U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-30518
GENELINK, INC.
(Exact name of registrant as specified in its charter)
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Pennsylvania
State of Incorporation
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23-2795613
I.R.S. Employer I.D. No. |
317 Wekiva Springs Road, #200
Longwood, FL 32779
(Address of principal executive offices)
Registrants telephone number including area code: (800) 588-4363
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark if the registrant is well-known season issuer, as defined in Rule 405 of the
Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller
reporting company in rule
12b-2 of the Exchange Act
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Non-accelerated filer o
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the
Exchange Act).
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Aggregate market value of common stock held by non-affiliates of the Registrant, as of June 30,
2008 was $44,100,000 based on the closing price of the common stock of the Nasdaq OTC Bulletin
Board.
As of October 30, 2009, there were 110,712,025 shares of the issuers common stock, $.01 par
value, outstanding.
EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed by GeneLink, Inc. (the Registrant) to amend the
Annual Report on Form 10-K filed by the Registrant with the Securities and Exchange Commission on
March 31, 2009 to revise the signature page and Exhibit 31.1 and to add Exhibits 3.1 and 10.1.
FORWARD LOOKING STATEMENTS
The statements, other than statements of historical or present facts included in this annual
report are forward looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements
of historical or present facts, that address activities, events, outcomes and other matters that we
plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate
(and other similar expressions) will, should or may occur in the future are forward-looking
statements. Forward-looking statements generally can be identified by the use of forward-looking
terminology such as, but not limited to, may, will, expect, estimate, anticipate or
believe. These forward-looking statements are based on managements current believe, based upon
currently available information, as to the outcome and timing of future events. Although we
believe that the expectations and assumptions reflected in the forward-looking statements are
reasonable, they involve risks and uncertainties that are difficult to predict and, in many cases,
beyond our control. Our forward-looking statements speak only as of the date on which this annual
report was filed with the SEC. We expressly disclaim any obligation to issue any updates or
revisions to our forward-looking statements, even if subsequent events cause our expectations to
change regarding the matters discussed in those statements, or if we believe that our actual
results, performance or achievements will likely differ from the anticipated results, performance
or achievements that are expressed or implied by our forward-looking statements, and such
differences might be significant and materially adverse to our shareholders. Many important
factors that could cause such a difference are described in this Form 10-K in Part I, Item 1A, Risk
Factors, which you should review carefully. Please consider our forward-looking statements in
light of those risks as you read this annual report.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
GeneLink, Inc. (GeneLink, the Company, we or us) is a publicly-held Pennsylvania corporation
listed on the NASDAQ OTC Bulletin Board trading under the symbol GNLK. We have created a
breakthrough methodology for SNP (single nucleotide polymorphism) based genetic profiling (patents
issued and pending) and we intend to market and/or license these proprietary assessments to
companies that manufacture or market to the nutraceutical, personal care and skin care industries.
We were founded in response to the explosion of information being generated in the field of human
molecular genetics. Scientists are discovering an increasing number of connections between genes
and specific diseases or physical attributes and tendencies. The growth of scientific knowledge in
this area has been accelerating as a direct result of the National Institutes of Health Genome
Project.
Our expansion into the bioscience field with our innovative genetic profiles help companies create
and deliver more effective products personalized wellness and quality of life products tailored
to their customers individual needs based on the science of genetics, thereby allowing the
consumer and/or their health care provider to determine what vitamin/nutritional supplements,
skin-care products, and health care or weight loss regimens are best for their individual needs.
We have developed proprietary SNP-based genetic profiles (named GeneLink Nutragenetic
ProfileTM and Dermagenetics® profiles). These profiles provide a means of predicting an
individuals inherent genetic capacity to combat such conditions as oxidative stress and other
important selected areas of physiologic health. The profiles, for example, can measure a persons
potential to efficiently control oxygen free radical damage, eliminate hydrogen peroxide, protect
and repair oxidized phospholipids and destroy harmful environmental compounds.
Our profile assessment enables nutritional and skin care companies and health care professionals to
recommend a specific and targeted regimen of antioxidant vitamins, nutrients or skin care
formulations that have been specifically designed to compensate for predicted deficiencies and to
help provide individuals the best of health and appearance.
In 2004, we formed a wholly owned subsidiary, Dermagenetics, Inc., to provide our genetically
customized products and services to the skin and personal care market. In December 2007, we formed
a wholly owned subsidiary, GeneWize Life Sciences, Inc. (GeneWize), to provide our genetically
customized products and services to the nutrition and skincare markets. GeneWize formally launched
its products and services in August 2008.
We have never achieved a profit, having realized net losses each year, including operating losses
before extraordinary items of $790,868 in 2006, $1,560,624 in 2007 and $2,603,509 in 2008. There
can be no assurance that we will ever realize significant sales or become profitable.
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Oxidative Stress Profiles
The Oxidative Stress (OS) Profile (US patent pending, Australian patent issued) provides a means of
predicting an individuals inherent genetic capacity to combat oxidative stress. The profile can
measure a persons potential to efficiently control oxygen free radical damage, eliminate hydrogen
peroxide, protect and repair oxidized phospholipids and destroy harmful environmental compounds.
This profile information will enable nutritional and skin care companies to recommend a specific
and targeted regimen of antioxidant vitamins, nutrients or skin-care formulations that have been
specifically designed to compensate for predicted deficiencies. Thus, the OS profile can be used
to make rational choices to help optimize nutritional and skin care needs to provide the best of
health and appearance.
The profile examines genes of the OS family for the existence of SNPs (naturally occurring
variations in genes) that can result in an amino acid substitution in the protein that is encoded
by that gene. If such a protein is an OS enzyme, it may be less efficient in enzymatic activity,
in which case oxidative damage to cellular proteins and DNA accumulates over time. It appears that
some tissues are more vulnerable than are others to oxidative stress. SNPs in other oxidative
stress genes have been associated with heart disease, cancer, neurological degeneration and aging.
A search for SNPs has the advantage of identifying genetic variations that reduce an individuals
antioxidant defense capacity. It can detect changes that are life-long and predicted to
chronically affect the ability to defend against oxidative stress, aging and age related disease.
Genetic profiling information based on SNPs analyses can be used to design appropriate antioxidant
vitamin, nutrient and skin-care formulations that are specifically tailored to each individual.
Oxidative Stress for Skin Health and Skin Aging Profile
By simply swabbing the inside of ones mouth and sending the collected sample to our laboratory, an
individual can have a skin or personal care formulation specifically designed to compensate for
associated deficiencies.
Currently, when a person sees wrinkles or lines, he or she may begin to apply a variety of products
and creams that contain antioxidants such as retinoids. This approach is only partially effective
because it typically begins only after the signs of aging have appeared. A superior strategy is to
predict certain causes of the aging of the skin and initiate a therapy that is designed to match
the individuals genetic pattern and genetic risk of skin aging. For example, individuals with
moderate or high risk of oxidative stress could be encouraged to initiate a therapy much earlier -
even before outward signs of skin aging.
Our Skin Health test for skin aging looks for SNPs in several key genes that are associated with
oxidative stress, skin irritation, photo aging and an individuals ability to naturally defend
against environmental stresses. Skin health test results can be used to guide consumers to skin
therapies or skin products containing unique active ingredients (SNPActives) and formulations
designed to help alleviate specific oxidative stresses and other potential deficiencies in the
skin.
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Other SNP Profiles Developed by the Company
We have also developed a Cardiovascular Risk Profile and an Osteopenia Susceptibility Profile.
Cardiovascular disease claims more lives each year than the next five leading causes of death
combined. We have recently developed a Cardiovascular Risk Profile, that analyzes a broad
collection of genes believes to play an important part in heart health, according to the latest
research. Our Cardiovascular Risk Profile is designed to identify SNPs associated with increased risk of
developing high blood pressure, atherosclerosis, inflammation, problems with vascular integrity and
coronary artery disease.
Osteopenia is a condition that often leads to osteoporosis, a disease characterized by low bone
density. Osteoporosis is responsible for 1.5 million fractures each year (including fractures of
the vertebrae, forearms, wrists and hips). According to the National Osteoporosis Foundation, 1 in
3 women and at least 1 in 12 men will develop osteoporosis during their lifetime. Our Osteopenia
gene test looks for SNPs in several key genes that are associated with bone density. Since
osteoporosis can develop undetected for decades, this test may be a tool to help determine the
future risk for fractures and related clinical conditions such as spinal column compression and
bone breaks with or without falls and guide early interventions or therapies that help combat or
prevent the condition.
We have developed a NQ01 SNP profile. NQ01 is a protein that contributes to the recharging
Coenzyme Q10. Coenzyme Q10 is a natural compound made by the human body that helps cells produce
energy and protect against free radicals that can damage DNA and other molecules of the cell. The
NQ01 assessment is complete, ready to market and a provisional patent has been filed. We have also
developed a DNA Integrity and Repair Panel which is complete and ready to market. We have
developed an Alzheimer/Dementia Panel that requires some additional clinical validation.
Intellectual Property
On May 1, 2007, we received a U.S. patent (No. 7,211,383) for our proprietary method for assessing
skin health in humans. Additionally, we have filed a series of U.S. patent applications relating
to the our DNA Collection Kit® and methods for assessing a human subjects susceptibility to
various health conditions, including skin health, oxidative damage, osteoporosis and other bone
density disorders and obesity and for methods of selecting and measuring recommended supplement
doses of preventative agents for such conditions. There can be no assurance that we will receive
patent protection on our methods or procedures. We are negotiating licensing these proprietary
assessments to companies that manufacture or market to the $100 billion plus nutraceutical,
personal care, skin care, and weight-loss industries.
We believe that our gene profiles offer marketing companies the information they need to create and
sell more effective products tailored to their customers individual needs based on the science
of genetics. By simply swabbing the inside of ones mouth (using our patented DNA Collection Kit®)
and sending the collected sample to our laboratories consumers can be directed to personalized
products specifically formulated to help compensate for their predicted deficiencies.
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We have also developed and received a U.S. patent (No. 6,291,171) on a non-invasive DNA Collection
Kit® for the collection of DNA specimens of clients. No licensing or training is necessary for the
collection by a client of his or her DNA specimen. The DNA Collection Kit® consists of several
swabs, collection accessories, complete instructions and a mailing envelope; the kit and kit
elements are bar coded to facilitate tracking, control and confidentiality. The collection process
is self administered and non-invasive (the DNA specimen is obtained by swabbing the inside of the
cheek) and takes less than five minutes to complete. The kit is currently classified as a
non-medical device. There is no assurance that the patent will prevent others from gathering DNA
in a similar manner.
In addition to the aforementioned U.S. patents for Kits and Methods for Assessing Skin Health and
GeneLinks non-invasive DNA Collection Kit, GeneLink has also been awarded an Australian patent
(No. 2002230953) for its Kits and Methods for Assessing Oxidative Stress.
GeneLink is also pursuing trademark protection for various trademarks and tradenames used in
connection with the marketing of its genetically-guided products. GeneLink now owns federal
trademark registrations in the U.S. for GENELINK®, SNPACTIVE®, DERMAGENETICS® and DNA ULTRACUSTOM®.
Additionally, GeneLink has received Notices of Allowance for federal trademark registration for
LIFEMAP NUTRITION, GENELINK HEALTHY AGING ASSESSMENT, LIFEMAP SKIN CARE; SNPBOOST,
JUICEBOOST, LIFEMAP WEALTH SYSTEM and YOUR GENETIC COMPASS. Additional trademark applications
are pending for LIFEMAP ESSENTIALS and LIFEMAP CUSTOM.
Scientific Advisory Board
Our Scientific Advisory Board consists of Dr. Robert P. Ricciardi, Dr. Bernard L. Kasten, Dr. Harry
Harrison, Dr. James Simpkins, Dr. Donald Cannon, Dr. Robert P.K. Keller, Dr. Robert L. Kagan and
Dr. Heather Mittiga. Dr. Ricciardi and Dr. Kasten are members of our Board of Directors. Dr.
Mittiga is the daughter of Dr. Kasten.
GeneWize Life Sciences, Inc.
On August 1, 2008, GeneWize Life Sciences, Inc., a wholly-owned subsidiary of GeneLink, held
its grand opening launch conference with over 1,500 participants from around the country. GeneWize
is the first direct selling company to focus exclusively on marketing nutritional supplements and
skin care products specifically tailored to an individuals genetic makeup.
GeneWizes product offering in 2008 consisted of its foundational LifeMap Nutrition System. The
LifeMap Nutrition System is the first comprehensive system of personalized (mass customized)
nutritional supplement manufacturing based on genetic testing that measures single nucleotide
polymorphisms (SNPs; pronounced snips) in DNA. GeneLinks patented pending assessments, such as
GeneLink Healthy Aging Assessment and Oxidative Stress, form the foundation of this system.
Genetic test results drive a proprietary algorithm that generates a nutritional report linked to an
individual titration matrix. In order to help compensate for any predicted deficiencies,
genetically selected ingredients and nutrients (SNPboosts, or snip boosts) are titrated and
blended into the individual nutritional formulation. Thus, each customers product is individually
customized and manufactured specifically for that customer.
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Customers order the LifeMap Nutrition in a 30-day supply which currently comes in an encapsulated
form. List price for monthly supplements is from $99 to $119. Customers generally subscribe to an
automatic shipment program which sends their product out monthly, creating a recurring revenue
stream for the company. GeneWize plans in the near future to expand product and product line
offerings to include other science-related but not genetically customized supplements (lifestyle
boosts) as well as to offer genetically customized skincare solutions developed by Dermagenetics,
another subsidiary of GeneLink. GeneLink has previously marketed the Dermagenetics skin care
product to the high-end spa market.
In addition to nutritional products, GeneWize, as a direct selling company, offers customers the
opportunity to participate in selling and distributing the product to others and receive
compensation for
doing so. These independent marketing affiliates must agree to and comply with the Companys
policies related to the sale and distribution of products, particularly as it relates to product
claims or, in the case of recruiting other affiliates, income potential. In return for creating
sales and complying with appropriate policies and regulations, GeneWize provides commissions and
incentives. It also provides internet ordering sites, business management tools, marketing
materials, training and events in support of these affiliates.
In March 2009, GeneWize launched GeneWize Academy, a sophisticated video/audio/interactive on-line
educational resource. We believe that GeneWize Academy will assure a high level of education and
consistency across the GeneWize sales channel, and will result in the best service and quality to
customers as the Company grows.
In January 2009, at the Super Bowl, GeneWize launched GeneWize Sports, an effort to engage athletes
in the benefit of genetically guided and personalized nutritional regimens. This division is
pursuing high visibility athletes as well as fitness and training professionals to extend their
influence to the non-professional athlete as well. We believe the benefits of LifeMap Nutrition
and its emphasis on oxidative stress are equally if not more applicable to the high performance
physical demands of an athlete, whether of a professional or weekend variety.
In terms of numbers of affiliates as of the August 1, 2008 launch and as of the date of this
filing, GeneWize far exceeded its plan and expectations, having enrolled over 14,300 independent
marketing affiliates as of the date of this filing. This unanticipated and extraordinary demand
has put unanticipated pressure on infrastructure, including laboratories, manufacturing and
customer service. Since the launch, GeneWize completed significant upgrades to its infrastructure,
Customer Service Team and technology, and Marketing and Sales Team capacity during Q4 2008 and Q1
2009. It has increased capacity in manufacturing and DNA testing labs as well as Customer Service
Teams. Management believes that they are now poised for the growth that new product offerings may
bring.
Affiliates and Licensing and Distribution Partners
We have entered into agreements with several laboratories pursuant to which these laboratories
perform SNP genotyping of samples provided by us for any genetics-based products that we may
develop.
In February 2006, we entered into a distribution agreement with Rejuvenation Plus Pty Ltd, an
international skincare and cosmetics company, pursuant to which that company has been granted the
exclusive right to distribute products based upon our technology in Australia and New Zealand.
In June 2007, we entered into a license and distribution agreement with PhytoRich, LLC, pursuant to
which PhytoRich will distribute our nutritional care and skin care systems to its medical
practitioner customers.
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In December 2007, we entered into a license and distribution agreement with Solgar Vitamin and
Herb, pursuant to which Solgar will manufacture, market and distribute a line of premium
genetically guided dietary supplements utilizing the Companys Nutritional System to Solgars
health food and specialty natural food retailers North America. Solgar has informed us that it has
terminated the license and distribution agreement, and while we continue to process tests for
Solgar we are negotiating the terms of the termination of the relationship with Solgar.
We have a Distribution Agreement with Food Science Corporation to develop and market personalized
nutritional products linked to our genetic profiling technology. Food Science has been a leader in
nutritional research by setting new standards of quality in the formulation of nutritional
supplements created exclusively for health care professionals and their patients. Food Science
focuses on innovation and product effectiveness and serves a loyal client base of over 12,000
medical doctors, chiropractors, osteopaths and nutritionists.
State and Federal Regulation
We offer a variety of DNA based predictive assessments designed to measure SNPs. SNPs are slight
variations in an individuals genetic makeup. GeneLink assessments are not intended to diagnose,
treat or cure any disease and are intended for education purposes only.
Our state-of-the-art genetic testing technologies are designed to accurately assess these genetic
variations and ultimately provide information that can help guide the selection of nutritional
supplements and customized skincare products. Worldwide, the laboratories contracted by us have
appropriate accreditations for the jurisdictions in which they are located. The assessment testing
protocols and test results are independently validated by the laboratories performing the tests.
Appropriate accreditations, licenses, and permits are obtained by the individual laboratories as
required.
Our predictive assessments may be subject to regulation both at a State and Federal level. The
Centers for Medicare & Medicaid Services (CMS) regulates most laboratory testing performed on
humans in the U.S. through the Clinical Laboratory Improvement Amendments (CLIA). The Division of
Laboratory Services, within the Survey and Certification Group, under the Center for Medicaid and
State Operations (CMSO) has the responsibility for implementing the CLIA Program.
Certain states such as New York and California have more stringent regulations for clinical
laboratories and broader definitions as to what testing is regulated. International jurisdictions
also may impose regulations on the conditions under which testing is performed on their residents.
Some states may require a physician order for the testing.
We endeavor to maintain compliance with all relevant State and Federal regulations. Currently due
to unique, state specific regulatory requirements GeneLink DNA assessment services have not been
available for the residents of New York and California. Compliance with California requirements was
accomplished in the first quarter of 2009 with the Companys affiliation with a California
compliant lab facility. We continue to actively seek the appropriate approvals to provide testing
in New York and in all other jurisdictions both domestic and international.
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Our sample collection kit is appropriately classified as a specimen transport and storage container
under 21 C.F.R. § 864.3250. Products covered by this classification regulation are defined as
follows:
A specimen transport and storage container, which may be empty or prefilled, is a device intended
to contain biological specimens, body waste, or body exudate during storage and transport in order
that the matter contained therein can be destroyed or used effectively for diagnostic examination.
If prefilled, the device contains a fixative solution or other general purpose reagent to preserve
the condition of a biological specimen added to the container. This section does not apply to
specimen transport and storage containers that are intended for use as part of an over-the-counter test
sample collection system for drugs of abuse testing.
Products falling within 21 C.F.R. § 864.3250 are Class I devices and are exempt from the Federal
Drug Administrations (FDA) 510(k) requirement. Our sample collection kit utilizes absorbent
tipped swabs for specimen collection, and such swabs are considered Class I, 510(k)-exempt devices,
pursuant to 21 C.F.R. § 880.6025.
As the regulatory environment evolves, our Scientific Advisory Board members monitor current
regulatory requirements and assist us and our contract laboratories in maintaining compliance with
all applicable regulatory requirements.
Existing State, Federal, or international regulations may change, be modified or expanded in any
jurisdiction. If our genetic testing was deemed to require a specific approval by the FDA or other
regulatory agency, additional costs might be incurred by us and delay of introduction of new tests
might ensue and current testing services could be impaired.
Federal Trade Commission Regulations
Marketing and advertising practices in the dietary supplement arena are subject to Federal Trade
Commission (FTC) regulation. Enforcement actions have been undertaken by the FTC against companies
alleged to have made false and misleading marketing statements. The FTC actions have resulted in
consent decrees and required monetary payments by the involved parties. We believe that we
currently are in compliance with all relevant FTC regulations. New regulations may be promulgated
as a result of new legislation or by changing enforcement policy in any of the relevant regulatory
agencies. We endeavor to proactively anticipate changes in the regulatory environment and to
maintain appropriate compliance.
FDA Regulation of Nutritional Supplements
The Dietary Supplement Health and Education Act of 1984 (DSHEA) amended the Federal Food Drug and
Cosmetic Act, defined dietary supplements including vitamins and minerals, and provided a
regulatory framework to ensure safe quality dietary supplements and the dissemination of accurate
information about such products. Under DSHEA dietary supplements are regulated as foods. The FDA is
prohibited from regulating the active ingredients in dietary supplements as food additives or drugs
unless product claims trigger a declaration drug status. GeneLinks supplements are all currently
accepted as safe and are not regulated as drugs. New ingredients will not be added to our product
offerings unless they are accepted by the FDA. If any individual ingredient becomes subject to
additional FDA regulation it could be replaced by a suitable substitute without material impact on
the usefulness or marketability of the specific GeneLink or GeneWize product.
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Privacy Protection and HIPAA
We are committed to meeting the ideals for confidentiality of individuals personal information as
expressed in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and maintains
strict confidentiality regarding clients identity and the security of their results.
Dermagenetics
We formed a subsidiary known as Dermagenetics, Inc. which has created and is distributing DNA
UltraCustom skin cream, genetically designed to an individuals needs, specifically to the spa
industry. Currently, Dermagenetics is not actively marketing to the spa industry at this time.
