U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 2009
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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
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23-2795613 |
State of Incorporation
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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.
Yes þ No o
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
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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
(Check one):
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Large accelerated filer o
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Accelerated filer o
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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).
Yes o No þ
Aggregate market value of common stock held by non-affiliates of the Registrant, as of June 30,
2009 was $13,500,000 based on the closing price of the common stock of the Nasdaq OTC Bulletin
Board.
As of March 15, 2010, there were 116,972,025 shares of the issuers common stock, $.01 par
value, outstanding.
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 Securities and Exchange Commission (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. |
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DESCRIPTION OF BUSINESS. |
Company Background
GeneLink, Inc. (GeneLink, the Company, we or us) is a Pennsylvania corporation that became
a publicly traded company in 1999. It is listed on the NASDAQ OTC Bulletin Board trading under the
symbol GNLK.
The Company is a genetics-based, personal healthcare and wellness firm that has developed DNA tests
that determine an individuals likelihood of developing adverse health conditions (heart, bone,
etc.) and susceptibility to accelerated aging over their lifetime. These pre-dispositions to aging
and adverse health conditions are determined by measuring DNA variations in each human, called SNPs
(snips). GeneLink scientists then formulate products to address these susceptibilities to help
decrease the likelihood of the onset of developing adverse health conditions and to help extend
their healthy, active lifetimes.
The Companys products are centered on natural organic compounds and food-derived supplements that
are generally considered safer than pharmaceuticals, with an emphasis on delivering the proper
nutrients and ingredients to optimize specific, individualized body functions. We have all been
taught the value of good nutrition. We have also been told that vitamins are good for us, yet none
of us know which ones we need, how much we need, or whether we can actually absorb them. GeneLink
scientists, along with other top research institutions, have discovered that each of us has a
unique genetically determined body chemistry. All humans have minor DNA variations that can cause
the body to be unable to produce some essential proteins for normal, healthy maintenance. Even
small variations in an individuals genes can have a profound influence on how well he or she
responds to food, physical activity, environmental stresses, and medicines. That is why vitamins
and supplements are important to compensate for deficiencies in each of our biological make-ups
so that our cells consistently have the right fuel to do their jobs.
The vitamin and supplement marketplace is now over 50 years old, with no significant advances in
technology in view. The market leaders continue to promote the decades-old multi-vitamins that we
have come to know as the industry standards. The fitness market has driven a vast array of
confusing supplements available at retail stores but with no ability for the customer to evaluate
what supplements would address their personal requirements, much less what adverse health
conditions they may deal with over their lifetime. GeneLink provides an early warning system and
the ability to do something about your future health now.
To determine each persons individual genetic makeup, a GeneLink customer performs a simple swab
inside their cheek using familiar cotton swabs, then mails in the swabs to the GeneLink lab for DNA
analysis. The Company then formulates and manufactures monthly supplies of all-natural,
organically-based customized vitamins, nutritional supplements, and skin care products for each
customer based on their DNA test. These products help protect against the identified adverse
health pre-dispositions, encourage longer, healthier, more active lives, and minimize the effects
of normal aging processes. The result is healthier bodies and skin, which are then better able to
cope with any environmental stresses and tendencies towards adverse health conditions.
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GeneLink is now delivering the new generation of the familiar but one size fits all
multi-vitamins and skin care products in personally-customized formulations that are manufactured
specifically to each individuals DNA test results. In addition, GeneLink utilizes the most
effective, highest quality and most current scientifically supported ingredients available. In the
case of nutrition, the current DNA-customized nutritional supplement product currently utilizes 89
all-natural organic compounds, compared to a typical multi-vitamin with 30 ingredients, all of
which are chemically-synthesized. The GeneLink skin care product currently contains 16 all-natural
plant-based ingredients. Each user gets just what he or she needs, nothing that he or she does not
need, and for the first time can now know that he or she is getting what will work best for his or
her individual body, saving cost, eliminating guesswork, and providing peace of mind.
