangible Assets





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





Intangible
assets consist of the following:




December
      31,
              
              
              September
      30,2009
              
              
              2009(unaudited)Patents
              
              $
              86,132
              
              
              $
              78,724Trademarks
              
              
              12,487
              
              
              
              12,487Licensing
      right
              
              
              8,429
              
              
              
              8,429107,048
              
              
              
              99,640Accumulated
      Amortization
              
              
              (2,976
              )
              
              
              (2,460
              )Intangibles,
      net
              
              $
              104,072
              
              
              $
              97,180
  The
Company recorded amortization expense related to the trademarks of $516 and
$305, for the three months ended December 31, 2009 and 2008,
respectively.





No
amortization has been recorded for the patents as of December 31, 2009, as the
patents have not been issued to the Company.




12




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  The
following table summarizes the amortization over the next 5 years:




Years
      ended September 30,
            
            Amount2010
            
            $
            1,2492011
            
            
            1,2492012
            
            
            1,2492013
            
            
            1,2492014
            
            
            1,249Thereafter
            
            
            4,369





Note
5 – Convertible Promissory Note





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, shall be due and payable upon the
earlier of (i) November 9, 2010, at the written request of the holder to the
Company, or (ii) the occurrence of an event of default.  At the date
of conversion, 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.





Convertible Promissory Note
Issued February 19, 2009





On
February 19, 2009, the Company issued to an unrelated third party, (1) an
unsecured convertible promissory note for an aggregate principal balance of
$75,000 with a conversion price of $0.20 per share, and (2) 37,500 shares of the
Company’s restricted common stock.  The interest rate on the note is
4.0% per annum and had an original maturity date of March 31, 2009, which was
subsequently amended to May 31, 2009.  The Company determined the
relative fair value of the convertible promissory note and the stock on the date
of issuance.  The fair value of the stock was $4,246 which was
recorded as a debt discount and was amortized over the original maturity date
and included in financing expenses in the accompanying consolidated financial
statements.  As of December 31, 2009, the promissory note was in
default for non-payment; however on January 12, 2010, the Company and the note
holder agreed to a settlement.  The interest rate was adjusted to 15%
retroactive to the issuance date, and the principal and accrued interest for one
year would be settled for a cash payment of $25,000 and 765,625 shares of the
Company’s common stock.





Convertible Promissory Note
Issued March 3, 2009





On March
3, 2009, the Company issued an unsecured convertible promissory note to an
unrelated third party for an aggregate principal balance of $25,000 with a
conversion price of $0.20.  The convertible promissory note was due on
April 30, 2009, and is non-interest bearing.  However, the note was
subsequently amended to extend the due date to May 31, 2009.  As of
December 31, 2009, the promissory note was in default for
non-payment.




13




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  However,
on January 12, 2010, the Company and the note holder have agreed to settle the
principal balance for a cash payment of $12,500 and 156,250 shares of the
Company’s common stock.





The
Company recorded interest expense relating to the convertible promissory notes
of $12,062 and $2,616 for the three months ended December 31, 2009 and 2008,
respectively.





The
Company amortized $28,803 and $28,803 of the debt discount for the three months
ended December 31, 2009 and 2008, respectively.  The unamortized
discount as of December 31, 2009, was $97,992.





The
following table summarizes the convertible promissory notes:




DescriptionIssued
      convertible note, August 2006, amended November 10, 2007
              
              $
              262,356Less
      debt discount at December 31, 2009
              
              
              (97,992
              )Net
      balance at December 31, 2009
              
              
              
              
              
              $
              164,364Issued
      convertible note, February 19, 2009
              
              
              
              
              
              
              75,000Issued
      convertible note, March 3, 2009
              
              
              
              
              
              
              25,000Balance
      at December 31, 2009, net
              
              
              
              
              
              $
              264,364





Note
6 – Convertible Promissory Note - Related Party





Stockholder Notes Issued
March 27, 2007





On March
27, 2007, the Company issued convertible promissory notes to two stockholders of
the Company.  The principal amount of each convertible promissory note
was $20,000 for a combined total of $40,000.  The convertible
promissory notes bear interest at 4% per annum, computed on the basis of the
actual number of days elapsed and a year of 365 days, and were scheduled to
mature on March 27, 2009; however, the maturity dates were extended to July 31,
2009.  The convertible notes were in default for non-payment; however
on December 3, 2009, the note holders agreed to convert the notes into shares of
the Company’s common stock at $0.0079 in accordance with the conversion option
provided for by the notes.