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DNA Banking
We have ceased marketing DNA banking services. The University of North Texas Health Science Center
(the Health Science Center) will continue to store the DNA specimen for a 75 year period, for all
existing clients who have sent in DNA for banking. Upon a clients request, and payment of a
retrieval fee, the stored DNA specimen can be retrieved and sent to a laboratory for testing. The
Health Science Center is no longer obligated to receive and store any additional DNA specimens.
Competition
Our potential competitors in the United States and abroad in the field of personalized nutrition
and skin care are numerous and include, among others, major pharmaceutical and diagnostic
companies, specialized biotechnology firms, universities and other research institutions. Many of
our potential competitors have considerably greater financial technical, marketing and other
resources than we do, which may allow these competitors to discover important genes or successfully
commercialize these discoveries before we could.
The business of manufacturing, distributing and marketing nutritional supplements and personalized
skin care and skin health products is highly competitive. Many of our competitors are
substantially larger and have greater financial resources with which to manufacture and market
their products. The barriers to competition are low in these markets because the products are
generally not protected by patents. Our ability to remain competitive depends on the successful
introduction, marketing, promotion, and addition of new offerings to our product line.
ITEM 1A. RISK FACTORS
Our business and the value of our shares are subject to the risks described above and certain
additional risks described below.
IF OUR FORMER CHIEF EXECUTIVE OFFICER PREVAILS WITH RESPECT TO HIS LITIGATION AGAINST US, WE MAY
NOT BE ABLE TO PAY ANY JUDGMENT AND COULD BE FORCED TO CEASE OUR OPERATIONS.
As more fully described above under Description of Our Business Recent Events, our former Chief
Executive Officer has brought a third action against us.
On October 14, 2005, we terminated the employment of John R. DePhillipo, our former Chief Executive
Officer and President. In November 2005, Mr. DePhillipo brought suit against us alleging, among
other things, that he was terminated without cause, that we breached the terms of his employment
agreement and that he was entitled to receive back salary and at least $1,500,000 of salary
throughout the remainder of the term set forth in such employment agreement. We denied such
allegations and brought counterclaims against Mr. DePhillipo alleging that Mr. DePhillipo was
terminated for cause, that Mr. DePhillipo breached his fiduciary duty to us and alleging breach of
fiduciary duty, conversion, negligent misrepresentation, unjust enrichment and fraud. We settled
this case in May 2008 and each party executed general releases in June 2008. In August 2008, John
and Maria DePhillipo brought another action against us and certain of our officers, directors and
advisors alleging among other things that we and our officers, directors and advisors fraudulently
and negligently induced Mr. DePhillipo to settle the previous matter and to cause him and his
family to
sell the shares of our common stock held by them at a price of $0.06 per share in accordance with
the terms of the settlement reached in May 2008. If John and Maria DePhillipo prevail in this
litigation and obtain a judgment against us for all or any substantial portion of their claim
against us or our officers, directors or advisors (as we have agreed to indemnify such officers,
directors and advisors), it is likely that we will not be able to pay any such judgment and may be
forced to cease operations. In such event, it is unlikely that our shareholders would receive any
distributions if we were forced to cease operations and liquidate.
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WE NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, TO CONTINUE OUR OPERATIONS.
We have spent, and expect to continue to spend in the future, substantial funds to complete our
planned product development efforts and expand our sales and marketing activities. We need to
raise additional funds to implement our business plan, and cannot be certain that we will be able
to obtain additional financing on favorable terms or at all.
Our future capital requirements and the adequacy of available funds will depend on numerous
factors, including:
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the successful commercialization of our existing products and services; |
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progress in our product development efforts; |
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progress with regulatory affairs activities; |
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the growth and success of effective sales and marketing activities; |
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the cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; and |
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the development of strategic alliances for the marketing of our products. |
If funds generated from our operations are insufficient to meet current or planned operating
requirements, we will have to obtain additional funds through equity or debt financing, strategic
alliances with corporate partners and others, or through other sources. We do not have any
committed sources of additional financing, and cannot provide assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay, scale-back or eliminate certain aspects of its operations or attempt to
obtain funds through arrangements with collaborative partners or others. This may result in the
relinquishment of our rights to certain of our technologies, product candidates, products or
potential markets. Therefore, the inability to obtain adequate funds could have a material adverse
impact on our business, financial condition, and results of operations and our ability to remain in
business.
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THE GLOBAL ECONOMIC DOWNTURN COULD RESULT IN A REDUCED DEMAND FOR OUR PRODUCTS AND INCREASED
VOLATILITY IN OUR STOCK PRICE.
Uncertainty about current and future economic conditions may cause consumers to reign in their
spending generally, the impact of which may be that they stop or delay their purchases of our
genetic tests and consumer products. If these general economic conditions persist or continue to
worsen, our future operating results could be adversely affected, particularly relative to our
current expectations. In addition, reduced consumer spending may drive us and our competitors to
offer additional products at promotional prices, which would have a negative impact on gross
profit. A continued softening in consumer sales may adversely affect our industry, business and
results of operations.
Additionally, due to the weak economic conditions and tightened credit environment, some of our
distributors may not have the same purchasing power, leading to lower purchases of our products for
placement into distribution channels. Consequently, demand for our products could be materially
different from expectations, which could negatively affect our results of operations and cause our
stock price to decline.
In addition, financial market volatility or credit market disruptions may limit our access to
capital and may also negatively affect our customers and our vendors ability to obtain credit to
finance their businesses on acceptable terms. As a result, our customers needs and ability to
purchase our products may decrease, and our vendors may increase their prices, reduce their output
or change their terms of sale. Any inability of customers to pay us for our products, or any
demands by vendors for different payment terms, may adversely affect our operations and cash flow.
Declining economic conditions may also increase our costs. If the economic conditions do not
improve or continue to deteriorate, our results of operations or financial condition could be
adversely affected.
CHANGES IN CREDIT CARD ASSOCIATION AND DEBIT NETWORK FEES OR PRODUCTS COULD INCREASE COSTS OR
OTHERWISE LIMIT OUR OPERATIONS.
From time to time, credit card associations and debit networks increase the organization and/or
processing fees (known as interchange fees) that they charge. It is possible that competitive
pressures will result in our absorbing a portion of such increases in the future, which would
increase its operating costs, reduce our profit margin and adversely affect our business, operating
results and financial condition.
INCREASED HOLDBACKS BY CREDIT CARD PROCESSORS MAY ADVERSELY AFFECT OUR CASH FLOW AND FINANCIAL
CONDITION.
Due to the current global credit crisis, some of the companies that process our credit card
transactions have increased and may continue to increase the amount that they keep in reserve as
holdbacks. Holdbacks are the portion of the revenue from a credit card transaction that is held in
reserve by the credit card processor to cover possible disputed charges, chargeback fees, and other
expenses. After a predetermined time or upon reaching levels of reserves deemed sufficient,
holdbacks are returned to us. In our case, a majority of the funds that we receive from consumers,
including all of our revenues from recurring monthly sales, are received from credit card
transactions. If the holdback percentage on credit card transaction increases, the percentage that
we receive upon processing the credit card transaction decreases. Although we are entitled to
receive any remaining holdback amount after a designated period of time, any increase in the
holdback percentage would result in a delay in our receiving the full proceeds from the sales of
our products and services. This will adversely affect our cash flow and financial condition.
12
GENELINK AND ITS SUBSIDIARIES MAY BECOME AFFECTED BY LAWS, GOVERNMENTAL REGULATIONS, ADMINISTRATIVE
DETERMINATIONS, COURT DECISIONS AND SIMILAR CONSTRAINTS WHICH COULD MAKE COMPLIANCE COSTLY AND
SUBJECT GENELINK AND ITS SUBSIDIARIES TO ENFORCEMENT ACTIONS BY GOVERNMENTAL AGENCIES.
The marketing and performing of genetic testing and the formulation, manufacturing, packaging,
labeling, holding, storage, distribution, advertising and sale of nutritional and skin care
products are affected by extensive laws, governmental regulations and policies, administrative
determinations, court decisions and similar constraints at the federal, state and local levels.
There can be no assurance that GeneLink, its subsidiaries or its independent distributors will be
in compliance with all of these regulations. A failure by GeneLink, its subsidiaries or its
distributors to comply with these laws and regulations could lead to governmental investigations,
civil and criminal prosecutions, administrative hearings and court proceedings, civil and criminal
penalties, injunctions against product sales or advertising, civil and criminal liability for
GeneLink or its subsidiaries, bad publicity, and tort claims arising out of governmental or
judicial findings of fact or conclusions of law adverse to GeneLink or its subsidiaries. In
addition, the adoption of new regulations and policies or changes in the interpretations of
existing regulations and policies may result in significant new compliance costs or discontinuation
of product sales and may adversely affect the marketing of our products, resulting in decreases in
revenues.
GeneWizes marketing program will be subject to laws and regulations applicable to direct selling
marketing organizations. These laws and regulations generally are directed at preventing fraudulent
or deceptive schemes, often referred to as pyramid or chain sales schemes, by ensuring that
product sales ultimately are made to consumers and that advancement within an organization is based
on sales of the organizations products rather than investments in the organization or other
non-retail sales-related criteria. The regulations concerning these types of marketing programs do
not include bright line rules and are inherently fact-based.
GeneWize may also be subject to the risk of private party challenges to the legality of its direct
selling program. Direct selling programs of some other companies have been successfully challenged
in the past. The challenges centered on whether the marketing programs of direct selling companies
are investment contracts in violation of applicable securities laws and pyramid schemes in
violation of applicable FTC rules and regulations.
In 2003, the FDA proposed a new regulation to require current Good Manufacturing Practice
guidelines (CGMPs) in the manufacture, packing, holding, and distribution of nutritional
supplements. The proposed rules would establish minimum standards that must be met by all companies
that manufacture, package, and hold nutritional supplements in the United States. Violation of
those standards would render the products in question presumptively adulterated and unlawful to
sell. The proposed CGMPs would require manufacturers to follow procedures that would track
nutrients from source to finished product, test nutrients for identity, purity, quality, strength,
and composition at each stage of production, and record full compliance with specific regulations
governing production, manufacture, and holding of nutritional supplements. We expect that the CGMPs
will increase GeneWizes product costs by requiring its various contract manufacturers to expend
additional capital and resources on quality control testing, new personnel, plant redesign, new
equipment, facilities placement, recordkeeping and ingredient and product testing. The FDA and
some state agencies invite the public to complain if they experience any adverse effects from the
consumption of nutritional supplements. These complaints may be made public. Regardless of whether
complaints of this kind are substantiated or proven, public release of complaints of this type may
have an adverse effect upon public perception of GeneLink and its subsidiaries, the quality of
their products or the prudence of taking their products. Changes in consumer attitudes based on
adverse event reports could adversely affect the potential market for and sales of products and
make it more difficult to recruit and retain independent distributors and obtain endorsers.
13
WE ARE SUBJECT TO GOVERNMENT REGULATION, WHICH MAY SIGNIFICANTLY INCREASE OUR COSTS AND DELAY
INTRODUCTION OF FUTURE PRODUCTS.
Changes in existing regulations at either the state or federal level could require advance
regulatory approval of genetic risk assessment tests, resulting in a substantial curtailment or
even prohibition of our activities without regulatory approval. If our genetic tests ever require
regulatory approval, on either a state or federal level, then the costs of introduction may
increase or marketing and sales of products may be significantly delayed. In September 2006, the
FDA issued draft guidelines pursuant to which it would require pre-market review of certain types
of genetic tests. Although we do not think that our genetic tests are covered by the draft
guidelines, the FDA is currently evaluating and could assert pre-market review of all types of
genetic tests.
WE HAVE A HISTORY OF LOSSES AND MAY HAVE CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.
We commenced operations in 1994. We have incurred significant losses to date and revenues have
been limited. Our expenses have exceeded revenues in each year since inception. Given planned
levels of operating expenses, we may continue to incur losses for the foreseeable future. Our
accumulated deficit as of December 31, 2008 was $15,285,207. Our expenses historically have
consisted principally of research and development, salaries and for general and administrative
expenses incurred while building its business infrastructure. We plan to increase operating
expenses in anticipation of increasing revenues. If our revenue growth is slower than anticipated
or operating expenses exceed expectations, our losses will significantly increase. Even if we were
to achieve profitability, it may not be able to sustain or increase profitability on a quarterly or
annual basis.
OUR BUSINESS CURRENTLY DEPENDS PRIMARILY ON THE SUCCESS OF PRODUCT SALES AND OUR TECHNOLOGY
LICENSING PROGRAM, WHICH IF UNSUCCESSFUL, WILL THREATEN OUR SURVIVAL.
An element of our current business strategy is to enter into licensing arrangements with companies
to manufacture products incorporating our technologies. We face challenges in entering into new
license agreements. During discussions with potential licenses, significant negotiation issues
arise from time to time. We can not be assured that prospective licensees will be persuaded during
negotiations to enter into a license agreement with us, either at all or on terms acceptable to us.
In addition, the existence of our subsidiaries could be seen by potential licensing partners as
competition to their plans.
14
The royalties we receive from licensees depend on their efforts and expenditures over which we have
no control. Because it is up to our licensees to decide when and if they will introduce products
using our technology, we cannot predict when and if our licensees will generate
substantial sales of such products. The amount and timing of royalty payments are dependent on the
ability of our licensees to gain successful regulatory approval for, market and sell products
incorporating our technologies. Failure of certain licensees to gain regulatory approval, if
required, or market acceptance for such products could have a material adverse effect on our
business, financial condition and results of operations.
If one or more of our licensees fail to pursue the development or marketing of these products as
planned, our revenue and profits could be adversely affected. We do not control the timing and
other aspects of the development or commercialization of products incorporating our licensed
technologies because our licensees may have priorities that differ from ours or their development
or marketing efforts may be unsuccessful, resulting in delayed or discontinued products. Hence,
the amount and timing of royalty payments received by us will fluctuate, and such fluctuations
could have a material adverse effect on our business, financial condition and results of
operations.
The addition of our GeneWize subsidiary has offered us an additional strategy of product
development and direct-to-market sales opportunities. While it has seen a high interest and
response to its initial offerings, its ability to retain affiliates and customers has yet to be
tested for any significant period. Critical to its success is the conversion of initial sales into
recurring revenue of product sales of its nutritional and skin products. GeneWizes sales history
is too abbreviated to determine accurately a conversion rate for recurring revenues. Because of
the short operating history, any forecasts and assurance of future revenues continue to be less
than certain. As a result of its initial demand, GeneWize has increased operating expenses in
order to serve the initial influx of affiliates and customers. This increase in overhead creates
significant additional demands on the cash flows of the Company which if not accompanied by
corresponding continued increase in sales could materially impact the financial condition of the
Company.
OUR COMMON STOCK PRICE IS VOLATILE AND WE HAVE A THIN TRADING MARKET.
Although the our Common Stock is listed on the NASDAQ OTC Bulletin Board, recently daily trading
volume of our Common Stock has generally been limited. The prices for securities of biosciences
companies have historically been volatile. The trading price of our Common Stock has experienced
considerable fluctuation since we began public trading in 1998.
WE EXPECT FUTURE DILUTION TO SHAREHOLDERS AND INVESTORS.
We believe it is likely that we will be required to raise additional amounts to fund future
operations. If additional funds are raised through issuing equity securities or debt securities
convertible into equity, dilution to shareholders may occur. In addition, if our former Chief
Executive Officer and his wife prevail in their outstanding litigation against us, we may be forced
to reissue as much as 3,953,000 shares to them.
15
OUR LIMITED OPERATING HISTORY AND RECENT CHANGE IN MARKETING STRATEGY MAKE IT DIFFICULT TO EVALUATE
OUR PROSPECTS.
We have a limited operating history on which to evaluate our business and prospects. We are in the
process of rebranding and repositioning our company and creating a network of independent
distributors. There is no assurance that we will achieve significant sales as a result of this new
strategy. We also may not be successful in addressing our operating challenges such as establishing
a viable network of independent distributors, developing brand awareness and expanding our market
presence. Our prospects for profitability must be considered in light of our evolving business
model. These factors make it difficult to assess our prospects.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME WIDESPREAD, WE MAY
HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the
resulting information. For these reasons, governmental authorities may call for limits on or
regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain
conditions, particularly for those that have no known cure. Any of these scenarios could reduce
the potential markets for our services and products.
DUE TO THE HIGH LEVEL OF COMPETITION IN OUR INDUSTRY, WE MIGHT FAIL TO RETAIN OUR CUSTOMERS AND
DISTRIBUTORS, WHICH WOULD HARM OUR FINANCIAL CONDITION AND OPERATING RESULTS.
The business of marketing skin care and nutrition products is highly competitive and sensitive to
the introduction of new products which may rapidly capture a significant share of the market. These
market segments include numerous manufacturers, distributors, marketers, retailers and physicians
that actively compete for the business of consumers both in the United States and abroad. In
addition, we anticipate that we will be subject to increasing competition in the future from
sellers that utilize electronic commerce. Many of these competitors have longer operating
histories, significantly greater financial, technical, product development, marketing and sales
resources, greater name recognition, larger established customer bases and better-developed
distribution channels than we do. Our present or future competitors may be able to develop products
that are comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends and standards or customer requirements, or devote greater
resources to the development, promotion and sale of their products than we do. For example, if our
competitors develop skin care or nutritional treatments that prove to be more effective than our
products, demand for our products could be reduced. Accordingly, we may not be able to compete
effectively in our markets and competition may intensify. We are also subject to significant
competition for the recruitment of distributors from other network marketing organizations,
including those that market nutritional supplements and skin care products as well as other types
of products. Our ability to be competitive therefore will depend, in significant part, on our
success in recruiting and retaining distributors through an attractive compensation plan, the
maintenance of an attractive product portfolio and other incentives. We cannot ensure that our
programs for recruitment and retention of distributors will be successful, and if they are not, our
financial condition and operating results would be harmed.
16
THE MARKET FOR OUR PRODUCTS AND SERVICES IS UNPROVEN.
The market for our products and services is at an early state of development and may not continue
to grow. The general scientific community has only a limited understanding of the role of genes in
predicting disease. The marketplace may never accept our products and services, and we may never
be able to sell our products and services at a profit. Our efforts to commercialize our
intellectual
property have had limited success to date. We can achieve broad market acceptance only with
substantial education about the benefits and limitations of our products and services.
NEW PRODUCTS MAY RENDER OUR PRODUCTS OBSOLETE AND OUR SALES MAY SUFFER.
The skin care and nutritional supplement markets historically have been influenced by fad
products that became popular due to changing consumer tastes and media attention. Our products
may be rendered obsolete by changes in popular tastes as well as media attention on new products or
adverse media attention on skin care and nutritional supplements, which could reduce our sales. It
may be difficult for us to change our product line to adapt to changing tastes. In addition, other
fad food regimens, such as low carbohydrate diets, may decrease the overall popularity and use of
our products, as well as result in higher returns of our products, thereby increasing our expenses.
THE SALE OF OUR PRODUCTS INVOLVES PRODUCT LIABILITY AND RELATED RISKS THAT COULD EXPOSE US TO
SIGNIFICANT INSURANCE AND LOSS EXPENSES.
We face an inherent risk of exposure to product liability claims if the use of our products results
in, or is believed to have resulted in, illness or injury. Most of our products contain
combinations of ingredients, and there is little long-term experience with the effect of these
combinations. In addition, interactions of these products with other products, prescription
medicines and over-the-counter drugs have not been fully explored or understood and may have
unintended consequences. While our third party manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to evaluate the inherent safety of our
products.
Although we maintain product liability insurance, it may not be sufficient to cover product
liability claims and such claims could have a material adverse effect on our business. The
successful assertion or settlement of an uninsured claim, a significant number of insured claims or
a claim exceeding the limits of our insurance coverage would harm us by adding further costs to our
business and by diverting the attention of our senior management from the operation of our
business. Even if we successfully defend a liability claim, the uninsured litigation costs and
adverse publicity may be harmful to our business.
Any product liability claim may increase our costs, and adversely affect our revenues and operating
income. Moreover, liability claims arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles, and may make it more difficult to secure
adequate insurance coverage in the future. In addition, our product liability insurance may fail to
cover future product liability claims, which if adversely determined could subject us to
substantial monetary damages.
17
WE ARE DEPENDENT ON A LIMITED NUMBER OF INDEPENDENT SUPPLIERS, LABORATORIES AND MANUFACTURERS OF
OUR PRODUCTS.
We rely entirely on a limited number of third parties to supply and manufacture our products and to
perform laboratory tests on our behalf. Our manufacturers produce our products on a purchase order
basis only and can terminate their relationships with us at will. These third parties may be unable
to satisfy our supply requirements, perform our laboratory tests, and manufacture our products on a
timely basis, fill and ship our orders promptly, provide services at competitive costs or offer
reliable products and services. The failure to meet of any of these critical needs would delay or
reduce product shipment and adversely affect our revenues, as well as jeopardize our relationships
with our independent distributors and customers. In the event any of our third party suppliers,
manufacturers or laboratories were to become unable or unwilling to continue to provide us with
services and products in required volumes and at suitable quality levels, we would be required to
identify and obtain acceptable replacement sources. There is no assurance that we would be able to
obtain alternative sources on a timely basis. An extended interruption in the supply of our
products would result in decreased product sales and our revenues would likely decline. We believe
that we can meet our current supply, laboratory and manufacturing requirements with our current
suppliers, laboratories and manufacturers or with available substitute suppliers, laboratories and
manufacturers.
While we require that our manufacturers verify the accuracy of the contents of our products, we do
not have the expertise or personnel to monitor the production of products by these third parties.
We rely exclusively, without independent verification, on certificates of analysis regarding
product content provided by our third party suppliers and limited safety testing by them. We cannot
be assured that these outside manufacturers will continue to supply products to us reliably in the
compositions we require. Errors in the manufacture of our products could result in product recalls,
significant legal exposure, adverse publicity, decreased revenues, and loss of distributors and
endorsers.
