Ealixir, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the attached financial statements and notes thereto. Except for the historical information contained herein, the matters discussed below are forward-looking statements that involve certain risks and uncertainties, including, among others, the risks and uncertainties discussed below. CRITICAL ACCOUNTING POLICIES We described our critical accounting policies in Item 6, "Management's Discussion and Analysis or Plan of Operation," of our Annual Report on Form 10-KSB for the year ended March 31, 2008. Our critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations, and require our management's significant judgments and estimates and such consistent application fairly depicts our financial condition and results of operations for all periods presented. OVERVIEW During the first half of our fiscal year 2009 we have continued to focus on sales of our HipLink family of software applications and services utilized by businesses and their employees to wirelessly connect to critical business systems, information and processes. These products maintain high gross and operating margins and form the core of our enterprise software marketing strategy with wireless and mobile features available in the software. We also continued to work towards closing the acquisition of the assets and liabilities of Flint Telecom, Inc. (“FTI”), which closed on October 1, 2008. Management believes that it has adequate working capital for the next 12 months. In the three months ended September 30, 2008, we had a net loss of $68,881 ($0.02 per share basic and diluted), as compared to net income of $3,328,361 ($1.85 per share basic and $1.69 per share diluted) in the three months ended September 30, 2007. We had a net loss of $303,446 ($0.13 per share basic and diluted) in the six months ended September 30, 2008, as compared to net income of $3,471,805 ($1.94 per share basic and $1.77 per share diluted) in the six months ended September 30, 2007. Our overall cash decreased by $139,222 in the six months ended September 30, 2008, compared to an increase by $181,007 in the six months ended September 30, 2007. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 REVENUES Revenues for the three months ended September 30, 2008 increased 204% to $425,680 as compared to $139,803 for the three months ended September 30, 2007. Revenues for the six months ended September 30, 2008 increased 45% to $656,415 as compared to $454,134 for the six months ended September 30, 2007. This increase is due to a sale to one significant new customer in the three months ended September 30, 2008 versus the same period in 2007. COST OF REVENUES AND GROSS MARGIN The overall gross profit margin increased to 99.8% in the three months ended September 30, 2008 from 98.7% in the same period ended September 30, 2007. The overall gross profit margin increased to 99.6% for the six months ended September 30, 2008 from 95% in the same period ended September 30, 2007. The increase in gross profit margin during the three and six months ended September 30, 2008 is principally due to a decrease in the cost of revenue. The cost of revenues principally includes costs of engineering development directed to specifically identified products, and costs of servicing and hosting customer products. OPERATING EXPENSES Operating expenses increased 4% to $552,642 in the three month period ended September 30, 2008 versus $530,613 for the same period in the last fiscal year, and increased 1% to $1,013,861 in the six month period ended September 30, 2008 versus $1,003,887 for the same period in the last fiscal year. This increase is mainly due to a slight increase in sales and marketing and general and administrative expenses. We categorize operating expenses into four major categories: research and development, sales and marketing, general and administrative, and stock, option and warrant expense. The table below summarizes the changes in these five categories of operating expenses (unaudited): Three Months Ended September 30, Six Months Ended September 30, Description 2008 2007 2008 2007 Research and development $ 89,387 $ 74,690 $ 113,972 $ 117,185 Sales and marketing 213,975 181,857 422,198 338,858 General and administrative 246,605 239,602 459,644 458,751 Stock, option and warrant expense 2,675 34,464 18,047 89,093 ----------------- ----------------- ------------------ ----------------- Total $ 552,642 $ 530,613 $ 1,013,861 $ 1,003,887 Research and development expenses are expenses incurred in developing new products and product enhancements for current products. These expenditures are charged to expense as incurred. These costs increased slightly due to an increase in product enhancements for current products. Remaining engineering costs are due to production projects for existing products and services; these projects also increased slightly in the second quarter ended September 30, 2008. Sales and marketing expenses consist of costs incurred to develop and implement marketing and sales programs for our product lines. These include costs required to staff the marketing department and develop a sales and marketing strategy, participation in trade shows, media development and advertising, and web site development and maintenance. These costs also include the expenses of hiring sales personnel and maintaining a customer support call center. These costs increased slightly in the three and six months ended September 30, 2008 compared to the same periods in last year due to an increase in sales and marketing personnel. General and administrative expenses include senior management, accounting, legal, business development consulting, rent, administrative personnel, and other overhead related costs. This category also includes the costs associated with being a publicly traded company, including the costs of SEC filings, investor relations and public relations efforts. These costs have increased slightly during the three and six months ended September 30, 2008 versus 2007 due to a slight increase in the costs associated with being a publicly traded company. The non-cash charges for compensation consist mainly of grants of stock, options and warrants for services provided to us. Such services include financial, legal and business development consulting. The common stock issued was valued at its fair market value at the date of issuance. The substantial decline in this expense is directly related to the substantial reduction in the number and amount of stock and option grants in the three and six months ended September 30, 2008. OTHER INCOME (EXPENSE) The $58,966 for the three months ended September 