On
October 25, 2007, the Company issued convertible promissory notes in the amount
of $10,000 with a conversion price of $0.0795 to each of the
stockholders.  The combined total for the two convertible promissory
notes was $20,000.  The promissory notes bear interest at 4% per
annum, computed on the basis of the actual number of days elapsed and a year of
365 days, and mature on October 25, 2009.  On December 3, 2009, the
note holders agreed to extend the maturity date until such time as the Company
has sufficient cash to repay these notes.





Stockholder Note Issued
February 4, 2009





On
February 4, 2009, the Company issued an unsecured convertible promissory note to
a related party for an aggregate principal amount of $43,000.  The
convertible promissory note has a conversion price of $0.20.  The
convertible promissory note was due on March 31, 2009, and was non-interest
bearing.  However, the note was subsequently amended to extend the due
date to May 31, 2009, and to accrue interest from the inception of the note at a
rate of 4.0%.  As of December 31, 2009, the promissory note was in
default for non-payment; however on January 5, 2010, the Company and the note
holder agreed to a settlement.  The interest rate was adjusted to 15%
retroactive to the issuance date, and the principal and accrued interest for one
year would be settled for a cash payment of $25,000 and 305,625 shares of the
Company’s common stock.




14




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  The
Company recorded interest expense related to the notes of $5,929 and $608 for
the three months ended December 31, 2009 and 2008.





The
Company amortized $1,092 and $18,976 of the debt discount for the three months
ended December 31, 2009 and 2008, respectively.  The unamortized
discount as of December 31, 2009 and September 30, 2009, was $0, and $1,092,
respectively.





The
following table summarizes the stockholder convertible promissory
notes:





DescriptionIssued
      convertible note, March 27, 2007
              
              $
              20,000Issued
      convertible note, March 27, 2007
              
              
              20,000Issued
      convertible note, October 25, 2007
              
              
              10,000Issued
      convertible note, October 25, 2007
              
              
              10,000Issued
      convertible note, February 4, 2009
              
              
              43,000Balance
      at December 31, 2009
              
              $
              103,000




Note
7 - 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 the 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 sheets.





The
Company recorded amortization expense related to the licensing agreement of $211
and $0 for the three months ended December 31, 2009 and 2008,
respectively.




15




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  Note
8 - 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 price for the warrants is as follows:




Number
      ofwarrants
      issued
              
              Exercise
      Price300,000
              
              $0.10
      per share500,000
              
              $0.15
      per share600,000
              
              $0.20
      per share600,000
              
              $0.25
      per share2,000,000


The
vesting schedule is as follows:




Number
      ofwarrants
      issued
              
              Exercise
      Price
              
              Vesting
      dates300,000
              
              $0.10
      per share
              
              Immediately500,000
              
              $0.15
      per share
              
              Immediately50,000
              
              $0.20
      per share
              
              Immediately550,000
              
              $0.20
      per share
              
              At
      time of extension600,000
              
              $0.25
      per share
              
              March
      31, 20102,000,000




On March
31, 2009, the date of issuance, the fair value of the 850,000 vested warrants
was $88,037.  The fair value was computed using the Black-Scholes
option pricing model under the following assumptions: (1) expected life of 3
years; (2) volatility of 110%; (3) risk free interest of 2.22% and (4) dividend
rate of 0%.  The Company recorded $88,037 as consulting expense on the
consolidated financial statements.





At
December 31, 2009, the Company determined the fair value of the 600,000 warrants
to be $66,092.  The fair value was computed using the Black-Scholes
option pricing model under the following assumptions: (1) expected life of 2.50
years; (2) volatility of 110%; (3) risk free interest of 2.22% and (4) dividend
rate of 0%.  The shares vest at 12 months after the execution of the
consulting agreement; therefore, the Company will amortize the expense over the
vesting period of one year.  The Company recorded $13,822 as
consulting expense for the three months ended December 31, 2009 which represents
75% of the fair value at December 31, 2009.  Each quarter, the Company
will determine the fair value of the warrants and record the expense related to
the vested warrants.







