UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K




x

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





For the fiscal year ended September 30, 2010





OR




o

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





For the transition period from                      to





Commission file number: 000-27147





CELLYNX GROUP, INC.


(Exact name of registrant as specified in its charter)




Nevada

95-4705831(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)25910 Acero, Suite 370

Mission Viejo, California

92691(Address of principal executive offices)

(Zip Code)





Registrant’s telephone number: (949) 305-5290





Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yeso Noþ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yeso Noþ





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.


Yesþ Noo





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  o  No  o










Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ





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






Large accelerated filero
Accelerated fileroNon-accelerated filero
Smaller reporting companyþ




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ





At March 31, 2010, the end of our second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $16,975,138  based on the closing price of $0.16 as reported on the Over-the-Counter Bulletin Board.





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































TABLE OF CONTENTS


TO ANNUAL REPORT ON FORM 10-K


FOR YEAR ENDED SEPTEMBER 30, 2010





PagePART IItem 1.

Business
1Item 1A.

Risk Factors
14Item 1B.

Unresolved Staff Comments
14Item 2.

Properties
15Item 3.

Legal Proceedings
15Item 4.

(Removed and Reserved.)
15PART IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15Item 6.

Selected Financial Data
18Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations
18Item 7A.

Quantitative and Qualitative Disclosures About Market Risk
25Item 8.

Financial Statements and Supplementary Data
25Item 9.

Disagreements With Accountants on Accounting and Financial Disclosure
25Item 9A.

Controls and Procedures
27Item 9B.

Other Information
28PART IIIItem 10.

Directors, Executive Officers and Corporate Governance
28Item 11.

Executive Compensation
32Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
35Item 13.

Certain Relationships and Related Transactions, and Director Independence
37Item 14.

Principal Accounting Fees and Services
37PART IVItem 15.

Exhibits, Financial Statement Schedules
38Signatures

















FORWARD LOOKING STATEMENTS AND CERTAIN TERMINOLOGY





Some of the statements made by us in this Annual Report on Form 10-K are forward-looking in nature, including but not limited to, statements relating to our future revenue, product development, demand, acceptance and market share, gross margins, levels of research and development, our management's plans and objectives for our current and future operations, and other statements that are not historical facts. Forward-looking statements include, but are not limited to, statements that are not historical facts, and statements including forms of the words "intend", "believe", "will", "may", "could", "expect", "anticipate", "plan", "possible", and similar terms. Actual results could differ materially from the results implied by the forward looking statements due to a variety of factors.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by us include, but are not limited to:





●
our limited operational history;





●
our ability to finance our activities and maintain our financial liquidity;





●
our ability to attract and retain qualified, knowledgeable employees;





●
the impact of general economic conditions on our business;





●
the ability to bring our technology to commercialization;





●
market acceptance of our products;





●
dependence on suppliers, third party manufacturers and other key vendors;





●
our ability to design and market new products successfully;





●
our failure to acquire new customers in the future;





●
continued enforceability of patent and trademark rights;





●
deterioration of business and economic conditions in our markets;





●
intensely competitive industry conditions with increasing price competition; and





●
the rate of growth in the cellular amplifier market.





In this document, the words "we," "our," "ours," "us,"  “CelLynx” and “Company” refer to CelLynx Group, Inc., and our subsidiary.























PART I





ITEM 1. BUSINESS





Corporate Background





CelLynx Group, Inc. (“CelLynx” or the “Company”) was originally incorporated under the laws of the State of Minnesota on April 1, 1998, under the name “Cool Can Technologies, Inc.” Effective July 12, 2004, the Company merged (the “Merger”) with NorPac Technologies, Inc., its wholly owned subsidiary (“Nevada Sub”), for the purpose of reincorporating the Company in Nevada. The Merger was completed effective July 12, 2004, with Nevada Sub as the surviving corporation. Upon completion of the Merger, the Company’s name was changed to NorPac Technologies, Inc. (“NorPac”).





The Company had originally been in the business of developing and marketing a proprietary technology for self-chilling beverage containers (the “Cool Can Technology”). However, the Company’s patents for the Cool Can Technology expired, and, as a result, the Company’s management decided to abandon the development of the Cool Can Technology and seek alternative business opportunities. To that end, as more fully explained below, on July 24, 2008, the Company closed a transaction with shareholders of CelLynx, Inc., a California corporation ("CelLynx-California"), by which it newly issued shares to the CelLynx-California shareholders in exchange for all outstanding shares of CelLynx-California. Through this transaction, the Company acquired a cellular amplifier business as its wholly owned subsidiary. This transaction has been considered a "reverse take-over" for accounting purposes.





Effective August 5, 2008, the Company changed its name to CelLynx Group, Inc. by merging another wholly owned subsidiary, CelLynx Group, Inc., a Nevada corporation, into the Company and assuming the subsidiary’s name.  On October 27, 2008, the CelLynx’s Board of Directors approved a change of the Company’s fiscal year.  CelLynx’s new fiscal year will begin on October 1 and end on September 30 of each year, and the change was applicable with the year ending September 30, 2008.  The Company previously had a June 30 fiscal year end.  The September 30 fiscal year end is also the fiscal year end of CelLynx-California.





The Reverse Take-Over





On July 24, 2008, the Company closed a reverse take-over transaction by which it acquired a cellular amplifier business pursuant to a Share Exchange Agreement, as amended  (the “Exchange Agreement”), by and among the Company, CelLynx, Inc., a California corporation (“ CelLynx-California ”), and twenty-three (23) CelLynx-California shareholders who, immediately prior to the closing of the transactions contemplated by the Exchange Agreement, collectively held 100% of CelLynx-California’s issued and outstanding shares of capital stock (the “CelLynx Owners”).





Prior to the closing, on July 23, 2008, the Company entered into a Regulation S Subscription Agreement (the “Subscription Agreement”) pursuant to which the Company agreed to issue and sell 10,500,000 shares of its common stock and warrants to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to non-U.S. persons (the “Investors”) for an aggregate purchase price of $1,575,000 (the “Financing”).





Prior to the closing, on July 22, 2008, CelLynx-California entered into a Master Global Marketing and Distribution Agreement (the “Distribution Agreement”) with Dollardex Group Corp., a company organized under the laws of Panama (“Dollardex”), whereby Dollardex shall act as CelLynx-California’s exclusive distributor of CelLynx-California’s products and related accessories in the following regions: Canada, South America, Europe, Middle East, China, India, Australia, Africa and South East Asia.





Immediately following the closing, on July 24, 2008, two of the new officers and directors, one of the new employees and one of the new non-officer directors of the Company entered into a Lock-Up Agreement (the “Lock-Up Agreement”) whereby they agreed not to transfer their Company shares for a period of 24 months following the closing of the reverse take-over transaction.  These Lock-Up Agreements expired in July 2010.





As a result of the closing of the reverse take-over transaction, the CelLynx Owners became our controlling shareholders, CelLynx-California became our wholly-owned subsidiary, and CelLynx-California’s business became our business.




1




The following is a brief description of the terms and conditions of the Exchange Agreement, Subscription Agreement and Distribution Agreement, and the transactions contemplated thereunder that are material to the Company.





Share Exchange





Under the Exchange Agreement, the Company was to acquire all of the equity interests of CelLynx-California in exchange for issuing restricted common stock to the CelLynx Owners in an aggregate amount equal to approximately 70% of the total issued and outstanding shares of common stock immediately after the closing of the reverse take-over, taking into account certain derivative shares held by certain CelLynx Owners and a CelLynx-California noteholder, but exclusive of the shares issued in the Financing and to certain CelLynx-California investors.   As a result, the CelLynx Owners were to receive 77,970,956 shares of the Company’s common stock in exchange for 100% of CelLynx’s common stock.   However, the Company had only 41,402,110 authorized, unissued and unreserved shares of common stock available, after taking into account the shares of common stock issued and reserved in the Financing described below.  Pursuant to the Exchange Agreement, in the event that there were an insufficient number of authorized but unissued and unreserved common stock to complete the transaction, the Company was to issue all of the available authorized but unissued and unreserved common stock to the CelLynx Owners in a pro rata manner and then establish a class of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and issue that number of shares of Series A Preferred Stock such that the common stock underlying the Series A Preferred Stock plus the common stock actually issued to the CelLynx Owners would equal the total number of shares of common stock due to the CelLynx Owners under the Exchange Agreement.  As a result, the Company issued to the CelLynx Owners an aggregate of 32,454,922 shares of common stock and 45,516,034 shares of Series A Preferred Stock.  The Series A Preferred Stock automatically converts into common stock on a one-to-one ratio upon the authorized capital stock of the Company being increased to include not less than 150,000,000 shares of common stock.





On September 22, 2008, shareholders owning in the aggregate 26,441,554 shares of the Company’s common stock and 40,411,544 shares of the Company’s Series A Preferred Stock, outstanding as of September 10, 2008 (the “Record Date”), consented in writing to amend the Company’s articles of incorporation to increase the number of shares of the Company’s authorized common stock from 100,000,000 to 400,000,000.  On October 8, 2008, the Company filed and mailed a Definitive Information Statement notifying its shareholders of this action and on November 7, 2008, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) with the Secretary of State of the State of Nevada to increase the number of authorized shares common stock of the Company from 100,000,000 to 400,000,000.  As a result of filing the Amendment, the 45,516,034 shares of Series A Preferred Stock were automatically converted into 45,516,034 shares of common stock.





The Exchange Agreement also provided that all options, warrants and convertible notes to purchase or acquire shares of CelLynx-California be converted into options, warrants or convertible notes to purchase or acquire shares of the Company in the same proportion at which the CelLynx-California shares were converted into Company shares (the “Conversion Ratio”) under the Exchange Agreement.  The exercise or conversion price for such options, warrants or convertible notes shall be the exercise price or conversion price of the CelLynx-California options, warrants or convertible notes divided by the Conversion Ratio.  As a result, 750,000 CelLynx-California options with an exercise price of $0.018 per share were converted into 943,447 Company options with an exercise price of $0.014 per share; 375,000 CelLynx-California options with an exercise price of $0.02 per share were converted into 471,723 Company options with an exercise price of $0.016 per share; 23,394,133 CelLynx-California options with an exercise price of $0.09 per share were converted into 29,428,166 Company options at an exercise price of approximately $0.0715 per share; 18,330,544 CelLynx-California options with an exercise price of $0.099 per share were converted into 23,058,527 Company options with an exercise price of approximately $0.0787 per share, and, with the exception of the Palomar Note described below, $40,000 of CelLynx-California convertible notes with a conversion price of $0.01 per share were converted into $40,000 of Company convertible notes with a conversion price of approximately $0.0079 per share, and $20,000 of CelLynx-California convertible notes with a conversion price of $0.10 per share were converted into $20,000 of Company convertible notes with a conversion price of approximately $0.0795 per share.  There were no CelLynx-California warrants issued and outstanding at the time of the closing of the Exchange Agreement.















2


In connection with the reverse take-over transaction, Palomar Ventures III, L.P. (“Palomar”), holder of a certain amended and restated convertible promissory note dated November 10, 2007 (the “Palomar Note”) executed by CelLynx-California in the principal amount of $262,356.16, is entitled to convert the Palomar Note into that number of shares of common stock of CelLynx-California such that immediately following the closing of the reverse take-over transaction, the Palomar Note would be convertible into 4.8% of the issued and outstanding common stock of the Company, exclusive of unvested options.  As a result, the Palomar Note is convertible into 6,340,029 shares of the Company's common stock.





As a condition to closing the Exchange Agreement, John P. Thornton resigned as the Company’s President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer, and the following officers were appointed:





§
Daniel R. Ash, President, Chief Executive Officer, Chief Operating Officer and Secretary;§
Kevin Pickard, Chief Financial Officer and Treasurer, and§
Tareq Risheq, Chief Strategy Officer.





In addition, Mr. Thornton agreed to resign as a director of the Company and Mr. Ash, Mr. Risheq, Norman W. Collins, and Robert J. Legendre were appointed directors of the Company.  Mr. Ash’s appointment was effective immediately.  The appointment of the other directors became effective on August 14, 2008, upon the Company’s compliance with the provisions of Section 14(f) of the Securities Act of 1933, as amended, and Rule 14(f)-1 thereunder.





On November 17, 2008, the Board of Directors of the Company appointed Mr. Legendre Executive Chairman of the Board to assist the Company’s Chief Executive Officer with strategy and execution of the Company’s manufacturing and supply chain operations, corporate development, capital markets and investor relations.  Mr. Legendre subsequently resigned on May 4, 2009.





On December 12, 2008, Mr. Risheq resigned as the Company’s Chief Strategy Officer but remained a director.





$1,575,000 Financing





Under the Subscription Agreement, the Company issued 10,500,000 shares of its common stock and warrants (the “Warrants”) to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to the Investors for an aggregate purchase price of $1,575,000, or $0.15 per share, payable in cash and through the cancellation of debt.  The proceeds from the Financing were allocated as follows: $100,000 to pay current obligations of NorPac, $225,000 as cancellation of current debt of NorPac and the remaining $1,250,000 for working capital.  The Warrants expire on July 22, 2010 except in the event that at any time CelLynx has manufactured 25 or more of its mobile or home repeater units, then the Company may, at its option, accelerate the expiry of the Warrants by giving notice (“Notice of Acceleration”) to the holder thereof.  If the holder does not exercise the Warrant within 30 days of the giving of the Notice of Acceleration, the Warrants will expire and the holder will have no further rights to acquire any shares of the Company under the Warrants.





Lock-Up Agreements





Under the Lock-Up Agreement, Robert J. Legendre, Executive Chairman of the Board of Directors of the Company,  Daniel R. Ash, Chief Executive Officer and a director of the Company, Tareq Risheq, Chief Strategy Officer and a director of the Company, and Anthony DeMarco, a senior employee of the Company, agreed not to transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in any other way encumber or dispose of, directly or indirectly and whether or not voluntarily, without express prior written consent of the Company, any common stock or options to purchase common stock of the Company for a period of 24 months.  The Lock-Up Agreements expired in July 2010.






3





FY 2010 Events





Ingram Micro Agreement





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





Dollardex Master Global Marketing and Distribution Agreement





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





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





Amendment of M&D Agreement





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





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





Change in Management





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





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





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





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




4




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





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





Asher Enterprises Agreement





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





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





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





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





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





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




5


Recent Developments





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





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





Line of Credit Agreement





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





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





(i)
$200,000 on or before January 30, 2011;


(ii)
$300,000 on or before January 30, 2011;


(iii)
$1,000,000 on or before February 28, 2011; and


(iv)
$1,000,000 on or before March 31, 2011.





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





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





(a)
Failure to pay any principal or interest hereunder within ten (10) days after the same becomes due.


(b)
Any representation or warranty made by CelLynx in the Line of Credit Agreement or in connection with any borrowing or request for an advance hereunder, or in any certificate, financial statement, or other statement furnished by CelLynx to Dollardex is untrue in any material respect at the time when made.


