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TMCNet:  CONTINUITYX SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 21, 2012]

CONTINUITYX SOLUTIONS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Introduction and Certain Cautionary Statements The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our consolidated financial statements and related notes and schedules included elsewhere in this Quarterly Report on Form 10-Q. The unaudited consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended June 30, 2012, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, intensified competition and/or operating problems in its operating business projects and their impact on revenues and profit margins or additional factors, and those discussed in Part II, Item 1A "Risk Factors" and elsewhere this Quarterly Report on Form 10-Q. In addition, certain information presented below is based on unaudited financial information. There can be no assurance that there will not be changes to this information once audited financial information is available.


General Organization and Business ContinuityX Solutions, Inc. (the "Company," "we," "us" or "our"), formerly known as EDUtoons, Inc. (EDUtoons) was incorporated in the State of Delaware on March 28, 2010. We are headquartered in Metamora, IL. In addition, we currently have approximately 30 data service centers throughout the country devoted to colocation and networks. The Company also hosts Cloud computing, manages equipment and storage and has relationships with strategic channel partners such as AT&T, Telx, XO Communications and others.

We provide consulting services and management of business continuity, virtual / Cloud hosting, managed equipment and storage, monitoring, VoIP and voice needs. Our consultative approach provides clients with business continuity and disaster recovery solutions alongside management, migration and re-engineering, system integration and cross connects, and IT infrastructure services including data center, converged networks (public / private Cloud) services and transformation solutions.

We provide client solutions that ensure efficient business continuity and disaster relief through experienced planning, implementation and management. The Company provides reliability and recovery through a methodology that strengthens its client's business continuity and disaster relief framework and preparedness with certified experts that specialize in security, risk management and consultation for practical business solutions and network-IT visibility.

We have business relationships with many companies including, but not limited to, being a "Premier Solutions Provider" for AT&T, an XO Communications "Business Partner" and partnering with Telx in colocation facilities and many others. We also have a relationship with the St. Louis Rams wherein we are replacing and upgrading their entire IT infrastructure including all of the hardware, software and networks. In addition, we are installing a new IP and voice network and will assist them in completing compliance for content, Ticketmaster, Media and any other requirements identified.

We meet and exceed new industry standards and requirements for medium and large-scale enterprise organizations by building national, tailor-made networks for public/private business communications. We understand that an organization's IT staff may not have the deep relationships with third-party technology vendors and telecommunication providers to construct and manage national and international IT infrastructures.

Our Network and Datacenter infrastructure includes facilities built to deliver the highest level of uptime availability and 24/7 NOC (Network Operational Center) services; high availability - low latency connectivity services in any major datacenter market; Cloud on demand via Appcore® and Telx™ partnership; and hosting facilities offering resilient network, data center, and hosted services Internet and Network Services, deploying Cisco's leading Aggregated Service Router platform into a single, customer facing network providing cost effective bandwidth and higher performance.

In August 2012, we entered into a Joint Marketing Agreement with Hutchison Global Communications Limited, a Hong Kong corporation, and its subsidiaries including Blue City and NexGen in the United States to market our complete portfolio of products and services focusing on co-location access, network and managed services. This relationship has created an opportunity to further international relationships and pursue the global network strategy incorporating the Far East, Canada, South America and Europe to our existing U.S. network and platform.

In August 2012, we entered into a two year consulting agreement with Millennium Capital Corporation which will provide various services to us including securing qualified management executives and potential Board of Director candidates, assisting us in the search for potential acquisitions, securing major clients and introducing us to investment banking contacts and investment relations advisors. Under the terms of the agreement, we will pay $25,000 per month for the term of the agreement in addition to the issuance of cashless warrants for 3,000,000 shares of the Company's Common Stock exercisable for a period of five years commencing on August 1, 2012 at an exercise price of $0.20.

In September 2012 we entered into a Marketing Agreement with M & M Licensing, Inc. focused on major sports leagues, teams, and stadium venues, with a goal to increase the quality of communication and data exchange experience. We will provide leading edge technology access, wi-fi and systems software to the organizations and their ownership companies.

13 -------------------------------------------------------------------------------- History On November 1, 2011, we issued three million (3,000,000) shares of our Common Stock pursuant to our Initial Public Offering ("IPO") for an aggregate purchase price of $150,000, pursuant to a Registration Statement on Form S-1 filed by us with the Securities and Exchange Commission ("SEC"), having an effective date of May 5, 2011 (the "Registration Statement"). Immediately after the closing, we redeemed 3,250,000 shares of our Common Stock owned by our existing shareholders excluding the shareholders who became shareholders pursuant to the IPO (the "Redemption") for an aggregate cost of $82,500, which was funded by the proceeds of the IPO. The balance of the proceeds of the IPO were utilized to pay various expenses.