Market Conditions
The entire global healthcare market is in dramatic change. It is now simply becoming too expensive
to be sick. Because of this market change, we as consumers are about to watch the end of the one
size fits all era of health care that served us with mass-marketed, mass-produced vitamin
supplements, medicines, and personal care products. We are now entering the era of personalized
and customized medicine and health care that will dramatically decrease costs and improve health
outcomes because they will be designed specifically to your body, as opposed to a one size fits
all formulation.
The growing health-care cost crisis is forcing a rapid transition from disease/sickness treatment
to a Wellness Strategy. Economics and prudence dictate that in addition to focusing on symptoms
(curative care), the Company is seeing a shift to preventative care and genetics is at the
forefront of this revolution. As a result, Wellness market product spending is forecast to grow
from $200B in 2010 to $600B in 2012.
GeneLinks Market Positioning
GeneLink is the pioneer in genetically-guided personal care products. Its scientific group is
comprised of world-recognized scientists and researchers in the fields of biotechnology, genomics,
molecular biology, chemistry, medicine, clinical laboratory medicine and nutritional sciences. As a
group they have over 600 peer reviewed publications and abstracts, numerous awards, dozens of
patents and distinguished careers with some of the worlds foremost public and private biosciences
corporations and universities. GeneLink possesses four patents and has fourteen patents pending.
Twenty-five trademarks have been registered to date.
GeneLink currently focuses in four business areas:
1. The first is to provide genetic test-driven products to GeneLink customers and GeneLink global
distribution channel partners. The LifeMap nutritional supplement and skin care products are
currently distributed via GeneLinks wholly-owned direct marketing subsidiary, GeneWize Life
Sciences, Inc. (GeneWize). In August 2008, GeneLink launched its core product, LifeMap
Nutrition®, through GeneWize. In September 2009, GeneWize launched the LifeMap Me DNA-based Skin
Serum.
2. The second is Private Label and Licensing applications of GeneLink genetic tests and various
product formulations into existing and new sales channels worldwide. Private label distribution is
anticipated to commence through partners in 2010. On March 17, 2010, the Company signed a joint
marketing agreement with a healthcare-related marketing and sales
organization to complement its current sales efforts. Revenues from this agreement are anticipated
to begin in the third quarter of 2010.
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3. The third will be the application and modification of GeneLink tests and products into Specialty
Vocational Markets such as Physicians, Fitness, Sports and Athletes. This will be achieved through
GeneLinks own distribution efforts and brands as well as in conjunction with outside partners
currently serving the target audiences.
4. The fourth area of development is a research effort focused on developing genetic tests linked
to non-FDA Medical or Pharmacogenomic Applications (Specific Condition Applications). This area
of GeneLinks developmental pipeline incorporates important research areas such as genetic
assessments for early detection of Alzheimers and Dementia, Cardiovascular Disease, Bone Density
Loss, and many significant adverse health conditions. These non-FDA regulated products, known as
nutraceuticals (derived from nutrients), will be all-natural compounds that replace or assist
current pharmaceutical solutions that have either low success rates or substantial negative side
effects, or both. Future plans involve partnering with established pharmaceutical companies to
support, fund and develop these technologies and take them to market starting in 2011.
Sales Channel/Market Development Roadmap
GeneLink will continue to develop its own direct channels as well as partnering with existing
channels to market via Private Labeled products, Licensing, and re-formulation of existing products
for specific applications or unique vocations. GeneLink scientists can formulate a customized
nutritional supplement formulation targeting that prevalent condition for a particular customer
base. The ability to tailor products to the specific application is part of GeneLinks market
advantage.
Product Development Roadmap
Current Products and Extensions for 2010: The GeneWize direct-marketing subsidiary of GeneLink
currently markets LifeMap Me Nutritional Supplements and Skin Care through its direct marketing
Affiliates. The Company plans to add additional products and extensions through this channel.