(c)
Default by CelLynx in the observance or performance of any other covenant or agreement contained in the Line of Credit Agreement, other than a default constituting a separate and distinct event of default under the Line of Credit Agreement.


(d)
Default by CelLynx in the observance or performance of any other covenant or agreement contained in any other document or agreement made and given in connection with the Line of Credit Agreement, other than a default constituting a separate and distinct event of default under the Line of Credit Agreement, and the continuance of the same unremedied for a period of thirty (30) days after notice thereof is given to CelLynx.


(e)
Any of the documents executed and delivered in connection herewith for any reason ceases to be valid or in full force and effect or the validity or enforceability of which is challenged or disputed by any signer thereof, other than Dollardex.


(f)
CelLynx shall default in the payment of principal or interest on any other obligation for borrowed money other than hereunder, or defaults in the payment of the deferred purchase price of property beyond the period of grace, if any, provided with respect thereto, or defaults in the performance or observance of any obligation or in any agreement relating thereto, if the effect of such default is to cause or permit the holder or holders of such obligation (or trustee on behalf of such holder or holders) to cause such obligation to become due prior to the stated maturity.






6




(g)
Filing by CelLynx of a voluntary petition in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended or under any other insolvency act or law, state or federal, now or hereafter existing.


(h)
Filing of an involuntary petition against CelLynx in bankruptcy seeking reorganization, arrangement or readjustment of debts, or any other relief under the Bankruptcy Code as amended, or under any other insolvency act or law, state or federal, now or hereafter existing, and the continuance thereof for sixty (60) days undismissed, unbonded, or undischarged.


(i)
All or any substantial part of the property of CelLynx shall be condemned, seized, or otherwise appropriated, or custody or control of such property is assumed by any governmental agency or any court of competent jurisdiction, and is retained for a period of thirty (30) days.





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





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





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





Amended and Restated Master Global Marketing and Distribution Agreement





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





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





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





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







7





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





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





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





The Company’s consent was required pursuant to Amendment No. 2.




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


BUSINESS





Overview of CelLynx





CelLynx develops and markets the next generation of cell phone signal network extenders as distinguished from cell phone boosters, repeaters or amplifiers for the small office, home office (“SOHO”) and vehicle.  This next generation product, CelLynx 5BARzTM, is the first consumer-friendly, single-piece unit that strengthens weak cellular signals to deliver higher quality signals for voice, data and video reception on cell phones being used indoors or in vehicles.   CelLynx plans to develop its products for use in North America, Europe and Asia.  The CelLynx product line is being  manufactured by contract manufacturers located in South East Asia.   These manufacturers allows CelLynx to capitalize on the full advantages of multiple manufacturing locations with a trained and experienced technical work force, state of the art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics. The marketing and sales functions will be handled by 5BARz International in accordance with the Dollardex assignment of the M & D Agreement referred to above.





The CelLynx Solution





Most Indoor or Vehicular cellular signal enhancers currently on the market require a receiving tower or antenna, usually placed in an attic or on a rooftop, and a transmitting tower or antenna to be placed at least 35 feet from the other antenna with each connected to the amplifier by cable.  CelLynx’s patent pending technology eliminates the need to distance the receiving and transmitting towers, allowing the two towers to be placed directly inside the unit, resulting in a more affordable, one piece unit sometimes referred to as ‘plug ‘n play’, i.e. requiring no installation other than plugging the unit into a power source.





CelLynx has recently completed a prototype of the 5BARz SOHO Unit which delivers 45 decibel (dB) of gain in a Single Band PCS environment providing up to 1,500 square feet of indoor coverage.  This unit measures 6.5 X 7.5 X 2.5 inches, weighs approximately one pound and does not require the installation of antennas or cables in order to function.  In order to optimize marketability, CelLynx is developing an improved model which it expects to operate in a dual band, PCS and Cellular, environment delivering 65 dB of gain thereby allowing for coverage of 2,000 to 3,000 square feet.  This dual band unit would work with all current wireless carriers in the U.S. and Canada except Nextel, which operates on its own frequency. The PCS network is generally used by the older carriers such as AT&T at 850MHz while the newer carriers such as T-Mobile operate on the Cellular network at 1900 MHz.  Management is confident that all of the critical functions required for this dual band unit have been identified and that their engineering team has the capability to accomplish development leading to commercialization.







8




We believe the CelLynx 5BARz product line, when commercialized, will also offer an advantage over  traditional amplifiers such as the Femtocell architecture being developed by wireless service providers such as AT&T and Verizon.  This Femtocell technology requires a small cellular base station which connects to the service provider’s network via a broadband such as DSL or cable.  As such, Femtocell will be carrier specific and subject to a monthly subscription fee.  CelLynx products, on the other hand, will be compatible with all wireless carriers in the U.S. and Canada (except Nextel), and will not require a broadband internet connection and will not entail a monthly service fee.





CelLynx has also developed a mobile 5BARz Universal Unit branded as The Road Warrior  designed primarily for use in vehicles, or for single-room coverage in the home or office.  In November, 2008, the Company announced it had manufactured 25 5BARz Universal Unit production samples, reaching a key commercialization milestone. The 5BARz Universal Unit is an adaptation of the 5BARz SOHO Unit described above.  The unit will produce up to 45 dB of gain offering higher performance than the competition within the interior of a vehicle cabin or single room, while minimizing the signal degrading effects of cabling.





Initially envisioned as a plug ‘n play mobile unit to be used in vehicles with a 12 volt cigarette lighter power adapter, the 5BARz  Road Warrior Unit has also proven highly effective for single-room coverage in a home or office. Accordingly, the Company has introduced the Unit with a 110 volt power cord for indoor single-room use, as well as with an accessory portable battery pack that can be used virtually anywhere a weak signal exists. Using the 5BARz Universal Unit with Bluetooth® extends the effective coverage range to that of the Bluetooth® signal.





Our first product, The Road Warrior, has passed FCC Certification and in July 2009, we ordered 220 units from our manufacturer in the Philippines and have since followed up with orders exceeding 16,000 units.  The company expects to start receiving delivery of those units during the first quarter of 2011.





History and Development of CelLynx





CelLynx assembled a veteran engineering team with extensive cellular radio frequency (RF) experience headquartered in Sacramento, California.  Within eight months, this team, with more than 80 years of combined experience in building RF products, developed working prototypes of an affordable consumer friendly single piece plug ‘n play booster with a minimum of 45dB of gain in both up and down paths. By late 2007, a pre-production prototype had been developed. At that time, CelLynx entered into a merger agreement with NorPac Technologies, Inc., a Nevada corporation trading on the Over The Counter Bulletin Board (OTC BB).





Since the closing of the reverse take-over July 24, 2008, CelLynx has continued the development of the 5BARz product line with both the 5BARz Road Warrior Unit and 5BARz SOHO Unit now referred to as the @Home unit on similar but separate development tracks. Concurrently, management is focusing on the manufacturing process and implementation of a sales and marketing plan to ensure the delivery of a quality low-cost product into the market place. In 2008, the Company has raised $2 million in equity capital, added executives to its board of directors and management team, and opened a new corporate headquarters in Mission Viejo, California while maintaining its R&D facility in El Dorado Hills, California.





The CelLynx 5BARzTM  Product Line





5BARz @Home  Unit





The 5BARz  @Home Unit  for the small office, or home office)is designed to eliminate cell phone weak spots in an area similar to the size of a single family home (2,000 to 3,000 square feet).  Expected to retail at a competitive price of about $299, the 5BARz SOHO Unit is lightweight, aesthetically pleasing and designed to sit on a table near a window in the direction of the nearest cell tower.  There is an indicator light to determine the best placement.  This product  requires no assembly: simply place the unit on a table and plug in the power chord.  Product introduction will take place in the first half of 2011 for the North American model with the European and Asian models following shortly thereafter are expected to be introduced in mid 2010.





5BARz Road Warrior Unit





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





9




For vehicles and vessels, simply place the unit on the dashboard and plug in the cigarette lighter power adapter/cradle for handheld cell phone use, or place the cell phone into the cradle for hands-free or Bluetooth® operation. This unit includes a Bluetooth® speaker phone adapter with caller ID.  CelLynx technology is designed to be superior to current vehicle solutions that require complex installation including roof top mounting of the antenna and, in some cases, a direct connection between the cell phone and the roof top antenna.





For single-room home, office, or hotel room coverage, simply place the unit near a window in the building, plug in the powerline and extend the antenna line for handheld cell phone operation. Place the cell phone in the cradle for best hands-free or Bluetooth® performance; use of a Bluetooth® device extends the effective coverage to that of the Bluetooth® range.





The Bluetooth® speaker phone adaptor with caller ID will offer the user the convenience of hands free phone conversation while driving, which is mandated by law in many areas including California, the nation’s largest automobile market.


Industry Overview





Given the nature of the CelLynx product line, CelLynx is within the overall cellular telephone market as well as two sub-segments of that market, i.e. the in-building wireless systems marketplace and the vehicle /marine marketplace.





The overall cellular telephone marketplace





Statistics from the 3GSM World Congress in Barcelona, Spain this year indicate that the number of worldwide mobile subscribers has surpassed the two billion mark and is predicted to reach three billion by the end of this year and four billion by the end of  2011.  Demand for cellular applications beyond voice, such as video, SMS, email and internet access have created a multi-billion dollar market for accessorial cellular network products such as the  CelLynx  Network Extenders. “Certain user segments have an almost insatiable appetite for connectivity and enhanced access to critical productivity applications while at work, at home and on the move,” according to Cliff Raskind, Strategy Analytics’ director of Wireless Strategies.  These early adopters are already driving the market for products that will improve connectivity. Business users are twice as likely to carry a mobile phone as a notebook when away from their desk and are keenly interested in expanding email and internet access to the phone.  This increase in bandwidth demand on the cellular network decreases signal strength and increases the need for CelLynx’s 5BARzproducts.





In spite of the overall proliferation of cell phones, the carriers themselves are suffering from a high rate of customer defections sometimes referred to as churn.  According to CITA, The Wireless Association, 40% of those customers switching networks are searching for a better signal. Considering that it costs the average carrier almost $400 to acquire a new subscriber, this global churn rate is the most serious problem affecting the cellular industry and CelLynx is directly addressing this problem through improving indoor and vehicle coverage while diminishing interference. It is also noteworthy that according to First Research, a D & B Company providing Industry Intelligence, 85% of the U.S. Wireless industry revenues are generated by the four major wireless companies, AT&T, Verizon, Sprint and T-Mobile. In the U.S. market, CelLynx will concentrate on adapting its products to the frequencies being used by those carriers, in particular the Dual Band 850/1900MHz.  In the International market, CelLynx will focus on the Dual Band 900/1800MHz being used in Europe, Africa, Asia, Australia, New Zealand and a portion  of South America.





CelLynx believes that all of the above market conditions indicate the potential for the success of the CelLynx 5BARz product line within the general cell phone market.  The CelLynx products will seek to attract virtually all cell phone users including those who will come by the product through their cellular and Wi-MAX carriers, enterprise employers, government agencies or military service organizations.








10


The ‘In Building’ wireless systems marketplace





According to ABI Research, ‘In-building wireless systems, forecasted to exceed $15 billion in revenues in 2013, are a key enabler for delivering on the potential of cellular mobile services.’  Total Telecom, a leading communications periodical, reports that the role of the traditional office is no longer essential for day-to-day productivity as people increasingly work wherever the technology is available, generally at home if not in the office.  The U.S. Department of Labor reports that over 20 million workers work at home and this does not include those who work out of a home office to conduct personal business or those who work at home to finish uncompleted tasks from their regular employment or use their home office for outside or after hours employment.  More and more workers are adopting the trend toward work-life balance that results in them spending more time at home. These factors reinforce the need for improved signal in the Small Office Home Office.  That need is expected to be met by the CelLynx 5BARz @Home Unit.





The ‘In-Vehicle’ wireless systems marketplace





Three trends are noteworthy when discussing this sub sector:  the growth of the number of motor vehicles on the road, the trend indicating the increased number of mobile workers and the trend toward legislation requiring hands free cell phone operation while driving.





According to Plunkett Research, Ltd. there were 806 million automobiles and light trucks on the roads of the world in 2007.  That number is expected to increase to one billion by the year 2020. Not so surprisingly, predictions by Analyst House IDC indicate that the number of mobile workers is set to reach one billion by the end of  2011. It is reasonable to assume that as the number of vehicles increase and the number of cell phones increase that the number of drivers using cell phones will also increase.





The National Council of Legislators estimate that 73 % of drivers use their cell phones in the car. That being the case, twenty states and dozens of municipalities have passed legislation requiring hands free cell phone usage while driving. Anticipating the continuation of this legislative trend, the CelLynx vehicular 5BARz Universal Unit is equipped with Bluetooth® for hands free, safe driving.




All of the above trends suggest the need for quality voice, data and media solutions in the mobile environment, and that the market for user friendly boosters such as the CelLynx 5BARz Universal Unit will follow these trends in both growth and application.





Sales and Marketing Strategy




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





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





Operating and Manufacturing Strategy





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





Given their expertise in this area, they have become aware of the advantages of partnering with a reputable contract manufacturer (“CM”).  In this case, CelLynx will immediately leverage manufacturing practices at minimal cost, providing immediate benefits from multiple manufacturing locations with a trained and experienced technical work force, state-of-the-art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics.






11




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





Competition by Market Segment





The  residential wireless amplifier competitors: Most of the companies in this industry do not offer plug ‘n play single-unit solutions such as CelLynx.  In fact, companies such as Wilson, Wi-Ex and CellAntenna, offer two-piece, ‘cable connected amplifier-to-antenna’ solutions requiring complex installation enabled only by tech savvy users or professional installers and at considerably higher prices than CelLynx.





The mobile vehicle market competitors: A few companies such as Digital Antenna and Richardson (Call Capture) are focused on the vehicle market and others such as Wilson are entering that market.  Again, however, most of these vehicle solutions require complex installation including roof top mounting of antenna and, in some cases, a direct connection between the cell phone and the roof top antenna.





The Wireless enterprise solution providers as competitors: While the equipment manufacturers in the enterprise market such as Wilson, EMS Wireless and Radioframe Networks are attempting to enter the  residential market, their products are engineered for commercial enterprises requiring complex installation and as a result are expensive as compared to the CelLynx solution.





While each of the above competitors has solutions for certain market segments such as large buildings and warehouses, there is no dominant market leader in the SOHO and Vehicle segments of the Market. CelLynx believes that the total indoor and vehicle cell signal amplification market, now exceeding $300 million annually, could experience continued growth through the commercialization of products such as those being offered by CelLynx. As compared to the current products in the marketplace, CelLynx’s key sustainable competitive advantage is in its patent pending technology providing for compact, plug ‘n play, consumer friendly and affordable product lines. An overview of the competition is shown below.