WE ARE DEPENDENT ON KEY PERSONNEL.
Our success will depend in large part upon the continued services of a number of key employees and
consultants. The loss of the services of any of these individuals could have a material adverse
effect on us. In addition, if one or more of our key employees or consultants leaves to join a
competitor or to form a competing company, the loss of such personnel and any resulting loss of
existing or potential clients to any such competitor could have a material adverse effect on our
business, financial condition and results of operations. In the event of the loss of any such
personnel, there can be no assurance that we would be able to prevent the unauthorized disclosure
or use of our technical knowledge, practices or procedures by such personnel.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR
SOMEONE CLAIMS THAT WE ARE INFRINGING ON THEIR PROPRIETARY TECHNOLOGY.
Our success depends, in part, upon our proprietary methodologies and other intellectual property
rights. There can be no assurance that the steps taken by us to protect our proprietary
information will be adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use and take appropriate steps to enforce our intellectual
property rights. In addition, although we believe that our services and products do not infringe
on the intellectual property rights of others, there can be no assurance that such a claim will not
be asserted against us in the future, or that if asserted any such claim will be successfully
defended. A successful claim against us could materially and adversely affect our business,
financial condition and results of operations.
18
Our success will depend on our ability to obtain and protect patents on our technology and to
protect our trade secrets. Our patents, which have been or may be issued, may not afford
meaningful
protection for our technology and products. Others may challenge our patents and, as a result, our
patents could be narrowed, invalidated or unenforceable. In addition, the our current and future
patent applications may not result in the issue of patents in the United States or foreign
countries. Competitors may develop products similar to our products that do not conflict with our
patents. In order to protect or enforce our patent rights, we may initiate patent litigation
against third parties, such as infringement suits or interference proceedings. These lawsuits
could be expensive, take significant time and divert managements attention from other business
concerns. We may also provoke third parties to assert claims against us.
We have received notice of an alleged patent infringement from an Australian bioscience company,
Genetic Technologies Limited (GTG), that it has certain rights under filed patents to which we may
be infringing upon. Although it is the opinion of our patent counsel that there is no
infringement, and that in the event there is an infringement, it will not effect our business
because GTGs patents are not material to our technology, no assurance can be given that GTG would
not prevail if it brings legal action against us or that the result of any such action would not
have a material adverse effect on our business and prospects.
INTERRUPTIONS TO OR FAILURE OF OUR INFORMATION PROCESSING SYSTEMS MAY DISRUPT OUR BUSINESS AND OUR
SALES MAY SUFFER.
We are dependent on our information processing systems to timely process customer orders, oversee
and manage our distributor network and control our inventory, and for our distributors to
communicate with their customers and distributors in their network. Interruptions to or failure of
our information processing systems may be costly to fix and may damage our relationships with our
customers and distributors, and cause us to lose customers and distributors. If we are unable to
fix problems with our information processing systems in a timely manner our sales may suffer. In
view of the unanticipated growth of GeneWize, many of our systems are either incomplete,
insufficient, and/or in process of being developed and could prove to be insufficient, especially
if we experience a large increase in business.
THE FAILURE TO RECRUIT, MAINTAIN AND MOTIVATE A LARGE BASE OF PRODUCTIVE INDEPENDENT DISTRIBUTORS
COULD LIMIT GENEWIZES ABILITY TO GENERATE REVENUES.
GeneWize has entered into the direct sales business. To derive revenues, GeneWize will have to
recruit and engage independent distributors. We cannot assure you that GeneWize will be successful
in recruiting and retaining productive independent distributors, particularly since direct sales
organizations usually experience high turnover rates of independent distributors. Typically,
independent distributors can terminate their relationships at any time.
19
In recruiting and keeping independent distributors, GeneWize will be subject to significant
competition from other direct sales organizations, both inside and outside its industry. Its
ability to attract and retain independent distributors will be dependent on the attractiveness of
its compensation plan, its product mix, and the support it offers to its independent distributors.
Adverse publicity concerning direct sales marketing and public perception of direct selling
businesses generally could negatively affect GeneWizes ability to attract, motivate and retain
independent distributors.
We anticipate that GeneWizes independent distributor organization will be headed by a relatively
small number of key independent distributors who together with their downline network will be
responsible for a disproportionate amount of revenues. We believe this structure is typical in the
direct selling industry, as sales leaders emerge in these organizations. The loss of key
independent distributors could adversely affect GeneWizes revenues and could adversely affect
GeneWizes ability to attract other independent distributors.
ADVERSE PUBLICITY ASSOCIATED WITH GENEWIZES PRODUCTS, INGREDIENTS OR NETWORK MARKETING PROGRAM, OR
THOSE OF SIMILAR COMPANIES, COULD HARM GENEWIZES FINANCIAL CONDITION AND OPERATING RESULTS.
Adverse publicity concerning any actual or purported failure of GeneWize or its independent
distributors to comply with applicable laws and regulations regarding product claims and
advertising, good manufacturing practices, the regulation of its network marketing program, the
licensing of GeneWizes products for sale in its target markets or other aspects of its business,
whether or not resulting in enforcement actions or the imposition of penalties, could have an
adverse effect on the goodwill of GeneWize and could negatively affect its ability to attract,
motivate and retain distributors, which would negatively impact its ability to generate revenue. We
cannot ensure that all distributors will comply with applicable legal requirements relating to the
advertising, labeling, licensing or distribution of its products.
WE ARE SUBJECT TO, AMONG OTHER THINGS, REQUIREMENTS REGARDING THE EFFECTIVENESS OF INTERNAL CONTROL
OVER FINANCIAL REPORTING AND OUR FAILURE TO IDENTIFY OR CORRECT DEFICIENCIES AND AREAS OF WEAKNESS
IN THE COURSE OF THESE AUDITS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We are required to comply with various corporate governance and financial reporting requirements
under the Sarbanes-Oxley Act of 2002, as well as new rules and regulations adopted by the
Securities and Exchange Commission and the Public Company Accounting Oversight Board. We expect to
spend significant amounts of time and money on compliance with these rules. Our failure to correct
any noted weaknesses in internal controls over financial reporting could result in the disclosure
of material weaknesses which could have a material adverse effect upon the market value of our
stock. There can be no assurance that these internal audits will uncover all material deficiencies
or areas of weakness in our operations or internal controls. If left undetected and uncorrected,
such deficiencies and weaknesses could have a material adverse effect on our financial condition
and results of operations.
20
OUR ARTICLES OF INCORPORATION AND BYLAWS COULD DELAY OR DISCOURAGE A TAKEOVER ATTEMPT.
Our articles of incorporation and bylaws contain provisions that may delay or discourage a takeover
attempt that a shareholder might consider in their best interest, including takeover attempts that
might result in a premium being paid on shares of our Common Stock. These provisions, among other
things provide that only the board of directors or president may call special meetings of the
shareholders; and establish certain advance notice procedures for nominations of candidates for
election as directors and for shareholder proposals to be considered at shareholders meetings.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2. PROPERTIES
The Company leases its principal offices in Longwood, Florida. The lease is for a term of
three (3) years, ending December 2010, and provides for monthly rental payments of $5,500.48.
ITEM 3. LEGAL PROCEEDINGS
Effective October 14, 2005, we terminated the employment of John R. DePhillipo, our
former Chief Executive Officer and President and a former director. In 2005, Mr.
DePhillipo commenced two lawsuits allegedly arising out of his termination by us for
cause, as defined in his Employment Agreement with us.
In an Action filed in the United States District Court for the Eastern District of
Pennsylvania, John R. DePhillipo v. Robert P. Ricciardi, Civil Action No. 05-5906, Mr.
DePhillipo alleged that Dr. Ricciardi, a Director and Officer of the Company,
(1) caused Mr. DePhillipos employment with us to be wrongfully terminated and
therefore is personally liable for all severance owed Mr. DePhillipo, in the amount of
at least $75,000; (2) was personally liable for Mr. DePhillipos unpaid back salary of
$84,000 simply because Dr. Ricciardi is an officer and/or director of the Company; and
(3) acted sufficiently maliciously to justify punitive damages being assessed against
Dr. Ricciardi of $10,000,000. Counsel for Dr. Ricciardi entered an answer to this
action and subsequently the action against Dr. Ricciardi was dismissed with prejudice
against Mr. DePhillipo in March 2006.
21
In a separate Action filed by Mr. DePhillipo against us in November 2005 in the
Superior Court of New Jersey, Law Division, Atlantic County, John R. DePhillipo v.
GeneLink, Inc., Docket No. ATL-L-7479-05, Mr. DePhillipo alleged that his termination
by us for cause was improper and therefore he was entitled to in excess of
$1,500,000 in severance pay under the terms of an employment agreement, allegedly
entered into effective January 1, 2005 (the Employment Agreement) and an additional
$84,000 in accrued and unpaid compensation. We filed an Answer denying the material
allegations of the Complaint and asserted a number of affirmative defenses. We filed
counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion,
negligent misrepresentation, unjust enrichment and fraud while Mr. DePhillipo served
as our Chief Executive Officer, President and Chief Financial Officer. The
counterclaims sought recovery in excess of that sought by Mr. DePhillipo in the
Complaint.
Pursuant to the Settlement, on May 13, 2008 we and Mr. DePhillipo settled all issues,
claims and counterclaims each may have with respect to the Action. Under the
Settlement, we acquired 3,953,000 shares from Mr. DePhillipo and his family and paid
Mr. DePhillipo and his family $0.06 per share, resulting in a purchase price of
$237,180. Additionally, under the Settlement we paid Mr. DePhillipo $220,000. As
part of the Settlement, we and Mr. DePhillipo delivered general releases to each
other.
On August 12, 2008, in an Action filed in the Philadelphia Court of Common Pleas,
DePhillipo, et.al. v. GeneLink, Inc. t/a GeneLink Biosciences, Inc., et. al.,
Philadelphia County Court of Common Pleas, August Term 2008 No. 1128, Mr. DePhillipo
and Maria DePhillipo, his spouse, filed suit against the Company, GeneWize and certain
of the Companys officers, directors and advisors. Mr. and Mrs. DePhillipo allege,
among other things, that the Company and certain of these officers, directors and/or
advisors fraudulently and/or negligently conspired to induce Mr. DePhillipo to enter
into the Settlement and to cause Mr. and Mrs. DePhillipo to sell their shares of the
Companys common stock to the Company, that the Company and its counsel fraudulently
and negligently misrepresented the Companys financial condition to induce Mr.
DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo sell
their shares of the Companys common stock, and that the Company failed to timely
disclose information concerning the formation and operation of GeneWize. Mr. and Mrs.
DePhillipo seek approximately $20 million in damages based upon an alleged value of
the Companys common stock of $5.00 per share. They also seek rescission of the
Settlement and thus the return of the 3,953,000 shares of the Companys common stock
sold by them to us pursuant to the Settlement.
We have agreed to indemnify our offices, directors and advisors who have been named as
defendants in the Action and will be liable for any costs or expenses incurred by or
judgments entered against such defendant.
22
On October 1, 2008, the Company, as well as all of the other defendants, moved to
dismiss the Action in its entirety through the filing of preliminary objections.
These preliminary objections are currently pending before the court.
We and our Board of Directors deny the claims set forth in the Action and are
vigorously defending the baseless claims made by Mr. and Mrs. DePhillipo.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Companys common stock is listed on the NASDAQ and OTC Bulletin Board under the System
GNLK. Set forth below, for the periods indicated, is the range of high and low bid information
for the Companys common stock for the past 2 years, when the Companys common stock began trading.
These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and
may not represent actual transactions.
|
|
|
|
|
|
|
|
|
2008 |
|
High |
|
|
Low |
|
1st Quarter |
|
$ |
0.12 |
|
|
$ |
0.07 |
|
2nd Quarter |
|
|
0.53 |
|
|
|
0.07 |
|
3rd Quarter |
|
|
0.56 |
|
|
|
0.22 |
|
4th Quarter |
|
|
0.35 |
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
2007 |
|
High |
|
|
Low |
|
1st Quarter |
|
$ |
0.07 |
|
|
$ |
0.05 |
|
2nd Quarter |
|
|
0.11 |
|
|
|
0.04 |
|
3rd Quarter |
|
|
0.20 |
|
|
|
0.09 |
|
4th Quarter |
|
|
0.21 |
|
|
|
0.08 |
|
As of March 16, 2009, there were 171 holders of record of the Companys Common Stock. The
Company has never paid dividends and does not anticipate paying any dividends in the future. The
Company anticipates that it will retain all future revenues for working capital purposes.
The payment of cash dividends in the future will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital requirements, the Companys
financial condition and other factors deemed relevant to the Board of Directors. In addition, the
Companys ability to pay dividends may become limited under future loan agreements which may
restrict or prohibit the payment of dividends.
24
EQUITY COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
securities remaining |
|
|
|
|
|
|
|
|
|
|
|
available for future |
|
|
|
Number of |
|
|
|
|
|
|
issuance under |
|
|
|
securities to be |
|
|
|
|
|
|
equity |
|
|
|
issued upon exercise |
|
|
Weighted-average |
|
|
compensation plans |
|
|
|
of outstanding |
|
|
exercise price of |
|
|
(excluding securities |
|
|
|
options, warrants |
|
|
outstanding options |
|
|
reflected in column |
|
|
|
and rights |
|
|
warrants and rights |
|
|
(a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans approved
by security
holders1 |
|
|
5,850,000 |
|
|
$ |
0.19 |
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans not
approved
by security
holders |
|
|
10,437,499 |
|
|
$ |
0.21 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16,287,499 |
|
|
$ |
0.20 |
|
|
|
150,000 |
|
|
|
|
1 |
|
Granted pursuant to the Companys 2007 Stock Option Plan |
RECENT SALES OF UNREGISTERED SECURITIES.
In November 2008, the Company issued a private placement memorandum for up to $1,000,000 of
stock at a price of $0.10 per share. Through December 31, 2008, the Company received $853,500 in
gross proceeds and issued 8,535,000 shares of Common Stock pursuant to such private placement
memorandum.
In June 2008, 1,562,500 warrants were exercised in cashless exercises in which the Company
held back 425,564 warrants as payment for the exercise prices and issued 1,136,936 shares of Common
Stock in connection with such exercises.
In June 2008, the holders of all of the outstanding convertible secured promissory notes (the
Notes) issued by the company converted the Notes into shares of the Companys Common Stock at a
conversion price of $0.05 per share. The Notes were issued in consideration for certain loans
provided to the Company by third parties between May 12, 2006 and June 6, 2007. $882,041 in
principal and accrued interest of Notes were converted into 17,640,813 shares of Common Stock.
25
Effective May 9, 2008 through June 12, 2008, pursuant to a tender offer undertaken by the
Company, holders of warrants, not including warrants issued to officers and directors of the
Company in June 2007 and September 2007, were entitled to exercise their warrants at reduced
exercise prices as follows:
|
|
|
|
|
|
|
|
|
Number of |
|
Original Exercise Price |
|
|
Revised |
|
Existing Warrants |
|
of Existing Warrants |
|
|
Exercise Price |
|
|
|
|
|
|
7,346,577 |
|
$0.075-$0.10 |
|
|
$0.05 |
|
4,872,704 |
|
$0.20-$0.25 |
|
|
$0.06 |
|
2,755,500 |
|
$0.40-$0.50 |
|
|
$0.08 |
|
2,246,250 |
|
$0.60-$1.00 |
|
|
$0.09 |
|
A total of 10,574,951 warrants were exercised in the tender offer for cash proceeds of
$706,990.
Pursuant to an Order of Settlement dated May 13, 2008 (the Settlement), the Company and John
R. DePhillipo settled all issues, claims and counterclaims each party may have with respect to the
Action entitled, John R. DePhillipo v. GeneLink, Inc. (Superior Court of New Jersey Law Division:
Atlantic County, Docket No. ATL-L-7479-05). Under the Settlement, the Company acquired 3,953,000
shares from Mr. DePhillipo and his family and paid Mr. DePhillipo and his family $0.06 per share,
resulting in a purchase price of $237,180.
The Company issued 68,750 and 510,000, shares of Common Stock for consulting services
rendered to the Company valued at $3,688 and $96,476 for the years ended December 31, 2007, and
2006, respectively. These shares were issued in reliance upon Rule 506 of Regulation D under the
Securities Act of 1933. In addition, the Company paid $155,312 in fundraising commissions related
to private placements during 2007 that were charged to paid in capital.
In August 2007, the Company issued a private placement memorandum for up to $1,700,000 of
units consisting of restricted common stock at $.075 per share with an attached warrant to acquire
1/4 of a share of common stock. The warrants are exercisable for 5 years at a price of $.10 per
share. During November 2007, the Company closed on $1,431,400 of units with proceeds allocated to
stock of $1,161,159 and attached warrants of $270,241. These shares and warrants were issued in
reliance upon Rule 506 of Regulation D under the Securities Act of 1933.
In connection with this offering, the Company issued 2,575,250 of dealer warrants with 5
year terms. 515,050 of the dealer warrants have an exercise price of $.10 per share, while the
remaining 2,060,200 are exercisable at $.075 per share.
During the year ended December 31, 2007, the Company issued $137,500
principal amount of convertible secured promissory notes and issued 687,500 shares of restricted
Common Stock in connection with the issuance of the notes.
During 2007 the Company issued 5,093,024 shares of common stock as conversion of
promissory notes and accrued interest. The value of the notes converted as of December 31, 2007
was $254,653.
26
During the year ended December 31, 2006, the Company issued $827,890 principal amount of
convertible secured promissory notes and issued 4,139,452 shares of restricted Common Stock in
connection with the issuance of the notes. The aggregate amounts recorded in connection with the
issuance of the notes and the stock were $1,008,788, representing the $827,890 of gross proceeds of
notes plus debt issuance costs related to the stock issuance of $180,898. The notes and shares
were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933.
In January 2006, the Company issued $200,000 of bridge notes in reliance upon Rule 506 of
Regulation D under the Securities Act of 1933. The bridge notes were refinanced in June 2006 upon
issuance of the convertible secured promissory notes referenced above.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our consolidated
financial statements and related notes in Item 8 in this Annual Report on Form 10-K.
Overview
2008 was a landmark year for the Company. The vision of being a leader in genetically-guided
health, beauty and wellness products leapt forward with the launch of GeneWize and its LifeMap
Nutritional Supplement. Revenues generated in the third quarter of 2008 alone exceeded revenues
from all prior years combined, although some of this revenue was not recognized until later in
2008. We finished the year having performed more than 10,000 DNA tests and had over 13,000 people
enroll as independent affiliates telling others about the LifeMap product.
The tremendous unexpected response to our new offering put significant strain on our systems and
service providers as well as our capital requirements for inventory and infrastructure. We ended
the year raising an additional $853,000 toward those ends. That private placement effort continues
into 2009 with an additional $565,000 in private-placement stock sales and $1,200,000 in
convertible debt raised in 2009 through the date of this filing. We believe the success in raising
capital in a dismal economy and financial environment supports the vision of the future of
nutrigenomics and personalization in the health, wellness and beauty products.
Results of Operations
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2008 TO FISCAL YEAR ENDED DECEMBER 31, 2007.
Assets
The Companys assets increased by $1,161,402 due largely to increases in inventory and accounts
receivable resulting from operations. Inventory increased by $735,869 and consists primarily of
raw materials products for the custom nutritional products sold by GeneWize. Inventory was
higher that anticipated due to delays in realizing recurring revenues, as more fully described
below in Revenues below. Receivables, which increased by $678,238, are largely amounts pending
from credit card companies for product sales, as well as receivables for DNA testing services from
licensees. In addition to inventory and receivables, the Company invested in capital equipment to
support operations. Property and equipment increased by $243,508, net of depreciation. These
increases in assets were offset by a $537,174 decrease in cash.
27
Liabilities
The Companys liabilities increased by $1,393,839 due to payables created from operations of
GeneWize and its related impact on GeneLinks DNA testing operations. In addition to general
payables, accrued expenses include commissions payable of $128,664 and $150,000 in guarantee
expenses accrued for an event contract. The Company also has recognized deferred royalty revenue
of $163,033 from its contract with Solgar. Offsetting the increase in operating liabilities was the
retirement through conversion of $487,968 of long term convertible debt.
Equity
The Company raised additional funds through two efforts during the year. In April 2008 the Company
made an offer of a reduced warrant exercise price to warrant holders to incentivise cash exercises
and provide funding to meet the cash required to complete the Settlement with our former CEO.
Additionally, at the end of the year, the Company pursued a private placement of shares which,
through December 31, 2008 had raised an additional $853,500 and resulted in the issuance of
8,535,000 additional shares at $.10. Private placement efforts continue into 2009 with an
additional $565,000 in private-placement stock sales and $1,200,000 in convertible debt raised in
2009 through the date of this filing.
Revenues
The Company saw its nominal licensing and testing revenues continue in 2008, but the dramatic
increase in revenues, from $97,744 in 2007 to $6,377,443 in 2008, is attributable to the launch of
GeneWize. Initial sales generated by GeneWize were very strong, driven by the unique offering of a
personalized and customized product providing genetically-guided nutrition. By the August 2008
launch date over 5,000 affiliates had signed on.
The growth in GeneWize revenues slowed substantially when, shortly after the August 2008 launch,
(a) our former CEO filed a complaint against the Company seeking to undo the Settlement and seeking
approximately $20,000,000, and (b) California and New York imposed more stringent requirements
regarding our DNA testing. The complaint filed by our former CEO, initiated nine days after the
launch conference, created substantial concern in the distribution channel and disrupted momentum
from the conference. In addition to the litigation, the noted regulatory requirements all but
shut down the critical California and New York markets while we worked on getting compliant under
the newly promulgated rules. Additionally, the huge initial response overwhelmed our initial lab
capacity. As a result, DNA testing and the commensurate beginning of recurring revenues from
monthly resales was delayed.