The initial LifeMap Me Nutrition System and LifeMap Me Skincare System consist of a home DNA test
that is mailed in, a one month supply of LifeMap Essentials® non-DNA customized product, and the
DNA customized product that is manufactured after the results of the DNA test are available from
the lab. A customer pays $129 per month for the customized nutrition or customized Skin Care
product and pays $228 per month if both products are purchased . GeneWize does not charge for the
DNA test if at least three months of autoship products are purchased, whereas other marketing
channels (such as physicians) may have a separate charge for the test.
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The Science Behind GeneLink
Genomic science began formally in 1990 with the establishment of the Human Genome Project,
including some researchers and scientists that are now part of the GeneLink Scientific Advisory
Board. This enormous undertaking was the combined effort between the United States Department
of Energy and the National Institutes of Health. The project was based on the mission of pursuing a
greater understanding of individual health risks.
The Human Genome Project showed that our physical uniqueness is largely due to variations in our
DNA called SNPs (snips), scientifically known as Single Nucleotide Polymorphisms,. The DNA
between any two humans is about 99.1% identical. Except for identical twins, variations in just a
small fraction of our DNA account for the major ways in which one human is different from another.
Scientists have identified about 1.4 million locations where single-base DNA differences occur in
humans.
SNPs in part explain why people react differently to different types or amounts of medicines. For
example, patients can react differently to the same heart medication, such as a beta-blocker.
Since SNPs can affect the structure and function of proteins and enzymes, they can influence how
efficiently a medicine is absorbed and metabolized. A current focus of the pharmaceutical industry
is to use the science of SNPs to help determine which drugs are most suitable for any given patient
- this is known as pharmacogenomics. GeneLinks scientists have spent over a decade pursuing
pharmacogenomic research, resulting in a significant pipeline of research and future opportunities.
GeneLink analyzes each persons DNA for flaws that cause pre-dispositions to common health
conditions, then compensates for DNA deficiencies through delivery of personally-customized
nutraceutical (vitamins/supplements), dermagenetic (skincare), and pharmacogenomic (medical)
products.
Nutragenetics and Dermagenetics are a combination of the sciences of genetics, nutrition and skin
care that reveal personalized information regarding an individuals status and provides the basis
for selecting a dietary, nutritional and skin care program best suited to achieving the healthiest
and longest life possible. Nutragenetics and Dermagenetics® use SNP testing to identify areas of
an individuals genetic make-up that may be functioning less than optimally.
Nutragenetics and Dermagenetics® can help guide individuals in choosing the optimal combination of
nutrients, vitamins and topical active ingredients matched to their unique genetic make-up. For
the first time, this revolutionary SNP science is making it possible to personalize and tailor
health and skin care products.
As pharmacogenomics is acknowledged to be the future of medicine, GeneLink believes that
Nutragenetics and Dermagenetics® are the future of the Wellness industry. GeneLink is not only
positioned as the leader, but it is the inventor which, through its genetic tests and patents, has
a head start in this important and emerging market.
Genetically Guided Personalization of Nutrient and Skin Care
GeneLinks Nutragenetic and Dermagenetics® DNA tests examine a variety of genes responsible for
making proteins that play a very important role in our overall health. These include oxidative
stress, heart and circulatory health, immune health, bone health, pulmonary health, eye/vision
health, defense against environmental pollutants, collagen breakdown, photo-aging, skin slacking
and wrinkling and mild skin irritations.
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With over half of the population of the United States taking nutritional supplements and using
topical skin care products, the vast majority are uncertain as to what theyre using and why. Many
times this shot-gun approach leads to the over (or under) consumption of vitamins, minerals and
active ingredients.
GeneLinks innovations have led the Company to develop a proprietary mass-customization product
manufacturing system for nutritional supplements and skin care product delivery. Mass Customization
is the process of manufacturing large volumes of one at a time formulations based on an
individuals DNA signature.