Competitive Matrix
Wi-Ex
CellAntenna
JD TECK
Wilson
CelLynxYX500-PCS
CAE50PCS
JD 55-PR
PCS 60dBClaimed Coverage
2,500 sq. ft
3,000 sq ft
1,200 sq ft
2,500 sq ft
2,500 sq ftOpen area
Open areaAdaptive/AGC
Yes
No
No
Yes
YesFreq./Carrier

Specific
No
No
No
No
NoMaximum System

Gain
55dB
50dB
55dB
60dB
70dBCable Length/Type
35’ RG6
33’ RG6
33’ RG6
Buy separately
None RequiredMarket
Consumer
Industrial
Industrial
Industrial
ConsumerDistribution
Direct
Direct
Direct
Distributors
DirectMaster VAR
(Online

(3rd Party)
Master VAR
Master VAR
DistributorsRetail


Online

(3rd Party)
OnlineOnline

(3rd Party)Price (MSRP)
$299.99
$499.99
$395.00
Various
$299.00Installation:
Recommended
Yes
Yes
Yes
None RequiredPrice
$150.00
>$300
$250
VariousExternal Antennae
1
2
2
2
0







12




Intellectual Property





CelLynx has trademark protection for the brand name “5BARz” and has applied for trademark protection for its sales slogan, “Turning Weak Spots into Sweet Spots.”  CelLynx has the following patent applications pending:





Matter ID

Title

Matter Type

Serial Number

Status101710.0001 P CT

Cell Phone Signal Booster

Patent – P CT

P CT/US07/060827

Pending101710.0001 US

Cell Phone Signal Booster

Patent – US

11/625331

Pending101710.0001 US2

Dual Cancellation Loop Wireless Repeater

Patent – US

12/106468

Pending101710.0002 PRO

Method to Remotely Enable and Disable the Operation of a Wireless Repeater

Patent – Provisional

61/018765

Pending101710.0003 PRO

Method to Integrate a Wireless Repeater into the Wireless System for Control and Monitoring

Patent – Provisional

61/018892

Pending101710.0004 PRO

Method for a Wireless System Home Base Station

Patent – Provisional

61/019097

Pending101710.0005 PRO

Dual Loop Active and Passive Repeater Antenna Isolation Improvement

Patent – Provisional

61/045662

Pending





The CelLynx Technology





The plug ‘n play aspects of the CelLynx cellular booster demanded complex algorithms and intuitive interfaces. Further complicating the challenge, the booster required a full duplex linear amplifier providing up to 45db of gain in both RX and TX paths and directional antennae with one inch of separation and 70db of isolation between them. It further required an active feed-forward cancellation in both the RX and TX links with real time correction and an active Automatic Gain Control for both links running in sync with the active feed-forward cancellation.  Typically, a repeater simply boosts off the air cell phone signals so operating performance of a repeater can be related to the amount of boost reliability delivered by the repeater.





System gain is the measure of boost in decibels or dB.  The major obstacles to reliable gain in a repeater are isolation and linearity.  Linearity is a function of the amplification in the active portion of the repeater. Generally, the amplifiers in a repeater are designed to operate class A and the usable output power is de-rated from the maximum output power by 10dB or 90% below the saturated output of the amplifier. Isolation is the measure of separation of the input from the output of the repeater.  If the separation is less than the system gain, the result will be similar to the feedback screech heard when a microphone is placed too close to a loud speaker.  In practice, isolation has proven to be the Achilles heel of repeaters because unlike linearity, improvements in isolation have proven to be costly and unmanageable.





Traditionally the low tech approaches to achieving the isolation necessary for adequate repeater performance includes vertical and horizontal spacing of the two antennae, as with a speaker and microphone.  In most cases this horizontal spacing requires approximately ten times the distance of vertical spacing.   CelLynx has used a high tech approach to deal with the real world environment resulting in a superior product delivering high performance. Not only did the team meet the challenge, but in the process they developed a user friendly, affordable unit that is protected by five pending patents.




13


Government Regulation and Probability of Affecting Business





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





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





In addition, because we plan to market and sell our products in other countries, importation and exportation regulations may impact our activities. A breach of these laws or regulations may result in the imposition of penalties or fines, suspension or revocation of licenses. We are not currently involved in any such judicial or administrative proceedings and believe that we are in compliance with all applicable regulations.  Although it is impossible to predict with certainty the effect that additional importation and exportation requirements and other regulations may have on future earnings and operations, we are presently unaware of any future regulations that may have a material effect on our financial position, but cannot rule out the possibility.





Compliance with Environmental Laws





CelLynx is not required to comply with any environmental laws that are particular to the cellular amplifier industry.  However, it is Company policy to be environmentally conscience in every aspect of its operations.





Employees/Contractors/consultants





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





Corporate Information





CelLynx’s principal executive offices are located at 25910 Acero, Suite 370, Mission Viejo, California 92691. CelLynx’s main telephone number is (949) 305-5290, and our website address is  www.CelLynx.com.  Information provided on our website, however, is not part of this report and is not incorporated herein.





ITEM 1A. RISK FACTORS





CelLynx is a “smaller reporting company” as that term is defined in Rule 12b-2 of the Securities Exchange Act, and, accordingly, is not required to provide the information required by this item.





ITEM 1B. UNRESOLVED STAFF COMMENTS





CelLynx is a “smaller reporting company” as that term is defined in Rule 12b-2 of the Securities Exchange Act, and, accordingly, is not required to provide the information required by this item.




14


ITEM 2. PROPERTIES





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





We also lease office space in El Dorado Hills, California at 5047 Robert J Mathews Parkway, Suite 400, El Dorado Hills, California 95762. This facility is used for research, development and engineering.  The facility is approximately 1,570 square feet. The lease expires March 31, 2012 and the monthly base rent is $1,962.





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





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





ITEM 3. LEGAL PROCEEDINGS





Dolphinshire L.P., v. CelLynx Group, Inc., and Does 1-10, Superior Court of California, Orange County, Case No. 00388787.  On July 12, 2010, plaintiff brought suit against the Company for unlawful detainer pursuant to a lease agreement, seeking an unspecified amount of damages not to exceed $25,000.  The Company has engaged in settlement negotiations with the plaintiff.





The Company is aware of formal as well as informal claims for back wages made by several former employees and expects to satisfy those claims in the normal course of business.





ITEM 4. (Removed and Reserved).





PART II





ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market Information





The Company’s common stock, par value $0.001 per share, is traded on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "CYNX." The following table sets forth, for each quarter within the last two fiscal years, the reported high and low bid quotations for the Company’s common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.





QUARTER
HIGH ($)
LOW ($)Quarter Ended December 31, 2008
$0.22
$0.15Quarter Ended March 31, 2009
$0.17
$0.09Quarter Ended June 30, 2009
$0.33
$0.09Quarter Ended September 30, 2009
$0.27
$0.17Quarter Ended December 31, 2009
$0.24
$0.06Quarter Ended March 31, 2010
$0.25
$0.12Quarter Ended June 30, 2010
$0.16
$0.04Quarter Ended September 30, 2010
$0.06
$0.02Quarter Ended December 31, 2010
$0.05
$0.02







15




Holders





As of January ____, 2011, there were approximately _______ shareholders of record of our common stock based upon the shareholder list provided by our transfer agent. Our transfer agent is Signature Stock Transfer located at 2632 Coachlight Court, Plano, Texas 75093, and their telephone number is (972) 612-4120.





Dividends





We have not declared any dividends on our common stock since our inception. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law. There are no dividend restrictions that limit our ability to pay dividends on our common stock in our Articles of Incorporation or Bylaws. Chapter 78 of the Nevada Revised Statutes (the “NRS”), does provide certain limitations on our ability to declare dividends. Section 78.288 of Chapter 78 of the NRS prohibits us from declaring dividends where, after giving effect to the distribution of the dividend:





(a)
we would not be able to pay our debts as they become due in the usual course of business; or




(b)
except as may be allowed by our Articles of Incorporation, our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders who may have preferential rights and whose preferential rights are superior to those receiving the distribution.





We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.





Recent Sales of Unregistered Securities





FY 2009





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





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





FY 2010





Debentures





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





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




16




The Unit Offering was made without registration under the 1933 Act in reliance on Section 4(2) of the 1933 Act and the rules and regulations promulgated thereunder.




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





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





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





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





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





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





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





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





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





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





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





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





Asher Enterprises





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




17




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





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





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





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





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





Repurchases of Equity Securities by the Issuer and Affiliated Purchasers





None.





ITEM 6. SELECTED FINANCIAL DATA





Not applicable.





ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





Forward Looking Statements





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





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




18


Plan of Operations





Overview





We are a producer of the next generation of cellular network extenders for the small office, home office  and vehicle/marine markets.  This next generation product line, CelLynx 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  commenced the ordering of production units.





We have recently completed a prototype of the @Home Unit which  will eventually deliver 70 decibel (dB) of gain in a Single Band PCS environment providing up to 2,500 square feet of indoor coverage.  We plan to commercialize this technology, with production and distribution scheduled to begin, in the third calendar quarter of 2011. This unit measures 6.5 X 7.5 X 2.5 inches, weighs approximately one pound and does not require the installation of antennas or cables in order to function.  Most small office home office (“SOHO”) cellular network extenders currently on the market require a receiving tower or antenna, usually placed in an attic or on a rooftop, and a transmitting tower or antenna to be placed at least 35 feet from the other antenna with each connected to the amplifier by cable.  Our patent pending technology is designed to eliminate the need to distance the receiving and transmitting towers, allowing the two towers to be placed directly inside the amplifier, resulting in a more affordable, one-piece unit sometimes referred to as ‘plug ‘n play,’ i.e., requiring no installation other than plugging the unit into a power source. In order to optimize marketability, we are developing an improved model which is expected to operate in a dual band, PCS and Cellular, environment delivering 65 dB of gain, thereby allowing for coverage of 2,500 to 3,000 square feet.  This dual-band unit would work with all current wireless carriers except Nextel, which operates on its own frequency. The PCS network is generally used by the older carriers such as AT&T at 850MHz, while the newer carriers such as T-Mobile operate on the cellular network at 1900 MHz.  Management believes that all of the critical functions required for this dual-band unit have been identified and that we have the capability to complete development leading to commercialization.





Our product line is being manufactured by contract manufacturers located in the Philippines, with whom CelLynx has established manufacturing and supply chain relationships.  These manufacturers allow us to capitalize on the full advantages of multiple manufacturing locations with a trained and experienced technical work force, state-of-the-art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics. The marketing and sales functions will be handled by 5BARz International, Inc., in accordance with the M&D Agreement discussed below, incorporating a multi-channel strategy that includes distribution partners, wireless service providers, retail outlets and international joint ventures.





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





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





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






19




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





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





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





Line of Credit Agreement





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





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





(i)
$200,000 on or before January 30, 2011;


(ii)
$300,000 on or before January 30, 2011;


(iii)
$1,000,000 on or before February 28, 2011; and


(iv)
$1,000,000 on or before March 31, 2011.





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





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





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





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




20




Amended and Restated Master Global Marketing and Distribution Agreement





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





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





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





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





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





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





Results of Operations





Comparison of years ended September 30, 2010 and 2009





Year ended September 30,2010


2009


$ Change


% ChangeREVENUE

$
89,867


$
10,373


$
79,494



766.4%COST OF REVENUE


59,758



7,554



52,204



691.1%GROSS PROFIT


30,109



2,819



27,290



968.1%OPERATING EXPENSES


4,031,357



3,635,153



396,204



10.9%NON OPERATING INCOME (EXPENSES)


363,895



(346,428
)


710,323



-205.0%NET LOSS

$
(3,637,353
)

$
(3,978,762
)

$
341,409



-8.6%












21


Revenue and Cost of Revenue





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





Operating Expenses





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





Non-Operating Income and Expenses





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





Liquidity and Capital Resources





Financial Condition





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





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





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





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





We anticipate raising an additional $1 million during the next three months through private equity offerings and through draws on the Equity Line, although there is no guarantee that such funds will be available.  There is no assurance that the Company will be able to raise the entire amount. We believe that our current cash, anticipated cash flows from operations, and net proceeds from the private placement financing will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures.




22


Going Concern





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





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





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





Contractual Obligations





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





The following table summarizes our contractual obligations as of September 30, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.





Contractual obligations

Total


Less than

1 year


1-3 yearsNote Payable

$
312,356


$
312,356


$
-Operating lease


85,230



46,275



38,955$
397,586


$
358,631


$
38,955








23




Off-Balance Sheet Arrangements





Off-Balance Sheet Arrangements





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





Critical Accounting Policies and Estimates





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





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





Intangible Assets





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





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





Impairment or Disposal of Long-lived Assets





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





Revenue Recognition





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




24


Income Taxes





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





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


Stock Based Compensation





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





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





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





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





January 2010





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





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






25




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





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





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





The Company provided MSWFT a copy of the disclosures in the Form 8-K and requested that MSWFT furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not MSWFT agrees with the Company’s statements in this Item 4.01(a). A copy of the letter dated January 7, 2010, furnished by MSWFT in response to that request was filed as Exhibit 16.1 to the January 7, 2010, Form 8-K.




December 2010




As disclosed in a Current Report filed with the Commission on December 27, 2010, on December 21, 2010, and acting upon a decision to change accountants recommended and approved by the Board of Directors, the Company dismissed Frazer Frost, which had audited the financial statements of the Company for the fiscal years ending September 30, 2009 and 2008.




Since the engagement of Frazer Frost, the Company did not consult Frazer Frost regarding either: (i) the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on the Registrant's financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-K or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.




Frazer Frost’s report on the Company’s financial statements for the years ended September 30, 2009 and 2008, did not contain any adverse opinion or disclaimer of opinion and was not qualified as to audit scope or accounting principles; however, such year-end report did contain a modification paragraph that expressed substantial doubt about the Company’s ability to continue as a going concern.




From January 1, 2010, the date of engagement of Frazer Frost, through December 21, 2010, the date of the Company’s dismissal of Frazer Frost, (i) there were no disagreements between the Company and Frazer Frost on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Frazer Frost, would have caused Frazer Frost to make reference to the subject matter of the disagreement in connection with its reports and (ii) there were no “reportable events,” as described in Item 304(a)(1)(iv) of Regulation S-K of the Securities Exchange Act of 1934, as amended.




The Company has authorized without limitation Frazer Frost, its former accountant, to respond fully to the inquiries of the successor accountant concerning any matter falling within the scope of the successor accountant's services to be provided to the Company.




The Company is not aware of any issues that had not been resolved to the satisfaction of Frazer Frost, prior to the Company’s dismissal of Frazer Frost on December 21, 2010.




26





Additionally, on December 21, 2010, and acting upon a decision to change accountants recommended and approved by the Company’s Board of Directors, the Company engaged Gruber & Company, LLC (“Gruber & Company”), to audit the Company’s financial statements beginning with the fiscal year ended September 30, 2010.