28
While we recognized substantial revenues in the fourth quarter of 2008, $2,453,434 represented
gross deferred revenues from the third quarter of 2008 which were realized in the fourth quarter of
2008 as we caught up in testing and shipping product. Gross revenues in GeneWize from recurring
sales for the year totaled $808,921.
Cost of Goods Sold
Cost of Good Sold also increased dramatically, from $70,809 in 2007 to $1,812,488 in 2008, with the
launch of GeneWize and its proprietary nutritional supplement. Costs include laboratory costs,
LifeMap ingredients, processing, packaging and outbound shipping related to the products.
Expenses
Expenses increased due to the launch of our GeneWize subsidiary. The most significant expense item
is customer acquisition and sales commissions paid to sales affiliates totaling $3,106,062.
Overall commissions were approximately 49% of GeneWizes sales for 2008. This number is higher
than we expect going forward due to the fact that most of the sales in this initial period included
a first order bonus commission. As recurring and subsequent sales build, the impact of
first-order commissions will be reduced as it is averaged with the normal commissions from
recurring revenues. Additionally, in 2008 the Company moved its headquarters to a new leased
facility in Longwood, Florida, hired 29 additional staff for management and customer service, began
leasing and customizing proprietary software for infrastructure and incurred significant conference
and event costs, all leading to increases in selling, general and administrative costs.
Furthermore, the Company incurred significant legal costs in 2008 in defending itself from
litigation brought against it by its former CEO.
Losses
The Company continued to incur an operating loss, largely related to startup and early-stages costs
related to the launch of GeneWize and its sales, marketing and operating costs. In addition to
general operating losses, the Company incurred significant legal costs in 2008 in defending itself
from litigation brought against it by its former CEO. The Company incurred $229,025 of Other
Expenses that were financing-related, resulting from converting debt issued in the prior year.
Losses increased from $1,560,624 in 2007 to $2,603,509 in 2008. Of those losses, $363,400 and
$384,081 respectively, resulted from non-cash charges relating to the granting of options and
warrants in those years.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2007 TO FISCAL YEAR ENDED DECEMBER 31, 2006.
Assets. The Companys assets increased from $548,481 at December 31, 2006 to $1,383,824 at
December 31, 2007, an increase of $835,343. This increase was primarily due to an increase in cash
and cash equivalents from $149,695 at December 31, 2006 to $972,371 at December 31, 2007, an
increase of $822,676. This increase of cash resulted from the sale of common stock and warrants by
the Company in November 2007 in the amount of $1,431,398, less fees and costs incurred in
connection with such offering.
29
Liabilities. The Companys liabilities decreased from $1,407,784 at December 31, 2006 to
$1,190,457 at December 31, 2007, a decrease of $217,327. This decrease in liabilities was
primarily due to a decrease in accrued compensation from $710,323 at December 31, 2006 to $144,168
at December 31, 2007, a decrease of $566,155, relating to a decrease in $662,617 of accrued
compensation owed to an officer and director of the Company. This decrease in liabilities was
partially offset by an increase in convertible secured promissory notes payable, net of debt
issuance and stock conversion discounts, from $298,390 at December 31, 2006 to $487,968 at December
31, 2007, an increase of $189,578, as Company issued $380,000 principal amount of convertible
secured promissory notes in 2007 and note holders converted $229,253 of notes into common stock of
the Company in 2007; and an increase in accounts payable and accrued expenses from $365,590 at
December 31, 2006 to $439,399 at December 31, 2007, an increase of $73,809. The $487,968 and
$298,390 amount of convertible secured notes payable reflected on the balance sheets as of December
31, 2007 and 2006, respectively, are net of debt issuance costs and stock conversion discounts.
The outstanding amount of convertible secured notes payable as of December 31, 2007 and 2006 was
$832,269 and $827,890, respectively.
Losses. The Company incurred an operating loss of $1,265,487 for the fiscal year ended December
31, 2007, as compared to an operating loss of $793,576 for the fiscal year ended December 31, 2006,
an increase of $471,911. This increase in operating losses was primarily due to the incurring of
$363,400 of expenses in connection with grants of options and warrants to officers and directors
during the year ended December 31, 2007; an increase in professional fees from $173,590 for the
year ended December 31, 2006 to $346,148 for the year ended December 31, 2007, an increase of
$172,558, which increase relates to costs incurred in connection with the litigation brought
against the Company by its former chief executive officer; and the decrease in gross profits from
$110,253 for the year ended December 31, 2006 to $26,935 for the year ended December 31, 2007.
Revenues. The Companys total operating revenues for the fiscal year ended December 31, 2007 were
$97,744 as compared to $175,674 for the fiscal year ended December 31, 2006, a decrease of $77,930.
The Company saw licensing and testing revenues continue in 2008, but the dramatic increase in
revenues, from $97,744 in 2007 to $6,377,443 in 2008, came from the launch of GeneWize. Initial
sales in the GeneWize subsidiary were very strong, driven by the unique offering of a
mass-customization model providing genetically-guided nutrition. By the August 2008 launch date
over 5,000 affiliates had signed on.
Expenses. Total expenses for fiscal year ended December 31, 2007 were $1,658,368, as compared to
$969,250 for the fiscal year ended December 31, 2006, an increase of $689,118. Selling, general
and administrative expenses increased from $476,539 for the year ended December 31, 2006 to
$1,268,022 for the year ended December 31, 2007, an increase of $791,483. This increase in
selling, general and administrative expenses is primarily due to the incurring of $363,400 of
expenses in connection with grants of options and warrants to officers and directors during the
year ended December 31, 2007, and an increase in professional fees from $173,590 for the year ended
December 31, 2006 to $346,148 for the year ended December 31, 2007, an increase of $172,558, which
increase relates to costs incurred in connection with the litigation brought against the Company by
its former chief executive officer.
30
Segment Operating Results
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our
segments for the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
GeneWize Life |
|
|
|
Inc. |
|
|
Inc. |
|
|
Sciences, Inc. |
|
Net Revenues |
|
$ |
291,206 |
|
|
$ |
29,738 |
|
|
$ |
6,056,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,973,028 |
|
|
|
40,113 |
|
|
|
6,980,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
12,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,669,584 |
) |
|
|
(10,375 |
) |
|
|
(923,550 |
) |
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our
segments for the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
|
Inc. |
|
|
Inc. |
|
Net Revenues |
|
$ |
30,458 |
|
|
$ |
67,286 |
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,479,300 |
|
|
|
190,648 |
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
10,956 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,437,886 |
) |
|
|
(122,738 |
) |
Liquidity and Capital Resources
For 2008, the Companys primary liquidity requirement was the funding of the Companys sales and
marketing efforts, funding improvements in the Companys infrastructure and the payment of past
obligations of the Company. While the Company has been successful at raising needed funds during
the year, the complaint filed in August 2008 by our former CEO against the Company has had a
negative impact, both direct and indirect, on the Companys ability to raise capital. The direct
impact reflects concerns by investors and potential investors over the Companys future in the face
of a $20,000,000 complaint. In addition, those concerns in the general public market impacted our
stock price. The negative pressure on our stock price influenced the offering price on subsequent
private offerings and created greater dilution from the offerings as well.
Subsequent to year end, in January 2009 the Company sold an additional 5,650,000 shares of
restricted Common Stock of the Company at a purchase price of $0.10 per share pursuant to a
continued Confidential Private Offering Memorandum, and received an aggregate gross amount of
$565,000.
31
On February 26, 2009, the Company issued to an accredited investor $1,000,000 principal amount of
Convertible Notes and issued 1,500,000 Warrants to acquire shares of Common Stock at an exercise
price of $0.11 per share in connection therewith. The Warrants are exercisable on or after August
26, 2009 and on or before February 26, 2014. In March 2009, the Company issued an additional
$200,000 of notes and issued 300,000 additional warrants in connection therewith. The Convertible
Notes mature on February 26, 2014 and bear interest at the rate of 8% per year through February 26,
2011 and thereafter bear interest at the rate of 10% per year. The Convertible Notes may not be
prepaid without the approval of the holders of the Convertible Notes. The Convertible Notes are
convertible at the option of the holders of the Convertible Notes upon the earlier to occur of (a)
August 26, 2009 or (b) the adoption and filing of an amendment to increase the capitalization of
the Company to at least 175,000,000 shares of Common Stock (the Initial Conversion Date).
Additionally, the Convertible Notes are exercisable at the option of the holders of the Convertible
Notes at any time upon the occurrence of a Change in Control Event (as defined in the Convertible
Notes). A mandatory conversion of the Convertible Notes will occur if after the Initial Conversion
Date the closing price of the Common Stock of the Company is at least $0.50 per share for 30
consecutive trading days. The conversion price for the Convertible Notes is $0.10 per share,
subject to adjustment in the event of a stock split, combination, reclassification, reorganization
or similar event.
Cash and Cash Equivalents
On December 31, 2008, the Companys cash and cash equivalents amounted to $435,197 as compared to
$972,371 at December 31, 2007, a decrease of $537,174. This decrease resulted from a net use of
cash from operations due to early stage operations of GeneWize. During 2008, the Companys
operating activities utilized $1,450,900 as compared to utilizing $705,086 in 2007, an increase of
$745,814. Cash utilized during these periods resulted from the Companys net losses for such
periods, payment of litigation expenses and the Settlement, and the payment of accounts payable.
Investing activities utilized $281,408 in 2008, as compared to utilizing $90,827 in 2007.
Financing activities provided $1,195,134 in 2008, as compared to $1,618,589 in 2007, primarily
through the issuance of 8,535,000 of shares of common stock, less $46,580 of cash costs associated
with such issuances and the exercise of warrants whose net proceeds provided $706,989.
The Company believes that it needs approximately $2.5 million of working capital to fund the
Companys sales and marketing efforts and infrastructure improvement and to pay existing
obligations for the balance of 2009. In 2009, through the date of this filing, the Company has
raised approximately $1.8 million of this amount. If the Company cannot obtain the balance of this
required financing, it is unlikely that the Company will be able to fully implement its business
plan.
32
Critical Accounting Policies
Stock options:
The Financial Accounting Standards Board has issued SFAS No. 123R, which defines a fair value based
method of accounting for an employee stock option and similar equity instruments and
encourages all entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also temporarily allowed an entity to continue to measure
compensation cost for those plans using the method of accounting prescribed by Accounting
Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB
25 must make proforma disclosures of net income (loss) and, if presented, earnings (loss) per
share, as if the fair value based method of accounting defined in SFAS 123R had been adopted. As
required, the Company has adopted SFAS No. 123R for the years ended December 31, 2008 and 2007.
Intangible assets and amortization of patents:
Legal and professional fees and expenses in connection with the filing of patent and trademark
applications have been capitalized and are amortized over fifteen years on a straight-line basis.
The Company has filed for and has patents pending in the USA and foreign countries on its method of
DNA gathering. The Company has a registered trademark for its names, logos, and other proprietary
products and branding terms. The Company also filed for and has patents pending on its three
proprietary genetic indicator tests and has received a patent in Australia regarding its Oxidative
Stress Profile.
Revenue and cost recognition:
GeneLink receives separate fees for the kits and for lab services. Upon entering into a
distribution arrangement with GeneLink, a distributor will order kits at a price negotiated between
GeneLink and the distributor. Upon the distributor receiving from a customer of such distributor
an order for the underlying genetically guided skin care or nutrition product that the distributor
is selling, a sample of the customers DNA will be obtained and the kit will be sent to the lab for
analysis. At that time the distributor will be charged an agreed upon price for the lab services.
This is in addition to the price of the kits.
The price for each of the kits and the lab services come about through arms-length negotiations
between GeneLink and its distributors and are based upon the costs incurred by GeneLink for the
kits and the lab services.
Upon termination of a distribution arrangement, GeneLink is not required to repurchase any kits
remaining in the possession of the distributor. Typically, only a small number of kits are
purchased at any time. The distributor has some period after the end of the distribution
arrangement to sell off any remaining kits. If it does, GeneLink will provide the lab services for
each kit sold.
Revenue from genetic testing services is recognized when there is persuasive evidence of an
arrangement, service has been rendered, the sales price is determinable and collectability is
reasonably assured. Service is deemed to be rendered when the results have been reported to the
individual who ordered the test. To the extent that tests have been prepaid but results have not
yet been reported, recognition of all related revenue is deferred.
33
Revenue from product sales is recognized when there is persuasive evidence of an arrangement,
delivery has occurred and title and risk of loss have transferred to the customer, the sales price
is determinable and collectability is reasonably assured. The Company has no consignment sales.
Product revenue is reduced for allowances and adjustments, including returns, discontinued items,
discounts, trade promotions and slotting fees.
Revenue from distributor sales and marketing kits is recognized when there is persuasive evidence
of an arrangement, delivery has occurred and title and risk of loss have transferred to the
customer, the sales price is determinable and collectability is reasonably assured. To the extent
that kits have been received from distributors but the related products or services have not been
fully delivered, recognition of all related revenue is deferred. Consistent with its return
policy, the Company recognizes revenues from the sales of products immediately upon shipment and
transfer of title. It offers no returns but allows for refunds on a genetically customized product
for the first 90 days after an initial order as a trial period. No refunds are offered on
genetic assessments, marketing materials, non-customized products or on customized products beyond
90 days of initial order unless it constitutes the correction of a billing error.
Allowance for sales returns and allowances:
The Company predominantly sells customized products and ships on an as-requested basis. As a
consequence of customization, there is no resulting finished product inventory at the Company or
any affiliate or distributor location for which to accrue returns allowance. The Company did
maintain an inventory for sale of some marketing and sales materials for separate resale, but the
amounts were immaterial. The Company does provide a refund policy, only on customized product, for
up to 90 days.
The Company analyzes sales returns in accordance with SFAS No. 48, Revenue Recognition When Right
of Return Exists. The Company is able to make reasonable and reliable estimates based on its
history. The Company also monitors the buying patterns of the end-users of its products based on
sales data received. The Company reviews its estimated product allowances based on historical
refunds of its customers. The Company believes that this analysis creates appropriate estimates of
expected future returns.
Accounts receivable:
Accounts receivable include amounts due from credit card service partners, including any holdbacks
or reserves, and to a lesser degree trade accounts receivable. A provision may be made for
estimated bad trade debts based on managements estimate of the amount of possible credit losses in
the Companys existing trade accounts receivable. As of December 31, 2008 and 2007, the Company has
not recorded any reserve for bad debts from trade or credit receivables.
Use of 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 reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
34
Evaluation of liability in respect of litigation and regulatory proceedings is determined on a
case-by-case basis and represents an estimate of probable losses after considering among other
factors, the progress of each case, our experience and the experience of others in similar cases,
and the opinions and views of legal counsel. Given the inherent difficulty of predicting the
outcome of our litigation matters, particularly in cases in which claimants seek substantial or
indeterminate damages, we cannot estimate losses or ranges of losses for cases where there is only
a reasonable possibility that a loss may have been incurred. See Legal Proceedings in Part I,
Item 3 of the Annual Report on Form 10-K for information on our judicial, regulatory and
arbitration procedures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Any long-term notes the Company has issued for financing have had fixed interest rates. As a
result, our exposure to market risk caused by fluctuations in interest ratio is minimal. Our
investments have short-term maturities and we do not believe that a change in market rates would
have a significant negative impact on the value of our interests.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTS
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
37-38 |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
41-42 |
|
|
|
|
|
|
|
|
|
43-63 |
|
|
|
|
|
|
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
GeneLink, Inc. and Subsidiaries
Longwood, Florida
We have audited the accompanying consolidated balance sheets of GeneLink, Inc. and
Subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders equity (deficiency) and cash flows for the years then ended.
These financial statements are the responsibility of the Companies management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of GeneLink, Inc. and Subsidiaries as of December
31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended
in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the financial statements, the
Company has suffered recurring losses from operations which raises substantial doubt about its
ability to continue as a going concern. Managements plans regarding those matters also are
described in Note 12. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Buckno, Lisicky & Company
Allentown, Pennsylvania
March 30, 2009
36
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
435,197 |
|
|
$ |
972,371 |
|
Accounts receivable |
|
|
713,565 |
|
|
|
35,327 |
|
Inventory |
|
|
739,515 |
|
|
|
3,646 |
|
Prepaid expenses |
|
|
53,688 |
|
|
|
11,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,941,965 |
|
|
|
1,022,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT |
|
|
281,984 |
|
|
|
38,476 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
321,277 |
|
|
|
322,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,545,226 |
|
|
$ |
1,383,824 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
37
GENELINK, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current maturity of long-term debt |
|
$ |
60,269 |
|
|
$ |
0 |
|
Accounts payable and accrued expenses |
|
|
2,034,322 |
|
|
$ |
439,399 |
|
Accrued compensation |
|
|
218,664 |
|
|
|
144,168 |
|
Deferred revenue |
|
|
161,727 |
|
|
|
100,922 |
|
Loans payable |
|
|
18,000 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,492,982 |
|
|
|
702,489 |
|
|
|
|
|
|
|
|
|
|
Convertible secured promissory notes payable, net of
debt issuance and stock conversion discounts |
|
|
0 |
|
|
|
487,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,492,982 |
|
|
|
1,190,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIENCY) |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share; authorized: |
|
|
|
|
|
|
|
|
125,000,000 and 75,000,000 shares as of December 31,
2008 and 2007, respectively; issued: 104,561,291 and
66,673,591 shares as of December 31, 2008 and 2007,
respectively; outstanding: 100,202,132 and 66,267,422
shares as of December 31, 2008 and 2007, respectively |
|
|
1,045,613 |
|
|
|
666,736 |
|
Additional paid in capital |
|
|
12,235,833 |
|
|
|
8,277,692 |
|
Stock warrants |
|
|
2,608,240 |
|
|
|
4,245,692 |
|
Accumulated deficit |
|
|
(15,285,207 |
) |
|
|
(12,681,698 |
) |
Treasury stock, 4,359,159 and 406,169 shares as of
December 31, 2008 and 2007, respectively, at cost |
|
|
(552,235 |
) |
|
|
(315,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficiency) |
|
|
52,244 |
|
|
|
193,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficiency) |
|
$ |
2,545,226 |
|
|
$ |
1,383,824 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
38
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
$ |
6,377,443 |
|
|
$ |
97,744 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
1,812,488 |
|
|
|
70,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,564,955 |
|
|
|
26,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
6,749,406 |
|
|
|
1,268,022 |
|
Research and development |
|
|
48,950 |
|
|
|
24,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,798,356 |
|
|
|
1,292,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(2,233,401 |
) |
|
|
(1,265,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES |
|
|
|
|
|
|
|
|
Debt conversion costs |
|
|
229,025 |
|
|
|
48,053 |
|
Amortization and depreciation |
|
|
87,053 |
|
|
|
58,406 |
|
Interest expense |
|
|
57,030 |
|
|
|
188,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,108 |
|
|
|
295,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE PROVISION FOR
INCOME TAXES |
|
|
(2,603,509 |
) |
|
|
(1,560,624 |
) |
|
PROVISION FOR INCOME TAXES |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(2,603,509 |
) |
|
$ |
(1,560,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted: |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
Weighted average common shares and
diluted potential common shares |
|
|
82,530,959 |
|
|
|
48,117,402 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
39
GENELINK, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity (Deficiency)
YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL |
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
TREASURY |
|
|
PAID IN |
|
|
STOCK |
|
|
ACCUMULATED |
|
|
|
|
|
|
SHARES |
|
|
AMOUNT |
|
|
STOCK |
|
|
CAPITAL |
|
|
WARRANTS |
|
|
DEFICIT |
|
|
TOTAL |
|
|
Balance, December 31, 2006 |
|
|
41,739,000 |
|
|
$ |
417,390 |
|
|
$ |
(315,055 |
) |
|
$ |
7,148,427 |
|
|
$ |
3,011,009 |
|
|
$ |
(11,121,074 |
) |
|
$ |
(859,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and stock warrants
related to convertible secured promissory
notes |
|
|
687,500 |
|
|
|
6,875 |
|
|
|
|
|
|
|
22,163 |
|
|
|
|
|
|
|
|
|
|
|
29,038 |
|
Conversion of secured promissory notes and
accrued interest to common stock |
|
|
5,093,024 |
|
|
|
50,931 |
|
|
|
|
|
|
|
203,722 |
|
|
|
|
|
|
|
|
|
|
|
254,653 |
|
Stock conversion discount related to
convertible secured promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,500 |
|
|
|
|
|
|
|
|
|
|
|
27,500 |
|
Issuance of common stock and stock warrants
for fundraising services |
|
|
68,750 |
|
|
|
688 |
|
|
|
|
|
|
|
(447,731 |
) |
|
|
447,043 |
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants
pursuant to private placement offering |
|
|
19,085,329 |
|
|
|
190,852 |
|
|
|
|
|
|
|
970,306 |
|
|
|
270,240 |
|
|
|
|
|
|
|
1,431,398 |
|
Issuance of stock warrants as payment of
accrued compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508,617 |
|
|
|
154,000 |
|
|
|
|
|
|
|
662,617 |
|
Commissions paid for fundraising costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155,312 |
) |
|
|
|
|
|
|
|
|
|
|
(155,312 |
) |
Issuance of stock warrants for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,400 |
|
|
|
|
|
|
|
363,400 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,560,624 |
) |
|
|
(1,560,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,934,603 |
|
|
|
249,346 |
|
|
|
|
|
|
|
1,129,265 |
|
|
|
1,234,683 |
|
|
|
(1,560,624 |
) |
|
|
1,052,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
66,673,603 |
|
|
|
666,736 |
|
|
|
(315,055 |
) |
|
|
8,277,692 |
|
|
|
4,245,692 |
|
|
|
(12,681,698 |
) |
|
|
193,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock from former officer |
|
|
|
|
|
|
|
|
|
|
(237,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237,180 |
) |
Fair value of vested stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384,081 |
|
|
|
|
|
|
|
384,081 |
|
Conversion of secured promissory notes and
accrued interest to common stock |
|
|
17,640,813 |
|
|
|
176,408 |
|
|
|
|
|
|
|
705,633 |
|
|
|
|
|
|
|
|
|
|
|
882,041 |
|
Exercise of stock warrants |
|
|
11,711,527 |
|
|
|
117,119 |
|
|
|
|
|
|
|
2,611,403 |
|
|
|
(2,021,533 |
) |
|
|
|
|
|
|
706,989 |
|
Common stock issued for cash, net |
|
|
8,535,000 |
|
|
|
85,350 |
|
|
|
|
|
|
|
641,105 |
|
|
|
|
|
|
|
|
|
|
|
726,455 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,603,509 |
) |
|
|
(2,603,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,887,340 |
|
|
|
378,877 |
|
|
|
(237,180 |
) |
|
|
3,958,141 |
|
|
|
(1,637,452 |
) |
|
|
(2,603,509 |
) |
|
|
(141,123 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
104,560,943 |
|
|
|
1,045,613 |
|
|
|
(552,235 |
) |
|
|
12,235,833 |
|
|
|
2,608,240 |
|
|
|
(15,285,207 |
) |
|
|
52,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
40
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,603,509 |
) |
|
$ |
(1,560,624 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Loss on abandonment of leasehold improvements |
|
|
0 |
|
|
|
62,420 |
|
Depreciation and amortization |
|
|
87,053 |
|
|
|
58,406 |
|
Amortization of discounts on loans payable |
|
|
240,844 |
|
|
|
140,196 |
|
Fair value of options granted for services |
|
|
384,081 |
|
|
|
363,400 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(678,238 |
) |
|
|
(3,142 |
) |
Inventory |
|
|
(735,869 |
) |
|
|
2,126 |
|
Prepaid expenses |
|
|
(42,415 |
) |
|
|
3,148 |
|
Other assets |
|
|
13,700 |
|
|
|
(44,801 |
) |
Deferred revenue |
|
|
60,805 |
|
|
|
85,441 |
|
Accounts payable and accrued expenses |
|
|
1,748,152 |
|
|
|
91,882 |
|
Accrued compensation |
|
|
74,496 |
|
|
|
96,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,450,900 |
) |
|
|
(705,086 |
) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(244,393 |
) |
|
|
(6,633 |
) |
Patent acquisition costs |
|
|
(37,015 |
) |
|
|
(84,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(281,408 |
) |
|
|
(90,827 |
) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from loans and notes payable |
|
|
54,582 |
|
|
|
272,462 |
|
Proceeds from issuance of common stock and
warrants, net |
|
|
726,455 |
|
|
|
1,431,400 |
|
Purchase of treasury stock |
|
|
(237,180 |
) |
|
|
0 |
|
Proceeds from exercise of stock warrants |
|
|
706,989 |
|
|
|
0 |
|
Principal payments on capital lease obligations |
|
|
(25,222 |
) |
|
|
0 |
|
Principal payments on note payable |
|
|
(30,490 |
) |
|
|
0 |
|
Common stock issued for bridge loans conversion |
|
|
0 |
|
|
|
70,038 |
|
Commissions paid for fundraising costs |
|
|
0 |
|
|
|
(155,311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,195,134 |
|
|
|
1,618,589 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
41
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
|
|
(537,174 |
) |
|
|
822,676 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
972,371 |
|
|
|
149,695 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
435,197 |
|
|
$ |
972,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
|
|
Interest: |
|
$ |
2,988 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
Stock options and warrants granted for services |
|
$ |
303,616 |
|
|
$ |
363,400 |
|
|
|
|
|
|
|
|
|
|
Common stock and warrants granted for fundraising |
|
$ |
80,465 |
|
|
$ |
450,731 |
|
|
|
|
|
|
|
|
|
|
Conversion of secured promissory notes into
common stock |
|
$ |
487,968 |
|
|
$ |
0 |
|
See Notes to Consolidated Financial Statements
42
GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
Note 1. Organization
GeneLink, Inc. (the Company) and its subsidiaries, Dermagenetics, Inc. and GeneWize
Life Sciences, Inc., operate in Florida. The Company was organized under the laws of
the Commonwealth of Pennsylvania and Dermagenetics, Inc. and GeneWize Life Sciences,
Inc. were organized under the laws of the State of Delaware. The Company is the
successor to a Delaware corporation organized under the same name on September 21,