The
remaining 550,000 warrants will vest at the time of extension.  The
Company will compute the fair value of these warrants at that time.







Note
9 – Stockholder’s Equity





On June
30, 2009, the Company entered into an agreement with non related parties to
provide the Company capital introduction services.  The Company agrees
to pay 3.33 shares of common stock for every dollar raised.  As of
December 31, 2009, the non-related parties had raised $57,000.





During
the three months ended December 31, 2009, the Company issued 72,727
for consulting services. The services were valued at $10,000 based on the
agreement which was determined to be a more reliable measurement of the fair
value.





On
November 9, 2009, the Company issued 108,000 warrants valued at $13,770 for
consulting services.




16




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)




During
the three months ended December 31, 2009, 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 three months ended December 31, 2009, the Company issued 6,966,666 shares of
$0.001 par value common stock for $0.06 per share with 6,966,666 detachable
warrants. The warrants have an exercise price of $0.20 and expire on
December 1, 2012.





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.





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




Number
      of
              
              
              Weighted
      Average
              
              
              AggregateShares
              
              
              Exercise
      Price
              
              
              Intrinsic
      ValueOutstanding
      at September 30, 2008
              
              
              53,901,863
              
              
              $
              0.072Granted
              
              
              9,546,081
              
              
              $
              0.158Canceled
              
              
              (35,734,111
              )
              
              $
              0.074Exercised
              
              
              -Outstanding
      at September 30, 2009
              
              
              27,713,833
              
              
              $
              0.102Granted
              
              
              -Canceled
              
              
              -Exercised
              
              
              -Outstanding
      at December 31, 2009
              
              
              27,713,833
              
              
              $
              0.102Exercisable
      at December 31, 2009
              
              
              12,532,497
              
              
              $
              0.078
              
              $
              2,746,987






17





CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)




The
number and weighted average exercise prices of all options outstanding as of
December 31, 2009 are as follows:




Options
      outstandingWeightedWeighted
              
              
              AverageNumber
              
              
              Average
              
              
              RemainingRange
      of
              
              
              Outsanding
      as of
              
              
              Exercise
              
              
              Contractual
      LifeExercise
      Price
              
              
              December
      31, 2009
              
              
              Price
              
              
              (Years)$
              0.014
      - 0.100
              
              
              
              18,167,752
              
              
              
              0.07
              
              
              
              3.43$
              0.110
      - 0.150
              
              
              
              3,447,480
              
              
              
              0.12
              
              
              
              4.06$
              0.160
      - 0.200
              
              
              
              4,356,961
              
              
              
              0.17
              
              
              
              4.60$
              0.210
      - 0.260
              
              
              
              1,741,640
              
              
              
              0.22
              
              
              
              4.5727,713,833


The
number and weighted average exercise prices of all options exercisable as of
December 31, 2009, are as follows:




Options
      ExercisableWeightedWeighted
              
              
              AverageNumber
              
              
              Average
              
              
              RemainingRange
      of
              
              
              Outstanding
      As of
              
              
              Exercise
              
              
              Contractual
      LifeExercise
      Price
              
              
              December
      31, 2009
              
              
              Price
              
              
              (Years)$
              0.014
      - 0.100
              
              
              
              11,413,314
              
              
              
              0.07
              
              
              
              3.51$
              0.110
      - 0.150
              
              
              
              287,594
              
              
              
              0.11
              
              
              
              4.15$
              0.160
      - 0.200
              
              
              
              703,885
              
              
              
              0.16
              
              
              
              4.34$
              0.210
      - 0.260
              
              
              
              127,704
              
              
              
              0.26
              
              
              
              4.4312,532,497





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




December
      31, 2009
              
              
              September
      30, 2009Expected
      life (years)
              
              2.63
      to 6.09
              
              
              2.63
      to 6.16Risk-free
      interest rate
              
              1.49%
      to 4.57%
              
              
              .56%
      to 4.57%Expected
      volatility
              
              
              110%
              
              
              
              110%Expected
      dividend yield
              
              
              0%
              
              
              
              0%


The
weighted average grant-date fair value for the options granted during the year
ended September 30, 2009, was $0.76.





The
compensation expense related to the unvested options as of December 31, 2009, is
$1,221,948, which will be recognized over the weighted average period of 2.37
years. Stock-based compensation expense to employees and non employees for the
three months ended December 31, 2009, and December 31, 2008, was $170,182 and
$122,867, respectively.