During the Company’s two most recent fiscal years, and any subsequent interim period prior to engaging the Gruber & Company, neither the Company nor anyone acting on its behalf consulted Gruber & Company (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Registrant's financial statements; (iii) any matter that was the subject of a disagreement between the Company and Frazer Frost, or (iv) any other matter.




The Company requested Gruber & Company to review the disclosure required by this Item 4.01 before it was filed with the Commission and provided Gruber & Company the opportunity to furnish the Company with a letter addressed to the Commission containing any new information, clarification of the Company’s expression of its views, or the respects in which it does not agree with the statements made by the Company in the Current Report filed with the Commission on December 27, 2010. The newly engaged accountant indicated to the Company that no such letter would be issued.





ITEM 9A. CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





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





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





(ii) our disclosure controls and procedures were effective as of the date of the evaluation.





Management’s Annual Report on Internal Control over Financial Reporting





Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such terms are defined in Rules 13(a) – 15(f) promulgated under the Securities Exchange Act of 1934, as amended. The purpose of an internal control system is to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.





An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. An internal control significant deficiency, or aggregation of deficiencies, is one that could result in a misstatement of the financial statements that is more than consequential.





Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2010, and this assessment identified the following material weaknesses in the company’s internal control over financial reporting:





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






27




-
A formal, internal accounting system has not been implemented.





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





-
Segregation of duties in the handling of cash, cash receipts, and cash disbursements is not formalized.





It is Management’s opinion that the above weaknesses exist due to the small size of operating staff and the current phase of operations.





In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework.   Because of the material weaknesses described in the preceding paragraph, Management believes that, as of September 30, 2009, the Company’s internal control over financial reporting was not effective based on those criteria.





This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.





Changes in Internal Controls





There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the year ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





ITEM 9B. OTHER INFORMATION





None.





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Executive Officers and Directors





Our current directors and executive officers, their ages, their respective offices and positions, and their respective dates of election or appointment are as follows:





Name

Age

Position

Date of AppointmentNorman W. Collins

71

Chief Executive Officer, Chairman of the Board

July 21, 2010Kevin Pickard

47

Chief Financial Officer and Treasurer (1)

July 24, 2008Dwayne Yaretz

49

Director

December 19, 2009Malcolm P. Burke

66

Director

July 21, 2010





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







28





Norman W. Collins – Chief Executive Officer, Chairman of the Board





Norman W. Collins, Sr. became the Company’s Chief Executive Officer and Chairman of the Board on July 21, 2010.   Before that, he was an independent Director who was appointed upon the completion of the merger between CelLynx, Inc. and NorPac.  Since June of 2003, Mr. Collins has been Director and President of Collins & Associates, a Delaware corporation providing consulting services to corporations as well as legal services in the form of Mediation and Arbitration of corporate disputes.  He is admitted to the Tennessee Bar and is a Certified Mediator and Arbitrator in Georgia and a Certified Mediator in North Carolina and the District of Columbia.  Between 2003 and 2007 Mr. Collins also served as the Executive Director of the Living Memorial Tree Foundation, a New York non-profit organization dedicated to the creation of a memorial to the victims of 9/11. Since May of 2006, Mr. Collins has also served as Director and CEO of Upgrade International, a Washington technology corporation.  Prior positions include Director and CEO of several non-reporting companies either in the development stage or with revenues exceeding $30 Million.





Mr. Collins holds a Bachelor of Science degree in Business Administration from Trine University and a Juris Doctor degree from Michigan State University, College of Law.





Kevin Pickard – Chief Financial Officer and Treasurer(Outside Consultant)





Since 1998, Mr. Pickard has been a principal officer and owner of Pickard & Green CPAs (formerly Pickard & Company, CPAs, P.C.), an accounting firm formed by Mr. Pickard that specializes in providing SEC accounting and other management consulting services for small to medium sized companies, including preparing required SEC filings for public companies, due diligence on potential acquisitions, preparing projections and business plans, assisting with restructuring of companies, and positioning companies for initial public offerings.  Mr. Pickard was a Partner with Singer Lewak Greenbaum & Goldstein, LLP, from 1996 to 1998, where he co-managed the firm’s securities practice group. Mr. Pickard also spent over nine years with Coopers & Lybrand, L.L.P. (currently PricewaterhouseCoopers, LLP), where he focused on the auditing companies in the insurance, high-tech and manufacturing industries.  Mr. Pickard holds Bachelors of Science and Masters degrees in Accounting from Brigham Young University.


Dwayne Yaretz –  Director





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





Malcolm P. Burke





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




29


Family Relationships





There are no family relationships among our directors and executive officers.





Involvement in Certain Legal Proceedings





Except as provided below, none of our directors or executive officers has, during the past five years:





(a)          Has had a petition under the federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;





(b)          Been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);





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





-
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;





-
Engaging in any type of business practice; or





-
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;





(d)          Been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph I(i) above, or to be associated with persons engaged in any such activity;





(e)          Been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; and





(f)           Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated.





In January 2008, Mr. Pickard became interim President of Universal Guardian Holding, Inc. (“UGH”) to assist the Board of Directors in disposing of UGH’s assets to repay UGH’s bondholders.  UGH was not successful in selling its assets and on June 23, 2008, the Board of Directors elected to voluntarily file for Chapter 7 bankruptcy protection.





30


Compliance with Section 16(a) of the Exchange Act





Based solely upon a review of the copies of such forms furnished to the Company, or written representations that no reports were required, we believe that except as set forth below, for the fiscal year ended September 30, 2010, beneficial owners complied with Section 16(a) filing requirements applicable to them:





-
Mr. Collins received options in December 2010 for which a Form 4 has not yet been filed; and


-
Mr. Pickard received options in December 2010 for which a Form 4 has not yet been filed.





Code of Ethics





We have not adopted a code of ethics, but we plan on adopting a code of ethics that applies to all directors, officers, and employees, including our Chief Executive Officer and Chief Financial Officer, and members of the board of directors in the near future.





Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors





There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.





Board Committees; Director Independence





In November 2008, our board of directors appointed Norman W. Collins to serve as a member of our audit committee, although he did not qualify at the time as an “audit committee financial expert.”  Subsequently, in July 2010, in connection with the changes in management discussed in this Report, the audit committee and the Compensation and Corporate Governance Committee were dissolved. Subsequently, on August 23, 2010, the Audit Committee was reorganized with Mr. Collins as Chair, and Messrs. Yaretz and Burke as members. The Compensation and Corporate Governance Committee was also reorganized with Mr. Yaretz as the Chair and Messrs. Collins and Burke as members.




Our board of directors consists of two independent directors, Mr. Yaretz and Mr. Burke, and one non-independent director, Mr. Collins. We have determined independence in accordance with definitions and criteria applicable under the NASDAQ rules.




The Board has determined that we do not have an audit committee financial expert serving on the Board of Directors.





Compensation Committee Interlocks and Insider Participation





No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.





Compensation Committee Report





The Compensation and Corporate Governance Committee and Management have reviewed and discussed the Executive Compensation section set forth below, and the Compensation and Corporate Governance Committee recommended that the Executive Compensation discussion set forth below be included in the Annual Report.




Dwayne Yaretz, Chair Norman W. Collins Malcolm P. Burke




31


ITEM 11. EXECUTIVE COMPENSATION





Summary of Compensation





Executive Compensation





The following summary compensation table reflects all compensation for fiscal years 2007 and 2008 received by CelLynx’s principal executive officer and two most highly compensated executive officers whose salary exceeded $100,000.





Summary Compensation Table




Non-

qualifiedNon-Equity

DeferredStock

Option


Incentive Plan

Compensation

All OtherSalary

Bonus

Awards

Awards


Compensation

Earnings

Compensation

TotalName and Principal Position

Year

($)

($)

($)

($)


($)

($)

( $)

($)Daniel R. Ash, President,  Former Chief Executive Officer, Former

2010


150,385


-


-

-



-


-


-

150,385Chief Operating Officer, Former Secretary, and Director (1)

2009


170,000


-


-

-



-


-


-

170,000Tareq Risheq, Former Chief Strategy Officer and Director (2) (3)

2009


-


-


-

-



-


-


-

-2010


-


-


-

117,201
(4)


-


-


-

117,201Norm Collins, Chief Executive officer and Director (5) (6)

2009


-


-


-

-



-


-


-

-2010


85,000


-




70,009
(4)


-


-


-

155,009Kevin Pickard, Chief Financial Officer (7)

2009


40,000


-


-

-



-


-


-

40,0002010


110,000


-


-

-



-


-


-

110,000





(1)
Mr. Ash relinquished his positions with the Company on July 15, 2010.


(2)
Mr. Risheq resigned from the Company’s Board of Directors on July 15, 2010.


(3)
Mr. Risheq received these options while serving as a Director of the Company.


(4)
The Company used the Black-Scholes option-pricing model to value the options.  The assumptions used in calculating the fair value of options granted are as follows:





Expected life (years):
3Risk-free interest rate:
2.28%Expected volatility:
145%Expected dividend yield:
0%




(5)
Mr. Collins was appointed as the Company’s Chief Executive Officer on July 15, 2010.


(6)
Mr. Collins received these options while serving as a Director of the Company.  Of the $85,000 Salary listed, Mr. Collins has received $10,000, and the Company has accrued the remaining $75,000.


(7)
Of the $110,000 compensation listed for 2010, Mr. Pickard has received $40,000, and the Company has accrued the remaining $70,000.





32





Outstanding Equity Awards





The following table sets forth certain information concerning stock and granted to our named executive officers.








OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDS

STOCK AWARDSName

Number of

securities

underlying

unexercised

options (#)

Exercisable


Number of

securities

underlying unexercised

options (#)

Unexercisable


Equity

Incentive

Plan

Awards:

Number of

Securities

underlying unexercised

unearned

options (#)


Option

exercise

price ($)

Option

expiration

date

Number

of

shares

or units

of stock

that

have

not

vested (#)

Market

value of

shares

or units

of stock

that

have

not

vested ($)

Equity

incentive

plan

awards:

number of unearned

shares,

units or

other

rights that

have not

vested (#)

Equity

incentive

plan

awards:

Market or

payout

value of

unearned

shares,

units or

other

rights that

have not

vested ($)Daniel R. Ash (1)(2)


4,538,768



4,211



-


$
0.0787

10/1/2012Daniel R. Ash (3)


349,426



-



-


$
0.0787

4/21/2013Daniel R. Ash (1)


6,670,589



1,804,644



-


$
0.0787

5/20/2013Norm Collins (4)(5)


675,000



-



-


$
0.13

3/4/2015


_______________________





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





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





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





(4)           Options fully vested in September 2010.





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






33


Retirement Plans





We currently have no plans that provide for the payment of retirement benefits, or benefits that will be paid primarily following retirement, including but not limited to tax-qualified defined benefit plans, supplemental executive retirement plans, tax-qualified defined contribution plans and nonqualified defined contribution plans.





Potential Payments upon Termination or Change-in-Control





Except as described below under “Employment Agreements,” we currently have no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to a named executive officer at, following, or in connection with any termination, including without limitation resignation, severance, retirement or a constructive termination of a named executive officer, or a change in control of the registrant or a change in the named executive officer’s responsibilities, with respect to each named executive officer.





Employment Agreements





On October 1, 2007, the Board of Directors of CelLynx-California approved the following compensation packages for Daniel R. Ash and Tareq Risheq:





Annual Base Salary:
$200,000Bonus Plan:
Participation in the CelLynx Bonus Plan can amount up to 30% of the annual base salary, but is conditioned upon achievement of the goals and objectives of the then current plan, including those related to overall company performance.





Fringe Benefits:
Fifteen paid vacation days per year.  Ten paid holidays per year.  Health insurance with hospital coverage.





Stock Options:
3% of the current outstanding common stock based the fair market value on the date of hire of $0.10 per share.  The options vest over three years with 33.3% vesting after the first year and monthly vesting thereafter of 1/24 th  of the remaining 66.6%.





Severance:
If employment is terminated without cause, Mr. Ash will receive six months pay.





Acquisition:
If CelLynx-California is acquired, all outstanding stock options will become fully vested.





The Board of Directors of CelLynx-California amended this compensation package on May 20, 2008, to provide for an annual salary of $170,000 for Mr. Ash and $108,000 for Mr. Risheq.  Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008, and as of that date was no longer entitled to this compensation.





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





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





34




On July 22, 2008, CelLynx-California entered into a consulting agreement (the “Consulting Agreement”) with Kevin Pickard whereby Mr. Pickard agreed to serve as the Company’s interim Chief Financial Officer for a period beginning on the date of the Consulting Agreement and ending on the earlier of (i) the date that the Company retains a permanent Chief Financial Officer, (ii) the 90th  day after the closing of the reverse take-over transaction contemplated by the Exchange Agreement, or (iii) the date which the Company notifies Mr. Pickard that he has been terminated in writing, and which notification may occur at any time for any reason.  As an inducement to enter into the Consulting Agreement, CelLynx-California granted Mr. Pickard 100,000 shares of CelLynx-California common stock and $5,000 in cash.  The CelLynx-California common shares were converted into 62,896 shares of the Company's common stock and 62,897 shares of the Company's Series A Preferred Stock upon the closing of the reverse take-over transaction.  The Series A Preferred Stock automatically converted into 62,897 shares of the Company’s common stock upon the filing of a Certificate of Amendment to the Company’s Articles of Incorporation increasing the number of authorized common stock from 100,000,000 to 400,000,000 on November 7, 2008.  On November 1, 2008, the Company entered into an updated agreement with Mr. Pickard’s accounting firm that provides for monthly cash compensation of $5,000 per month and the issuance of 350,000 shares of the Company’s common stock.  In January, 2010, the Company entered into another  updated agreement with Mr. Pickard’s accounting firm that provides for monthly cash compensation of $10,000 per month, which was increased to $15,000 per month effective September 1, 2010.





Director Compensation





On July 15, 2008, CelLynx-California entered into an agreement with Mr. Norman W. Collins that granted Mr. Collins a stock option to purchase 610,000 shares of CelLynx-California’s common stock at an exercise price of $0.09 per share that vests 25% per year so long as Mr. Collins remains a director of CelLynx.  Upon the closing of the Exchange Agreement, this option was exchanged for an option to purchase 767,337 shares of the Company's common stock at an exercise price of $0.0715 per share.





Other than as described above, we do not pay any compensation to members of our board of directors for their service on the board. However, we intend to review and consider future proposals regarding board compensation.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





Securities Authorized for Issuance under Equity Compensation Plans





Set forth in the table below is information regarding awards made through compensation plans or arrangements through September 30, 2010, the most recently completed fiscal year.