The competitive advantage is simple. GeneLink offers the best all-natural ingredients, as others
could. However, unlike the rest of the nutrition and skincare industry, the Company has the
ability to provide its customers, on an individual by individual basis, the ability to determine
and obtain:
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what they need, |
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in the right amount, and |
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not pay for or consume what they dont need. |
Utilizing genetics, GeneLink adds a completely unique preventative dimension the ability to
address an individuals genetic deficiencies, hopefully before they become symptomatic. In
addition to GeneLinks own proprietary science and discoveries, in order to protect its Customers,
GeneLink uses only:
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Genetic variations (SNPs) independently verified by world-recognized medical and scientific
institutions |
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Ingredients already generally accepted as safe by the FDA; and |
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Ingredients independently verified to be efficacious in addressing the deficiencies identified
through the SNPs. |
Thus, although GeneLinks approach is unique, the scientific underpinnings are independently
verified and well accepted by the scientific community. Furthermore, as a science company,
GeneLink continues to design its tests and products to benefit from new breakthroughs in regard to
relevant SNPs and compensatory ingredients. For instance, GeneLink is currently working on a 37
SNP test, the next generation to its initial 12 SNP test panel.
In laymans terms, over time GeneLink will be able to see further and further into the layers of
health issues revealed by genetic information then deliver more and more finely-tuned
formulations. Aside from a continual expansion of its initial product offering, this process will
result in the ultimate goal of condition specific nutraceuticals much like the vast array of
pharmaceutical medicines we are familiar with today, but with targeted accuracy and without the
effects of synthesized chemicals that often have severe and unwanted side effects.
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Market Expansion: 2010 and Beyond
Since commercial launch in August 2008, GeneLink has performed over 20,000 genetic tests and
delivered over 70,000 units of customized product. GeneLink has delivered something no company has
before: mass personalization of genetically customized products at an affordable price. With
increased volumes and investment in systems, manufacturing and lab capabilities, costs can be
further reduced, allowing for increased margins and more attractive market pricing, which the
Company believes will afford access to more customers and marketing opportunities.
GeneLink will continue to support its GeneWize direct-marketing sales channel as well as to address
new private label and other market channels in 2010 and beyond. The Company has additional
products and technologies in development that it expects to introduce, including specific-condition
nutraceuticals.
Commercial History
From its inception in 1994, GeneLink focused on the collection and storage of DNA as a database for
research. GeneLinks scientists focused their genetic research on the ability to identify
pre-dispositions to various adverse health conditions something not previously possible before
the completion of the Human Genome Project, which some of the GeneLink scientists were intimately
involved with. The early work contributed to a growing portfolio of discoveries, patents, and
product concept pipeline that GeneLink continues to research and develop. GeneLink plans to
commercially develop this research and patent portfolio.
Commencing in the late 1990s, GeneLinks scientists began to focus on consumer genetic panels and
sought to develop compensating products and filing patents. GeneLink is the first (and only)
company to be granted a patent for a therapeutic skin health regimen linked to DNA-based skin
health assessment (U.S. Patent No. 7,211,383). From 2001 through 2004, GeneLink worked with
numerous larger companies including Fortune 100 firms in an attempt to develop commercial
applications for GeneLinks genetic profiles. Although GeneLinks science was generally well
received, GeneLink discovered that genetic customization proved to be a difficult technology for
mainstream commercial companies, and large firms were unable for the time being to overcome
their one size fits all high-volume business model as well as the publics fears about privacy
and its lack of familiarity and acceptance of DNA and genomics.
Thus, in 2004, GeneLink decided to launch its own consumer product. Through GeneLinks
Dermagenetics, Inc. subsidiary, GeneLink developed its DNA UltraCustom® SkinCare product, a night
cream which was successfully beta tested at the Pebble Beach Spa in Monterey, California and
eventually offered in approximately 100 spas, resulting in the first material revenues for
GeneLink. For various reasons, including a lack of capital, GeneLink decided not to pursue this
mode of distribution in the fall of 2005.
In December 2007, GeneLink entered into a license and distribution agreement with Solgar Vitamin
and Herb, pursuant to which Solgar was to 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. Although launched commercially in
the spring of 2008, shortly after the death of Solgars CEO, Solgar terminated the license and
distribution agreement.
