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 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 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, 2011, the Company wrote off its entire inventory
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 Companys 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.
Other receivables were
amounts due from the sale of 50% of the Companys intangible assets.
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, 2012 and 2011,
the Company did not have any deposits in excess of federally-insured limits. To date, the Company has not experienced
any losses in such accounts.
Equipment 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.
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, 2012, and September 30, 2011, there was no significant impairment of its long-lived
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.
The gain on the sales
of intangible assets is fully recognized as payment in full has been made by the delivery of 9,000,000 shares of common stock in
5BARz International Inc.
Fair Value Measurements
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
||Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.|
||Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.|
||Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.|
The Companys warrant
liability is carried at fair value totaling $8,364 and $6,160, as of September 30, 2012 and 2011, respectively. The
Companys conversion option liability is carried at fair value totaling $1,479,204 and $96,126 as of September 30, 2012 and
2011, 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, 2012|
|Annual dividend yield
|Expected life (years)
|Risk-free interest rate
Expected volatility is
based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods
that correspond to the term of the warrants and conversion options. We believe this method produces an estimate that is representative
of our expectations of future volatility over the expected term of these warrants and conversion options. We have no reason to
believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility.
The expected life is based on the remaining term of the warrants and conversion options. The risk-free interest rate is based on
U.S. Treasury securities with maturity terms similar to the expected remaining term of the warrants and conversion options.
At September 30, 2012,
the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:
||Fair Value Measurements at
||September 30, 2012
||September 30, 2012
||Using Fair Value Hierarchy
|Conversion option liability
|Total accrued derivative liabilities
For the year ended September
30, 2012, the Company recognized a loss of $2,402 for the change in the fair value of accrued warrant liability and the Company
recognized a loss of $1,190,295 for the change in fair value of accrued beneficial conversion liability, respectively. For
the year ended September 30, 2010, the Company recognized a gain of $167,696 for the change in the fair value of accrued warrant
liability and $647 for the change in fair value of accrued beneficial conversion liability.
The Company did not identify
any other non-recurring assets and liabilities that are required to be presented in the consolidated balance sheets at fair value
in accordance with ASC 825.
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 Companys 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, 2012 and 2011.
Basic and Diluted 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, 2012 and 2011, none of the potential dilutive securities have been included in the calculation
of dilutive earning per share because their effect would be anti-dilutive.
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 employees requisite service period. Under ASC 718, the Companys volatility is based on the historical volatility
of the Companys 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 Companys 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 Companys employee stock options, it is managements opinion that
the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Companys 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
Recent Accounting Pronouncements
In December 2010, the
FASB issued updated guidance on when and how to perform certain steps of the periodic goodwill impairment test for public entities
that may have reporting units with zero or negative carrying amounts. This guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2010, with early adoption prohibited. The adoption of this
standard update did not impact the Companys consolidated financial statements.
In May 2011, the FASB
issued guidance to amend certain measurement and disclosure requirements related to fair value measurements to improve consistency
with international reporting standards. This guidance is effective prospectively for public entities for interim and annual reporting
periods beginning after December 15, 2011, with early adoption by public entities prohibited. The Company is currently evaluating
this guidance, but does not expect its adoption will have a material effect on its consolidated financial statements.
In June 2011, the FASB
issued new guidance on the presentation of comprehensive income that will require a company to present components of net income
and other comprehensive income in one continuous statement or in two separate, but consecutive statements. There are no changes
to the components that are recognized in net income or other comprehensive income under current GAAP. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, with early adoption permitted. The
Company is currently evaluating this guidance, but does not expect its adoption will have a material effect on its consolidated