Equity Compensation Plan Information
  Plan category


Number of

securities to be

issued upon exercise

of outstanding

options, warrants

and rights

(a)


Weighted-average

exercise price of

outstanding

options,warrants

and rights

(b)


Number of securities

remaining available

for future issuance

under equity

compensation

plans (excluding

securities reflected

in column (a))

(c)Equity compensation plans approved by security holders



--


$
--



--Equity compensation plans not approved by security holders



33,188,050


$
--



41,811,950Total



33,188,050







41,811,950







35




Security Ownership of Certain Beneficial Owners and Management





Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name. Unless otherwise indicated, the address of each beneficial owner listed below is 25910 Acero, Suite 370, Mission Viejo, California 92691.  The percentage of class beneficially owned set forth below is based on 185,165,210 shares outstanding as of January 14, 2011.








Name and Position

Number of

Shares of

Common

Stock

Beneficially

Owned

(1)


Percent of

Shares of

Common

Stock

Beneficially

Owned (2)Daniel R. Ash, President, Chief Executive Officer, Chief Operating Officer, Secretary and Director (3)


37,855,024



19.45%Kevin Pickard, Chief Financial Officer and Treasurer (4)


1,382,970



*Tareq Risheq, Director (5)


32,487,103



17.30%Norman W. Collins, Director (6)


3,583,130



1.90%Dwayne Yaretz, Director


998,400



*Malcolm P. Burke, Director


-



*All Executive Officers and Directors as a Group (4 persons)


5,964,500



3.15%


________________


* Less than 1%





(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding.





(2)
Percentage based upon 185,165,210issued and outstanding shares of the Company’s capital stock.




(3)
Includes 28,345,452 shares of common stock, options to purchase 6,867,921 shares of common stock at an exercise price of $0.0787 per share, a $20,000 note convertible into 2,515,858 shares of common stock at a conversion price of $0.0079 per share and a $10,000 note convertible into 125,793 shares of common stock at a conversion price of $0.0795 per share.





(4)
Mr. Pickard is an outside consultant providing services commonly provided by a Chief Financial Officer and Treasurer.  This figure does not include 400,000 shares owned of record by Pickard & Green, CPAs, an entity in which Mr. Pickard is a partner.  Mr. Pickard disclaims beneficial ownership of such 400,000 shares.





(5)
Includes 29,845,452 shares of common stock, a $20,000 note convertible into 2,515,858 shares of common stock at a conversion price of $0.0079 per share and a $10,000 note convertible into 125,793 shares of common stock at a conversion price of $0.0795 per share.  Mr. Risheq resigned as Chief Strategy Officer on December 12, 2008 but remains a director of the Company.





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




36





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





Director Independence





Two of our directors, Dwayne Yaretz and Malcolm Burke, are independent directors as that term is defined under NASDAQ Rules and Regulations.  However, because the Company’s stock trades on the OTC Bulletin Board, the Company is not required to have independent directors.





ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES





The aggregate fees billed for the two most recently completed fiscal years ended September 30, 2010 and 2009, for professional services rendered by the principal accountant for the audit of the Corporation’s annual financial statements and review of the financial statements included our quarterly reports and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:





Year Ended

September 30,

2009


Year Ended

September 30,

2010Audit Fees

$
81,000


$
94,400Audit Related Fees

$
-



-Tax Fees


-



-All Other Fees


-



-Total

$
81,000


$
94,400





Fees for audit services include fees associated with the annual audit and the review of documents filed with the Securities and Exchange Commission. Audit-related fees principally include fees reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees. Tax fees included tax compliance, tax advice and tax planning work.




















37




PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





Financial Statements





A list of the financial statements of the Company filed as part of this Report can be found in the Index to Financial Statements on page F-1.





Exhibits





INDEX TO EXHIBITS





Exhibit

Number

Description2.1

Share Exchange Agreement by and among the Company, CelLynx-California and the CelLynx Owners dated January 3, 2008 (1)2.2

Amendment Agreement to Share Exchange Agreement between the Company and CelLynx-California dated May 20, 2008 (2)2.3

Waiver of Conditions Precedent *3.1

Articles of Incorporation of CelLynx Group, Inc. (3)3.2

Articles of Merger of CelLynx Group, Inc. (4)3.3

Bylaws of CelLynx Group, Inc. (4)3.4

Certificate of Designation of CelLynx Group, Inc. (5)3.5

Articles of Merger of CelLynx Group, Inc. (8)3.6

Certificate of Amendment to Articles of Incorporation of CelLynx Group, Inc. (9)10.1

Form of Subscription Agreement dated July 23, 2008 (6)10.2

Form of Warrant dated July 23, 2008 (6)10.3

Master Global Marketing and Distribution Agreement between CelLynx and Dollardex Group Corp. dated July 22, 2008 (7)10.4

Palomar Ventures III, LP Amended and Restated Subordinated Convertible Promissory Note dated November 10, 2007 (7)
  38
  10.5

Lease Agreement between CelLynx-California and CSS Properties, LLC dated February 21, 2008 (7)10.6

CelLynx-California 2007 Stock Incentive Plan (7)10.7

Amendment No. 1 to CelLynx-California 2007 Stock Incentive Plan (7)10.8

Form of Lock-Up Agreement dated July 22, 2008 (7)10.9

Norman W. Collins Offer Letter dated July 15, 2008 (7)10.10

Kevin Pickard Consulting Agreement dated July 22, 2008 (7)10.11

Convertible Promissory Note between CelLynx-California and Daniel Ash dated March 27, 2007 (7)10.12

Convertible Promissory Note between CelLynx-California and Tareq Risheq dated March 27, 2007 (7)10.13

Convertible Promissory Note between CelLynx-California and Daniel Ash dated October 25, 2007 (7)10.14

Convertible Promissory Note between CelLynx-California and Tareq Risheq dated October 25, 2007 (7)10.15

Incentive Stock Option Agreement between CelLynx-California and Daniel Ash dated October 1, 2007 (7)10.16

Incentive Stock Option Agreement between CelLynx-California and Tareq Risheq dated October 1, 2007 (7)10.17

Incentive Stock Option Agreement between CelLynx-California and Robert Legendre dated October 1, 2007 (7)10.18

Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated October 1, 2007 (7)10.19

Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated October 1, 2007 (7)10.20

Non-Qualified Stock Option Agreement between CelLynx-California and Robert Legendre dated October 1, 2007 (7)10.21

Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated April 21, 2008 (7)
    39
  10.22

Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated April 21, 2008 (7)10.23

Non-Qualified Stock Option Agreement between CelLynx-California and Daniel Ash dated May 20, 2008 (7)10.24

Non-Qualified Option Agreement between CelLynx-California and Tareq Risheq dated May 20, 2008 (7)10.25

Non-Qualified Option Agreement between CelLynx-California and Norman Collins dated July 20, 2008 (7)10.26

Stock Purchase Agreement between CelLynx-California and Norman Collins dated February 12, 2008 (7)10.27

Lease Agreement between CelLynx and Dolphinshire, L.P. dated August 26, 2008 (11)10.28

Securities Issuance Agreement executed on May 4, 2009 by and among the Registrant, Dollardex Group Corp. and the other parties listed therein (10)17.1

Letter of Resignation from John P. Thornton to the Board of Directors (7)17.2

Letter of Resignation from Daniel Ash dated July 16, 2010 (12)21.1

List of Subsidiaries (7)  31.1

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

Section 302 Certification by the Corporation’s Chief Financial Officer *32.1

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

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


__________________


* Filed Herewith.




(1)
Filed on January 9, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(2)
Filed on May 27, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(3)
Filed as an exhibit to our Registration Statement on Form 10SB originally filed on August 26, 1999, as amended, an incorporated herein by reference.(4)
Filed as an exhibit to our Quarterly Report on Form 10-QSB for the fiscal period ended September 30, 2003, and incorporated herein by reference.(5)
Filed on July 15, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(6)
Filed on July 23, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(7)
Filed on July 30, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(8)
Filed on August 8, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(9)
Filed on November 21, 2008 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(10)
Filed on May 8, 2009, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.(11)
Filed on October 14, 2008, as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.(12)
Filed on July 21, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.








40





CelLynx Group, Inc.


Consolidated Financial Statements
 
 
 Contents
 
 
 
 
 PageReport of Independent Registered Public Accounting Firm
F-2Report of Independent Registered Public Accounting Firm
F-3Consolidated Balance Sheets as of September 30, 2010 and 2009
F-4Consolidated Statements of Operations for the Years Ended September 30, 2010 and 2009
F-5Consolidated Statements Of Stockholders’ Deficit for the Years Ended September 30, 2010 and 2009
F-6Consolidated Statements of Cash Flows for the Years Ended September 30, 2010 and 2009
F-7Notes To Financial Statements
F-8
 
 
 
 
 
 
 
 
 
 F-1
 
 Report of Independent Registered Public Accounting Firm
 
 To the Board of Directors and Stockholders
 CelLynx Group, Inc.
 Mission Viejo, California
 
 We have audited the accompanying consolidated balance sheet of CelLynx Group, Inc. and subsidiary (formerly Norpac Technologies, Inc.), as of September 30, 2010, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CelLynx Group, Inc as of September 30, 2010, and the results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has net operating cash flow deficits and a deficit accumulated during the development stage.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 /s/ Gruber & Company, LLC
 St Louis, Missouri
 January 12, 2011
 
 
 
 F-2
 
 Report of Independent Registered Public Accounting Firm
 
 To the Board of Directors and Stockholders
 CelLynx Group, Inc.
 Mission Viejo, California
 
 We have audited the accompanying consolidated balance sheet of CelLynx Group, Inc.  and subsidiary (formerly Norpac Technologies, Inc.), as of September 30, 2009, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CelLynx Group, Inc as of September 30, 2009  and the results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has net operating cash flow deficits and a deficit accumulated during the development stage.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 /s/ Frazer Frost, LLP
 (Successor entity of Moore Stephens Wurth Frazer and Torbet, LLP, see Form 8-K filed on January 7, 2010)
 Brea, California
 January 13, 2010
 
 
 
 F-3
 
 CELLYNX GROUP, INC.
 CONSOLIDATED BALANCE SHEETS
 AS OF SEPTEMBER 30, 2010 AND 2009
 
 2010


2009ASSETSCURRENT ASSETS:Cash

$
6,601


$
6,776Accounts receivable


1,925



-Inventory


30,212



16,316Prepaids and other current assets


165,411



15,750TOTAL CURRENT ASSETS


204,149



38,842EQUIPMENT, net


6,087



11,359INTANGIBLE ASSETS, net


117,772



97,180OTHER ASSETS


-



16,190TOTAL ASSETS

$
328,008


$
163,571LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIES:Accounts payable and accrued expenses

$
1,437,641


$
832,634Accrued interest


36,054



28,334Accrued derivative liabilities


204,139



-Convertible stockholder notes, net of debt discount of $1,092as of September 30, 2009


-



101,908Convertible promissory notes, net of debt discount of $34,359 and $0as of September 30, 2010 and 2009, respectively


277,997



100,000TOTAL CURRENT LIABILITIES


1,955,831



1,062,876LONG TERM LIABILITIES:Convertible promissory note, net of debt discount of $126,795as of September 30, 2009


-



135,561TOTAL LIABILITIES


1,955,831



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; 171,752,572 and137,379,397 shares issued and outstanding as of September 30, 2010 and2009, respectively


171,752



137,379Additional paid-in capital


13,511,988



10,501,965Accumulated deficit


(15,311,563
)


(11,674,210
)Total stockholders' deficit


(1,627,823
)


(1,034,866
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
328,008


$
163,571





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


F-4
 
 CELLYNX GROUP, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
 
 2010


2009Net Revenue

$
89,867


$
10,373Cost of Revenue


59,758



7,554Gross profit


30,109



2,819Operating expenses:Research and development


67,514



340,995General and administrative


3,963,843



3,294,158Total operating expenses


4,031,357



3,635,153Loss from operations

$
(4,001,248
)

$
(3,632,334
)Non-operating income (expense):Interest income


9



961Interest and financing costs


(156,841
)


(179,228
)Change in fair value of accrued beneficial conversion liability


59,046



251,410Change in fair value of accrued warrant liability


461,681



(419,571
)Total non-operating expense


363,895



(346,428
)Loss before provision for income taxes


(3,637,353
)


(3,978,762
)Provision for income taxes


-



-Net loss

$
(3,637,353
)

$
(3,978,762
)Weighted average shares outstanding - Basic and Diluted:


161,006,366



125,094,999Loss per share - Basic and Diluted:

$
(0.02
)

$
(0.03
)








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





F-5


CELLYNX GROUP, INC.
 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
 FOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 2009
 
 TotalPreferred Stock





Common Stock





Additional Paid-


Accumulated


Stockholders'Shares


Amount


Shares


Amount


in Capital


Deficit


DeficitBalance, September 30, 2008


45,516,034


$
45,516



80,552,812


$
80,553


$
2,335,949


$
(7,695,448
)

$
(5,233,430
)Conversion of preferred stock to common stock upon the

increase of authorized shares


(45,516,034
)


(45,516
)


45,516,034



45,516



-



-



-Reclassification of share based compensation liability to equity


-



-



-



-



2,701,572



-



2,701,572Fair value of share based compensation for employees and consultants


-



-



-



-



690,353



-



690,353Reclassification of beneficial conversion liability to equity


-



-



-



-



2,120,181



-



2,120,181Reclassification of warrant liability to equity


-



-



-



-



1,023,564



-



1,023,564Issuance of common stock for the purchase of licensing rights


-



-



57,143



57



7,372



-



7,429Issuance of common stock for promissory note


-



-



37,500



38



4,208



-



4,246Issuance of warrants for consulting services


-



-



-



-



118,382



-



118,382Issuance of common stock for accounting services


-



-



400,000



400



71,600



-



72,000Issuance of common stock for consulting services


-



-



3,970,908



3,971



722,628



-



726,599Issuance of common stock for cash


-



-



6,845,000



6,844



706,156



-



713,000Net loss


-



-



-



-



-



(3,978,762
)


(3,978,762
)Balance, September 30, 2009


-


$
-



137,379,397


$
137,379


$
10,501,965


$
(11,674,210
)

$
(1,034,866
)Conversion of convertible note payable to common stock


-



-



6,290,792



6,291



134,532



-



140,823Stock based compensation for employees and consultants


-



-



-



-



1,060,170



-



1,060,170Issuance of warrants for consulting services


-



-



-



-



327,087



-



327,087Issuance of common stock for consulting services


-



-



4,445,486



4,445



696,671



-



701,116Issuance of common stock for cash


-



-



23,636,897



23,637



1,487,064



-



1,510,701Reclassification of beneficial conversion liability to equity


-



-



-



-



(59,964
)


-



(59,964
)Reclassification of warrant liability to equity


-



-



-



-



(635,537
)


-



(635,537
)Net loss


-



-



-



-



-



(3,637,353
)


(3,637,353
)Balance, September 30, 2010


-


$
-



171,752,572


$
171,752


$
13,511,988


$
(15,311,563
)

$
(1,627,823
)
 
 Effective July 24, 2008, the Company effected a 1.2579 for 1 forward stock split of the authorized, issued and outstanding common stock, without change to par value. All shareamounts have been retroactively adjusted for all periods presented.
 