For a purchase price of twenty-five thousand ($25,000) dollars we sold 3,250,000 shares of our Common Stock, par value of $0.001 per share, to ContinuityX, Inc.

Pursuant to an Acquisition Agreement with ContinuityX, Inc., Inc., dated November 8, 2011, we acquired ContinuityX, Inc. through a reverse acquisition which gave the shareholders of ContinuityX, Inc. effective control of the Company.

We filed a Certificate of Amendment to its Certificate of Incorporation changing our name to ContinuityX Solutions, Inc. on December 28, 2011.

Also, on December 28, 2011, we implemented a stock split of 13.333 shares of Common Stock for every one (1) share of then existing Common Stock (the "Forward Stock Split"), which resulted in a total of 117,330,400 issued and outstanding shares of our Common Stock on such date. On January 27, 2012, we issued a stock dividend of 1.667 shares of Common Stock for every one share of Common Stock issued and outstanding prior to the Forward Stock Split.

Since our formation we have brought together a collaboration of individuals in technical sales, marketing and operations, combined with engineers and technology specialists for companies including, but not limited to, Microsoft, VMWare, Cisco, EMC, AT&T, XO Communications, AboveNet, Qwest, and Level 3 among others.

Intellectual Property We filed for trademark protection for the mark "ContinuityX" in various trademark classes in which we operate and a name search has been completed. The name has been cleared and our Formal Application has been accepted by the U.S.

Patent and Trademark Office as of April 12, 2012.

Competition We believe our main competitors are the companies set forth below: Accenture Consulting o Accenture is a global management consulting, technology consulting and technology outsourcing company headquartered in New York City. According to its Yahoo Finance profile, it is the largest consulting firm in the world and is a Fortune Global 500 company. According to Accenture's website, as of September 2012, Accenture had approximately 257,000 employees across 120 countries.

14-------------------------------------------------------------------------------- IBM Consulting o IBM Global Services is the information technology and business services arm of International Business Machines and operates in approximately 170 countries, providing a comprehensive range of enterprise IT and consulting services to commercial and public sector clients. According to IBM's website, IBM Global Services started in the spring of 1991, with the aim towards helping companies manage their IT operations and resources. IBM Global Business Services "GBS" is the professional services arm of Global Services, including management consulting, systems integration and application management services. GBS is also the highest revenue earning division of IBM.

Others o Zayo Group, which provides high bandwidth connectivity primarily for large corporate enterprises and communications carriers as well as an optical network that delivers key network and IP services throughout the United States and London; Rack Space, which provides Cloud hosting, managed hosting, hybrid hosting, managed server configuration and managed colocation servers and collaboration and Masergy, which provides managed, secure, and virtualized services to enterprises that have complex needs across multiple locations.

Results of Operations Three Months Ended September 30, 2011 and 2012 September September 30, 2011 30, 2012 Operating loss $ (158,062 ) $ (118,033) Other (expenses): (21,518 ) (517,524 ) Loss before income taxes (179,580 ) (635,557) Provision for (benefit from) income taxes (69,525 ) (241,309) Net loss $ (110,055 ) $ (394,248) Revenue Gross service revenue for the three months ended September 30, 2012 amounted to $7,428,846. During the three months ended September 30, 2012, $813,015 of reseller commissions were recognized resulting in $6,615,831 of net service revenue. During the three months ended September 30, 2011, gross service revenue amounted to $1,018,566. Reseller commissions and net service revenue amounted to $57,436 and $961,130, respectively, for the three months ended September 30, 2011. The increase of $5,654,701 in net service revenue resulted from significantly more contracts being recognized during the three months ended September 30, 2012 compared to the three month ended September 30, 2011.

Cost of Services and Gross Profit Cost of services for the three months ended September 30, 2012 amounted to $1,331,812. Gross profit was $5,284,019 which resulted in a gross profit percentage of approximately 71% for the three months ended September 30, 2012.

Cost of revenue for the three months ended September 30, 2011 amounted to $212,816. Gross profit was $748,314 which resulted in a gross profit percentage of approximately 78% for the three months ended September 30, 2011. Gross profit percentage decreased between the three months ended September 30, 2012 and 2011, due to increased resellers commissions on a percentage basis due to our JMA with Hutchison HG.

Selling and Administrative Expenses For the three months ended September 30, 2012, selling and administrative expenses amounted to $5,402,052. For the three months ended September 30, 2011, selling and administrative expenses amounted to $906,376. The major categories of selling and administrative expenses and the amounts for the three months ended September 30, 2012 and 2011, respectively, were the following: bad debts expense, approximately $3,500,000 and $0, advertising and promotion, approximately $195,000 and $22,000, consulting, approximately $153,000 and $67,000, and payroll and related expenses, approximately $1,006,000 and $522,000. The overall increase in expenses resulted from an overall increase in business during the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The major difference between the three months ended September 30, 2012 compared to the three months ended September 30, 2011, was the recognition of bad debts expense in the amount of $3,499,685.