1994. The Companys offices are located in Longwood, Florida.
The Company was founded in response to the information being generated in the field of
human molecular genetics. Scientists are discovering an increasing number of
connections between genes and specific diseases or physical attributes and tendencies.
The growth of scientific knowledge in this area has been accelerating as a direct
result of the National Institutes of Health Genome Project.
The Company has developed and received a patent on a DNA Collection Kit® for the
collection of DNA specimens of clients. The kit is classified as a non-medical device.
The Company has also developed proprietary SNP-based genetic profiles (named GeneLink
Nutragenetic ProfileTM and Dermagenetics® profiles. These profiles provide
a means of predicting an individuals inherent genetic capacity to combat such
conditions as oxidative stress and other important selected areas of physiologic
health. The profiles, for example, can measure a persons potential to efficiently
control oxygen free radical damage, eliminate hydrogen peroxide, protect and repair
oxidized phospholipids and destroy harmful environmental compounds. The Companys
profile assessment enables nutritional and skin care companies and health care
professionals to recommend a specific and targeted regime of antioxidant vitamins,
nutrients or skin care formulations that have been specifically designed to compensate
for predicted deficiencies and to help provide individuals the best of health and
appearance.
On December 12, 2007, the Company formed a new wholly owned subsidiary, GeneWize Life
Sciences, Inc., to operate its direct sales efforts. GeneWize is the first direct
selling company to focus exclusively on marketing nutritional supplements and skin care
products specifically tailored to an individuals genetic makeup.
43
GeneWizes product offering in 2008 consisted of its foundational LifeMap Nutrition
System. The LifeMap Nutrition System is the first comprehensive system of
personalized (mass customized) nutritional supplement manufacturing based on genetic
testing that measures single nucleotide polymorphisms (SNPs; pronounced snips) in
DNA. GeneLinks patented pending assessments, such as
GeneLink Healthy Aging Assessment and Oxidative Stress, form the foundation. Genetic
test results drive a proprietary algorithm that generates a nutritional report linked
to an individual titration matrix. In order to help compensate for any predicted
deficiencies, genetically selected ingredients and nutrients (SNPboosts, or snip
boosts) are titrated and blended into the individual nutritional formulation. Thus,
each customers product is individually customized and manufactured, just for that
customer.
GeneWize, as a direct selling company, offers customers the opportunity to participate
in selling and distributing the products to others and receive compensation for doing
so. These independent marketing affiliates must agree to and comply with the companys
policies related to sales and distribution of product, particularly as it relates to
product claims or, in the case of recruiting other affiliates, income potential. In
return for creating sales and complying with appropriate policies and regulations,
GeneWize provides commissions and incentives. It also provides internet ordering
sites, business management tools, marketing materials, training and events in support
of these affiliates.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its
Subsidiaries, each of which are wholly owned. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
Use of 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 reported amounts of
revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Cash and cash equivalents:
Highly liquid debt instruments purchased with a maturity of three months or less are
considered to be cash equivalents. At times, cash and cash equivalents may exceed
insured limits. The Company also maintains certain cash balances with Fifth Third
Bancorp, which is FDIC insured up to $250,000.
Property and equipment:
Property and equipment are stated at cost. Expenditures for maintenance and repairs
are charged against operations. Renewals and betterments that materially extend the
life of the assets are capitalized. Depreciation is computed using the straight-line
method over the estimated useful lives of 5 to 39 years of the related assets.
44
Revenue and cost recognition:
GeneLink receives separate fees for the kits and for the lab services. Upon entering
into a distribution arrangement with GeneLink, a distributor will order kits at a
price negotiated between GeneLink and the distributor. Upon the distributor receiving
from a customer of such distributor an order for the underlying genetically guided
skin care or nutrition product that the distributor is selling, a sample of the
customers DNA will be obtained and the kit will be sent to the lab for analysis. At
that time the distributor will be charged an agreed upon price for the lab services.
This is an addition to the price of the kits.
The price of each of the kits and the lab services come about through arms-length
negotiations between GeneLink and its distributors and are based upon the costs
incurred by GeneLink for the kits and the lab services.
Upon termination of a distribution arrangement. GeneLink is not required to
repurchase any kits remaining in the possession of the distributor. Typically, only a
small number of kits are purchase at any time. The distributor has some period after
the end of the distribution arrangement to sell off any remaining kits If it does,
GeneLink will provide the lab services for each kit sold.
Revenue from genetic testing services is recognized when there is persuasive evidence
of an arrangement, service has been rendered, the sales price is determinable and
collectability is reasonably assured. Service is deemed to be rendered when the
results have been reported to the individual who ordered the test. To the extent that
tests have been prepaid but results have not yet been reported, recognition of all
related revenue is deferred.
Revenue from product sales is recognized when there is persuasive evidence of an
arrangement, delivery has occurred and title and risk of loss have transferred to the
customer, the sales price is determinable and collectability is reasonably assured.
The Company has no consignment sales. Product revenue is reduced for allowances and
adjustments, including returns, discontinued items, discounts, trade promotions and
slotting fees.
Revenue from distributor sales and marketing kits is recognized when there is
persuasive evidence of an arrangement, delivery has occurred and title and risk of
loss have transferred to the customer, the sales price is determinable and
collectability is reasonably assured. To the extent that kits have been received from
distributors but the related products or services have not been fully delivered,
recognition of all related revenue is deferred. Consistent with its return policy,
the Company recognizes revenues from the sales of products immediately upon shipment
and transfer of title. It offers no returns but allows for refunds on a product for
the first 90 days after an initial order as a trial period. No refunds are offered
on genetic assessments, marketing materials, non-customized products or on customized
products beyond 90 days of initial order unless it constitutes the correction of a
billing error.
45
Allowance for Sales Returns and Allowances:
The Company predominantly sells customized products and ships on an as-requested
basis. As a consequence of customization, there is no resulting finished product
inventory at the Company or any affiliate or distributor location for which to accrue
returns allowance. The Company did maintain an inventory for sale of some marketing
and sales materials for separate resale, but the amounts were immaterial. The Company
does provide a refund policy, only on customized product, for up to 90 days.
The Company analyzes sales returns in accordance with SFAS No. 48, Revenue Recognition
When Right of Return Exists. The Company is able to make reasonable and reliable
estimates based on its history. The Company also monitors the buying patterns of the
end-users of its products based on sales data received. The Company reviews its
estimated product allowances based on historical refunds of its customers. The Company
believes that this analysis creates appropriate estimates of expected future returns.
Accounts Receivable:
Accounts receivable include amounts due from credit card service partners, including
any holdbacks or reserves, and to a lesser degree trade accounts receivable. A
provision may be made for estimated bad trade debts based on managements estimate of
the amount of possible credit losses in the Companys existing trade accounts
receivable. As of December 31, 2008 and 2007, the Company has not recorded any reserve
for bad debts from trade or credit receivables.
Intangible Assets and Amortization of Patents:
Legal and professional fees and expenses in connection with the filing of patent and
trademark applications have been capitalized and are amortized over fifteen years on a
straight-line basis. The Company has filed for and has patents pending in the USA and
foreign countries on its method of DNA gathering. The Company also filed for and has
patents pending on its three proprietary genetic indicator tests. The Company has a
registered trademark for its name, logo, and the name DNA Collection Kit®. In March
2001, the Company reached a Notice of Allowance of Patent on its method of DNA
gathering, and has received trademark protection for its name, logo, and the name DNA
Collection Kit®.
Research and Development:
Research and development costs are expensed as incurred.
46
Inventory:
Inventory consists primarily of raw materials products for the custom nutritional
products sold by GeneWize. Other inventories include marketing materials for
distribution as well as DNA kits. Inventory is valued at the lower of cost (using the
first-in, first-out method) or market. The shelf life of inventory items is generally
one year.
Income taxes:
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes and FIN 48
Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No.
109, which requires the use of an asset and liability approach for financial
accounting and reporting for income taxes and to consider the likelihood of a tax
position to be accepted by federal and state taxing authorities. Under this method,
deferred tax assets and liabilities are recognized based on the expected future tax
consequences of temporary differences between the financial statement carrying amounts
and tax basis of assets and liabilities as measured by the enacted tax rates that are
expected to be in effect when taxes are paid or recovered.
Long lived assets:
The Company reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of an asset and its eventual disposition
are less than its carrying amount. The Company has not identified any such impairment
losses during the years ended December 31, 2008 and 2007.
Per share data:
Effective November 12, 1998, the Company adopted SFAS No. 128, Earnings Per Share.
The provisions of SFAS 128 establish standards for computing and presenting earnings
per share (EPS). This standard replaces the presentation of primary EPS with a
presentation of basic EPS. Additionally, it requires dual presentation of basic and
diluted EPS for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS computation.
Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS for 2007 and 2006 excludes any effect from such securities, as their
inclusion would be antidilutive.
47
Stock-Based Compensation:
The Company accounts for its stock-based compensation expense in accordance with
SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R) using the modified
prospective basis. SFAS No. 123R addresses all forms of share-based payment (SBP)
awards, including shares issued under employee stock purchase plans, stock options,
restricted stock and stock appreciation rights. SFAS No. 123R requires the Company to
expense SBP awards with compensation cost for SBP transactions measured at fair value.
SFAS No. 123R applies to new equity awards and to equity awards modified, repurchased or canceled after the effective date,
January 1, 2006. Additionally, compensation cost for the portion of awards for which
the requisite service has not been rendered that are outstanding as of the effective
date shall be recognized as the requisite service is rendered on or after the
effective date. The compensation cost for that portion of awards shall be based on the
grant-date fair value of those awards as calculated from the pro forma disclosures
under SFAS No. 123. Additionally, the Company records an expense for the amount that
the fair market value exceeds the purchase cost for common stock purchased pursuant to
its employee stock purchase plan.
Recent Accounting Pronouncements:
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 was issued to provide consistency and
comparability in determining fair value measurements and to provide for expanded
disclosures about fair value measurements. The definition of fair value maintains the
exchange price notion in earlier definitions of fair value but focuses on the exit
price of the asset or liability. The exit price is the price that would be received to
sell the asset or paid to transfer the liability adjusted for certain inherent risks
and restrictions. Expanded disclosures are also required about the use of fair value to
measure assets and liabilities. The effective date is for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. The Company has not yet determined the impact, if any, of adopting this
statement on its financial position, results of operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,
which is effective for fiscal years beginning after November 15, 2007. The statement
permits entities to choose to measure many financial instruments and certain other
items at fair value. The Company has not yet determined the impact, if any, of adopting
this statement on its financial position, results of operations and cash flows.
In July 2007, the Emerging Issues Task Force (EITF) issued EITF 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services to be Used in Future Research and
Development Activities (EITF 07-3). EITF 07-3 clarifies the accounting for
nonrefundable advance payments for goods or services that will be used or rendered for
research and development activities. EITF 07-3 states that such payments should be
capitalized and recognized as an expense as the goods are delivered or the related
services are performed. If an entity does not expect the goods to be delivered or the
services rendered, the capitalized advance payment should be charged to expense.
EITF 07-3 is effective for fiscal years beginning after December 15, 2007. The Company
is currently evaluating the effect of EITF 07-3 on its financial statements but does
not expect the adoption of EITF 07-3 to have a material effect on the Companys
financial position or results of operations.
48
In December 2007, the FASB issued Statement No. 141R, Business Combinations, which
establishes principles for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired and liabilities assumed in a
business combination, recognizes and measures the goodwill acquired in a business
combination, and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of a business
combination. The Company is required to apply this Statement prospectively to business
combinations for which the acquisition date is on or after January 1, 2009. Earlier
application is not permitted.
In December 2007, the FASB ratified a consensus opinion reached by the EITF on EITF
Issue 07-1, Accounting for Collaborative Arrangements (EITF 07-1). The guidance in
EITF 07-1 defines collaborative arrangements and establishes presentation and
disclosure requirements for transactions within a collaborative arrangement (both with
third parties and between participants in the arrangement).
The consensus in EITF 07-1 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2008. The consensus requires
retrospective application to all collaborative arrangements existing as of the
effective date, unless retrospective application is impracticable. The impracticability
evaluation and exception should be performed on an arrangement-by-arrangement basis.
The Company intends to adopt EITF 07-1 effective January 1, 2009 and retrospectively
apply the requirements of this consensus to its collaborative arrangements in
existence on that date.
Reclassifications:
Certain amounts in the prior years financial statement have been reclassified to
conform with the current years presentation.
Note 3. Property and Equipment
As of December 31, 2008 and 2007, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment |
|
$ |
82,803 |
|
|
$ |
50,598 |
|
Equipment |
|
|
143,421 |
|
|
|
8,050 |
|
Leasehold improvements |
|
|
6,781 |
|
|
|
0 |
|
Software |
|
|
234,147 |
|
|
|
102,712 |
|
|
|
|
|
|
|
|
|
|
|
467,152 |
|
|
|
161,360 |
|
Less accumulated depreciation
and amortization |
|
|
185,168 |
|
|
|
122,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
281,984 |
|
|
$ |
38,476 |
|
|
|
|
|
|
|
|
Depreciation expense was $62,284 and $37,832 for the years ended December 31, 2008
and 2007, respectively.
49
Note 4. Other Assets
As of December 31, 2008 and 2007, other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Patents and trademarks |
|
$ |
394,485 |
|
|
$ |
357,470 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
31,101 |
|
|
|
41,001 |
|
|
|
|
|
|
|
|
|
|
Less accumulated
amortization |
|
|
104,309 |
|
|
|
79,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
321,277 |
|
|
$ |
318,931 |
|
|
|
|
|
|
|
|
Amortization expense was $24,769 and $21,024 for the years ended December 31, 2008 and
2007, respectively.
The future estimated minimum amortization expense that will be charged to operations as of December 31, 2008
is as follows:
|
|
|
|
|
Year ending |
|
|
|
|
December 31, |
|
|
|
|
2009 |
|
$ |
27,199 |
|
2010 |
|
|
27,199 |
|
2011 |
|
|
27,199 |
|
2012 |
|
|
27,199 |
|
2013 |
|
|
27,199 |
|
Thereafter |
|
|
258,491 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
394,486 |
|
|
|
|
|
Note 5. Income Taxes
At December 31, 2008 and 2007, the Company had federal and state tax net operating
loss carry forwards of approximately $19,569,000 and $16,794,000, respectively. The
difference between the operating loss carry forwards on a tax basis and a book basis
is due principally to differences in depreciation, amortization, and treatment of
stock options. The federal carry forwards begin to expire in 2009 and the state carry
forwards began to expire in 2003.
The Company had a net deferred tax asset of $3,910,000 and $2,180,000 at December 31,
2008 and 2007, respectively, primarily from net operating loss carry forwards. A
valuation allowance was recorded to reduce the net deferred tax asset to zero. The
deferred tax asset valuation allowance increased $1,730,000 for the year ended December
31, 2008 and $225,000 for the year ended December 31, 2007.
50
Note 6. Stockholders Equity Transactions
Common Stock
In November 2008, the Company issued a private placement memorandum for up to
$1,000,000 of stock at a price of $0.10 per share. Through December 31, 2008, the
Company issued secured $853,500 in gross proceeds and issued 8,535,000 shares of Common
Stock pursuant to such private placement.
In June 2008, 1,562,500 warrants were exercised in cashless exercises in which the
Company held back 425,564 warrants as payment for the exercise prices and issued
1,136,936 shares of Common Stock in connection with such exercises.
In June 2008, the holders of all of the outstanding convertible secured promissory
notes (the Notes) issued by the company converted the Notes into shares of the
Companys Common Stock at a conversion price of $0.05 per share. The Notes were issued
in consideration for certain loans provided to the Company by third parties between
May 12, 2006 and June 6, 2007. $882,041 in principal and accrued interest of Notes were
converted into 17,640,813 shares of Common Stock.
Effective May 9, 2008 through June 12, 2008, pursuant to a tender offer undertaken by
the Company, holders of warrants, not including warrants issued to officers and
directors of the Company in June 2007 and September 2007, were entitled to exercise
their warrants at reduced exercise prices as follows:
|
|
|
|
|
|
|
|
|
Number of |
|
Original Exercise Price |
|
|
Revised |
|
Existing Warrants |
|
of Existing Warrants |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
7,346,577 |
|
$0.075-$0.10 |
|
|
$0.05 |
|
4,872,704 |
|
$0.20-$0.25 |
|
|
$0.06 |
|
2,755,500 |
|
$0.40-$0.50 |
|
|
$0.08 |
|
2,246,250 |
|
$0.60-$1.00 |
|
|
$0.09 |
|
A total of 10,574,951 warrants were exercised in the tender offer for cash proceeds of
$706,989.
Pursuant to an Order of Settlement dated May 13, 2008 (the Settlement), the Company
and John R. DePhillipo settled all issues, claims and counterclaims each party may have
with respect to the Action entitled, John R. DePhillipo v. GeneLink, Inc. (Superior
Court of New Jersey Law Division: Atlantic County, Docket No. ATL-L-7479-05). Under the
Settlement, the Company acquired 3,953,000 shares from Mr. DePhillipo and his family
and paid Mr. DePhillipo and his family $0.06 per share, resulting in a purchase price
of $237,180. Additionally, under the Settlement
the Company paid Mr. DePhillipo $220,000. As part of the Settlement, the Company and
Mr. DePhillipo delivered general releases to each other.