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GeneWize Life Sciences, Inc. Sales Channel
On August 1, 2008, GeneWize 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 and first three quarters of 2009 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 SNPs in DNA. GeneLinks patented and patent 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 custom recipe for each customer. In order to help compensate for any anticipated need for
additional supplementation, genetically selected ingredients and nutrients (SNPboost®, or snip
boosts) are blended into the individual nutritional formulation. Thus, each customers product is
individually customized and manufactured each month 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 comply with the GeneWizes policies related to sales and
distribution of product, particularly as it relates to product claims or, in the case of enrolling
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.
Customers order the LifeMap Nutrition® in a 30-day supply which currently comes in an encapsulated
form. List price for monthly supplements is $129. 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). GeneWize
also offers 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.
At the August 1, 2008 launch and through the end of 2008, GeneWize far exceeded its enrollment plan
and expectations. This unanticipated and extraordinary demand put pressure on infrastructure,
including laboratories, manufacturing and customer service. In Spring 2009, GeneWize completed
significant upgrades to its systems infrastructure, customer service team, and marketing and sales
support staff. It increased capacity in manufacturing and DNA testing labs as well as customer
service teams.
During 2009, the Company continued to develop its sales, marketing and operations to support its
position as a leader in the genetically customized nutritional and personal care businesses. Nearly
all of the approximately $8.6M of revenues realized in 2009 by GeneLink were through its GeneWize
subsidiary. On September 16, 2009, GeneWize made a strategic shift in its core product pricing
structure to enhance customer acquisition and margins, as discussed more thoroughly below.
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On September 16, 2009, GeneWize combined the launch of LifeMap Me (made exclusively) Skin Serum
and new sales and marketing tools with a strategic shift in pricing of its core offerings. The
formulation of LifeMap Me (made exclusively) Custom Nutrition, newly enhanced to include the
enzyme CoQ10 and digestive enzymes, was priced at $129 per month, as was the LifeMap Me (made
exclusively) Skin Serum (nutrition customers already on a monthly autoship program were
grandfathered in at the earlier price of $99 per month.) In the period since its launch in August
2008, the nutrition product has proven to have strong customer retention and, as a result of the
increased margins, GeneWize is on a steady and planned path to profitability.
GeneLink Manufacturing
GeneLinks products are manufactured by a third party exclusively for GeneLink. GeneLink starts
with a base formula and adds the specific Genetically Guided active nutrients to customize each
product to the exact DNA information from each Customer.
GeneLink established the first commercially viable DNA-guided nutrition and skin care production
facility. Large pharmaceutical and skin care providers manufacture very large volumes of one,
single formula product, then ship it to warehouses for storage until it is ordered by a customer or
distribution channel. Some products are on the shelf for months, even a year because it saves
the manufacturer money. GeneLink has manufactured and delivers a new, individually-customized
product for each customer every month, so ingredient freshness is assured and the customer receives
the exact product formulation that his or her body needs. The GeneLink operations team has invested
considerable time and energy in designing a reliable delivery process. Customization and
personalized products are the future, and GeneLink is the first to conquer the challenge of
delivering customized wellness products.
GeneLink employs a US based one at a time manufacturing strategy. This permits GeneLink to
control quality in real time. Its current third-party methodology is scalable for the foreseeable
future, but the Company intends to further automate its manufacturing process to decrease cost,
expand capacity, increase the level of customization, and allow special orders allowing
customers to delete or add ingredients. This level of customization could provide GeneLink with
additional competitive and financial advantages as it facilitates adding additional ingredient(s)
to an order at a fraction of the cost a customer would pay if purchasing such ingredient(s)
elsewhere.
