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 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. Our critical accounting policies are described below. Revenue Recognition – We recognize revenues based upon contract terms and completion of the sales process in accordance with Staff Accounting Bulletin No. 104, a codification of revenue recognition. Revenue is generated from the sale of telecom services to the Company’s partners. We recognize the revenue when the service is provided and payment is collected either through credit cards or through payments by check. The appropriate partner revenue allocation is deducted from those accounts that pay us directly. Other accounts that pay the partners directly, we recognize the portion of the revenue share that relates to it and invoices the Partner for this. The invoice becomes a receivable from the Partner when raised. Cost of Revenue – Costs directly related to the production of revenue are categorized as a cost of revenue. These costs are the cost of call generation, including transmission and termination, network charges including access costs, lease and right-of-way charges and other third party fulfillment costs, and other telecommunication fees, such as emergency 911 service fees. Earnings (loss) per share - Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method or the if converted method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in our earnings. Any dilutive security issued, that would create an anti-dilutive effect, is not included in the weighted average share calculation for that period. Stock Compensation Expense – We adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expense related to the fair value of our employee stock option awards. We recognize the cost of all share-based awards on a straight line vesting basis over the vesting period of the award. Total stock compensation expense recognized by us during the three and nine months ended March 31, 2009 was $443,948 and $3,489,198, respectively. Income taxes - We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Cash and Cash Equivalents – We consider all highly liquid investments with original maturities of three months or less or money market funds from substantial financial institutions to be cash equivalents. We place substantially all of its cash and cash equivalents in interest bearing demand deposit accounts with one financial institution and in amounts that are insured either by the Irish government for Euro deposits or by the Federal Deposit Insurance Corporation for U.S deposits. Concentrations of Credit Risk - Financial instruments which potentially subject us to concentrations of risk consist principally of trade and other receivables. We extend credit to its customers in the ordinary course of business and periodically reviews the credit levels extended to customers, estimates the collectability and creates an allowance for doubtful accounts, as needed. We do not require cash collateral or other security to support customer receivables. Provision is made for estimated losses on uncollectible accounts. We estimate our allowance for doubtful accounts by applying estimated loss percentages against our aging of accounts receivable balances. The estimated loss percentages are updated periodically and are based on our historical write-off experience, net of recoveries. Changes to allowances may be required if the financial condition of our customers improves or deteriorates or if we adjust its credit standards for new customers, thereby resulting in write-off patterns that differ from historical experience. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates were made in connection with preparing our financial statements. Actual results could differ from those estimates. Fair value of financial instruments - The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short term notes approximate fair value because of their short maturity as of March 31, 2009. The Convertible Notes were recorded at face value as of the issuance date. Those Convertible Notes issued in the Euro currency were translated at the Euro – U.S. Dollar exchange rate as of the transaction date and are adjusted for exchange rate changes on a quarterly basis. The Convertible Notes approximate fair value since they are a long term liability with a fixed interest rate, adjusted for exchange rates if required and will be held until maturity or until converted into common stock. Foreign Currency Transactions - Exchange adjustments resulting from foreign currency transactions are generally recognized in operations. Flint has a bank account and convertible notes that are in the Euro currency. Net foreign currency transaction losses were $374,650 for the nine months ended March 31, 2009. Property and Equipment – These assets are stated at cost, net of accumulated depreciation and amortization. Depreciation is provided on the straight-line method over the estimated useful lives of the related assets, generally three to seven years. Amortization on capital leases is over the lesser of the estimated useful life or term of the lease if shorter, and is included in depreciation and amortization expense in the statement of operations. Ordinary course repairs and maintenance on fixed assets are expensed as incurred. The carrying value of property and equipment is assessed annually or when factors indicating an impairment are present. