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. OVERVIEW Management’s objective for the three and nine months ended March 31, 2010 was to improve overall operations to reduce the need for external financing in the difficult economic and financial markets. We continued our focus on growing our prepaid card business. We have been actively engaged in seeking additional external financing and other strategic partnerships and relationships to further enhance the scale, depth and profitability of the business. In the three months ended March 31, 2010, we had a net loss of $8,509,926 ($0.10 per share basic and diluted), as compared to a net loss of $1,246,295 ($0.02 per share basic and diluted) in the three months ended March 31, 2009. We had a net loss of $21,616,123 ($0.27 per share basic and diluted) in the nine months ended March 31, 2010, as compared to a net loss of $10,940,839 ($0.24 per share basic and diluted) in the nine months ended March 31, 2009. The increase in the losses year on year was a direct result of a one time impairment charge of goodwill and other intangibles in the amount of $12,215,200, along with some other exceptional operational costs relating to the closing of non-profitable businesses as of March 31, 2010, that were acquired as part of the CHVC transaction in 2009. Management felt it prudent to revalue the businesses acquired in 2009 at this time based on this action. Without this charge the net loss would have been $4,054,754 for the three months and $9,400,923 for the nine months ended March 31, 2010. Our overall cash decreased by $1,328,117 in the nine months ended March 31, 2010, compared to a decrease by $1,163,562 in the nine months ended March 31, 2009. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009 REVENUES Revenues for the three months ended March 31, 2010 decreased 55% to $5,025,631 as compared to $11,220,472 for the three months ended March 31, 2009. Revenues for the nine months ended March 31, 2010 increased 75% to $30,414,547 as compared to $17,432,765 for the nine months ended March 31, 2009. This increase is primarily due to the acquisition of the six subsidiaries of China Voice Holding, Corp. (CHVC) and successful launch and growth of our prepaid calling products business. COST OF REVENUES AND GROSS MARGIN While the overall gross margin decreased during the three months ended March 31, 2010 versus the three months ended March 31,2009, the overall gross margin percentage has improved substantially in the nine months ended March 31, 2010 versus 2009 due to the launch of our own branded calling cards through one of our subsidiaries, Flint Prepaid, Inc. (formerly named Wize Communications). Our own brand calling cards enable us to increase margin by selling our high margin products through our existing strong distribution channels. OPERATING EXPENSES Operating expenses in the three months ended March 31, 2010 increased 63% to $2,384,923 as compared to $1,461,860 in the three month period ended March 31, 2009, and increased 2% to $6,865,864 during the nine month period ending March 31, 2010 as compared to $6,704,272 in the nine month period ended March 31, 2009. Operating expenses consist of general and administrative expenses, including payroll, accounting, legal, consulting, rent and other overhead 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 decreased during the three and nine months ended March 31, 2010 versus 2009 due to cost savings that have been achieved by the business following the full integration of the six companies acquired from China Voice Holding Company. 24 The non-cash charges for compensation consist mainly of the grants of stock issued for services rendered. The common stock issued was valued at its fair market value at the date of issuance and do not represent any cash payments. INTEREST EXPENSE Interest expense increased by 116% to $1,005,549 for the three months ended March 31, 2010 as compared to $465,644 in the three months ended March 31, 2009, and increased 82% to $2,953,710 as compared to $1,626,598 during the nine months ended March 31, 2010 versus 2009. Interest expense is related to accrued interest on the convertible and promissory notes, as well as the amortization of the debt discounts related to those notes. The amount of interest charges related to accounting for debt discounts that did not involve the payment of cash amounted to $336,679 and $1,579,379 for the three and nine months ended March 31, 2010, respectively. LIQUIDITY AND CAPITAL RESOURCES Overall cash decreased by $1,328,117 for the nine months ended March 31, 2010 due to a continued loss from operations, and delays in the private offerings that only partially closed during 2009, and which we previously expected to fully close prior to December 31, 2009. We were able to cover some of the cash loss through proceeds from convertible and additional promissory note issuances. The sources and uses of cash are summarized as follows (unaudited): Nine Months Ended March 31, 2010 2009 Net cash used in operating activities $ (2,052,956 ) $ (3,387,428 ) Net cash used in investing activities (133,732 ) (771,237 ) Net cash provided by financing activities 1,008,551 3,076,800 Net cash used in foreign currency activities (149,980 ) (81,697 ) Net increase (decrease) in cash and cash equivalents --------------------------- -------------------- $ (1,328,117 ) $ (1,163,562 ) During the nine months ended March 31, 2010, cash used in operating activities was $2,052,956 resulting from a gross profit of $1,550,956 and operating expenses of $6,865,864. The loss included non cash charges for stock and option compensation of $2,483,095 and amortization of debt discount of $1,576,379. During the nine months ended March 31, 2009, cash used in operating activities was $3,387,428 resulting from a gross gain of $15,982 and operating expenses of $6,704,272. 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 during the nine months ended March 31, 2010 were a decrease in accounts receivable of $1,518,218, decrease of prepaid expenses of $8,724, reduction in inventory of $392,118 and an increase in accrued interest of $640,372. Operating activities that decreased cash included a decrease in cash overdraft of $116,062 and a decrease in accounts payable of $2,883,279. Cash provided by financing activities for the nine months ended March 31, 2010 consisted of the sale of short term promissory notes, which provided $1,225,550 in cash, and from our line of credit in the amount of $18,293. Cash used in financing activities for the nine month ended March 31, 2010 consisted primarily of repayment of $225,279 to various promissory note holders. 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. 25 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 and payments of $98,558 on certain lease obligations.. As of March 31, 2010, we had cash and cash equivalents of $8,885, a decrease of $1,328,117 from the balance at June 30, 2009, which was $1,337,002. Our working capital deficit increased as of March 31, 2010 to $18,594,788 as compared to a working capital deficit of $10,221,599 at June 30, 2009 . 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. FORWARD LOOKING STATEMENTS Certain statements contained in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like “expects,” “assumes,” “projects,” “anticipates,” “estimates,” “we believe,” “could be,” and other words of similar meaning, are forward-looking statements. These statements are based on management’s expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, risks associated with the integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of the Company’s significant contracts or partnerships, the Company’s inability to maintain working capital requirements to fund future operations or the Company’s inability to attract and retain highly qualified management, technical and sales personnel, changes in laws regulating telecommunications providers, changes in laws affecting the telecommunications products and services we provide. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.