Quality
GeneLink is committed to quality and efficiency. Currently, GeneLink products are made in a clean
room environment, with pharmaceutical grade ingredients and FDA pharmaceutical-grade processes. In
addition, GeneLink is also committed to privacy. All DNA samples are bar coded to protect privacy
and confidentiality of all customer information, and all DNA samples are destroyed after
genotyping. Dr. Donald J. Cannon, Ph.D., a GeneLink Scientific Advisory Board member, is an expert
in pharmaceutical product quality and processes and oversees the GeneLink Quality Program.
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Intellectual Property
GeneLink has a compilation of issued and pending patents that center on using DNA analysis for the
purpose of customizing nutrition and skin care formulations for wellness and anti-aging. Patents
that focus on certain specific adverse health conditions are being developed.
The DNA gene technology utilizes SNP analysis. SNPs, which reside in each persons DNA, are
variations in the genetic code of life and account for most of the individual differences among
humans including their biochemical pathways. SNPs can account for many physiological differences,
e.g., why people respond differently to certain medications, or are more prone to skin rashes or
the build up of plaque in their blood vessels.
On May 1, 2007, GeneLink was granted a U.S. Patent (No. 7,211,383) for Kits and Methods for
Assessing Skin Health the third patent to be granted from a family of patent applications filed
by GeneLink in the U.S. and abroad. In addition, GeneLink is the first (and only) company to be
granted a patent for a therapeutic skin health regimen linked to DNA-based skin health assessment.
To support its vision, GeneLink has developed an impressive portfolio of DNA-based assessments and
proprietary systems for individually tailored product manufacture and delivery:
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Oxidative Stress Assessment |
GeneLinks Oxidative Stress Assessment is a DNA-based tool designed to help measure an individuals
inherent genetic capacity to combat oxidative stress. This assessment measures and helps predict
the bodys ability to efficiently control oxygen free radical damage, eliminate hydrogen peroxide,
protect and repair oxidized phospholipids and destroy harmful environmental compounds and
pollutants.
This test specifically looks for variations known as SNPs in key oxidative stress genes. SNPs
predict inefficient enzymatic activity that, over time, can result in oxidative damage (also known
as free radical damage) to cellular proteins and DNA. SNPs in oxidative stress genes have been
associated with a wide variety of physiologic and health related conditions including heart
disease, neurological degeneration, premature aging and skin conditions. GeneLink has been
granted an Australian patent (No. 2002230953) for this technology.
Oxidative Stress Assessment results are effective when used to create a customized or targeted
antioxidant supplement regimen for patients or consumers.
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Lipid Metabolism Assessment/Metabolic Syndrome |
GeneLinks Lipid Metabolism Assessment was designed to help predict an individuals susceptibility
to abnormalities related to lipid balance, lipid metabolism, functional areas that modulate blood
pressure regulation and to Metabolic Syndrome.
Metabolic Syndrome is a serious emerging health problem that affects 40 to 50 million American
adults. It is related to a constellation of abnormalities that include obesity, abnormal lipid
metabolism, and insulin resistance that together yield enhanced risks of cardiovascular problems
and Type 2 diabetes mellitus.
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GeneLinks Lipid Metabolism and Metabolic Syndrome Assessment is an important predictive tool to
help determine individual susceptibility to cardiovascular events and conditions related to this
emerging health crisis.
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Bone Density Assessment |
GeneLinks Bone Health Assessment looks for SNPs in several key genes associated with bone density
and bone loss and is designed to help predict an individuals susceptibility to osteopenia a
condition that often leads to osteoporosis.
Osteoporosis is responsible for 1.5 million fractures each year, most notably fractures of the
vertebrae, forearms, wrists and hips (these are often crippling and sometimes fatal). According to
the National Osteoporosis Foundation, one in three women and at least one in twelve men will
develop osteoporosis during their lifetime.
GeneLinks Bone Health Assessment is an important predictive tool that can be used as a guide to
help determine an individuals genetic propensity for bone density loss, and to help create a
therapeutic strategy that minimizes in-born health risks.
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GeneLink Healthy Aging Assessment® |
GeneLinks Healthy Aging Assessment is a twelve gene-SNP panel containing a cross section of some
of the most important basic functional health areas including oxidative stress, bone health,
cardiovascular health, lipid metabolism and includes genes that play multiple functions in immune
response and detoxification.