18




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)


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





Warrants





On
November 9, 2009, the Company entered into an agreement with Seahawk Capital
Partners, Inc. (“Seahawk”), to provide the Company capital introduction
services, as well as strategic alliance services.  The Company agrees
to pay 8% in cash fees for capital introduced by Seahawk and a number of
warrants based on the cash fee amount at $0.10.  As of December 31,
2009, the Company paid a cash fee of $10,800 and issued 108,000
warrants.





The
Company determined the fair value of the 108,000 warrants to be
$13,770.  The fair value was computed using the Black-Scholes option
pricing model under the following assumptions: (1) expected life of 3 years; (2)
volatility of 110%; (3) risk free interest of 1.40% and (4) dividend rate of
0%.  The shares vest immediately and have an exercise price of
$0.10.




During
the three months ended December 31, 2009, 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 three months ended December 31, 2009, the Company issued 6,966,666 shares of
$0.001 par value common stock for $0.06 per share with 6,966,666 detachable
warrants. The warrants have an exercise price of $0.20 and expire on
December 1, 2012.





The
following table summarizes the warrant activity:





Number
      of
              warrants
      issuedOutstanding,
      September 30, 2008
            
            
            10,500,000Granted
            
            
            8,060,000Cancelled
            
            
            (10,500,000
            )Exercised
            
            
            -Outstanding,
      September 30,2009
            
            
            8,060,000Granted
            
            
            9,074,666Cancelled
            
            
            -Exercised
            
            
            -Outstanding,
      December 31, 2009 (unaudited)
            
            
            17,134,666




19




CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  Note
10 - Commitments and Contingencies





Operating
Leases





On
February 21, 2008, the Company entered into a one-year lease for office space
for its El Dorado Hills, California, office, which was subsequently amended to
extend the lease term to March 31, 2010.  The lease requires monthly
payments of $2,198. On August 26, 2008, the Company entered into an
eighteen-month lease for office space for its Mission Viejo, California, office
beginning on October 1, 2008.  The lease requires monthly payments of
$4,664.  The Mission Viejo lease term was amended and extended to
April 30, 2012 with monthly payments of $3,710 commencing on May 1, 2010,
thereafter increasing to $3,816 on May 1, 2011.





The
Company recorded rent expense of $20,586 and $20,686 for three months ended
December 31, 2009 and 2008, respectively.




Future
minimum rent expense for the remaining years are as follows:


Years
      ended September 30,
              
              Amount2010
              
              $
              42,2612011
              
              
              43,3502012
              
              
              25,287





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
11 – Taxes




We have
provided no current income taxes due to the losses incurred from October 11,
2005 (date of inception), through December 31, 2009.  Net operating
losses of approximately $4,433,771 at December 31, 2009, are available
for carryover.  The net operating losses will expire from 2022
through 2024.  The Company has provided a 100% valuation
allowance for the deferred tax benefit resulting from the net operating loss
carryover due to their limited operating history.  In addressing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences are deductible.




A
reconciliation of the statutory Federal income tax rate and the effective income
tax rate for the three months ended December 31, 2009, and the year ended
December 31, 2008, follows:




December
      31,
              
              
              December
      31,2009
              
              
              2008Statutory
      federal income tax rate
              
              
              (0.34
              )
              
              
              (0.34
              )State
      income taxes (benefit), net of federal taxes
              
              
              (0.06
              )
              
              
              (0.06
              )Equity
      instruments issued for compensation/services
              
              
              0.09
              
              
              
              0.05Change
      in derivative liabilities
              
              
              -
              
              
              
              0.08Valuation
      allowance
              
              
              0.31
              
              
              
              0.27Effective
      income tax rate
              
              
              -
              
              
              
              -







20





CelLynx
Group, Inc.
 Notes to
Consolidated Financial Statements
 (unaudited)
  Significant
components of deferred tax assets and liabilities are as
follows:




December
      31,
              
              
              September
      30,2009
              
              
              2009(unaudited)Deferred
      tax assets:Net
      operating loss carryforwards
              
              $
              1,937,435
              
              
              $
              1,694,205Valuation
      allowance
              
              
              (1,937,435
              )
              
              
              (1,694,205
              )Net
      deferred tax assets
              
              $
              -
              
              
              $
              -




The
Company adopted ASC Topic 740 "Income Taxes", on January 1,
2007.  There were no unrecognized tax benefits as of the date of
adoption and there are no unrecognized tax benefits included in the balance
sheet at December 31, 2009, that would, if recognized, affect the effective tax
rate.