 Effective July 24, 2008, the Company issued Series A Preferred Stock on a pro rata basis to the shareholders of CelLynx, Inc.  All share amounts have been retroactivelyadjusted for all periods presented.
 
 The accompanying notes are an integral part of these consolidated financial statements.
 
 F-6
 
 CELLYNX GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED SEPTEMBER 30, 2010 AND 20092010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(3,637,353
)

$
(3,978,762
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization


7,545



6,813Warrants issued for services


327,087



118,382Stock issued for services


347,692



798,599Stock issued for interest expense


20,323



-Stock compensation expense for options issued to employees and consultants


1,060,170



690,353Change in fair value of accrued beneficial conversion liability


(59,046
)


(251,410
)Change in fair value of accrued warrant liability


(461,681
)


419,571Amortization of debt discount


122,893



163,400Changes in operating assets and liabilities:Change in accounts receivable


(1,925
)


-Change in inventory


(13,896
)


(16,316
)Change in other assets


219,954



(13,552
)Change in accounts payable, accrued expenses and accrued interest


615,727



641,163Net cash used in operating activities


(1,452,510
)


(1,421,759
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of equipment


-



(6,663
)Purchase of intangible assets


(22,865
)


(19,826
)Net cash used in investing activities


(22,865
)


(26,489
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from notes payable


-



-Proceeds from related parties


-



68,000Payment of convertible shareholder notes


(45,000
)


-Proceeds from convertible promissory notes


50,000



75,000Payment of costs associated with convertible promissory notes


(3,000
)


-Payment of convertible promissory notes


(37,500
)


-Proceeds from issuance of common stock


1,544,450



713,000Payment of offering costs associated with the sale of common stock


(33,750
)


-Net cash provided by financing activities


1,475,200



856,000NET DECREASE IN CASH


(175
)


(592,248
)CASH, BEGINNING OF PERIOD


6,776



599,024CASH, END OF PERIOD

$
6,601


$
6,776SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest

$
-


$
-Cash paid for income taxes

$
-


$
-SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING:Issuance of stock for licensing agreement

$
-


$
7,429Reclassification 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

$
-


$
1,023,564Conversion of convertible note payable to common stock

$
140,823


$
-Issuance of common stock for prepaid services

$
353,426


$
-
 
 The accompanying notes are an integral part of these consolidated financial statements.
 F-7
 CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 Note 1 – Organization and Basis of Presentation
 
 Organization and Line of Business
 
 CelLynx Group, Inc. (the “Company”) was originally incorporated under the laws of the State of Minnesota on April 1, 1998.
 
 On July 23, 2008, prior to the closing of a Share Exchange Agreement (described below), the Company entered into a Regulation S Subscription Agreement pursuant to which the Company issued 10,500,000 shares of its common stock and warrants to purchase 10,500,000 shares of common stock at an exercise price of $0.20 per share to non-U.S. persons for an aggregate purchase price of $1,575,000.
 
 On July 24, 2008, the Company entered into a Share Exchange Agreement, as amended, with CelLynx, Inc., a California corporation ("CelLynx-California"), and twenty-three CelLynx-California shareholders who, immediately prior to the closing of the transaction, collectively held 100% of CelLynx-California’s issued and outstanding shares of capital stock.  As a result, the CelLynx-California shareholders were to receive 77,970,956 shares of the Company’s common stock in exchange for 100%, or 61,983,580 shares, of CelLynx-California’s common stock.  However, the Company had only 41,402,110 authorized, unissued and unreserved shares of common stock available, after taking into account the shares of common stock issued in the July 23, 2008, financing described above.  Pursuant to the Share Exchange Agreement, in the event that there was an insufficient number of authorized but unissued and unreserved common stock to complete the transaction, the Company was to issue all of the available authorized but unissued and unreserved common stock to the CelLynx-California shareholders in a pro rata manner and then establish a class of Series A Convertible Preferred Stock (“Series A Preferred Stock”) and issue that number of shares of Series A Preferred Stock such that the common stock underlying the Series A Preferred Stock plus the common stock actually issued to the CelLynx-California shareholders would equal the total number of shares of common stock due to the CelLynx-California shareholders under the Share Exchange Agreement.  As a result, the Company issued to the CelLynx-California shareholders an aggregate of 32,454,922 shares of common stock and 45,516,034 shares of Series A Preferred Stock.  The Series A Preferred Stock automatically would convert into common stock on a one-to-one ratio upon the authorized capital stock of the Company being increased to include not less than 150,000,000 shares of common stock.
 
 On November 7, 2008, the Company amended the Articles of Incorporation to increase the number of authorized shares to 400,000,000 and converted the 45,516,034 shares of Series A Preferred Stock into 45,516,034 shares of the Company’s common stock.
 
 The exchange of shares with CelLynx-California was accounted for as a reverse acquisition under the purchase method of accounting because the shareholders of CelLynx-California obtained control of the Company. On August 5, 2008, NorPac Technologies, Inc., changed its name to CelLynx Group, Inc.  Accordingly, the merger of CelLynx-California into the Company was recorded as a recapitalization of CelLynx-California, with CelLynx-California being treated as the continuing entity. The historical financial statements presented are the financial statements of CelLynx-California. The Share Exchange Agreement has been treated as a recapitalization and not as a business combination; therefore, no pro forma information is disclosed. At the date of the reverse merger transaction, the net assets of the legal acquirer CelLynx Group, Inc., were $1,248,748.
 As a result of the reverse merger transactions described above, the historical financial statements presented are those of CelLynx-California, the operating entity.  Each CelLynx-California shareholder received 1.2579292 shares of stock in the Company for each share of CelLynx-California capital stock.  All shares and per-share information have been retroactively restated for all periods presented to reflect the reverse merger transaction.
  F-8
 
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 On October 27, 2008, the Board of Directors approved a change of the Company’s fiscal year end from June 30 to September 30 to correspond to the fiscal year of CelLynx-California.  The fiscal year end change was effective for the year ended September 30, 2008.
 
 The Company develops and manufactures cellular network extenders which enable users to obtain stronger signals and better reception.
 
 Going Concern and Exiting Development Stage
 
 These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support from its stockholders, the ability of the Company to obtain necessary equity and debt financing to continue operations and to generate sustainable revenue. There is no guarantee that the Company will be able to raise adequate equity or debt financing or generate profitable operations. For the years ended September 30, 2010 and 2009, the Company incurred a net loss of $3,637,353 and $3,978,762, respectively.  As of September 30, 2010, the Company had an accumulated deficit of $15,311,563.  Further, as of September 30, 2010 and 2009, the Company had negative working capital of $1,751,682 and $1,024,034, respectively.  Moreover, the Company had negative cash flows from operations of $1,452,510 and $1,421,759 for the years ended September 30, 2010 and 2009, respectively.  These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  During the year ended September 30, 2010, the Company raised $1,544,450 through the sale of common stock, and management intends to raise additional funds through equity or debt financing and to generate cash from the sale of the Company’s products and from license fees as further described below.
 
 The Company was in the development stage through June 30, 2009.  In July 2009, the Company received the first 220 units of the Company’s cellular network extender, The Road Warrior, from its manufacturer.  As of July 2009, the Company was fully operational and as such was no longer considered a development stage company.  During the period that the Company was considered a development stage company, the Company incurred accumulated losses of approximately $10,948,625.
 
 Master Global Marketing and Distribution Agreement
 
 On July 22, 2008, CelLynx entered into a Master Global Marketing and Distribution Agreement (the “Distribution Agreement”) with Dollardex Group Corp., a company organized under the laws of Panama (“Dollardex”), whereby Dollardex agreed to act as CelLynx’s exclusive distributor of CelLynx’s products and related accessories in the following regions: Canada, South America, Europe, Middle East, China, India, Australia, Africa and South East Asia.
 
 Subsequently, on April 29, 2010, the Company entered into a new master global marketing and distribution agreement (the “2010 Agreement”) that amended the prior agreement dated July 22, 2008 with Dollardex.  Under the 2010 Agreement, Dollardex proposed to establish a distribution network of our line of products in the territories, as defined, as well as to assist the international dealers in the promotion and marketing of the Company’s products.  As consideration for exclusive licenses, the Company would receive an aggregate of $11 million, payable to the Company from May 2010 to April 2011.  The funding was subject to terms and condition, as set forth in the 2010 Agreement.  Both parties could terminate the agreement in the event of breach or default and subject to certain conditions allowing for a cure of default.
  F-9
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 On June 14, 2010, the Company and Dollardex entered into Amendment No. 1 (the “Amendment”) to the 2010 Agreement.  Pursuant to Amendment No. 1, the Company and Dollardex agreed to grant an additional termination right to the Company.  In addition to those rights listed in the original 2010 Agreement, the Company and Dollardex agreed that in the event that Dollardex failed to provide by July 10, 2010, the payments required to be provided by May 31, 2010 (the “May Payment”), and July 1, 2010 (the “July Payment”), as originally provided in the 2010 Agreement, the Company would have the right to immediately terminate the 2010 Agreement.  The Company and Dollardex also agreed that if Dollardex made the May and July Payments due by the revised payment date of July 10, 2010, all other payment dates listed in the 2010 Agreement would be extended automatically by 30 days.
 
 Additionally, in Amendment No. 1, the Company and Dollardex agreed that nothing contained in the Amendment would be deemed to affect or be construed to affect any of the terms or provisions of the 2010 Agreement nor impair the validity or enforceability thereof or any rights or powers which the Company now or hereafter may have under or by virtue of the 2010 Agreement in case of any default or non-fulfillment of the terms of the 2010 Agreement by Dollardex, or otherwise.
 
 On August 15, 2010, the Company and Dollardex agreed to a further amendment of the 2010 Agreement (“Amendment No. 2”).  Pursuant to Amendment No. 2, Dollardex and the Company agreed that its Board of Directors would conduct a “Technology and Business” review of the Company and its products to provide Dollardex with specific information relating to product milestones, budgets and use of funds as well as other business and technical information.  Also pursuant to Amendment No. 2, and in further consideration for the funding to be provided by Dollardex,  the Company agreed to appoint Dollardex as the Company’s independent and exclusive distributor of the Company’s products throughout the world including the United States.
 
 Line of Credit Agreement and Related Agreements; Further Amendment of M&D Agreement
 
 On October 5, 2010, the Company entered into a Line of Credit Agreement (the “Line of Credit Agreement”), and an Amended and Restated Master Global Marketing and Distribution Agreement (the “A&R Agreement”) with Dollardex.
 
 Line of Credit Agreement
 
 Pursuant to the Line of Credit Agreement, Dollardex agreed to establish a revolving line of credit (the “Credit Line”) for the Company in the principal amount of two million five hundred thousand dollars ($2,500,000) (the “Credit Limit”) which indebtedness will be evidenced by and repaid in accordance with the terms of one or more a promissory notes for the amount of the Credit Limit (each a “Promissory Note”).  All sums advanced on the Credit Line or pursuant to the terms of the Line of Credit Agreement (each an “Advance”) shall become part of the principal of the applicable Promissory Note.
 
 Dollardex agreed to make funds available under the Credit Line on the following schedule:
 
 (i)
$200,000 on or before January 30, 2011;
 (ii)
$300,000 on or before January 30, 2011;
   F-10
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
  (iii)
$1,000,000 on or before February 28, 2011; and
 (iv)
$1,000,000 on or before March 31, 2011.
 
 The Company and Dollardex agreed that upon the funding of the first $200,000, Dollardex would have the right, but not the obligation, to purchase 50% of the Intellectual Property (the “Purchased Assets”) of the Company, for $1,500,000 (the “Purchase Price”), pursuant to the terms of an asset purchase agreement (the “Asset Purchase Agreement”).  The payment dates for the Purchased Assets would be the same as the first three advance dates listed above.  If Dollardex exercises that right, the first $1,500,000 advanced under the Credit Line would be deemed to be the purchase price paid for the Purchased Assets, and the funds so paid will not be treated as advances under the Credit Line; provided, however, that if Dollardex exercises its right to require the Company to sell the Purchased Assets, but fails to make the required payments, the Purchased Assets will revert to the Company, and any amount of the Purchase Price paid will be treated as an advance under the Credit Line.
 
 Upon the occurrence of an Event of Default as defined in the Line of Credit Agreement, Dollardex may declare the entire unpaid principal balance, together with accrued interest thereon, to be immediately due and payable without presentment, demand, protest, or other notice of any kind.  Additionally, Dollardex may suspend or terminate any obligation it may have hereunder to make additional Advances.
 
 As security for all obligations of the Company to Dollardex, the Company granted to Dollardex security interests in the Collateral.  The grant of the security interest is evidenced by and subject to the terms of the Security Agreement (the “Security Agreement”), and such other such security agreements, financing statements, pledges, collateral assignments and other documents and instruments as Dollardex reasonably requires, all in form and substance satisfactory to Dollardex.
 
 The Company granted to Dollardex a first priority security interest in all of the assets and property of the Company of every kind and description, tangible or intangible, wherever located, whether now owned or hereafter acquired, including, without limitation, the assets and properties listed in the Security Agreement (collectively, the “Collateral”).
 
 Amended and Restated Master Global Marketing and Distribution Agreement
 
 Additionally, on October 5, 2010, the Company entered into the A&R Agreement with Dollardex.  The A&R Agreement terminated the Original MGMD Agreement and all obligations of the parties thereunder.  Additionally, pursuant to the A&R Agreement, CelLynx appointed Dollardex, and Dollardex accepted such appointment, as the independent, exclusive distributor of the Products (defined as The Road Warrior, The @Home unit and any other product using the 5BARzTM Trademark including all related accessories, if any, and any and all future products of CelLynx) in the Territory (defined as all countries worldwide including the U.S.).
 
 In consideration for the appointment as exclusive distributor, Dollardex agreed to pay to CelLynx a fee (the “Marketing and Distribution Fee”) amounting to 50% of Dollardex’s Net Earnings (defined as mean the total net earnings, as defined under U.S. generally accepted accounting principles, before taxes, of Dollardex from sales, licensing and other income relating directly or indirectly to the Products in the Territory).  The Marketing and Distribution Fee will be paid on a quarterly basis, payable in cash or immediately available funds and shall be due and payable not later than 45 days following the end of each calendar quarter of the year. CelLynx will have the right to audit the books and records of Dollardex to insure that the Dollardex’s obligations to make the Marketing and Distribution Fee are being met.
   F-11
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 Assignment of Agreements from Dollardex to 5BARZ International, Inc.
 
 On December 30, 2010, the Company entered into an agreement (the “Assignment Agreement”) with Dollardex and 5BARZ International, Inc. (“5BARZ”), pursuant to which the Company agreed to an assignment from Dollardex to 5BARZ of four agreements between the Company and Dollardex.
 