The Healthy Aging Assessment represents a foundational health test for clinicians, patients or
consumers interested in using their personal genetics information to create an integrative strategy
to help minimize potential health risks.
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GeneLink Nutragenetic Profile® |
GeneLinks Nutragenetics Nutritional Assessment is designed to identify variations (SNPs) in
propensity for: Oxidative stress; Environmental challenges; Cardiovascular health; Detoxification;
Immune health; Neurological health: Pulmonary health, Eye/Vision health & Bone health.
This powerful assessment represents an excellent starting place for clinicians, patients or
consumers interested in using their personal genetic information to create an integrative strategy
to help minimize potential health risks.
Depending upon the marketing channel, assessment result presentations may vary.
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CoQ10 Efficiency Assessment |
CoQ10 is a powerful antioxidant very important to cardiovascular health, neuronal health, skin
health; also functions in the protection against environmental toxins. CoQ10 changes are
increasingly associated with metabolic syndrome, an important clustering of conditions that are
powerful determinants of cardiovascular disease and diabetes.
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GeneLinks CoQ10 Efficiency Assessment is designed to help determine which form of CoQ10 an
individual is able to efficiently use. The fully oxidized form of COQ10 (called Ubiquinone) or the
active form of CoQ10 (called Ubiquinol).
Many people (approximately 30% of the population) may not be able to efficiently use the more
popular form of CoQ10 (Ubiqionone) and would likely benefit from utilizing Ubiquinol, the active
form of the antioxidant.
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Skin Health Assessment (also know as Dermagenetics® Skin Health Assessment) |
GeneLinks patented Dermagenetics Skin Health Assessment is a first of its kind skin-health
assessment that helps identify variations in key genes related to skin aging, wrinkling and overall
skin health; it is designed to specifically measure important gene-SNPs associated with collagen
breakdown, photo-aging, oxidative stress, skin irritation and the skins ability to tolerate
environmental pollutants.
This breakthrough test provides information that forms the foundation for the first and only
scientifically proven customized skin care system genetically matched to an individuals DNA.
The Dermagenetics Skin Health Assessment provides information that can be used to help guide the
selection of compensatory active ingredients (SNPactives) which can be used to help guide
customized therapies or regimens.
GeneLink offers the only patented (No. 6,291,171), FDA reviewed, non-invasive, self-administered
DNA collection system available today. The process is easy to understand, simple to do and takes
just a few minutes its about as straight forward as brushing ones teeth! No invasive procedures
are involved so anyone, clinicians or consumers, can use this collection system.
A person simply swabs the inside of their mouth (inner cheek) with the provided swabs and mails the
swabs back to GeneLinks laboratories in the special envelopes. Everything, along with
easy-to-follow instructions is included. All materials and forms are bar coded with a unique ID
number to insure privacy and confidentiality. All GeneLink DNA assessment panels utilize this DNA
collection system.
Proprietary Technology
GeneLink has also developed other proprietary technology that is not patented or patent pending.
This technology includes the following:
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Comprehensive Cardio Assessment |
Heart disease and stroke (the principal components of cardiovascular disease) are the first and
third leading causes of death in the United States and account for more then 40% of all deaths.
Coronary heart disease is a leading cause of premature permanent disability among working adults.
GeneLinks Comprehensive Cardio Assessment incorporates twenty-six SNPs (within twenty-one genes)
associated with a variety of important cardio-functional areas that modulate blood pressure
regulation, lipid balance and metabolism, vascular integrity, procoagulation, platelets and
oxidative stress.
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GeneLinks Comprehensive Cardio Assessment is an important assessment tool that can help to
determine individual susceptibilities and for creating therapies that help promote heart-healthy
outcomes.
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Dermagenetics® Customized Skin Care System |
First introduced in 2005, the Dermagenetics® Skin Care System was the first comprehensive system of
personalized (mass customized) skin care product manufacturing based on genetic testing that
measures SNPs in DNA.
