Ealixir, Inc. 10-Q/A

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 months ended September 30, 2010 was to improve overall operations to reduce the need for external financing in the difficult economic and financial markets. 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 September 30, 2010, we had a net loss of $2,089,583 ($0.01 per share basic and diluted), as compared to a net loss of $3,052,220 ($0.04 per share basic and diluted) in the three months ended September 30, 2009. The decrease in the losses year on year was predominantly as a result of the corporate restructuring activities carried out in early 2010. This has resulted in a smaller organization of operating companies that are either profitable or breakeven and a reduced operating corporate overhead. Our overall cash decreased by $10,064 in the three months ended September 30, 2010, compared to a decrease of $1,212,545 in the three months ended September 30, 2009. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 REVENUES Revenues for the three months ended September 30, 2010 decreased 4% to $4,436,760 as compared to $4,603,647 for the three months ended September 30, 2009. This decrease is due to management’s focus on mimizing bad debt risk in the prepaid segment given the tough economic climate the low gross margins generated by this segment. COST OF REVENUES AND GROSS MARGIN Gross margins for the three months ended September 30, 2010 decreased 28% to $248,867 as compared to $347,428 for the months ended September 30, 2009. This decrease is mainly due to a change in the product mix sold in the prepaid segment as a result of vendors changing the products offered and reducing the margins available. Management continues to source new products and services that will increase the margins generated from this segment. The recent acquisitions of Power2Process and Ingedigit will provide higher margin products for sale through the prepaid channels to improve gross margins in the future. OPERATING EXPENSES Operating expenses decreased 73% to $687,816 in the three month period ended September 30, 2010 versus $2,518,506 for the same period in the last fiscal year. 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 months ended September 30, 2010 versus 2009 due to cost savings that have been achieved by the business following restructuring activities during the last financial year. The non-cash charges for compensation consist mainly of the grants of stock issued as part of settlements for services rendered. The common stock issued was valued at its fair market value at the date of issuance. 23 INTEREST EXPENSE The $1,581,749 for the three months ended September 30, 2010 in interest expense is related to accrued interest on the convertible and promissory notes, as well as the amortization of the debt discounts and the accounting cost of beneficial conversion features related to those notes. LIQUIDITY AND CAPITAL RESOURCES Overall cash decreased by $10,064 for the three months ended September 30, 2010 due to a continued loss from operations. 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): Three Months Ended September 30, 2010 2009 Net cash used in operating activities $ (226,159 ) $ (1,052,944 ) Net cash used in investing activities $ -- $ (133,603 ) Net cash used in financing activities $ 147,210 $ (31,843 ) Net cash provided by foreign currency activities $ 68,885 $ 5,845 Net increase (decrease) in cash and cash equivalents $ (10,064 ) $ (1,212,545 ) During the three months ended September 30, 2010, cash used in operating activities was $226,159 resulting from a gross loss of $2,089,583 and operating expenses of $687,816. The loss included non-cash charges for stock and option compensation of $344,521, accretion of debt discounts and amortization of beneficial conversion features on loan notes totaling $797,139. Other operating activities that decreased cash were an increase in accounts receivable of $493,522, and an increase in inventory of $4,788. Operating activities that increased cash were an increase in cash overdraft of $33,859 and an increase in accounts payable of $285,624, along with an increase in accrued liabilities of $82,879 and an increase in accrued interest of $761,080. Cash provided by financing activities for the three months ended September 30, 2010 consisted of the issuance of convertible notes payable of $150,000 and a reduction in the line of credit of $2,789. As of September 30, 2010, we had cash and cash equivalents of $9,355, a decrease of $10,064 from the balance at June 30, 2010, which was $19,419. Our working capital deficit increased as of September 30, 2010 to ($12,915,595) as compared to a working capital deficit of ($10,630,231) at June 30, 2010 . 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 have been successful in raising required capital to date by way of convertible debt. In June 2010 we completed a $10 million Reserve Equity Finance agreement with AGS Capital that will allow us to put up to $10 million worth of Common Stock to AGS Capital at our option over 2 years from the effective date subject to certain conditions and limitations. On November 26, 2010 we terminated this Agreement and signed an Equity Line of Credit Agreement with Kodiak Capital. This agreement allows us to place up to $15 million worth of our common stock to Kodiak over two years, subject certain conditions, which will become available to us when a registration statement on Form S-1 is deemed effective by the SEC. This agreement will require Kodiak to sell shares in the market and in order to be successful requires the stock to be liquid and trading at levels that will generate enough value to allow the company to draw the full amount over the period. The agreement allows us to place shares with Kodiak based on a formula. The maximum amount of each Put is equal to, at Kodiak’s election, five hundred percent (500%) of the average daily volume (U.S. market only) of the Common Stock for the five (5) trading days prior to the applicable Put notice date, multiplied by the average of the five (5) daily closing bid prices immediately preceding the Put Date, or (B) five hundred thousand dollars ($500,000). This determines the maximum amount that we can draw per Put and is directly related to the trading activity of the stock. 24 If this formula was applied to the trading history of our stock over the previous calendar quarter and we elected to make two puts per month then we would have been able to place shares up the following Put amounts on Kodiak : Date 5 Day Average Volume 500% of 5 Day Average Average Closing Bid Price Maximum Put Amount Available Oct 15, 2010 11,551,055 57,755,273 $ 0.0068 $ 393,891 Oct 29, 2010 36,956,706 184,783,530 $ 0.0054 $ 500,000 Nov 12, 2010 27,519,420 137,597,101 $ 0.0032 $ 437,559 Nov 26, 2010 33,929,362 169,646,810 $ 0.0024 $ 403,759 Dec 15, 2010 15,030,872 75,154,359 $ 0.0016 $ 123,253 Dec 30, 2010 43,849,763 219,248,816 $ 0.0015 $ 337,643 The above table is based on historical performance and is intended purely to illustrate the amount of funds that we could have drawn from Kodiak had the Equity Finance Agreement been available during that period. Actual amounts sold to Kodiak are based on the lowest closing bid price of the shares in the 5 days following the Put that will determine the actual amount of shares issued to Kodiak with each Put. We are under no contractual obligation to exercise a Put and market conditions at the time will determine when management would take that option. Future performance cannot be guaranteed but on the basis that the share volumes continue in future periods in line with recent history we would have the ability to avail ourselves of the full $15 million available under the agreement. Management continue to investigate the capital markets for suitable 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 disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. 25