30, 2008 and $56,473 for the six months ended September 30, 2008 in other income is comprised mainly from the income from our contract with Stockgroup where we are providing transitional services (See Note 7). The $3,720,924 for the three months ended September 30, 2007 and $4,044,021 for the six months ended September 30, 2007 in other income is comprised mainly from the gain on the software license sold to Innofone (See Note 10). LIQUIDITY AND CAPITAL RESOURCES Much more cash was spent on operating resources during the six months ended September 30, 2008 versus the same period in 2007, but the sale of a convertible promissory note to Flint Telecom Ltd. provided $200,000 in cash in the six month period ended September 30, 2008. . Consequently the overall cash decreased by $139,222 for the six months ended September 30, 2008 versus a cash increase of $181,007 for the six months ended September 30, 2007. The sources and uses of cash are summarized as follows (unaudited): Six Months Ended September 30, 2008 2007 Cash used in operating activities $ (370,840 ) $ (10,147 ) Cash provided by investing activities 31,618 191,893 Cash provided by (used in) financing activities 200,000 (739 ) -------------------- -------------------- Net increase (decrease) in cash and cash equivalents $ (139,222 ) $ 181,007 During the six months ended September 30, 2008, cash used in operating activities from continuing operations consisted principally of an operating loss of $359,919 resulting from gross profits of $653,942 and operating expenses of $1,013,861. Also, the transitional services we provide to Stockgroup produced other income of $56,473, which was slightly offset by interest expense of $4,000.. Other operating activities contributing to the decrease in cash were an increase in accounts receivable of $222,429 and in the Stockgroup receivable of $16, 288, as well as a decrease in deferred revenue of $46,411. The decline in cash was partially offset by an increase in accrued liabilities of $197,164. During the six months ended September 30, 2007, cash used in operating activities from continuing operations consisted principally of an operating loss of $572,216 resulting from gross profits of $431,671 and operating expenses of $1,003,887. Also, a gain on the sale of the software license sold to Innofone, offset by interest expense of $49,314 produced other income of $4,044,021. Other operating activities contributing to the increase in cash were mainly from a decrease in accounts receivable of $217,023 offset by an increase in the Stockgroup receivable of $41,463. There was also an increase in cash resulting from the capitalization of a $100,000 fee we paid in March 2007 related to the potential merger with Citytalk, which we wrote off because the merger did not close. During the six months ended September 30, 2008, cash provided by investing activities consisted of the collection of the long term receivable from Stockgroup. During the six months ended September 30, 2007, cash provided by investing activities consisted of proceeds resulting from the asset sale to Stockgroup and the related interim services agreement with Stockgroup. Cash provided by financing activities for the six months ended September 30, 2008 consisted of the sale of a convertible promissory note to Flint Telecom Ltd. which provided $200,000 in cash. Cash used in financing activities for the six months ended September 30, 2007 consisted principally of the repayment of $717 on a line of credit from a computer company. As of September 30, 2008, we had cash and cash equivalents of $83,162, a decrease of $139,222 from the balance at March 31, 2008, which was $226,601. Our working capital deficit increased as of September 30, 2008 at ($91,884) as compared to a working capital deficit of ($42,103) at March 31, 2008 . We have not yet generated sufficient revenues to cover the costs of continued product development and support, sales and marketing efforts and general and administrative expenses. We have an operating lease for our facility in Los Gatos, California for which the future minimum lease payments are $119,908 in fiscal 2008, $62,496 in fiscal 2009 and $3,600 in fiscal 2010. There are no material commitments for capital expenditures at September 30, 2008. Management believes that it has adequate cash and cash equivalents to provide working capital for the next 12 months. RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not believe that the adoption of FIN 48 currently has a material impact on our financial statements. In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that the adoption of SFAS 157 currently has a material impact on our financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R) which replaces SFAS No. 141. SFAS 141R retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141R is effective for us beginning January 1, 2009 and will apply prospectively to business combinations completed on or after that date. We do not expect the adoption of SFAS 141R to have a material impact on our consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51” (SFAS 160) which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning January 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial statements. FORWARD LOOKING STATEMENTS AND RISK FACTORS This report includes forward-looking statements relating to, among other things, projections of future results of operations, our plans, objectives and expectations regarding our future services and operations, and general industry and business conditions applicable to us. We have based these forward-looking statements on our current expectations and projections about future events. You can find many of these forward-looking statements by looking for words such as "may", "should", "believes", "expects", "anticipates", "estimates", "intends", "projects", "goals", "objectives", or similar expressions in this document or in documents incorporated herein. These forward-looking statements are subject to a number of risks, uncertainties and assumptions about us that could cause actual results to differ materially from those in such forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to, our limited operating history, our historical losses, the infancy of the wireless data industry where there is no established market for our products and services, our ability to adapt to rapid technological changes, our dependence on wireless networks owned and controlled by others, and the other factors that we describe in the section entitled "Risk Factors" in the Form 10KSB for the year ended March 31, 2008. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.