51
In August 2007, the Company issued a private placement memorandum for up to $1,700,000
of units consisting of restricted common stock at $.075 per share with an attached
warrant to acquire 1/4 of a share of common stock. The warrants are exercisable for 5
years at a price of $.10 per share. During November, 2007 the Company closed on
$1,431,400 units with proceeds allocated to stock of $1,161,159 and attached warrants
of $270,241.
In connection with this offering, the Company issued 2,575,250 of dealer warrants with
5 year terms. 515,050 of the dealer warrants have an exercise price of $.10 per share,
while the remaining 2,060,200 are exercisable at $.075 per share.
The Company issued 68,750 and 68,750 shares of common stock for services rendered,
valued at $3,688 and $688 for the years ended December 31, 2008 and 2007, respectively.
During the year ended December 31, 2008 and 2007, the Company issued $0 and $137,500
principal amount of convertible secured promissory notes and issued 0 and 687,500
shares of restricted Common Stock in connection with the issuance of the notes.
In June 2008, the holders of all of the outstanding convertible secured promissory
notes (the Notes) issued by the company converted the Notes into shares of the
Companys Common Stock at a conversion price of $0.05 per share. The Notes were issued
in consideration for certain loans provided to the Company by third parties between
May 12, 2006 and June 6, 2007. $882,041 in principal and accrued interest of Notes were
converted into 17,640,813 shares of Common Stock.
During 2007 the Company issued 5,093,024 shares of common stock as conversion of
promissory notes and accrued interest. The value of the notes converted as of December
31, 2007 was $254,653.
In connection with the convertible secured promissory notes and shares of Common Stock
issued, the Company issued 410,000 shares of Common Stock valued at $22,950, warrants
to acquire 1,640,000 shares of Common Stock at an exercise price of $.05 valued at
$49,200, and paid a cash commission of $57,400 to the Administrative Agent. The total
costs of $129,550 have been recorded as a reduction of the proceeds in accordance with
AICPA Technical Practice Aid 4110.01.
Stock Options and Warrants
The Financial Accounting Standards Board has issued SFAS No. 123R, which defines a fair
value based method of accounting for an employee stock option and similar equity
instruments and requires all entities to adopt that method of accounting for all of
their employee stock compensation plans.
52
SFAS 123R requires the recognition of the fair value of stock at the dates stock
options are granted to employees at exercise prices equal to the fair market value of
our stock at the dates of grant. Generally, options are fully vested within three
years from the grant date and have a term of 10 years. Performance awards are granted
to officers and key employees are payable in shares of common stock. The number of
performance award shares actually issued, if any, varies depending on the achievement
of certain performance goals. In general, performance grants vest ratably over the
service period. The Company recognizes the stock-based compensation expense over the
requisite service period of the individual grantees, which generally equals the vesting
period. The Company provides newly issued shares and treasury stock to satisfy stock
option exercise and for the issuance of performance awards.
During 2007 the Company granted options to Board members, executives and advisors in
lieu of compensation in accordance with the Companys Stock Option Plan. Options
granted under this plan primarily vested over 4 years beginning in 2007. The options
have terms of 10 years and a fair value based on the Companys lattice valuation model
of $.08/ share. The compensation recognized in relation to the issuance of these
options for the years ended December 31, 2008 and 2007 is $384,081 and $363,400,
respectively.
Effective May 9, 2008 through June 12, 2008, pursuant to a tender offer undertaken by
the Company, holders of warrants, not including warrants issued to officers and
directors of the Company in June 2007 and September 2007, were entitled to exercise
their warrants at reduced exercise prices as follows:
|
|
|
|
|
|
|
Number of |
|
Original Exercise Price |
|
Revised |
Existing Warrants |
|
of Existing Warrants |
|
Exercise Price |
|
|
|
|
|
|
|
7,346,577
|
|
$0.075-$0.10
|
|
$ |
0.05 |
|
4,872,704
|
|
$0.20-$0.25
|
|
$ |
0.06 |
|
2,755,500
|
|
$0.40-$0.50
|
|
$ |
0.08 |
|
2,246,250
|
|
$0.60-$1.00
|
|
$ |
0.09 |
|
A total of 10,574,951 warrants were exercised in the tender offer for cash proceeds of
$706,989.
In June 2008, 1,562,500 warrants were exercised in cashless exercises in which the
Company held back 425,564 warrants as payment for the exercise prices and issued
1,136,936 shares of Common Stock in connection with such exercises.
In addition, in connection with an officer of the Company reducing deferred
compensation due to him, the Company issued 1,400,000 in options to such officer in
September 2007 at an exercise of $0.11 per share, to settle a deferred compensation
liability with an advisor. The options issued with a 10 year term had a fair value of
$154,000.
53
A summary of the status of the Companys stock options and warrants as of December 31,
2008 and 2007, and changes during the years ending of those dates are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Exercise |
|
|
Average |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options/warrants outstanding
at beginning of year |
|
|
31,043,535 |
|
|
$ |
0.19 |
|
|
|
14,992,987 |
|
|
$ |
0.38 |
|
Granted |
|
|
7,112,249 |
|
|
|
0.37 |
|
|
|
17,721,581 |
|
|
|
0.08 |
|
Exercised |
|
|
(12,137,453 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
Expired |
|
|
(2,995,000 |
) |
|
|
(0.44 |
) |
|
|
(1,671,033 |
) |
|
|
(0.80 |
) |
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/warrants outstanding
at end of year |
|
|
23,023,331 |
|
|
$ |
0.17 |
|
|
|
31,043,535 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/warrants exercisable
at end of year |
|
|
15,039,162 |
|
|
|
|
|
|
|
26,886,035 |
|
|
|
|
|
Weighted-average fair value
of options granted during
the year |
|
|
|
|
|
$ |
0.38 |
|
|
|
|
|
|
$ |
0.11 |
|
The following table summarizes information about stock options and warrants
outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
|
|
Exercise |
|
Outstanding |
|
|
Contractual Life |
|
|
Exercisable |
|
Price |
|
at 12/31/08 |
|
|
(Years) |
|
|
Warrants |
|
0.05 |
|
|
1,915,000 |
|
|
|
2.70 |
|
|
|
1,915,000 |
|
0.075 |
|
|
2,310,200 |
|
|
|
6.75 |
|
|
|
2,310,200 |
|
0.08 |
|
|
8,700,000 |
|
|
|
8.58 |
|
|
|
6,094,996 |
|
0.10 |
|
|
3,135,633 |
|
|
|
4.07 |
|
|
|
3,135,633 |
|
0.12 |
|
|
1,800,000 |
|
|
|
9.00 |
|
|
|
1,075,000 |
|
0.20 |
|
|
375,000 |
|
|
|
1.09 |
|
|
|
375,000 |
|
0.25 |
|
|
50,000 |
|
|
|
0.57 |
|
|
|
50,000 |
|
0.50 |
|
|
4,737,498 |
|
|
|
9.58 |
|
|
|
83,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,023,331 |
|
|
|
|
|
|
|
15,039,162 |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options were valued using a lattice model approach. Significant assumptions
used to calculate the fair value of all options issued for services are as follows:
|
|
|
|
|
Risk free interest rate of return |
|
4.5 - 5% |
Expected option life |
|
5 - 10 yrs. |
Expected dividends |
|
$0.00 |
Expected volatility |
|
169 - 170% |
54
Note 7. Net Loss Per Share
Earnings per share is calculated under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128 Earnings Per Share.
Basic EPS is calculated using the weighted average number of common shares outstanding
for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Given that the Company is
in a loss position, there is no difference between basic EPS and diluted EPS since the
common stock equivalents would be antidilutive.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,603,509 |
) |
|
$ |
(1,560,624 |
) |
|
Weighted average number of common shares
outstanding for computing basic earning per share |
|
|
82,530,959 |
|
|
|
48,117,402 |
|
Dilutive effect of warrants and stock options after
application of the treasury stock method |
|
|
|
|
|
|
|
|
Weighted average number of common shares out-
standing for computing diluted earnings per share |
|
|
82,530,959 |
|
|
|
48,117,402 |
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
The following common stock equivalents are excluded from the earnings per share
calculation as their effect would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Warrants and stock options |
|
|
23,023,331 |
|
|
|
31,043,535 |
|
|
|
|
|
|
|
|
Note 8. Advertising
The Company expenses the production costs of advertising when incurred. Advertising
expense was $62,230 and $31,810 for the years ended December 31, 2008 and 2007,
respectively.
Note 9. Rent
The Company leases its offices in Longwood, Florida. The lease is for a term of
three years, ending December 2010, and provides for monthly rental payments of $5,500.
55
The future minimum lease payments that will be charged to operations as of
December 31, 2008 is as follows:
|
|
|
|
|
Year ending |
|
|
|
|
December 31, |
|
|
|
|
2009 |
|
$ |
66,000 |
|
2010 |
|
|
66,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
132,000 |
|
|
|
|
|
Note 10. Related Party Transactions and Convertible Secured Promissory Notes
In January 2006 the Company entered into an Exclusivity and Indemnity Agreement with
First Equity Capital Securities, Inc. (First Equity), pursuant to which the Company
granted First Equity the exclusive right to assist the Company in raising between
$200,000 and $2,000,000 in debt financing and agreed to indemnify First Equity from
any claims made as a result of First Equity providing services to or on behalf of the
Company. This exclusive arrangement continued through May 2006. Kenneth R. Levine, a
holder of greater than five percent (5%) of the Companys outstanding common stock, is
a principal and officer of First Equity.
In May 2006, December 2006, January 2007 and June 2007, pursuant to the terms of a
Convertible Secured Loan Agreement, dated as of May 12, 2006 (as amended and
supplemented, the Loan Agreement), the Company issued $965,390 principal amount of
Notes.
The Company issued to First Equity Capital Securities, Inc., as Administrative Agent
under the Loan Agreement, an aggregate of 435,000 shares of restricted Common Stock of
the Company and warrants to acquire 1,740,000 shares of restricted Common Stock of the
Company at an exercise price of $0.05 per share in connection with the issuance of the
Notes. The Company also paid First Equity Capital Securities, Inc. a placement fee of
$60,900, equal to 7% of all loans raised pursuant to the Loan Agreement. Kenneth R.
Levine, a holder of more than five percent of the equity securities of the Company, is
an officer and principal of First Equity Capital Securities, Inc. Mr. Levine
purchased $69,078 of Notes and received 345,390 shares of restricted Common Stock of
the Company in connection with the issuance of the Notes.
In December 2008, the Company issued $853,500 of Common Stock in a private placement,
and in connection with such offering the Company issued to First Equity
Capital Securities, Inc. warrants to acquire 597,250 shares of Common Stock and paid
First Equity Capital Securities, Inc. a cash fee of $47,780.
56
A family trust of which Robert Hoekstra, a director of the Company, is a trustee,
acquired 1,050,000 shares in this offering for a purchase price of $105,000.
Short Term Loans Payable
As of December 31, 2008, the Company has various shareholders of the Company who
provided short term obligations, as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Note payable, due no specific maturity with
no stated interest. All interest and principal
due at maturity |
|
$ |
10,000 |
|
|
$ |
10,000 |
|
|
|
|
|
|
|
|
|
|
Note payable, no specific maturity with no stated
Interest. All interest and principal
due at maturity |
|
|
8,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
|
18,000 |
|
Less: Discount for warrants issued |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term loans payable |
|
$ |
18,000 |
|
|
$ |
18,000 |
|
|
|
|
|
|
|
|
Employees and Consultants
The Company is dependent on the services of Monte E. Taylor, Jr., its Chief Executive
Officer. The Company is in the process of negotiating an employment agreement with
Mr. Taylor. A new agreement has not been signed.
The Company has entered into a consulting agreement with Dr. Ricciardi (shareholder
and officer) dated February 24, 1998. The initial term of the agreement was five (5)
years.
Pursuant to an agreement dated September 27, 2007, Dr. Ricciardi agreed to reduce the
accrued compensation payable to him to $90,000 as of September 30, 2007, payable when
the Board of Directors of the Company determines that the Companys financial position
can accommodate such payments, and to reduce the compensation payable to him for
future services to be rendered pursuant to the consulting arrangement to $30,000 per
year, payable in monthly installments of $2,500 each commencing, October 2007 and
payable on the last day of each month. The Company reimbursed Dr. Ricciardi $10,000
for legal fees incurred in connection with the litigation instituted by John R.
DePhillipo, the former Chief Executive Officer and President of the Company against
the Company and Dr. Ricciardi in connection with Mr. DePhillipos termination;
released Dr. Ricciardi from any potential claims the Company may have against the
directors and officers of the Company in connection with actions taken prior to the
termination of Mr. DePhillipos employment; and issued Dr. Ricciardi a full-vested
warrant to acquire
1,400,000 shares of Common Stock of the Company at an exercise price per share of
$0.11, the closing price per share as of September 27, 2007. Dr. Ricciardi will
remain eligible to receive additional option and warrant grants as a member of the
Board of Directors and the Advisory Board of the Company.
57
Convertible Secured Promissory Notes Payable
As of December 31, 2007, the Company had various shareholders of the Company who
provided convertible secured promissory note obligations, as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Notes payable, due May 12, 2011
with interest at 12%. All
interest and principal due at
maturity. All Company assets
pledged as collateral |
|
$ |
|
|
|
$ |
728,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728,812 |
|
|
|
|
|
|
|
|
|
|
Less: Debt issue discount |
|
|
|
|
|
|
(105,864 |
) |
Less: Stock conversion discount |
|
|
|
|
|
|
(134,980 |
) |
Less: Debt proceeds not received |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short term loans payable |
|
$ |
|
|
|
$ |
487,968 |
|
|
|
|
|
|
|
|
In connection with issuance of the convertible secured promissory notes, the
Company has recognized a debt issuance discount as of December 31, 2008 and 2007 of
$0 and $29,038, respectively, that is being amortized over the term of the notes.
As of December 31, 2008 and 2007, the unamortized debt issuance discount is $0 and
$134,980, respectively.
In connection with issuance of the convertible secured promissory notes, the
Company has recognized a stock conversion discount as of December 31, 2008 and 2007
of $0 and $27,500, respectively, that is being amortized over the term of the
notes. As of December 31, 2008 and 2007, the unamortized stock conversion discount
is $0 and $105,864, respectively.
Interest expense related to notes payable is $283,036 and $192,723 for the years
ended December 31, 2008 and 2007, respectively.
In June 2008, the holders of all of the outstanding convertible secured promissory
notes (the Notes) issued by the company converted the Notes into shares of the
Companys Common Stock at a conversion price of $0.05 per share. The Notes were
issued in consideration for certain loans provided to the Company by third parties
between May 12, 2006 and June 6, 2007. $882,041 in principal and accrued interest
of Notes were converted into 17,640,813 shares of Common Stock.
58
Note 11. Segment Information
The Company distinguishes its two main operating segments by entity and
the types of products they sell.
The following table sets forth the net revenues, operating expenses and pre-tax
earnings of our segments for the year ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeneWize Life |
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
Sciences |
|
|
|
Inc. |
|
|
Inc. |
|
|
Inc. |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
291,206 |
|
|
$ |
29,738 |
|
|
$ |
6,056,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,973,028 |
|
|
|
40,113 |
|
|
|
6,980,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
12,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,669,584 |
) |
|
|
(10,375 |
) |
|
|
(923,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
|
30,458 |
|
|
$ |
67,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,479,300 |
|
|
|
190,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
10,956 |
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,437,886 |
) |
|
|
(122,738 |
) |
|
|
|
|
Note 12. Going Concern
The Companys financial statements are prepared using generally accepted accounting
principles applicable to a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. The Company incurred
a net loss of $2,603,509 and $1,560,624 for the years ended December 31, 2008 and
2007, respectively. The Company reported a deficit of $15,285,207 and $12,681,698 as
of December 31, 2008 and 2007, respectively. The Company has announced marketing
plans to enhance sales and, as a result, management believes that they will be able to
generate sufficient revenue and cash flow for the Company to continue as a going
concern. Should the Company be unable to continue as a going concern, assets and
liabilities would require restatement on a liquidation basis that would differ
materially from the going concern basis.
59
Note 13. Commitments and Contingencies
Effective October 14, 2005, we terminated the employment of John R. DePhillipo, our
former Chief Executive Officer and President and a former director. In 2005, Mr.
DePhillipo commenced two lawsuits allegedly arising out of his termination by us for
cause, as defined in his Employment Agreement with us.
In an Action filed in the United States District Court for the Eastern District of
Pennsylvania, John R. DePhillipo v. Robert P. Ricciardi, Civil Action No. 05-5906, Mr.
DePhillipo alleged that Dr. Ricciardi, a Director and Officer of the Company,
(1) caused Mr. DePhillipos employment with us to be wrongfully terminated and
therefore is personally liable for all severance owed Mr. DePhillipo, in the amount of
at least $75,000; (2) was personally liable for Mr. DePhillipos unpaid back salary of
$84,000 simply because Dr. Ricciardi is an officer and/or director of the Company; and
(3) acted sufficiently maliciously to justify punitive damages being assessed against
Dr. Ricciardi of $10,000,000. Counsel for Dr. Ricciardi entered an answer to this
action and subsequently the action against Dr. Ricciardi was dismissed with prejudice
against Mr. DePhillipo in March 2006.
In a separate Action filed by Mr. DePhillipo against us in November 2005 in the
Superior Court of New Jersey, Law Division, Atlantic County, John R. DePhillipo v.
GeneLink, Inc., Docket No. ATL-L-7479-05, Mr. DePhillipo alleged that his termination
by us for cause was improper and therefore he was entitled to in excess of
$1,500,000 in severance pay under the terms of an employment agreement, allegedly
entered into effective January 1, 2005 (the Employment Agreement) and an additional
$84,000 in accrued and unpaid compensation. We filed an Answer denying the material
allegations of the Complaint and asserted a number of affirmative defenses. We filed
counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion,
negligent misrepresentation, unjust enrichment and fraud while Mr. DePhillipo served
as our Chief Executive Officer, President and Chief Financial Officer. The
counterclaims sought recovery in excess of that sought by Mr. DePhillipo in the
Complaint.
Pursuant to the Settlement, on May 13, 2008 we and Mr. DePhillipo settled all issues,
claims and counterclaims each may have with respect to the Action. Under the
Settlement, we acquired 3,953,000 shares from Mr. DePhillipo and his family and paid
Mr. DePhillipo and his family $0.06 per share, resulting in a purchase price of
$237,180. Additionally, under the Settlement we paid Mr. DePhillipo $220,000. As
part of the Settlement, we and Mr. DePhillipo delivered general releases to each
other.
60
On August 12, 2008, in an Action filed in the Philadelphia Court of Common Pleas,
DePhillipo, et.al. v. GeneLink, Inc. t/a GeneLink Biosciences, Inc., et. al.,
Philadelphia County Court of Common Pleas, August Term 2008 No. 1128, Mr. DePhillipo
and Maria DePhillipo, his spouse, filed suit against the Company, GeneWize and certain
of the Companys officers, directors and advisors. Mr. and Mrs. DePhillipo allege,
among other things, that the Company and certain of these officers, directors and/or
advisors fraudulently and/or negligently conspired to induce
Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo to
sell their shares of the Companys common stock to the Company, that the Company and
its counsel fraudulently and negligently misrepresented the Companys financial
condition to induce Mr. DePhillipo to enter into the Settlement and to cause Mr. and
Mrs. DePhillipo sell their shares of the Companys common stock, and that the Company
failed to timely disclose information concerning the formation and operation of
GeneWize. Mr. and Mrs. DePhillipo seek approximately $20 million in damages based
upon an alleged value of the Companys common stock of $5.00 per share. They also
seek rescission of the Settlement and thus the return of the 3,953,000 shares of the
Companys common stock sold by them to us pursuant to the Settlement.
We have agreed to indemnify our offices, directors and advisors who have been named as
defendants in the Action and will be liable for any costs or expenses incurred by or
judgments entered against such defendant.
On October 1, 2008, the Company, as well as all of the other defendants, moved to
dismiss the Action in its entirety through the filing of preliminary objections.
These preliminary objections are currently pending before the court.
We and our Board of Directors deny the claims set forth in the Action and are
vigorously defending the baseless claims made by Mr. and Mrs. DePhillipo.
Note 14. Quarterly Results of Operations (unaudited)
Below is a summary of the quarterly results of operations for each quarter of the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Sales |
|
$ |
26,424 |
|
|
$ |
124,503 |
|
|
$ |
1,829,669 |
|
|
$ |
4,396,847 |
|
Gross profit |
|
|
1,104 |
|
|
|
15,331 |
|
|
|
1,403,963 |
|
|
|
3,144,557 |
|
Net income (loss) |
|
|
(448,250 |
) |
|
|
(1,107,479 |
) |
|
|
(513,472 |
) |
|
|
(534,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per
common share |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.005 |
) |
|
|
(0.005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Sales |
|
$ |
31,385 |
|
|
$ |
27,182 |
|
|
$ |
26,150 |
|
|
$ |
13,027 |
|
Gross profit |
|
|
6,262 |
|
|
|
6,935 |
|
|
|
14,252 |
|
|
|
(514 |
) |
Net income (loss) |
|
|
(359,792 |
) |
|
|
(225,196 |
) |
|
|
(550,747 |
) |
|
|
424,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per
common share |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
61
Note 15. Subsequent Events
In January 2009, the Company sold an additional 5,650,000 shares of restricted Common
Stock of the Company at a purchase price of $0.10 per share pursuant to a continued
Confidential Private Offering Memorandum, and received an aggregate gross amount of
$565,000.