 Pursuant to the Assignment Agreement, Dollardex assigned all its right, title, and interest in the A&R Agreement, the Asset Purchase Agreement, the Line of Credit Agreement, and the Security Agreement to 5BARZ in exchange for 14,600,000 shares of common stock of 5BARZ and a promissory note in the amount of $370,000.  The Company’s consent was required pursuant to the A&R Agreement
 
 There is no assurance that the Company will receive the entire amount of funding provided in the 2010 Agreement. As of January 10, 2011, the Company had not received any of the licensing fees under this agreement.
 
 Note 2 - Summary of Significant Accounting Policies
 
 Basis of Presentation
 
 The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The accompanying consolidated financial statements include the accounts of CelLynx Group, Inc., and its 100% wholly owned subsidiary, CelLynx, Inc.  All intercompany accounts and transactions have been eliminated in consolidation.
 
 Cash
 
 Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
 
 Inventory
 
 Inventory consists of finished goods ready for sale and is valued at the lower of cost (determined on a first-in, first-out basis) or market.  The Company reviews its reserves for slow moving and obsolete inventories. As of September 30, 2010, and September 30, 2009, the Company believed that no reserve was necessary.
 
 Accounts Receivable
 
 The Company maintains reserves for potential credit losses for accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded based on the Company’s historical collection history.  Receivables are written off when they are determined to be uncollectible.  As of September 30, 2010, the Company determined that allowance for bad debt was not necessary.
  F-12
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   Use of Estimates
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 Concentration of Credit Risk
 
 Cash includes deposits in accounts maintained at financial institutions.  Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States. As of September 30, 2010 and 2009, the Company did not have any deposits in excess of federally-insured limits.  To date, the Company has not experienced any losses in such accounts.  For the year ended September 30, 2010, one supplier accounted for 100% of the Company’s inventory purchases.
 
 Equipment
 
 Equipment is recorded at historical cost and is depreciated using the straight-line method over their estimated useful lives.  The useful life and depreciation method are reviewed periodically to ensure that the depreciation method and period are consistent with the anticipated pattern of future economic benefits. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains and losses on disposals are included in the results of operations. The useful life of the equipment is being depreciated over three years.
 
 Intangible Assets
 
 Acquired patents, licensing rights and trademarks are capitalized at their acquisition cost or fair value. The legal costs, patent registration fees, and models and drawings required for filing patent applications are capitalized if they relate to commercially viable technologies. Commercially viable technologies are those technologies that are projected to generate future positive cash flows in the near term. Legal costs associated with applications that are not determined to be commercially viable are expensed as incurred. All research and development costs incurred in developing the patentable idea are expensed as incurred. Legal fees from the costs incurred in successful defense to the extent of an evident increase in the value of the patents are capitalized.
 
 Capitalized costs for patents are amortized on a straight-line basis over the remaining twenty-year legal life of each patent after the costs have been incurred. Once each patent or trademark is issued, capitalized costs are amortized on a straight-line basis over a period not to exceed 20 years and 10 years, respectively. The licensing right is amortized on a straight-line basis over a period of 10 years.
 
 Impairment or Disposal of Long-lived Assets
 
 The Company applies the provisions of Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant, and Equipment,” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review, the Company believes that as of September 30, 2010, and September 30, 2009, there was no significant impairment of its long-lived assets.
   F-13
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   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
 
 Fair Value Measurements
 
 For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term 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 line of credit and other long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics.
 
 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, certain other current assets 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 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.
 
    F-14
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
  The Company’s warrant liability is carried at fair value totaling $173,856 and $0, as of September 30, 2010 and 2009, respectively.  The Company’s conversion option liability is carried at fair value totaling $30,283 and $0 as of September 30, 2010 and 2009, respectively.  The Company used Level 2 inputs for its valuation methodology for the warrant liability and conversion option liability as their fair values were determined by using the Black-Scholes option pricing model using the following assumptions:
  September 30, 2010Annual dividend yield


-Expected life (years)


1.5 – 4.4Risk-free interest rate


.16%-1.27%Expected volatility


145%
 
 Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants and conversion options. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion options. We have no reason to believe future volatility over the expected remaining life of these warrants likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and conversion options. The risk-free interest rate is based on U.S. Treasury securities with maturity terms similar to the expected remaining term of the warrants and conversion options.
 
 Fair Value

As of

September 30, 2010

Fair Value Measurements at

September 30, 2010

Using Fair Value HierarchyLiabilities



Level 1

Level 2

Level 3Warrant liability

$
173,856



$
173,856Conversion option liability


30,283




30,283Total accrued derivative liabilities

$
204,139



$
204,139
 
 For the year ended September 30, 2010, the Company recognized a gain of $461,681 and $59,046 for the change in the fair value of accrued warrant liability and the change in fair value of accrued beneficial conversion liability, respectively   For the year ended September 30, 2009, the Company recognized a loss of $419,571 and a gain of $251,410 for the change in the fair value of accrued warrant liability and the change in fair value of accrued beneficial conversion liability, respectively.
 
 The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value in accordance with ASC 825.
 
 Income Taxes
 
 The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
 Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s consolidated financial statements.  Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.  No significant penalties or interest relating to income taxes were incurred during the years ended September 30, 2010 and 2009.
  F-15
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   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 years ended September 30, 2010 and 2009, none of the potential dilutive securities have been included in the calculation of dilutive earning per share because their effect would be anti-dilutive.
 
 Stock-Based Compensation
 
 The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation.”  ASC 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
 The Company uses the Black-Scholes option-pricing model which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/seller market transaction.
 
 The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
 
 Recent Accounting Pronouncements
 
 In October 2009, the Financial Accounting Standards Board (“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 adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
    F-16
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 In January 2010, the FASB issued ASU No. 2010-06 Fair Value Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements.”  This ASU requires certain new disclosures and clarifies 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.  This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
  On February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, “Derivatives and Hedging — Embedded Derivatives — Recognition.” All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU was effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 “Revenue Recognition – Milestone Method (Topic 605)” provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010 – 17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update for the fiscal year beginning October 1, 2010.
 
 In April 2010, the FASB issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. This ASU provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-13 to have a significant impact on its consolidated financial statements.
    F-17
 
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 
 
 Note 3 - Equipment
 
 Equipment consisted of the following:
  September 30,


September 30,2010


2009Office furniture and equipment

$
9,879


$
9,879Computer equipment


8,930



8,93018,809



18,809Accumulated depreciation


(12,722
)


(7,450
)Equipment, net

$
6,087


$
11,359
 
 The Company recorded depreciation expense of $5,272 and $4,962 for the years ended September 30, 2010 and 2009, respectively.
 
       F-18
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   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.
 
 Intangible assets consist of the following:
  September 30,


September 30,2010


2009Patents

$
101,378


$
78,724Trademarks


12,487



12,487Licensing right


8,640



8,429122,505



99,640Accumulated Amortization


(4,733
)


(2,460
)Intangibles, net

$
117,772


$
97,180
  The Company recorded amortization expense related to the trademarks of $2,273 and $1,851, for the years ended September 30, 2010 and 2009, respectively.
 
 No amortization has been recorded for the patents as of September 30, 2010, as the patents have not been issued to the Company.
 
 The following table summarizes the amortization for the above intangible assets over the next 5 years and thereafter:
  Years ended September 30,

Amount2011

$
2,0922012


2,0922013


2,0922014


2,0922015


2,092Thereafter


5,934$
16,394
  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 amendment date, the Company determined that the Amended Note had a beneficial conversion feature with a fair value of $767,047. The Company recorded a debt discount of $262,356 and expensed as financing costs the $504,691 of the beneficial conversion feature that exceeded the principal balance.  The Company did not pay the note on November 9, 2010 and is currently in default.
  F-19
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   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 (the “February 2009 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 February 2009 Note is 4.0% per annum.  The interest was adjusted to 15% retroactive to the issuance date as the February 2009 Note was in default as of May 31, 2009.  On January 12, 2010, the Company settled the principal balance and accrued interest 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 a non-interest bearing 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 was amended to extend the due date to May 31, 2009. The Company failed to pay down the note on May 31, 2009. Therefore, on January 12, 2010, the Company settled the principal balance for a cash payment of $12,500 and 156,250 shares of the Company’s common stock.
 
 Convertible Promissory Note Issued July 22, 2010
 
 On July 22, 2010, the Company entered into a Securities Purchase Agreement (the “SPA”) with Asher Enterprises, Inc. a Delaware corporation (“Asher”), in connection with the purchase by Asher of a Convertible Promissory Note (the “Asher Note”).
 
 Pursuant to the Asher Note, Asher loaned to the Company the principal amount of $50,000.  The Asher Note bears interest at a rate of 8%, and is due on April 21, 2011.   Asher may convert principal and unpaid interest on the note into shares of the Company’s common stock, with the number of shares issuable determined by dividing the amount to be converted by the conversion price which is equal to 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion.  Asher is prohibited under the Asher Note from converting amounts if principal and interest that would result in Asher receiving shares, which when combined with shares of the Company’s common stock held by Asher, would result in Asher holding more than 4.99% of the Company’s then-outstanding common stock.  No registration rights were granted in connection with the purchase of the Asher Note, and the shares of common stock, if any, issued upon conversion, will be restricted securities as defined pursuant to the terms of Rule 144.
 
 Pursuant to the terms of the Note, while there remains any unpaid amounts owing on the Asher Note, the Company may not incur additional debt without Asher’s approval except for (i) debt that was owed or committed as of the date of the SPA and of which the Company had informed Asher; (ii) indebtedness to trade creditors or financial institutions in the ordinary course of business; (c) debt which in the aggregate does not exceed $250,000; or (d) debt the proceeds of which are used to repay the Asher Note.
   F-20
 CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The Company has the right to pre-pay the Asher Note during the first 120 days following the date of the Asher Note by paying to Asher 150% of the then-outstanding principal amount and any accrued and unpaid interest, penalties, or other amounts owing.
 
 The Company determined that the July 2010 Note contained a beneficial conversion feature because the conversion rate was less than the share price at the date of issuance.  The Company recorded a $29,365 debt discount related to the beneficial conversion feature.  The Company paid $3,000 related to the Asher Note which is recorded as interest and financing costs on the accompanying consolidated statement of operations.
 
 The Company recorded interest expense relating to the convertible promissory notes of $29,844 and $12,327 for the years ended September 30, 2010 and 2009, respectively.
 
 The Company amortized $121,801 and $114,272 of the debt discount for the years ended September 30, 2010 and 2009, respectively.
 
 The following table summarizes the convertible promissory notes:
  September 30,


September 30,2010


2009Issued August 2006,amended November 2007

$
262,356


$
262,356Issued February 19, 2009


-



75,000Issued March 3, 2009


-



25,000Issued July 22, 2010


50,000



-Less: Debt discount


(34,359
)


(126,795
)Convertible promissory notes, net

$
277,997


$
235,561
  Note 6 – Convertible Promissory Note - Stockholders
 
 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 Company failed to pay down the notes on July 31, 2009.  Therefore, on December 29, 2009, the Company settled the notes and issued a total of 5,063,292 shares of the Company’s stock at $0.0070 per share in accordance with the conversion price.
 Stockholder Notes Issued October 25, 2007
 
 On October 25, 2007, the Company issued convertible promissory notes in the amount of $10,000 with a conversion price of $0.0795 to two stockholders.  The combined total for the two convertible promissory notes was $20,000.  The promissory notes bore interest at 4% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days, and was scheduled to mature on October 25, 2009.  On December 3, 2009, the note holders agreed to extend the maturity date until such time as the Company had sufficient cash to repay these notes.   These notes were fully repaid in April 2010.
  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 had 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%.  The Company failed to pay down the note on March 31, 2009;  however on January 5, 2010, the Company and the note holder agreed to settle the principal and accrued interest due for a cash payment of $25,000 and 305,625 shares of the Company’s common stock.
 F-21
 
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The Company recorded interest expense related to the notes of $1,104 and $3,502 for the years ended September 30, 2010 and 2009, respectively.
 
 The Company amortized $1,092 and $44,882 of the debt discount for the years ended September 30, 2010 and 2009, respectively.
 
 The following table summarizes the stockholder convertible promissory notes:
 
 September 30,


September 30,2010


2009Issued March 27, 2007

$
-


$
20,000Less: Debt discount


-



(546
)-



19,454Issued March 27, 2007






20,000Less: Debt discount


-



(546
)-



19,454Issued October 25, 2007


-



10,000Issued October 25, 2007


-



10,000Issued February 4, 2009


-



43,000Stockholder convertible promissory notes, net

$
-


$
101,908
  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 certain technology rights and intellectual rights.  The License Agreement has a term of ten years.  As consideration for the License Agreement, the Company issued 57,143 shares of its common stock and paid $1,000 in cash.  The Company determined the fair value of the License Agreement to be $7,429 based on the market value of its common stock on the date of the agreement plus the $1,000, for a total acquisition cost of $8,429, which is included in the accompanying consolidated balance sheet.
 
 The Company recorded amortization expense related to the licensing agreement of $1,054 and $633 for the years ended September 30, 2010 and 2009, respectively.
    F-22
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   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 prices for the warrants are 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 of warrants 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 shares

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 March 31, 2010, the Company determined the fair value of the 600,000 warrants vesting on that date to be $60,318.  The fair value was computed using the Black-Scholes option pricing model under the following assumptions: (1) expected life of 2.00 years; (2) volatility of 145%; (3) risk free interest of 1.40% and (4) dividend rate of 0%.  The shares vest 12 months after the execution of the consulting agreement; therefore, the Company amortized the total fair market value of $60,318 over the vesting period of one year.  As of September 30, 2010, the fair value of the warrants was fully expensed.
 
 The remaining 550,000 warrants will vest at the time of extension of the Consulting Agreement.  The Company will compute the fair value of these warrants at that time.
 
 On January 15, 2010, the Company entered into a consulting agreement with Seahawk Capital Partners, Inc.  The Company issued 1,000,000 shares of Company restricted stock and 2,000,000 warrants upon signing of agreement.  In addition, the Company agreed to issue an additional 50,000 shares of restricted Company stock.
   F-23
 
 CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The exercise prices of the warrants are as follows:
 Number ofWarrants Issued

Exercise Price285,714

$0.40 per share285,714

$0.75 per share285,714

$1.50 per share285,714

$2.00 per share285,714

$3.00 per share285,714

$3.50 per share285,716

$4.00 per share2,000,000
 The warrants were valued using the Black-Scholes option pricing model, resulting in a fair market value of $297,114 and vested immediately.  The assumptions used in the Black-Scholes option pricing model at the dates the funds were received are as follows: (1) dividend yield of 0%; (2) expected volatility of 145%, (3) risk-free interest rate of 2.44%, and (4) expected life of 5 years.  The Company had expensed $297,114 related to these warrants in January 2010, as the warrants were exercisable upon signing of the agreement.
 