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review our property, plant, and equipment for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Impairment reviews require a comparison of the estimated future undiscounted cash flows to the carrying value of the asset. If the total of the undiscounted cash flows is less than the carrying value, an impairment charge is recorded for the difference between the estimated fair value and the carrying value of the asset. Goodwill and Goodwill Impairment-In association with the acquisition of CHVC subsidiaries, in accordance with FASB 142, “Goodwill and Other Intangible Assets”, we recorded the purchase price in excess of the net assets acquired as of the acquisition date as goodwill. The goodwill was recorded on January 29, 2009, the closing date of the CHVC subsidiaries acquisition (See Note 3, Acquisition of the CHVC Acquisition Companies.) in the amount of $8,554,248. In accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), we perform an evaluation of the fair values annually, and more frequently if an event occurs or circumstances change that may indicate that the fair value of a reporting unit is less than the carrying amount. We are currently performing a valuation of the assets acquired for the purchase price allocation and management expects the valuation will be done by June 30, 2009. In accordance with FASB 142, “Goodwill and Other Intangible Assets” we determined that the goodwill from the Semotus acquisition was impaired due to the disposition of the Semotus Business Division on January 29, 2009 (See Note 4, Acquisition and Subsequent Disposition of Semotus Solutions, Inc.). The goodwill was recorded on October 1, 2008, the closing date of the Semotus acquisition (See Note 4, Acquisition and Subsequent Disposition of Semotus Solutions, Inc.) in the amount of $2,538,148. OVERVIEW Management’s objective for the three months ended March 31, 2009 was to increase the size of the business through acquisition or other strategic business combination structures, and to improve overall operations to reduce the need for external financing in the difficult economic and financial markets. We closed an acquisition of six wholly owned subsidiary companies of China Voice Holding Corp. on January 29, 2009, thereby increasing the depth and breadth of operations, enhanced the management team and identified additional acquisitions in the telecom, media and technology (TMT) space. After the CHVC subsidiaries acquisition, we continued our focus on our operations and consolidation of the entities. We have been actively engaged in seeking other potential acquisition targets to further enhance the scale, depth and profitability of the business In the three months ended March 31, 2009, we had a net loss of $1,246,295 ($0.02 per share basic and diluted), as compared to a net loss of $531,572 ($0.02 per share basic and diluted) in the three months ended March 31, 2008. We had a net loss of $10,940,839 ($0.24 per share basic and diluted) in the nine months ended March 31, 2009, as compared to net loss of $1,604,431 ($0.06 per share basic and diluted) in the nine months ended March 31, 2008. The increase in the losses year on year were predominantly as a result of costs and SEC accounting provisions associated with the Semotus transaction which are non recurring. Our overall cash decreased by $1,163,562 in the nine months ended March 31, 2009, compared to an increase of $150,783 in the nine months ended March 31, 2008. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2009 AND 2008 REVENUES Revenues for the three months ended March 31, 2009 increased 2,197.3% to $11,220,472 as compared $492,275 for the three months ended March 31, 2008. Revenues for the nine months ended March 31, 2009 increased 1,854% to $17,432,765 as compared to $892,155 for the nine months ended March 31, 2008. This increase is primarily due to the acquisition of the six subsidiaries of China Voice Holding, Corp. (CHVC) and growth of our wholesale call traffic business. COST OF REVENUES AND GROSS MARGIN The overall gross margin has improved in both the three and nine months ended March 31, 2009 versus 2008 due to larger traffic volumes being delivered through the call platform and the cessation of certain business activities that required high cost of revenues. We have moved from a fixed cost of revenue structure to a fully variable cost model that results in consistent positive gross margins going forward. The cost of revenues principally is the cost of call generation, including transmission and termination, network charges including access costs, lease and right-of-way charges and other third party fulfillment costs, and other telecommunication fees, such as emergency 911 service fees. OPERATING EXPENSES Operating expenses increased 147% to $1,544,129 in the three month period ended March 31, 2009 versus $624,884 for the same period in the last fiscal year, and increased 575% to $9,591,430 in the nine month period ended March 31, 2009 versus $1,420,964 for the same period in the last fiscal year. This increase is mainly due to non-recurring costs associated with the reverse merger with Semotus Solutions, Inc. and the CHVC subsidiaries, the growth of the telephony business, the non-cash expense of stock and options issued to directors, officers and employees, and the impairment of goodwill. We categorize operating expenses into three major categories: research and development, sales and marketing, and general and administrative. The table below summarizes the changes in these three categories of operating expenses (unaudited): Three Months Ended March 31, Nine Months Ended March 31, Description 2009 2008 2009 2008 Research and development $ 22,842 $ - $ 78,429 $ - Sales and marketing 60,427 - 270,576 - General and administrative 1,460,860 624,884 9,242,425 1,420,964 ----------------- ----------------- ------------------ ----------------- Total $ 1,544,129 $ 624,884 $ 9 ,591,430 $ 1,420,964 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 are solely related to the Hiplink product in the Semotus business division. 