On February 26, 2009, the Company issued to an accredited investor $1,000,000
principal amount of Convertible Notes and issued 1,500,000 Warrants to acquire shares
of Common Stock at an exercise price of $0.11 per share in connection therewith. The
Warrants are exercisable on or after August 26, 2009 and on or before February 26,
2014. In March 2009, the Company issued an additional $200,000 of notes and issued
300,000 additional warrants in connection therewith.
The Convertible Notes mature on February 26, 2014 and bear interest at the rate of 8%
per year through February 26, 2011 and thereafter bear interest at the rate of 10% per
year. The Convertible Notes may not be prepaid without the approval of the holders of
the Convertible Notes.
The Convertible Notes are convertible at the option of the holders of the Convertible
Notes upon the earlier to occur of (a) August 26, 2009 or (b) the adoption and filing
of an amendment to increase the capitalization of the Company to at least 175,000,000
shares of Common Stock (the Initial Conversion Date). Additionally, the Convertible
Notes are exercisable at the option of the holders of the Convertible Notes at any
time upon the occurrence of a Change in Control Event (as defined in the Convertible
Notes). A mandatory conversion of the Convertible Notes will occur if after the
Initial Conversion Date the closing price of the Common Stock of the Company is at
least $0.50 per share for 30 consecutive trading days.
The conversion price for the Convertible Notes is $0.10 per share, subject to
adjustment in the event of a stock split, combination, reclassification,
reorganization or similar event.
Note 16. Industry Risk and Concentration
The business of marketing nutrition and skin care products is highly competitive and
sensitive to the introduction of new products which may rapidly capture a significant
share of the market. These market segments include numerous manufacturers,
distributors, marketers, retailers and physicians that actively compete for the
business of consumers both in the United States and abroad. In addition, the Company
anticipates that it will be subject to increasing competition in the future from
sellers that utilize electronic commerce. Many of these competitors have longer
operating histories, significantly greater financial, technical, product development,
marketing and sales resources, greater name recognition, larger established customer
bases and better-developed distribution channels than does the Company.
62
The Companys present or future competitors may be able to develop products that are
comparable or superior to those offered by the Company, adapt more quickly than
the Company does to new technologies, evolving industry trends and standards or
customer requirements, or devote greater resources to the development, promotion and
sale of their products than does the Company. For example, if the Companys competitors
develop skin care or nutritional treatments that prove to be more effective than our
products, demand for our products could be reduced. Accordingly, the Company may not be
able to compete effectively in our markets and competition may intensify. The Company
is also subject to significant competition for the recruitment of distributors from
other network marketing organizations, including those that market nutritional
supplements and skin care products as well as other types of products.
The Companys ability to be competitive will depend, in significant part, on its
success in recruiting and retaining distributors through an attractive compensation
plan, the maintenance of an attractive product portfolio and other incentives. The
cannot ensure that the Companys programs for recruitment and retention of distributors
will be successful, and if they are not, the Companys financial condition and
operating results would be harmed.
In addition, the Company relies entirely on a limited number of third parties to supply
raw materials, manufacture our products and perform laboratory tests on the Companys
behalf. In the event any of the Companys third party suppliers, manufacturers or
laboratories were to become unable or unwilling to continue to provide the Company with
services and products in required volumes and at suitable quality levels, the Company
would be required to identify and obtain acceptable replacement sources.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and other procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by an issuer
in the reports that it files or submits under the Exchange Act is accumulated and communicated to
the issuers management, including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.
With the participation of management, the Companys Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the design and operation of its disclosure
controls and procedures at the conclusion of the fiscal quarter ended December 31, 2008. Based
upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective in ensuring that material information
required to be disclosed is included in the reports that it files with the Securities and Exchange
Commission.
Change In Internal Controls
There were no changes in the Companys internal controls over financial reporting or, to the
knowledge of the Companys management, in other factors that have materially affected or are
reasonably likely to materially affect internal controls over financial reporting during the fiscal
quarter ended December 31, 2008.
64
Managements Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the Companys internal control over financial reporting as of December 31,
2008 using the criteria for effective control over financial reporting established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of December 31, 2008, the
Company maintained effective internal control over financial reporting.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
ITEM 9B. OTHER INFORMATION
Not applicable.
65
PART III
ITEM 10. DIRECTORS; EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to each of the executive officers and current directors of the
Company is set forth below:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Dr. Bernard L. Kasten, Jr.
|
|
|
63 |
|
|
Executive Chairman of the Board,
Director |
|
|
|
|
|
|
|
Monte E. Taylor, Jr.
|
|
|
60 |
|
|
Chief Executive Officer, Chief
Financial Officer,
Director |
|
|
|
|
|
|
|
Douglas M. Boyle
|
|
|
42 |
|
|
Director |
|
|
|
|
|
|
|
Robert Hoekstra
|
|
|
58 |
|
|
Director |
|
|
|
|
|
|
|
James Monton
|
|
|
63 |
|
|
Director |
|
|
|
|
|
|
|
Robert P. Ricciardi, Ph.D
|
|
|
63 |
|
|
Secretary, Chief Science Officer,
Director |
|
|
|
|
|
|
|
John H. Souza
|
|
|
47 |
|
|
Chief Operating Officer, Director |
Dr. Kasten is currently the Chairman and a director of the Company. Dr. Kasten has been a
scientific advisor to the Company since 1999 and a member of our Advisory Committee since 2001.
Dr. Kasten is a graduate of Miami University (Oxford Ohio), BA Chemistry 1967, and the Ohio State
University College of Medicine MD 1971. His residency was served at the University of Miami,
Florida and fellowships at the National Institutes of Health Clinical Center and National Cancer
Institute, Bethesda, Maryland. Dr. Kasten is a Diplomat of the American Board of Pathology with
Certification in Anatomic and Clinical Pathology with sub-specialty certification in Medical
Microbiology. Dr. Kasten is an author of Infectious Disease Handbook 1st through 5th
Editions 1994-2003 and the Laboratory Test Handbook 1st through 4th
Editions 1984-1996 published by Lexi-Comp Inc., Hudson, Ohio. Dr. Kasten has been active with the
College of American Pathologists (CAP) serving as Chairman of its Publication Committee from
1985-1993, its Management Resources Committee from 1993-1998 and its Chairman Internet Editorial
Board from 1999-2003. Dr. Kasten received the College of American Pathologists Presidents Medal
Awarded for Outstanding Service in 1989 and the College of American Pathologists Frank W. Hartman
Award, in 1993 for Meritorious Service to the College (Founding CAP Today) the organizations
highly successful monthly tabloid magazine. Dr. Kastens professional staff appointments have
included the Cleveland Clinic, Northeastern Ohio
Universities College of Medicine, the Bethesda Hospitals and Quest Diagnostics. Dr. Kasten
served eight years, 1996-2004, at Quest Diagnostics Incorporated [NYSE-DGX], where he was Chief
Laboratory Officer; Vice-President of Business Development for Science and Medicine and
Vice-President of Medical Affairs of a Quest Diagnostics wholly-owned subsidiary, MedPlus Inc. Dr.
Kasten joined SIGA Technologies, Inc. [NASDAQ-SIGA] as a Board of Directors member in May 2003, and
accepted the appointment as SIGAs Chief Executive Officer in July of 2004, serving through April
2006. Dr. Kasten is Chairman of the Board of Cleveland Bio Labs Inc. [NASDAQ-CBLI], and also
serves on the Board of Directors of Enzo Biochem [NYSE_ENZ], Lexi-Comp Inc and Riggs-Heinrich Media
Inc.
66
Mr. Taylor currently is the Chief Executive Officer and Chief Financial Officer and a director
of the Company. Mr. Taylor joined the Company as Director of Business Development in 2001. In such
role, Mr. Taylor has focused his efforts in rolling out the Companys products and technologies to
the skin-care, skin health and nutrition industries worldwide. Prior to joining the Company, Mr.
Taylor was a senior management consultant specializing in strategic marketing plans, business
development and marketing communications for mid-size and Fortune 500 companies. Mr. Taylor has
significant direct selling/MLM industry experience as a consultant, distributor and corporate
trainer. Mr. Taylor received a masters degree in business administration from the Crummer School
of Business at Rollins College.
Mr. Boyle is the President of Empirical Healthcare Consulting, LLC. He has over 20 years of
professional experience in the areas of finance, operations, corporate governance and business
turnarounds, including over 17 years of experience in the healthcare field as a financial and
operational executive. He has served in executive roles in start-up, middle market and Fortune 500
companies, where he has held the titles of Chief Executive Officer, President, Chief Operations
Officer and Chief Financial Officer, prior to which he worked as a Senior Auditor for KPMG Peat
Marwick. Mr. Boyle also led the national financial revenue operations for Quest Diagnostics
Incorporated, and was Chief Financial Officer for Doylestown Hospital and Health Care System and
MediMax Incorporated. Mr. Boyle holds an MBA from Columbia University and a BS in Accounting from
the University of Scranton.
Mr. Hoekstra is currently a director of the Company. Mr. Hoekstra a management consultant,
organizational therapist and co-founder of Team Architects, an international management and
relationship skills training company. Mr. Hoekstra is a co-creator and a certified instructor for
Redirecting Corporate America, a management training course offered world wide since 1991.
Formerly, he was the V.P. of Sales for U.S. Medical and President of the Hoekstra Agency. Mr.
Hoekstra graduated from Loyola University, New Orleans with a B.S. in Psychology (Cum Laude).
67
Mr. Monton is currently a director of the Company. After graduating Magna Cum Laude from
Michigan State University Honors College, Mr. Monton joined Procter & Gamble (P&G) in 1968 as a
research scientist. He holds one of P&Gs key beauty care patents. He led a number of successful
projects including the launch of Pantene Pro V, which has become the worlds largest beauty care
brand. Mr. Monton worked for P&G in Europe from 1979 to 1982 where he helped lay the foundation for
P&G becoming the most successful health and beauty care company in Europe. As a director in P&Gs
Latin American organization from 1984 to 1988, he managed projects in the health, beauty, cleaning,
and food industries. Mr. Monton worked at P&Gs Asian headquarters in Kobe, Japan from 1996 to
2001, leading much of P&Gs Asian Beauty Care organization and serving on the China Beauty Care
Management Leadership Team. From 2001
until 2005, he was a Director in P&Gs External Relations Department where he led much of the
companys connections with the media and outside influencers. Mr. Monton retired from P&G in 2005
where he was honored for 37 years of outstanding service. Mr. Monton currently serves on the
Boards of the Northern Kentucky Universitys Business School and the International Business Center.
He is a frequent speaker at international business seminars, guest lectures on management to MBA
students, and sponsors scholarships for business students to work as interns outside the United
States. Mr. Monton is a member of the Foreign Policy Leadership Council of Cincinnati and also uses
his expertise to consult for companies on strategic management and organizational issues.
Dr. Ricciardi is currently the Chief Science Officer and a director of the Company. Dr.
Robert Ricciardi is also Professor of Microbiology at the University of Pennsylvania. Dr.
Ricciardi received his Ph.D. from the University of Illinois at Urbana and went on to Brandeis
University and Harvard Medical School in the Department of Biological Chemistry where he was a
Fellow of the American Cancer Society and a Charles A. King Trust Fellow. He developed one of the
first techniques in molecular biology that has been widely used to map genes. While most of his
research has centered on mechanisms of cancer, Dr. Ricciardi has developed and patented recombinant
delivery systems for use as vaccines and new methods for identifying chemical therapeutics. Dr.
Ricciardi has served as a consultant to The National Institutes of Health, Smith Kline and
Beckmans Department of Molecular Genetics, and Childrens Hospital of Philadelphias Department of
Infectious Disease. He has authored 85 publications and was a NATO Visiting Professor at Ferrara
Medical School in Italy. Dr. Ricciardi has been an invitational speaker at numerous scientific
meetings and universities.
Mr. Souza is currently the Chief Operating Officer and a director of the Company. In the past
20 years, Mr. Souza has owned and operated manufacturing and distribution companies in the
packaging and cosmetics fields, doing business with fortune 100 and 500 companies as well as retail
spa outlets. Mr. Souza has held executive management positions in both the public and private
sectors where he was responsible for operations, business development and mergers and acquisitions,
and also has an extensive background in sales and marketing. Mr. Souza received a Bachelor of
Science from Rochester Institute of Technology. Mr. Souza is also a Nationally Certified PT/NC.
68
Audit Committee
Dr. Kasten and Mr. Hoekstra comprised the Audit Committee for the fiscal year ended December
31, 2008. For the current fiscal year, Mr. Boyle (Chair) and Mr. Monton, who both are independent
members of the Board of Directors, will serve on the Audit Committee for the fiscal year ending
December 31, 2009. The Board of Directors has determined that Mr. Boyle, a director of the
Company, is the audit committee financial expert as defined in section 3(a)(58) of the Exchange Act
and the related rules of the SEC, based upon his professional and educational background as set
forth above in this Item 10.
Consistent with SEC policies regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of the independent
auditor. In recognition of this responsibility, the Audit Committee has established a policy to
pre-approve all audit and permissible non-audit services provided by the independent registered
public accounting firm. Prior to engagement of the independent auditor for the next years audit,
management will submit a detailed description of the audit and permissible non-audit services
expected to be rendered during that year for each of four categories of services described
above to the Audit Committee for approval. In addition, management will also provide to the Audit
Committee for its approval a fee proposal for the services proposed to be rendered by the
independent auditor. Prior to the engagement of the independent auditor, the Audit Committee will
approve both the description of audit and permissible non-audit services proposed to be rendered by
the independent auditor and the budget for all such services. The fees are budgeted and the Audit
Committee requires the independent registered public accounting firm and management to report
actual fees versus the budget periodically throughout the year by category of service.
During the year, circumstances may arise when it may become necessary to engage the
independent registered public accounting firm for additional services not contemplated in the
original pre-approval. In those instances, the Audit Committee requires separate pre-approval
before engaging the independent registered public accounting firm. To ensure prompt handling of
unexpected matters, the Audit Committee may delegate pre-approval authority to one or more of its
members. The member to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled meeting. The four
categories of services provided by the independent registered public accounting firm are as defined
in the footnotes to the fee table set forth above.
69
Nominating Committee
The Board of Directors has not created a standing Nominating Committee. The directors are or
have been actively involved in the Companys business and all are able to contribute valuable
insights into the identification of suitable candidates for nomination to the Board. As a result,
the Company believes that it is in its best interest that the entire Board oversee the composition
of the Board of Directors and therefore, the Company has not created a standing nominating
committee of the Board. Recommendations to the Board of Directors are approved by a majority of
directors. The full Board of Directors is responsible for identifying and evaluating individuals
qualified to become Board members and to recommend such individuals for nomination. All candidates
must possess an unquestionable commitment to high ethical standards and have a demonstrated
reputation for integrity. Other facts considered include an individuals business experience,
education, civic and community activities, knowledge and experience with respect to the issues
impacting the biogenetic industry and public companies, as well as the ability of the individual to
devote the necessary time to service as a director.
The Board of Directors does not have a formal policy with regard to the consideration of any
director candidates recommended by security holders. The Board of Directors will consider
candidates recommended by shareholders. All nominees will be evaluated in the same manner,
regardless of whether they were recommended by the Board of Directors, or recommended by a
shareholder. This will ensure that appropriate director selection continues.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on the Companys review of certain reports filed with the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the 1934
Act), and written representations of the Companys officers and directors, the Company believes
that all reports required to be filed pursuant to the 1934 Act with respect to
transactions in the Companys Common Stock through December 31, 2008 were filed on a timely
basis.
Code of Ethics.
The Company has adopted a code of conduct that applies to all employees, including the
Companys principal executive officer, principal financial officer, principal accounting officer or
controller and persons performing similar functions. A copy of the Companys code of conduct will
be provided to anyone without charge upon request therefor.
Meeting of Directors
The Board of Directors met 8 times in 2008. Each director attended at least 75% of the
meetings.
Communications with the Board of Directors
You may contact the Board of Directors as a group by writing to them c/o GeneLink, Inc., 317
Wekiva Springs Road, #200, Longwood, Florida 32779, Attention: Chairman. Any communications
received will be forwarded to all Board members.
70
REPORT FROM THE AUDIT COMMITTEE
The Audit Committee is responsible for considering managements recommendation of independent
certified public accountants for each fiscal year, recommending the appointment or discharge of
independent accountants to the board of directors and confirming the independence of the
accountants. It is also responsible for reviewing and approving the scope of the planned audit,
the results of the audit and the accountants compensation for performing such audit, reviewing the
Companys audited financial statements, and reviewing and approving the Companys internal
accounting controls and discussing such controls with the independent accountants.
In connection with the audit of the Companys financial statements for the year ended December
31, 2008, the Audit Committee met with representatives from Buckno, Lisicky & Company, the
Companys independent auditors. The Audit Committee reviewed and discussed with the Companys
financial management and financial structure, as well as the matters relating to the audit required
to be discussed by Statements on Auditing Standards 61 and 90.
In addition, the Audit Committee reviewed and discussed with the Companys management the
Companys audited financial statements relating to year ended December 31, 2008.
Based upon the review and discussions described above, the Audit Committee recommended to the
Board of Directors that the Companys financial statements audited by Buckno, Lisicky & Company be
included in the Companys Annual Report on Form 10-K for year ended December 31, 2008.
|
|
|
|
|
|
Robert Hoekstra
Dr. Bernard L. Kasten, Jr.
|
|
71
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our compensation program for senior executives is administered by the Compensation Committee
of our Board of Directors. The Compensation Committee is responsible for considering and making
recommendations to the Board of Directors regarding executive compensation and is responsible for
administering our stock option and executive incentive compensation plans. The Compensation
Committee is committed to ensure that its compensation plan is consistent with our company goals
and objectives and the long term interests of its shareholders.
Overview of Compensation Philosophy and Objectives
Our compensation programs are designed to deliver a compensation package which is competitive
in attracting and retaining key executive talent in our industry. Different programs are geared to
short and longer term performance with the goal of increasing shareholder value over the long term.
To achieve these objectives, the Compensation Committee has established an incentive program
commencing in 2009 for our executive officers based on meeting specific earnings criteria. More
specifically, the Compensation Committee believes that our executive compensation should encompass
the following:
|
|
|
help attract and retain the most qualified individuals by being
competitive with compensation packages paid to persons having similar
responsibilities and duties in comparable businesses; |
|
|
|
|
motivate and reward individuals who help us achieve our short term and
long term objectives and thereby contribute significantly to the
success of our company; |
|
|
|
|
relate to the value created for shareholders by being directly tied to
our financial performance and condition and the particular executive
officers contribution; and |
|
|
|
|
reflect the qualifications, skills, experience, and responsibilities
of the particular executive officer. |
The Compensation Committee has approved a compensation structure for the named executive
officers, determined on an individual basis, which incorporates four key components: base salary,
bonuses commencing in 2009 based upon the annual performance of the Company, stock options and
other benefits.
In connection with its compensation determinations, the Compensation Committee seeks the views
of the Chief Executive Officer with respect to appropriate compensation levels of the other
officers.
72
Executive Compensation Components
For the year ended December 31, 2008, the principal components of compensation for the named
executive officers were annual base salary, stock options and other benefits.
Annual Base Salary
In general, base salary for each employee, including the named executive officers, is
established based on the individuals job responsibilities, performance and experience; our size
relative to competitors; the competitive environment; a general view as to available resources of
the Company and the compensation agreed to in employment agreements with the named executive
officers.
Stock Options and Stock Awards
We provide a long term incentive opportunity for each of the named executive officers through
awards of stock options. Our stock option program is a long term plan designed to create a link
between executive compensation and our financial performance, provide an opportunity for increased
equity ownership by executives, and maintain competitive levels of total compensation.
All stock options have been granted at an exercise price equal to or above the closing market
price of our common stock on the date of grant. Stock options generally vest in four equal annual
installments; however, options will immediately vest in full upon a change on control of the
Company. Stock options expire ten years from date of grant.
Other Benefits
|
|
|
Retirement Benefits. We are looking to establish a 401(k) plan for our
employees. Named executive officers would be eligible to participate
in these plans on the same terms as other eligible employees, subject
to any legal limits on the amount that may be contributed by
executives under the plans. |
|
|
|
|
Medical Benefits. Our employees have a choice of coverage options
under our company-sponsored group health insurance plan. Each option
covers the same services and supplies but differs in the quality of
provider network. |
|
|
|
|
Life Insurance. We maintain a group life insurance plan that provides
for basic life and accidental death and dismemberment coverage. We pay
the premiums under this plan. |
|
|
|
|
Vacation. All employees are eligible for vacation based on years of service. |
|
|
|
|
Other Perquisites. Vehicle and car allowances have been provided for
certain named executives. |
73
Deductibility of Compensation Expenses
Pursuant to Section 162(m) under the Internal Revenue Code, certain compensation paid to
executive officers in excess of $1 million is not tax deductible, except to the extent such excess
constitutes performance-based compensation. The Compensation Committee has and will continue to
carefully consider the impact of Section 162(m) when establishing incentive compensation plans and
could, in certain circumstances, approve and authorize compensation that is not fully tax
deductible.
Accounting and Tax Considerations
We consider the accounting implications of all aspects of our executive compensation program.
Our executive compensation program is designed to achieve the most favorable accounting (and tax)
treatment possible as long as doing so does not conflict with the intended plan design or program
objectives.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of our Board of Directors currently consists of Dr. Bernard L.
Kasten, Jr. and Robert Hoekstra. The Compensation Committee is responsible for considering and
making recommendations to the Board of Directors regarding executive compensation and is
responsible for administering our stock option and executive incentive compensation plans.