Note
12 – Subsequent Events







The
Company has entered into agreements after December 31, 2009 on those convertible
notes that were in default to settle outstanding principal and accrued interest
balances (See Notes 5 and 6).





On
January 8, 2010, the Company issued 280,112 shares of common stock for legal
services valued at $67,227.





During
January 2010, the Company entered into subscription agreements and issued
4,250,085 shares of $0.001 par value common stock for $0.20 per share with
4,250,085 detachable warrants in the amount of $255,000.  The warrants
have an exercise price of $0.06 and expire on December 1, 2012.





During
January 2010, the Company entered into subscription agreements and issued
8,633,333 shares of $0.001 par value common stock for $0.06 per share with
8,633,333 detachable warrants in the amount of $518,000.  The warrants
have an exercise price of $0.20 and expire on December 31, 2012.








On
January 15, 2010, the Company entered into a one year agreement with Seahawk
Capital Partners, Inc. for consulting services.  The Company, will
issue 1 million shares of Company restricted stock and 2 million warrants upon
signing of agreement.  The Company agreed to issue an additional
50,000 shares of restricted Company stock per month until January 15,
2011.












21





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





Forward
Looking Statements





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





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





Plan
of Operations





Overview





We are a
producer of the next generation of cell phone boosters (also known as repeaters
or amplifiers) for the small office, home office SOHO and
vehicle.  This next generation product line, CelLynx 5BARzTM , 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
ordered 220 units from our manufacturer in the Philippines.  We used
some of the units as demo units and started selling the
remainder.  Due to cash flow issues, we only recently placed an
order for an additional 1,000 units and have received the first 250 units from
that order in November 2009.




We have
recently completed a prototype SOHO Unit which delivers 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 fourth quarter of 2010.
This unit measures 6.5 X 7.5 X 2.5 inches, weighs approximately one pound and
does not require the installation of antennas or cables in order to
function.  Most SOHO cellular amplifiers currently on the market
require a receiving tower or antenna, usually placed in an attic or on a
rooftop, and a transmitting tower or antenna to be placed at least 35 feet from
the other antenna with each connected to the amplifier by cable.  Our
patent pending technology 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 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 complete development leading
to commercialization.




22




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 in house incorporating a multi-channel strategy that includes
distribution partners, wireless service providers, retail outlets and
international joint ventures.





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.





Results
of Operations





Comparison
of the three months ended December 31, 2009 and 2008




Three
      months ended December 31,2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeREVENUE
              
              $
              11,820
              
              
              $
              -
              
              
              
              11,820
              
              
              
              100.0
              %COST
      OF REVENUE
              
              
              9,559
              
              
              
              -
              
              
              
              9,559
              
              
              
              100.0
              %GROSS
      PROFIT
              
              
              2,261
              
              
              
              -
              
              
              
              2,261
              
              
              
              100.0
              %OPERATING
      EXPENSES
              
              
              788,884
              
              
              
              773,340
              
              
              
              15,544
              
              
              
              2.0
              %NON
      OPERATING EXPENSES
              
              
              (47,879
              )
              
              
              (218,203
              )
              
              
              170,324
              
              
              
              -78.1
              %NET
      LOSS
              
              $
              (834,502
              )
              
              $
              (991,543
              )
              
              $
              157,041
              
              
              
              -15.8
              %




Revenue
and Cost of Revenue





During
the three months ended December 31, 2009, we generated net $11,820 in revenue
that arose from the initial sale of our 5Barz units which became sellable in
July 2009. Cost of revenues was $9,559 resulting in a gross profit of
$2,261.  During the same period of 2008, we were in development stage
and did not recognize any revenues, cost of revenues, or gross
profit.





Operating
Expenses





Total
operating expenses incurred for the three months ended December 31, 2009, was
$788,884 compared to $773,340 for the three months ended December 31, 2008,
which increased by $15,544.  The increase was due to an increase in
professional fees of $160,000, offset by a decrease in research and
development expenses and payroll related expenses, as we continued to build our
infrastructure.