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 activities. These costs incurred in 2008 are a result of an increase in sales and marketing personnel through the Semotus Business, as well as a management fee to Flint, Ltd. General and administrative expenses include senior management, accounting, legal, business development consulting, rent, administrative personnel, and other overhead related costs. This category also includes stock compensation and option expense, the costs associated with being a publicly traded company, including the costs of SEC filings, a management fee payable to Flint, Ltd., investor relations and public relations. These costs have increased during the three and nine months ended March 31, 2009 versus 2008 due to the costs associated with becoming a publicly traded company and the stock compensation and option expense from the stock and options issued to directors, officers and employees. Also, we determined that the goodwill from the Semotus acquisition was impaired due to the disposition of the Semotus Business Division. The non-cash charges for compensation consist mainly of the grants of stock as a result of the reverse merger with Semotus Solutions, Inc. and the acquisition of the six CHVC subsidiaries, and of warrants issued as part of financing loans. The common stock issued was valued at its fair market value at the date of issuance. OTHER INCOME The $1,279,657 for the three months ended March 31, 2009 and $1,131,956 for the nine months ended March 31, 2009 in other income is comprised mainly from the gain from Semotus spin-off, net any other expense related to accrued interest on the convertible and promissory notes, as well as the amortization of the debt discounts related to those notes. During the three months ended March 31, 2009, the Company disposed of Semotus (see Note 4). As a result of the Acquisition and Subsequent Disposition of Semotus Solutions, Inc., we recorded a gain of $1,639,767. The other component is exchange gains and losses from currency transactions in the Euro and U.S. dollar. DISCONTINUED OPERATIONS, NET OF TAX During the three months ended March 31, 2009, as part of our restructuring and consolidation efforts after the CHVC acquisition transaction closed, we discontinued our wholesale telecom operations that were based out of New York City. As a result of this discontinuation, we recorded $(870,749) in discontinued operations, net of tax for the three months and nine months ended March 31, 2009 LIQUIDITY AND CAPITAL RESOURCES Overall cash decreased by $1,163,562 for the nine months ended March 31, 2009 due to a continued loss from operations, purchases of equipment for the wholesale call platform, the reverse merger with Semotus and the acquisition of the six CHVC subsidiaries. We were able to cover some of the cash loss through proceeds from convertible and promissory note issuances. Cash increased $150,783 for the nine months ended March 31, 2008 due mainly to financing from Flint Telecom Ltd., which offset the operating losses. The sources and uses of cash are summarized as follows (unaudited): Nine Months Ended March 31, 2009 2008 Cash used in operating activities $ (3,187,428 ) $ (1,771,022 ) Cash used in investing activities (771,237 ) (48,659 ) Cash provided by financing activities 2,876,800 1,970,464 Cash used in foreign currency activities (81,697 ) -------------------- -------------------- Net increase (decrease) in cash and cash equivalents $ (1,163,562 ) $ 150,783 During the nine months ended March 31, 2009, cash used in operating activities was $3,187,428 resulting from a gross gain of $15,982 and operating expenses of $9,242,425. The loss included non cash charges for stock and option compensation and impairment of goodwill of $3,489,198 and $2,538,148, respectively. Other non-cash expenses were depreciation and amortization of $379,338 and a loss on the purchase of notes of $174,956. Other operating activities that increased cash were an increase in accounts payable of $1,235,492, of accrued liabilities of $606,118, and accrued interest of $652,344. During the nine months ended March 31, 2008, cash used in operating activities was $1,771,022 resulting from gross loss of $183,572 and operating expenses of $1,420,964. Other operating activities contributing to the increase in cash were mainly an increase in accounts payable of $128,202, slightly offset by a decrease in accrued liabilities of 34,096. During the nine months ended March 31, 2009, cash used in investing activities consisted of $351,305 of purchases of telephony equipment, $196,906 for the cash assumed in the acquisition of six CHVC subsidiaries and $700,000 cash consideration payment for the acquisition of the six CHVC subsidiaries. During the nine months ended March 31, 2008, $48,659 was used in investing activities of purchase telephony equipment. Cash provided by financing activities for the nine months ended March 31, 2009 consisted of the sale of short term promissory notes, which provided $3,526,060 in cash and convertible notes payable in the amount of $150,000, which was offset by the repayment of some short term notes in the amount of $886,000, the repayment of $209,702 due to Flint, Ltd., and payments of $98,558 on certain lease obligations. Cash provided by financing activities for the nine months ended March 31, 2008 consisted principally of proceeds from convertible notes issued of $2,840,089 and advances from Flint, Ltd. of $875,063. $81,697 of cash was used in foreign currency transactions for