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 and nine months ended March 31, 2011 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, 2011, we had a net loss of $2,151,846 ($0.05 per share basic and diluted), as compared to a net loss of $8,509,926 ($2.06 per share basic and diluted), in the three months ended March 31, 2010. We had a net loss of $6,463,091 ($0.25 per share basic and diluted) in the nine months ended March 31, 2011, as compared to a net loss of $21,616,123 ($5.49 per share basic and diluted) in the nine months ended March 31, 2010. The decrease 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. 42 RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010 REVENUES Revenues for the three months ended March 31, 2011 increased to $3,779,682 as compared to $2,862,261 for the three months ended March 31, 2010. Revenues for the nine months ended March 31, 2011 increased to $12,640,351 as compared to $11,537,215 for the nine months ended March 31, 2010. This increase is primarily due an 151% increase in revenues in our software and equipment segment on increased orders for cable equipment which is expected to continue throughout 2011 and a 2.7% growth in sales our third party calling products. COST OF REVENUES AND GROSS MARGIN While the overall gross margin increased by 3.8% during the three months ended March 31, 2011 versus the three months ended March 31,2010 primarily due to revenue mix of higher margin products in the quarter, the overall gross margin percentage has decreased by 2% in the nine months ended March 31, 2011 versus 2010 due to lower margins generated on the prepaid products sold as a result of increased competition in the segment which represent 89% of revenues for the nine month period. OPERATING EXPENSES Operating expenses in the three months ended March 31, 2011 decreased by 28% to $1,620,765 as compared to $2,234,906 in the three month period ended March 31, 2010, and decreased by 42% to $3,664,910 during the nine month period ending March 31, 2011 as compared to $6,373,512 in the nine month period ended March 31, 2010. 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 decreased in the three months ended March 31, 2011 primarily due to one time stock compensation costs of approximately $800,000 issued to departing management as part of the corporate restructuring during the three months ended March 31,2010 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 decreased to $812,127 for the three months ended March 31, 2011 as compared to $1,004,401 in the three months ended March 31, 2010, and increased to $3,467,920 as compared to $2,953,136 during the nine months ended March 31, 2011 versus 2010. Interest expense is related to accrued interest on the notes payable and 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 $1,903,314. 43 LIQUIDITY AND CAPITAL RESOURCES Overall cash increased by $26,149 for the nine months ended March 31, 2011 due to management’s focus on maximizing the use of cash in the business to minimize the amounts of capital required to be raised from outside sources. The sources and uses of cash are summarized as follows (unaudited): Nine Months Ended March 31, 2011 2010 Net cash used in operating activities $ (830,997 ) $ (2,052,956 ) Net cash provided by (used in) investing activities 15,063 (133,732 ) Net cash provided by financing activities 837,481 1,008,551 Exchanage gain (loss) on debt 4,602 (149,980 ) Net increase (decrease) in cash and cash equivalents 26,149 (1,328,117 ) $ (45,568 ) $ 8,885 During the nine months ended March 31, 2011, cash used in operating activities was $830,997 resulting from a gross profit of $673,905 and operating expenses of $3,664,910. The loss included non cash charges for stock and option compensation of $808,196, accretion of debt discount of $1,141,870 and amortization of beneficial conversion feature of $761,444 and depreciation and amortization charges of $710,177. During the nine months ended March 31, 2010, cash used in operating activities was $2,052,956 resulting from a gross profit of $842,311 and operating expenses of $5,531,201. The loss included non cash charges for stock and option compensation of $2,483,095 and accretion of debt discount of $1,576,359. Other operating activities that increased cash during the nine months ended March 31, 2011 were a increase in accounts payable of $465,731, reduction in inventories of $140,427, an increase in the cash overdraft of $34,398 and accrued liabilities $440,448. Operating activities that decreased cash included a increase in accounts receivable of $543,149 and an increase in prepaid expenses of $29,421 and a decrease in other payables of $6,134 Cash provided by financing activities for the nine months ended March 31, 2011 consisted of the sale of short term promissory notes, which provided $810,611 in cash, and from the sale of common stock of $32,500. Cash used in financing activities for the nine month ended March 31, 2011 of the repayment on the line of credit of $5,630. During the nine months ended March 31, 2010, 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. $4,602 of cash was provided in foreign currency transactions related to exchange losses on convertible notes payable during the nine months ended March 31, 2011 and $149,980 of cash was used in foreign currency transactions for the nine months ended March 31, 2010. As of March 31, 2011, we had cash and cash equivalents of $45,568, an increase of $26,149 from the balance at June 30, 2010, which was $19,419. Our working capital deficit increased as of March 31, 2011 to $15,859,195 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. 44 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. On November 26, 2010 we signed an Equity Line of Credit Agreement with Kodiak Capital, as amended and restated on January 21, 2011. 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. 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 available amount 15-Jan-11 788,223 3,941,113 0.0216 85,207 31-Jan-11 242,459 1,212,293 0.0153 18,597 14-Feb-11 1,367,179 6,835,894 0.0111 75,878 28-Feb-11 312,022 1,560,111 0.0075 11,763 15-Mar-11 1,282,434 6,412,171 0.0129 82,845 31-Mar-11 1,806,468 9,032,342 0.0067 60,336 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. As of March 31, 2011, we do not have sufficient authorized shares available to raise the full $15 million under the Kodiak financing agreement. In order to facilitate the full draw we will most likely have to increase our number of total authorized shares, requiring a shareholder vote, before we would have the ability to raise the full $15 million under the Kodiak financing agreement. 45 As of the date of the filing of this report, we have a total of approximately $3.7 million of loan principal that is past due from a total principal balance of approximately $6.7 million, representing 14 individual parties. Under the terms of the loan agreements the $6.7 million principal is payable. In addition, approximately $2.1 million of accumulated interest, preferred share dividends and related penalties is past due on these loans. We are in active discussions with these parties about the outstanding debt and rescheduling payments in the future based on the business progress during 2010 and the ability of the Company to meet the new arrangements from the Kodiak funding. They are waiting to finalize these terms once the Registration Statement is deemed effective and a structured funding environment is in place. Of the 11 parties, four have initiated legal proceedings, the remainder, including our secured lender, have not initiated legal proceedings. Of the four that have taken legal steps, we believe, based on discussions with them, that suitable payment terms will be agreed upon over the duration of the Kodiak funding. In addition to these loans, we have approximately $1.2 million of trade payables that are past due. Two parties have received summary judgments, as reported in our Form 10-K for the year ended June 30, 2010 and in this quarterly report, and we have been served with a pending action from another. Despite receiving these judgments, we have agreed to terms to pay down one of the larger amounts over two years. Management is confident the Company will be successful in satisfying these obligations prior to foreclosure or bankruptcy. However, there is no assurance that any additional capital will be raised. FORWARD LOOKING STATEMENTS Certain statements contained in this report may constitute forward-looking statements. 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.