23


Non
Operating Income and Expenses





Total
non-operating expenses incurred for the three months ended December 31, 2009,
was $47,879 compared to $218,203 for the three months ended December 31,
2008, for a decrease of $170,324.  The decrease was due to the change
in fair value of the accrued beneficial conversion liability and the change in
fair value of the accrued warrant liability.  During the three months
ended December 31, 2008, we recognized a gain of $251,410 related to the accrued
beneficial conversion liability and we recognized a loss of $419,571 related to
the accrued warrant liability.  During the three months ended December
31, 2009, we did not have any accrued warrant or beneficial conversion
liabilities.  Interest and financing costs were $47,879 and $50,042
for the three months ended December 31, 2009 and 2008,
respectively.





Liquidity
and Capital Resources





Financial
Condition





As of
December 31, 2009, we had cash of $28,316 and we had a working capital deficit
of $1,198,457, 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 an increase in accrued expense as we continue to build our
infrastructure.





During
the three months ended December 31, 2009, cash used in operating activities was
$584,085.  Cash used in operating activities consisted of a net loss
of $834,502 offset by non cash expenses of $10,000 for stock issued for
services, $13,822 for warrants issued for services, $170,182 for stock based
compensation, $29,895 for the amortization of debt discount, and an increase of
$45,021 for change in accounts payable and accrued expenses.  These
were offset by an increase in accounts receivable and inventory of $6,171 and
$27,238, respectively.





We used
$1,575 for the purchase of intangible assets for the three months ended December
31, 2009 compared to $12,018 purchase of equipment and intagible assets for
the three months ended December 31, 2008.





Cash
provided by financing activities was $607,200 for the three months ended
December 31, 2009 compared to $0 for the three months ended December 31,
2008.  We received $618,200, less offering costs of $10,800 associated
with the common stock, for the three months ended December 31,
2009.  We have financed our operations primarily through proceeds from
the issuance of common stock.




We
anticipate raising an additional $1 million during the next four to six months
through private equity offerings. We believe that our current cash,
anticipated cash flow from operations, and net proceeds from the private
placement financing will be sufficient to meet our anticipated cash needs,
including our cash needs for working capital and capital
expenditures.





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our financial position, results of operations, and cash flows.




24




The
following table summarizes our contractual obligations as of December 31 2009,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.





Less
      thanContractual
      obligations
              
              Total
              
              
              1
      year
              
              
              1-3
      yearsNote
      Payable
              
              $
              264,364
              
              
              $
              264,364
              
              
              $
              -Stockholder
      notes
              
              
              103,000
              
              
              
              103,000
              
              
              
              -Operating
      lease
              
              
              110,898
              
              
              
              53,098
              
              
              
              57,800$
              478,262
              
              
              $
              420,462
              
              
              $
              57,800




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.  The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





While our
significant accounting policies are more fully described in Note 2 to our
financial statements, 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 over a period
of 10 years.




25


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 December
31, 2009, and September 30, 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.





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.





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
3.QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
Applicable.




26


ITEM
4.CONTROLS AND
PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





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





(i) our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in 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 December 31, 2009 that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.





PART
II - OTHER INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS





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





ITEM
      1A.
            RISK
      FACTORS





Not applicable.





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





None.





ITEM 3.
            DEFAULTS UPON SENIOR
      SECURITIES





None.





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





None.




27





ITEM 5.
            OTHER
      INFORMATION





(a)
            None.





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








ITEM 6.
            EXHIBITS





EXHIBIT
INDEX





Exhibit
              Number
            
            Description





31.1
            
            Section 302
      Certification by the Corporation’s Chief Executive Officer
    *31.2
            
            Section 302
      Certification by the Corporation’s Chief Financial Officer
    *32.1
            
            Section 906
      Certification by the Corporation’s Chief Executive Officer
    *32.2
            
            Section 906
      Certification by the Corporation’s Chief Financial Officer
    *


__________________


*
      Filed Herewith.




28





SIGNATURES





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





CELLYNX
      GROUP, INC.
                (Registrant)Date:
      February 19, 2010
              By:
              /s/ Daniel
      R. AshDaniel
      R. AshChief
      Executive Officer








29