the nine months ended March 31, 2009. There were no foreign currency transactions for the nine months ended March 31, 2008. As of March 31, 2009, we had cash and cash equivalents of $323,459, a decrease of $1,163,562 from the balance at June 30, 2008, which was $1,487,021. Our working capital deficit increased as of March 31, 2009 to ($7,908,813) as compared to a working capital deficit of ($2,814,281) at June 30, 2008 . We have not yet generated sufficient revenues to cover the costs of continued product and service development and support, sales and marketing efforts and general and administrative expenses. We are still largely dependent on financing in order to generate cash to maintain its operations. We are currently investigating the capital markets for additional financings. However, there is no assurance that any additional capital will be raised. We closely monitor our cash balances and our operating costs in order to maintain an adequate level of cash. We have a capital lease for our telecom equipment for which future minimum lease payments are $112,651 in fiscal 2009 and $450,605 in fiscal 2010. We have an operating lease for our facility in New York, NY for which the future minimum lease payments are $63,363 in fiscal 2009 and $93,000 in fiscal 2010. There were no material commitments for capital expenditures at March 31, 2008. RECENT ACCOUNTING PRONOUNCEMENTS Statement No. 157 In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”); SFAS 157 establishes a formal framework for measuring fair value under GAAP. It defines and codifies the many definitions of fair value included among various other authoritative literature, clarifies and, in some instances, expands on the guidance for implementing fair value measurements, and increases the level of disclosure required for fair value measurements. Although SFAS 157 applies to and amends the provisions of existing FASB and AICPA pronouncements, it does not, of itself, require any new fair value measurements, nor does it establish valuation standards. SFAS 157 applies to all other accounting pronouncements requiring or permitting fair value measurements, except for; SFAS 123R, share-based payment and related pronouncements, the practicability exceptions to fair value determinations allowed by various other authoritative pronouncements, and AICPA Statements of Position 97-2 and 98-9 that deal with software revenue recognition. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We have adopted SFAS 157 and we believe that it has no material impact on the Financial Statements. Statement No. 159 In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Liabilities”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We have adopted SFAS 159 and we believe that it has no material impact on the Financial Statements. Statement No. 141R In December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS No. 141R”), which revises current purchase accounting guidance in SFAS No. 141, “Business Combination s ”. SFAS No. 141R requires most assets acquired and liabilities assumed in a business combination to be measured at their fair values as of the date of acquisition. SFAS No. 141R also modifies the initial measurement and subsequent remeasurement of contingent consideration and acquired contingencies, and requires that acquisition related costs be recognized as expense as incurred rather than capitalized as part of the cost of the acquisition. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively to business combinations occurring after adoption. The impact of SFAS No. 141R on our consolidated financial statements will depend on the nature and extent of our future acquisition activities. Statement No. 160 In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement changes the way the consolidated income statement is presented. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We do not believe that the adoption of SFAS 160 will have a material affect on our financial statements. Interpretation No. 48 Financial Accounting Standards Board Interpretation No 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No 109, “Accounting for Income Taxes (“FIN 48”)” is effective for fiscal years beginning after December 15, 2006. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. We have adopted FIN 48 and we believe that it has no material impact on the Financial Statements. FSP No. EITF 99-20-1 In January 2009, FASB released final FSP No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 . According to FASB, the FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment (OTTI) has occurred. The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. We have adopted FSP No. EITF 99-20-1 and we believe that it has no material impact on the Financial Statements. FSP No. FAS 107-1 and APB 28-1 On April 9, 2009 the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Values of Financial Instruments , which amends SFAS 107, Disclosures about Fair Values of Financial Instruments, and requires that companies also disclose the fair value of financial instruments during interim reporting similar to those that are currently provided annually. FSP No.FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009 and it will have no impact on our statement of financial position or results of operations. Management does not believe that there are any other recently-issued, but not yet effective, accounting standards that could have a material effect on the accompanying 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, our ability to secure additional sources of finance, our ability to adapt to rapid technological changes 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.