Interest Expense Interest expense for the three months ended September 30, 2012 amounted to $518,419. Interest expense for the three months ended September 30, 2011 amounted to $21,591. Interest expense was earned by the holders of the notes payable and our factor, Forest Capital, LLC. During the three months ended September 30, 2012, interest expense was also recognized in connection with a capital lease agreement, as well as $132,546 of amortization of a debt-discount 15 -------------------------------------------------------------------------------- Other (Income) During the three months ended September 30, 2012, $895 of other income was recognized. During the three months ended September 30, 2011, $73 of other income was recognized.

Income Tax Provision Income tax expense (benefit from income taxes) for the three months ended September 30, 2012 and 2011 amounted to $(241,309) and $(69,525), respectively.

The expense (benefit) was based on the U.S. Federal and Illinois income tax rates.

Impact of Inflation The impact of inflation upon the Company's revenue and income from operations during the three months ended September 30, 2012 and 2011 has not been material to its financial position or results of operations for those periods because the Company does not maintain any inventories whose costs are affected by inflation.

Liquidity and Capital Resources Since the reverse acquisition of the Company by ContinuityX, Inc. in 2011, we have generated income from operations. As of September 30, 2012 and June 30, 2012, our shareholders' equity was approximately $4,200,000 and $4,500,000, respectively. The Company's operating loss for the three months ended September 30, 2012 and 2011 was $(118,033) and $(158,062), respectively. Net cash provided by (used in) operations was $649,838 and ($194,704) for the three months ended September 30, 2012 and 2011, respectively. Operations since inception have been mainly funded with the proceeds from debt financings and sales activity. Our net loss for the three months ended September 30, 2012 was $394,248. As of September 30, 2012, we had cash and cash equivalents of $2,076,458. As of September 30, 2012 our working capital was $854,153.

Net cash used in investing activities was $3,955,100 and $11,951 for the three months ended September 30, 2012 and 2011, respectively. Net proceeds from financing activities were $4,683,437 and $431,695 for the three months ended September 30, 2012 and 2011, respectively. During the three months ended September 30, 2012, we generated net cash of $2,975,000 from the issuance of senior secured convertible debentures, $1,825,000 from the issuance of notes payable and $179,352 from factored accounts receivable. We also repaid $260,815 of debt during the three months ended September 30, 2012.

We finance our day to day operations through financing our accounts receivable and working capital from revenues. We intend to expand operations to generate cash flow and to raise funds through either borrowings and / or selling equity.

Off Balance Sheet Arrangements As of September 30, 2012 and June 30, 2012, the Company had no material off-balance sheet arrangements other than operating leases to which we are a party.

16 -------------------------------------------------------------------------------- Critical Accounting Estimates and Recent Accounting Pronouncements Critical Accounting Estimates The preparation of consolidated financial statements in accordance with Generally Accepted Accounting Principals in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the consolidated financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

Revenue Recognition. The Company recognizes revenue when it is realized or realizable and earned, net of commissions paid to third parties. The Company's current revenue generating activities primarily involve compensation earnings from coordinating network and telecommunication needs with third parties and maintaining a customer service relationship with those parties on behalf of the Company's customers and from sales originated through a Joint Marketing Agreement ("JMA") with Hutchison HG.

Depending on the nature of the customer contract, the timing of the Company's revenue recognition occurs in three ways: Type 1 The Company submits a contract with a third party to its customer for services that the customer will provide (typically over a 36-month period). The customer completes its review of the submitted contract and accepts the submitted contract by publishing an order number and releasing the contract for provisioning. The amount is determined based on the agreed upon total contract value multiplied by the established compensation rates and revenue is recognized. These sales result in a one-time incentive compensation fee.

In these lump-sum compensation arrangements, the customer may not claw back - unreasonably withhold - or transfer these orders and must pay the Company per agreement within 90-120 days depending on the type and timing of the contract.

Type 2 The Company submits a contract with a third party to its customer for services that the customer will provide (typically over a 36-month period). The customer completes set-up and installation services with the third party. The third party will provide acceptance to the customer at which point the Company is also granted acceptance from its customer. The amount is based on the customer's monthly billing to the third party times an established compensation rate. These sales result in monthly recognition of the compensation fee.

Type 3 The Company sells data center rack space, cross connections between data centers and associated network services to Hutchison HG on behalf of their clients under the JMA. The JMA provides that the Company pay 20% of the revenue earned through the JMA to a wholly-owned US based subsidiary of Hutchison HG. The Company recognizes revenue on a monthly basis based on rack space and data center usage along with provided network services to the Hutchinson HG clients, pursuant to their related contracts with Hutchison HG.

Office Locations We are headquartered in Metamora, IL. We also lease office space in New York, NY on a month to month basis.

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