 Note 9 – Stockholders’ Equity
 
 On January 13, 2009, the Company issued 57,143 to obtain a licensing right from an un-related party.
 
 On February 18, 2009, the Company issued 37,500 shares of common stock to an unrelated third party in connection to an issuance of a convertible promissory note agreement.
 
 On March 16, 2009, the Company entered into a six-month consulting agreement with an unrelated party.  As compensation for the consulting services, the Company will issue 50,000 shares per month.  On May 28, 2009, the consulting agreement was amended to obtain additional work for six months.  The Company will pay $5,000 and issue an additional 22,727 shares per month for six months.  The Company can terminate the consulting agreement upon a thirty-day written notice to the unrelated party.
 
 The Company issued an additional 3,530,000 common stock for consulting services during the quarters ended June 30, 2009 and September 30, 2009.
 
 On April 23, 2009, the Company entered into a Securities Issuance Agreement (“Securities Agreement”) with four related parties (the “Investors”).  Pursuant to the Securities Agreement, the Company agreed to sell and issue to the Investors 2,785,000 shares of its common stock and warrants to purchase 2,785,000 shares of common stock at $0.10 per share for an aggregate purchase price of $278,500.  In addition, the company agreed to sell additional common stock and warrants at $0.10 per share up to 2 million shares.  As of September 30, 2009 the Company sold 3,785,000 shares of common stock and warrants.  The Company determined the fair value of the 3,785,000 warrants to be $512,920.  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 1.16% - 1.97% and (4) dividend rate of 0%.  The warrants are exercisable immediately and have an exercise price based on the share price at the date of grant.
 
 On May 1, 2009, as part of the Securities Agreement, the Company accepted the resignations of Mr. Legendre as Executive Chairman of the Board of Directors of the Company, and of Mr. Risheq as an officer of the Company.  The Company agreed that all of Mr. Legendre’s 12,234,608 options would be immediately canceled.  As full compensation for his services to the Company to date, he would receive 2,000,000 shares of common stock.  In addition, the Company agreed that all of Mr. Risheq’s 9,645,889 options would be immediately canceled.  As full compensation for his services to the Company to date, he would receive 1,500,000 shares of common stock.
  F-24
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 On May 6, 2009, the Company entered into a one year agreement with its new Executive Chairman that provides for monthly payments of $10,000 and the issuance of 100,000 options to purchase shares of the Company’s common stock for $0.16 per share.
 
 As of September 30, 2009 the Company issued 400,000 shares of common stock for accounting services.
 
 During the quarter ended September 30, 2009, the Company entered into stock subscription agreements and issued a total of 3,060,000 shares of common stock for $334,500.
 
 On November 9, 2009, the Company issued 108,000 warrants valued at $13,770 for consulting services.
 
 On January 15, 2010, the Company issued 2 million warrants valued at $297,114 for consulting services.
 
 On February 10, 2010, the Company issued 190,000 shares of the Company’s restricted common stock to unrelated parties in connection with an agreement entered into on June 30, 2009, to provide the Company capital introduction services.  The Company agreed to pay 3.33 shares of common stock for every dollar raised.
 
 On March 10, 2010, the Company issued 2.5 million shares of common stock for a one year consulting agreement with an unrelated party.  As additional compensation, the Company issued 2.5 million warrants with an exercise price of $0.001 which may only be exercised after June 9, 2010, and subject to the terms and conditions of the warrant agreement.  To date, the warrants have not been exercised.
 
 On March 31, 2010, the Company entered into a subscription agreement with an unrelated party and issued 980,000 shares of $0.001 par value common stock for $0.10 per share with 980,000 detachable warrants.  The warrants have an exercise price of $0.25 and expire on March 18, 2013.
 
 During the year ended September 30, 2010, the Company issued 1,945,486 shares of common stock for consulting services.
 
 During the year ended September 30, 2010, the Company had issued 6,290,792 shares of common stock as part of the conversion of convertible notes settled during the period.
 
 During the year ended September 30, 2010, the Company issued 2,000,000 shares of $0.001 par value common stock for $0.10 per share with 2,000,000 detachable warrants in connection with subscription agreements.  The warrants have an exercise price of $0.10 and expire on April 1, 2012.
 
 During the year ended September 30, 2010, the Company issued 11,516,757 shares of $0.001 par value common stock for $0.06 per share with 11,516,757 detachable warrants in connection with subscription agreements.  The warrants have an exercise price of $0.20 and expire on December 1, 2012.
 
 During the year ended September 30, 2010, the Company entered into subscription agreements and issued 8,500,000 shares of $0.001 par value common stock for $0.06 per share with 8,500,000 detachable warrants in connection with subscription agreements.  The warrants have an exercise price of $0.20 and expire on December 31, 2012.
  F-25
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 On April 12, 2010, the Company entered into subscription agreements and issued 450,000 shares of $0.001 par value common stock for $0.10 per share with 450,000 detachable warrants in connection with subscription agreements.  The warrants have an exercise price of $0.25 and expire on April 12, 2013.
 
 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


Weighted

Average


AggregateShares


Exercise Price


Contractual Life


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


7,874,217


$
0.128Canceled


(2,400,000
)

$
0.170Exercised


-Outstanding at September 30, 2010


33,188,050


$
0.103



3.29


$
943Exercisable at September 30, 2010


22,029,255


$
0.092



3.07


$
943
       F-26
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The number and weighted average exercise prices of all options outstanding as of September 30, 2010, are as follows:
  Options outstandingWeightedWeighted


AverageNumber


Average


RemainingRange of


Outsanding as of


Exercise


Contractual LifeExercise Price


September 30, 2010


Price


(Years)$
0.014 - 0.05



1,415,170



0.015



5.14$
0.06 - 0.100



17,918,822



0.078



2.62$
0.110 - 0.150



9,555,457



0.125



4.02$
0.160 - 0.200



2,556,961



0.172



5.01$
0.210 - 0.260



1,741,640



0.217



3.8233,188,050
 The number and weighted average exercise prices of all options exercisable as of September 30, 2010, are as  follows:
 
 Options ExercisableWeightedWeighted


AverageNumber


Average


RemainingRange of


Outstanding as of


Exercise


Contractual LifeExercise Price


September 30, 2010


Price


(Years)$
0.014 - 0.05



1,415,170



0.015



5.14$
0.06 - 0.100



14,101,005



0.078



2.44$
0.110 - 0.150



4,909,969



0.125



3.98$
0.160 - 0.200



1,442,667



0.171



3.83$
0.210 - 0.260



160,444



0.260



3.6822,029,255
  The assumptions used in calculating the fair values of options granted using the Black-Scholes option-pricing model are as follows:
 
 September 30, 2010


September 30, 2009Expected life (years)

2.77 to 5.05


2.63 to 6.16Risk-free interest rate

1.00% to 2.66%


.56% to 4.57%Expected volatility

110% to 145%



110%Expected dividend yield


0%



0%
  F-27
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The weighted average grant-date fair value for the options granted during the year ended September 30, 2010 and 2009, was $0.079 and $0.076, respectively.
 
 The compensation expense related to the unvested options as of September 30, 2010, was $498,204, which will be recognized over the weighted average period of 1.18 years. Stock-based compensation expense to employees and non employees for the years ended September 30, 2010 and 2009, was $1,060,170 and $690,353, respectively.
 
 Warrants
 
 On November 9, 2009, the Company entered into an agreement with Seahawk Capital Partners, Inc. (“Seahawk”), for Seahawk to provide the Company capital introduction services, as well as strategic alliance services.  The Company agreed 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 September 30, 2010, 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 warrants vested immediately and have an exercise price of $0.10.
 
 On January 15, 2010, the Company entered into a consulting agreement with Seahawk.  The Company issued 1,000,000 shares of Company restricted stock and 2,000,000 warrants upon signing of agreement.  In addition, the Company agreed to issue an additional 50,000 shares of restricted Company stock. (See note 8.)
 
 On March 10, 2010, in connection with a one year consulting agreement with an unrelated party, the Company issued 2,500,000 warrants with an exercise price of $0.001 which may only be exercised after June 9, 2010 and subject to the terms and conditions of the warrant agreement.   To date, the warrants have not been exercised
 
 On March 31, 2010, the Company entered into a subscription agreement with an unrelated party and issued 980,000 shares of $0.001 par value common stock for $0.10 per share with 980,000 detachable warrants.  The warrants have an exercise price of $0.25 and expire on March 18, 2013.
 
 On April 12, 2010, the Company entered into a subscription agreement with an unrelated party and issued 450,000 shares of $0.001 par value common stock for $0.10 per share with 450,000 detachable warrants.  The warrants have an exercise price of $0.25 and expire on April 12, 2013.
 
 During the year ended September 30, 2010, the Company issued 2,000,000 shares of $0.001 par value common stock for $0.10 per share with 2,000,000 detachable warrants.  The warrants have an exercise price of $0.10 and expire on April 1, 2012.
 
 During the year ended September 30, 2010, the Company issued 11,516,757 shares of $0.001 par value common stock for $0.06 per share with 11,516,757 detachable warrants.  The warrants have an exercise price of $0.20 and expire on December 1, 2012.
 
 During the year ended September 30, 2010, the Company entered into subscription agreements and issued 8,500,000 shares of $0.001 par value common stock for $0.06 per share with 8,500,000 detachable warrants.  The warrants have an exercise price of $0.20 and expire on December 31, 2012.
  F-28
 
 CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
 
 
 The following table summarizes the warrant activity:
 
 Weighted


AverageAverage


Remaining


AggregateNumber of


Exercise


Contractual


IntrinsicWarrants


Price


Life (in years)


ValueOutstanding, September 30, 2008


10,500,000


$



$



$
-Granted


8,060,000



0.12Exercised


-



-Cancelled


(10,500,000
)


0.20Outstanding, September 30, 2009


8,060,000



0.12



1.76



-Granted


28,054,757



0.32



2.37Exercised


-



-Expired


-



-Outstanding, September 30, 2010


36,114,757


$
0.27



2.18


$
35,000Exercisable, September 30, 2010


36,114,757


$
0.27



2.18


$
35,000
  Note 10 - Commitments and Contingencies
 
 Operating Leases
 
 On March 5, 2010, the Company entered into an amended agreement to a lease dated February 21, 2008.  The lease was renewed for two years and requires monthly payments of $1,962 commencing April 1, 2010, with a 4% increase of the base rent beginning on month thirteen, terminating on March 31, 2012, for office space for its El Dorado Hills, California, office.
 
 On December 31, 2009, the Company entered into an amended agreement to a lease dated August 26, 2008.  The lease was renewed for 25 months and requires monthly payments of $3,710 commencing on May 1, 2010 with a $106 increase of the base rent beginning on the fourteenth month, terminating on April 30, 2012, for office space for its Mission Viejo, California, office.
 
 The Company recorded rent expense of $72,877 and $77,780 for years ended September 30, 2010 and 2009, respectively.
 
 For the two leases, the Company expects to pay approximately $46,000 and $39,000 during the years ended September 30, 2011 and 2012, respectively.
 
 Litigation
 
 Dolphinshire L.P., v. CelLynx Group, Inc., and Does 1-10, Superior Court of California, Orange County, Case No. 00388787.  On July 12, 2010, plaintiff brought suit against the Company for unlawful detainer pursuant to a lease agreement, seeking an unspecified amount of damages not to exceed $25,000.  The Company has not made rent payments in accordance with the lease agreement.  The Company has engaged in settlement negotiations with the plaintiff.
   F-29
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
   The Company is aware of formal as well as informal claims for back wages made by several former employees and expects to satisfy those claims in the normal course of business.
 
 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 – Accrued Derivative Liabilities
 
 On July 22, 2010, the Company issued a $50,000 convertible note to Asher with a conversion rate of 63% of the average of the three lowest trading prices of the Company’s common stock over the ten trading days prior to the date of the conversion.  The Company determined that these notes contained a beneficial conversion feature that would need to be bifurcated from the host instrument because theoretically, the Company would not have enough authorized shares to satisfy the conversion.  The Company determined that the conversion option of the outstanding notes and the warrants that had been classified in equity should be reclassified to derivative liability because the number of potential dilutive shares exceeds the authorized shares.  The Company reclassified the conversion option’s fair value of $59,964 and warrant’s fair value of $635,537 from equity to derivative liability on July 22, 2010.  The Company determined the fair value of conversion option and the warrants using the Black-Scholes model with the following assumptions.
 
 ·
Risk free interest rate -    between .60% and 1.69%
 ·
Expected life (year) -        between .30 and 4.64
 ·
Volatility                            145%
 ·
Annual dividend rate       0%
 
 Note 12 – Taxes
 
 We have provided no current income taxes due to the losses incurred from October 11, 2005 (date of inception), through September 30, 2010.  Net operating losses of approximately $4,011,540 at September 30, 2010, are available for carryover.  The net operating losses will expire from 2022 through 2025.  We have provided a 100% valuation allowance for the deferred tax benefit resulting from the net operating loss carryover due to our limited operating history.  In addressing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible.  When we demonstrate a history of profitable operation, we will reduce our valuation allowance at that time.
 
   F-30
  CELLYNX GROUP, INC
 Notes to Consolidated Financial Statements
 For the Years Ended September 30, 2010 and 2009
  A reconciliation of the statutory Federal income tax rate and the effective income tax rate for the years ended September 30, 2010 and 2009 follows:
 
 September 30,


September 30,2010


2009Statutory federal income tax rate


(34
) %


(34
) %State income taxes (benefit), net of federal taxes


(6
) %


(6
) %Equity instruments issued for compensation/services


19
%


15
%Change in derivative liabilities


(6
) %


2
%Non-cash financing costs


(1
) %


-Valuation allowance


28
%


23
%Effective income tax rate


-



-
 The significant components of deferred tax assets and liabilities are as follows:
 
 September 30,


September 30,2010


2009Deferred tax assets:Net operating loss carryforwards

$
2,587,723


$
1,694,205Valuation allowance


(2,587,723
)


(1,694,205
)Net deferred tax assets

$
-


$
-




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


F-31





SIGNATURES





Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.





CELLYNX GROUP, INC.Dated: January 18, 2011
By:
/s/ Norman W. CollinsNorman W. CollinsChief Executive Officer and Chairman of the Board




Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.





Name

Position

Date/s/ Norman W. Collins

Chairman of the Board, Chief Executive Officer

January 18, 2011Norman W. Collins

(Principal Executive Officer)/s/ Kevin Pickard

Consultant providing services commonly

January 18, 2011Kevin Pickard

provided by a Chief Financial Officer, Principal Financing and Accounting Officer/s/ Dwayne Yaretz

Director

January 18, 2011Dwayne Yaretz/s/ Malcolm P. Burke

Director

January 18, 2011Malcolm P. Burke









41