The Compensation Committee has reviewed and discussed with management the Compensation
Discussion and Analysis included in this report. Based on the review and discussion with
management, the Compensation Committee recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in the Companys Annual Report on Form 10-K.
|
|
|
|
|
|
COMPENSATION COMMITTEE
Dr. Bernard L. Kasten, Jr.
Robert Hoekstra |
|
74
EXECUTIVE COMPENSATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY COMPENSATION TABLE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
Incentive Plan |
|
|
Deferred |
|
|
All Other |
|
|
|
|
Name and |
|
|
|
|
|
|
|
|
|
Bonus |
|
|
Awards |
|
|
Option |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
|
|
principal position |
|
Year |
|
|
Salary ($) |
|
|
($) |
|
|
($) |
|
|
Awards ($) |
|
|
($) |
|
|
Earnings ($) |
|
|
($) |
|
|
Total ($) |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
(i) |
|
|
(j) |
|
Monte E. Taylor, Jr. |
|
|
2008 |
|
|
$ |
131,442 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
57,000 |
1 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
9,562 |
2 |
|
$ |
198,004 |
|
Chief Executive
Officer |
|
|
2007 |
|
|
$ |
102,500 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
158,000 |
1 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
13,170 |
2 |
|
$ |
273,670 |
|
Robert P. |
|
|
2008 |
|
|
$ |
22,500 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
4,000 |
3 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
26,500 |
|
Ricciardi, Ph.D.
Chief Science
Officer |
|
|
2007 |
|
|
$ |
97,500 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6,000 |
3 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
103,500 |
|
John A. Souza |
|
|
2008 |
|
|
$ |
91,506 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
49,000 |
4 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,455 |
2 |
|
$ |
148,961 |
|
Vice President of
Business
Development |
|
|
2007 |
|
|
$ |
79,500 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
102,000 |
4 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
181,500 |
|
Dr. Bernard L. |
|
|
2008 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
29,000 |
5 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
29,000 |
|
Kasten, Jr.
Chairman |
|
|
2007 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
75,000 |
5 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
75,000 |
|
|
|
|
1 |
|
On June 1, 2007, Mr. Taylor received a fully vested warrant to acquire 1,600,00
shares of common stock of an exercise price of $0.08 per share and received options to acquire
1,500,000 shares of common stock at an exercise price of $0.08 per share, which options vest in
four equal annual installments of 375,000 each, commencing June 1, 2007. On May 20, 2008,
Mr. Taylor received options to acquire 350,000 shares of Common Stock at an exercise price of $0.12
per share, of which 225,000 options have vested and 125,000 options vest on May 20, 2009. On
July 28, 2008, Mr. Taylor received options to acquire 1,883,333 shares of Common Stock at a price
of $0.50 per share, of which 516,666 options vest on July 28, 2011, 516,667 options vest on each of
July 28, 2012 and July 28, 2013, and 333,333 options vest upon the Company becoming listed on the
NASDAQ National Market or a national stock exchange. |
|
2 |
|
Represents the cost of health insurance premiums provided from the Company. |
|
3 |
|
On June 1, 2007, Dr. Ricciardi received a fully-vested warrant to acquire 25,000
shares of common stock at an exercise price of $0.08 per share and received options to acquire
200,000 shares of common stock at an exercise price of $0.08 per share, which options vest in four
equal annual installments of 50,000 each, commencing June 1, 2007. On September 30, 2007, in
connection with the amendment to Dr. Ricciardis consulting agreement, Dr. Ricciardi received a
fully-vested warrant to acquire 1,400,000 shares of common stock at an exercise price of $0.11 per
share. |
|
4 |
|
On June 1, 2007, Mr. Souza received a fully vested warrant to acquire 1,000,000
shares of common stock at an exercise price of $0.08 per share, and received options to acquire
1,100,000 shares of common stock at an exercise price of $$0.08 per share, which options vest in
four equal installments of 275,000 each, commencing June 1, 2007. On May 20, 2008, Mr. Souza
received options to acquire 350,000 shares of Common Stock, of which 285,000 options have vested
and 125,000 options vest on May 20, 2009. On July 28, 2008, Mr. Souza received options to acquire
1,483,333 shares of Common Stock of which 383,333 options vest on each of July 28, 2011 and
July 28, 2012, 383,374 options vest on July 28, 2013 and 333,333 options vest upon the Company
becoming listed on the NASDAQ or National Market or national stock exchange. |
|
5 |
|
On June 1, 2007, Dr. Kasten received a fully-vested amount to acquire 735,000 shares
of Common Stock at an exercise price of $0.08 per share and received options to acquire 850,000
shares of Common Stock at an exercise price of $0.08 per share, which options vest in four equal
annual installments of 282,500 each, commencing June 1, 2007. On May 20, 2008, Dr. Kasten received
a fully-vested option to acquire 100,000 shares of Common Stock at an exercise price of $0.12 per
share. On July 28, 2008, Dr. Kasten received options to acquire 1,120,833 shares of Common Stock
at an exercise price of $0.50 per share, of which 262,500 options vest on each of July 28, 2011,
July 28, 2012 and July 28, 2013, and 333,333 options vest upon the Company becoming listed on the
NASDAQ National Market or a national stock exchange. |
75
Employment Agreements with Executive Officers
The Company revised its consulting agreement with Dr. Robert P. Ricciardi, an officer and
director of the Company effective September 30, 2007. Pursuant to the terms of a Consulting
Agreement dated as of February 24, 1998, the Company owed Dr. Ricciardi $752,616.55 in accrued
compensation through September 30, 2007.
Pursuant to an agreement dated September 27, 2007, Dr. Ricciardi agreed to reduce the accrued
compensation payable to him as of September 30, 2007 from $752,616.55 to $90,000 as of September
30, 2007, payable when the Board of Directors of the Company determines that the Companys
financial position can accommodate such payments, and to reduce the compensation payable to him for
future services to be rendered pursuant to the consulting arrangement to $30,000 per year, payable
in monthly installments of $2,500 each commencing, October 2007 and payable on the last day of each
month.
In consideration for Dr. Ricciardi agreeing to reduce the accrued compensation due him, the
Company reimbursed Dr. Ricciardi $10,000 for legal fees incurred in connection with the litigation
instituted by John R. DePhillipo, the former Chief Executive Officer and President of the Company
against the Company and Dr. Ricciardi in connection with Mr. DePhillipos termination; released Dr.
Ricciardi from any potential claims the Company may have against the directors and officers of the
Company in connection with actions taken prior to the termination of Mr. DePhillipos employment;
and issued Dr. Ricciardi a full-vested warrant to acquire 1,400,000 shares of Common Stock of the
Company at an exercise price per share of $0.11, the closing price per share as of September 27,
2007. Dr. Ricciardi will remain eligible to receive additional option and warrant grants as a
member of the Board of Directors and the Advisory Board of the Company.
76
OPTION GRANTS
The following table sets forth information concerning the grant of stock options made to each
of the Named Executive Officers in 2008.
|
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|
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|
|
|
|
|
|
|
GRANTS OF PLAN-BASED AWARDS |
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|
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|
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|
|
|
|
|
|
All |
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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Other |
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|
Stock |
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|
|
|
|
|
|
|
|
|
Awards: |
|
|
All Other |
|
|
Exercise |
|
|
Grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Number |
|
|
Option |
|
|
or |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
of |
|
|
Awards: |
|
|
Base |
|
|
Fair |
|
|
|
|
|
|
|
Estimated Future Payouts Under |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Number of |
|
|
Price |
|
|
Value of |
|
|
|
|
|
|
|
Non-Equity Incentive Plan |
|
|
Estimated Future Payouts Under |
|
|
of |
|
|
Securities |
|
|
of |
|
|
Stock |
|
|
|
|
|
|
|
Awards |
|
|
Equity Incentive Plan Awards |
|
|
Stocks |
|
|
Underlying |
|
|
Option |
|
|
and |
|
|
|
|
|
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
|
Threshold |
|
|
Target |
|
|
Maximum |
|
|
or Units |
|
|
Options |
|
|
Awards |
|
|
Options |
|
Name |
|
Grant Date |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
(#) |
|
|
(#) |
|
|
($/sh) |
|
|
Awards |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
(i) |
|
|
(j) |
|
|
(k) |
|
|
(l) |
|
Monte E. Taylor, Jr. |
|
May 20, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
July 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,883,333 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
John H. Souza |
|
May 20, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
July 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,483,333 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
Dr. Bernard L. Kasten, Jr. |
|
May 20, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
|
July 28, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,120,833 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
77
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTION AWARDS |
|
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
Number of Securities |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Underlying Unexercised |
|
|
Unexercised |
|
|
Option Exercise |
|
|
|
|
|
|
Unexercised Options (#) |
|
|
Options (#) |
|
|
Unearned Options |
|
|
Price |
|
|
Option Expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
(#) |
|
|
($) |
|
|
Date |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
Monte E. Taylor, Jr. |
|
|
2,350,000 |
|
|
|
750,000 |
(1) |
|
|
0 |
|
|
$ |
0.08 |
|
|
June 1, 2017 |
|
|
|
225,000 |
|
|
|
125,000 |
(2) |
|
|
0 |
|
|
$ |
0.12 |
|
|
May 20, 2018 |
|
|
|
0 |
|
|
|
1,883,333 |
(3) |
|
|
0 |
|
|
$ |
0.50 |
|
|
July 28, 2018 |
Robert P.
Ricciardi, Ph.D |
|
|
125,000 |
|
|
|
100,000 |
(4) |
|
|
0 |
|
|
$ |
0.08 |
|
|
June 1, 2017 |
|
|
|
1,400,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.11 |
|
|
September 30, 2017 |
John H. Souza |
|
|
1,550,000 |
|
|
|
550,000 |
(5) |
|
|
0 |
|
|
$ |
0.08 |
|
|
June 1, 2017 |
|
|
|
225,000 |
|
|
|
125,000 |
(2) |
|
|
0 |
|
|
$ |
0.12 |
|
|
May 20, 2018 |
|
|
|
0 |
|
|
|
1,483,333 |
(6) |
|
|
0 |
|
|
$ |
0.50 |
|
|
July 28, 2018 |
Dr. Bernard L.
Kasten, Jr. |
|
|
1,200,000 |
|
|
|
425,000 |
(7) |
|
|
0 |
|
|
$ |
0.08 |
|
|
June 1, 2017 |
|
|
|
100,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.12 |
|
|
May 20, 2018 |
|
|
|
0 |
|
|
|
1,120,833 |
(8) |
|
|
0 |
|
|
$ |
0.50 |
|
|
July 28, 2018 |
|
|
|
(1) |
|
375,000 options vest on each of June 1, 2009 and
June 1, 2010. |
|
(2) |
|
The remaining unvested options vest on May 20, 2009. |
|
(3) |
|
516,666 options vest on July 28, 2011, 516,667 options vest on each of July 28,
2012 and July 28, 2013, and 333,333 options vest upon the Company becoming listed on the NASDAQ
National Market or a national stock exchange. |
|
(4) |
|
50,000 options vest on each of June 1, 2009 and June 1, 2010. |
|
(5) |
|
275,000 options vest on each of June 1, 2009 and June 1, 2010. |
|
(6) |
|
383,333 options vest on each of July 28, 2011 and July 28, 2012, 383,334 options
vest on July 28, 2013, and 333,333 options vest upon the Company becoming listed on the NASDAQ
National Market or national stock exchange. |
|
(7) |
|
212,500 options vest on each of June 1, 2009 and June 1, 2010. |
|
(8) |
|
262,500 options vest on each of July 28, 2011, July 28, 2012 and July 28, 2013, and
333,333 options vest upon the Company becoming listed on the NASDAQ |
National Market or national
stock exchange.
78
DIRECTOR COMPENSATION
Directors to not receive any cash compensation for their service as directors of the Company
or for attending any meetings.
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DIRECTOR COMPENSATION |
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Change in |
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Pension Value |
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Non-Equity |
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and Nonqualified |
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Fees |
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Stock |
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Options |
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Incentive Plan |
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Deferred |
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All Other |
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Earned |
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Awards |
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Awards |
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Compensation |
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Compensation |
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Compensation |
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Total |
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Name |
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($) |
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|
($) |
|
|
($) |
|
|
($) |
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|
($) |
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|
($) |
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|
($) |
|
(a) |
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(b) |
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(c) |
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(d) |
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(e) |
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(f) |
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(g) |
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(h) |
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Robert Hoekstra |
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0 |
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|
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0 |
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|
$ |
26,000 |
(1) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
26,000 |
|
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|
|
(1) |
|
On May 20, 2008, Mr. Hoekstra received options to acquire 500,000 shares of Common
Stock, of which 200,000 options vested on May 20, 2008 and 100,000 options vest on each of May 20,
2009, May 20, 2010 and May 20, 2011. |
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors currently consists of. Dr. Bernard L. Kasten,
Jr. and Robert Hoekstra, Jr. These individuals were officers or employees of the Company during
2008. No current executive officer of the Company has served as a member of the board of directors
or compensation committee of any entity for which a member of our Board of Directors or
Compensation Committee has served as an executive officer.
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
PRINCIPAL SHAREHOLDERS
Security Ownership of Management and Certain Beneficial Owners
The following table sets forth certain information as of March 16, 2009 (the record date for
the Annual Meeting) regarding the ownership of Common Stock (i) by each person known by the Company
to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) by each
current officer and director of the Company, (iii) by each nominee for director, and (iv) by all
current officers and directors of the Company as a group.
The beneficial owners and amount of securities beneficially owned have been determined in
accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, includes all shares
of the Companys Common Stock that may be acquired by such beneficial owners within 60 days of
March 16, 2009 upon the exercise or conversion of any options, warrants or other convertible
securities. This table has been prepared based on 105,950,025 shares of Common Stock outstanding
on March 16, 2009. Unless otherwise indicated, each person or entity named below has sole voting
and investment power with respect to all Common Stock beneficially owned by that person or entity,
subject to the matters set forth in the footnotes to the table below. Unless otherwise stated, the
beneficial owners exercise sole voting and/or investment power over their shares.
80
|
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Number of Shares |
|
|
Approximate Percentage |
|
Name |
|
Beneficially Owned |
|
|
Of Stock Outstanding |
|
Chesed
Congregation of America
One State Street Plaza, 29th Floor
New York, NY 10004 |
|
|
10,625,000 |
(1) |
|
|
5.9 |
% |
Dr. Bernard L. Kasten, Jr.
4380 27th Court, SW #104
Naples, FL 34116 |
|
|
6,346,192 |
(2) |
|
|
4.2 |
% |
Kenneth R. Levine
2 Oaklawn Road
Short Hills, NJ 07078 |
|
|
6,302,046 |
(3) |
|
|
5.9 |
% |
Robert Hoekstra
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
4,537,196 |
(4) |
|
|
3.9 |
% |
Robert P. Ricciardi, Ph.D.
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
4,235,000 |
(5) |
|
|
3.9 |
% |
John H. Souza
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
3,351,331 |
(6) |
|
|
3.1 |
% |
Monte E. Taylor, Jr.
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
2,727,250 |
(7) |
|
|
2.5 |
% |
Directors and Officers as a
Group |
|
|
21,371,971 |
(2)(4)(5)(6)(7) |
|
|
18.4 |
% |
|
|
|
(1) |
|
Includes 10,000,000 shares of Common Stock issuable upon the conversion of convertible notes. |
|
(2) |
|
Includes currently exercisable options and warrants to acquire 2,420,833 shares of Common
Stock. |
|
(3) |
|
Includes 6,182,046 shares held directly and 70,000 shares held in a retirement plan. Includes
currently exercisable options and warrants to acquire 50,000 shares of Common Stock. |
|
(4) |
|
Includes currently exercisable options and warrants to acquire 620,455 shares of Common Stock.
Includes 1,697,000 shares of Common Stock and warrants to exercise 500,000 shares of Common Stock
held by a family trust for which Mr. Hoekstra is a trustee. Mr. Hoekstra disclaims beneficial
ownership of those shares and warrants. |
|
(5) |
|
Includes currently exercisable options and warrants to acquire 1,525,000 shares of Common
Stock. |
|
(6) |
|
Includes currently exercisable warrants to acquire 2,506,661 shares of Common Stock. |
|
(7) |
|
Include 16,000 shares held by Mr. Taylor and various family members in joint tenancy. Includes
currently exercisable options and warrants to acquire 2,700,000 shares of Common Stock. |
81
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
In 2006 and 2007, pursuant to the terms of a Convertible Secured Loan Agreement, dated as of
May 12, 2006 (as amended and supplemented, the Loan Agreement), the Company issued $965,390.40
principal amount of Notes.
The Company issued to First Equity Capital Securities, Inc., as Administrative Agent under the
Loan Agreement, an aggregate of 478,750 shares of restricted Common Stock of the Company and
warrants to acquire 1,915,000 shares of restricted Common Stock of the Company at an exercise price
of $0.05 per share in connection with the issuance of the Notes. The Company also paid First
Equity Capital Securities, Inc. a placement fee of $60,900, equal to 7% of all loans raised
pursuant to the Loan Agreement. Kenneth R. Levine, a holder of more than five percent of the
equity securities of the Company, is an officer and principal of First Equity Capital Securities,
Inc.
In November 2007, the Company issued $1,431,399.66 of units comprised of common stock and
warrants, and in connection with the sale of such units the Company issued to First Equity Capital
Securities, Inc. warrants to acquire 1,137,749 shares of Common Stock and paid First Equity Capital
Securities, Inc. a cash fee of $54,612.
In December 2008, the Company issued $853,500 of Common Stock in a private placement, and in
connection with such offering the Company issued to First Equity Capital Securities, Inc. warrants
to acquire 597,250 shares of Common Stock and paid First Equity Capital Securities, Inc. a cash fee
of $47,780.
A family trust of which Robert Hoekstra, a director of the Company, is a trustee, acquired
1,050,000 shares in this offering for a purchase price of $105,000.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Buckno, Lisicky & Company was the Companys independent public accountant for 2008 and 2007.
Fees for Independent Auditors for Fiscal Years 2008 and 2007
Set forth below are the fees billed for services rendered by Buckno, Lisicky & Company in 2008
and 2007.
|
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|
2008 |
|
|
2007 |
|
Audit Fees |
|
$ |
22,000 |
|
|
$ |
22,000 |
|
Audit-Related Fees |
|
|
0 |
|
|
|
0 |
|
Tax Fees |
|
|
0 |
|
|
|
0 |
|
All Other Fees |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
22,000 |
|
|
$ |
22,000 |
|
|
|
|
|
|
|
|
Audit fees consist of fees billed for professional services rendered by the Companys
independent accountant for the audit of the Companys annual financial statements, review of
financial statements included in quarterly reports on Form 10-Q and services that are normally
provided by the independent accountant in connection with statutory and regulatory filings or
engagements.
82
Audit Committee Pre-Approval Procedures. The Audit Committee approves the engagement of the
independent auditors, and meets with the independent auditors to approve the annual scope of
accounting services to be performed and the related fee estimates. It also meets with the
independent auditors, on a quarterly basis, following completion of their quarterly reviews and
annual audit and prior to our earnings announcements, if any, to review the results of their work.
During the course of the year, the chairman has the authority to pre-approve requests for services
that were not approved in the annual pre-approval process. The chairman reports any interim
pre-approvals at the following quarterly meeting. At each of the meetings, management and the
independent auditors update the Audit Committee with material changes to any service engagement and
related fee estimates as compared to amounts previously approved. During 2008, all audit and
non-audit services performed by our independent accountants were pre-approved by the Audit
Committee in accordance with the foregoing procedures.
ITEM 15. EXHIBITS
|
(1) |
|
Financial Statements. The financial statements required to be filed are
presented beginning on page 36. |
|
(2) |
|
Exhibits. The following Exhibits have been filed pursuant to Item 601 of
Regulation S-K. |
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended Articles of Incorporation |
|
|
|
|
|
|
10.1 |
|
|
Letter Agreement with Robert P. Ricciardi, Ph.D. dated
September 30, 2007 |
|
|
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|
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|
21 |
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
83
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused
this registration statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
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|
|
|
GENELINK, INC.
Registrant
|
|
Date: November 5, 2009 |
Monte E. Taylor, Jr.
|
|
|
Monte E. Taylor, Jr., Chief Executive Officer |
|
|
and Chief Financial Officer |
|
In accordance with the Exchange Act this report has been signed below by the following persons
on behalf of the registrant and in the capacities and the dates indicated.
|
|
|
|
|
Signatures |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ Monte E. Taylor, Jr.
Monte E. Taylor
|
|
Principal Executive Officer, Principal Financial Officer,
Principal Accounting Officer and Director |
|
November 5, 2009 |
|
|
|
|
|
|
|
Director |
|
|
|
|
|
|
|
/s/ Robert Hoekstra
|
|
Director
|
|
November 5, 2009 |
|
|
|
|
|
Robert Hoekstra |
|
|
|
|
|
|
|
|
|
/s/ Bernard L. Kasten, Jr.
|
|
Chairman and Director
|
|
November 5, 2009 |
|
|
|
|
|
Dr. Bernard L. Kasten, Jr. |
|
|
|
|
|
|
|
|
|
|
|
Director |
|
|
|
|
|
|
|
/s/ Robert P. Ricciardi
|
|
Director
|
|
November 5, 2009 |
|
|
|
|
|
Robert P. Ricciardi, Ph.D. |
|
|
|
|
|
|
|
|
|
/s/ John H. Souza
|
|
Director
|
|
November 5, 2009 |
|
|
|
|
|
John H. Souza |
|
|
|
|
84
EXHIBIT INDEX
|
|
|
|
|
Exhibit Number |
|
Description |
|
|
|
|
|
|
3.1 |
|
|
Amended Articles of Incorporation |
|
|
|
|
|
|
10.1 |
|
|
Letter Agreement with Robert P. Ricciardi, Ph.D. dated
September 30, 2007 |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
85