GeneLinks patented Dermagenetics® Skin Health Assessment forms the foundation: Genetic test
results drive a proprietary algorithm that generates a skin health report linked to an individual
titration matrix. Next, genetically selected ingredients called SNPactive® (actives which have
been shown to help compensate for genetic deficiencies) are infused into the individual skin care
or cosmetic product.
The Dermagenetics® Skin Care System is the first and only clinically tested, scientifically proven
customized skin care system genetically matched to an individuals DNA.
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Nutragenetics Customized Nutritional Supplement System |
The Nutragenetics Nutritional Care System is the first comprehensive system of personalized (mass
customized) nutritional supplement manufacturing based on genetic testing that measures SNPs in
DNA.
GeneLinks patented pending assessments, such as Healthy Aging 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 (called SnpNutrients) are titrated and blended into the individual nutritional
formulation.
The Nutragenetics Nutritional Care System is the first customized nutritional and optimal health
system where nutritional supplement ingredients and products are genetically matched to an
individuals DNA.
Development Pipeline
GeneLinks scientists continue to research and develop DNA assessments and products for a growing
list of condition-specific products:
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Dementia and Alzheimers Assessment |
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Metabolic Syndrome Assessment |
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Macular Degeneration Assessment |
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Neurological Health Panel |
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DNA Integrity and Repair Panel |
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Next Generation DNA Collection Kit |
Regulation
State and Federal Regulation
GeneLink offers a variety of DNA based predictive assessments designed to measure SNPs. GeneLink
assessments are not intended to diagnose, treat or cure any disease and are intended for education
purposes only.
The Companys 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.
GeneLinks 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.
GeneLink endeavors to maintain compliance with all relevant State and Federal regulations.
Historically, 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. The Company continues to actively seek the
appropriate approvals to provide testing in New York and in all other jurisdictions, both domestic
and international.
GeneLinks DNA 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.
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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 GeneLink would look to replace it with a suitable substitute without
material impact on the usefulness or marketability of the specific GeneLink or GeneWize product.
Privacy Protection and HIPAA
GeneLink is 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.
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SCIENTIFIC ADVISORY BOARD
The Scientific Advisory Board (SAB) is comprised of leading scientists and researchers in the
fields of biotechnology, genomics, molecular biology, chemistry, medicine, clinical laboratory
medicine, pediatrics, and nutritional sciences. As a group, the SAB has published over 600 peer
reviewed publications and abstracts, numerous awards, dozens of patents, distinguished careers and
affiliations with some of the worlds foremost public and private biosciences corporations and
universities.
Bernard L. Kasten, Jr. M.D.
Dr. Kasten is the Executive Chairman of the Board. Dr. Kasten has been a scientific advisor to the
Company since 1999 and a member of the Companys 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 has been Chairman of the Board of Directors of Cleveland Bio Labs Inc. [NASDAQ-CBLI] since
2006, and also serves on the Board of Directors of Enzo Biochem [NYSE-ENZ].
Dr. Robert P. Ricciardi, Ph.D.
Dr. Robert P. Ricciardi is the founder of GeneLink and is a Professor of Microbiology at the
University of Pennsylvania, where he is a Graduate Group Chairman. He received his Ph.D. from the
University of Illinois at Urbana. He was a Postdoctoral Fellow at Brandeis University and Harvard
Medical School in the Department of Biological Chemistry where he was awarded Fellowships by the
American Cancer Society, National Institutes of Health and the Charles A. King Trust. He developed
one of the first genomic technologies, which was used widely to discover and map many hundreds of
genes by identifying the proteins they encode. Most of Dr. Ricciardis research has centered on
understanding basic mechanisms of cancer. He identified one of
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the first gene activators from a virus that can make cells cancerous by enabling them to escape the immune
system. These studies, in turn, disclosed a key mechanism that modulates NF-kappa-B, the master
regulator of the immune system. Dr. Ricciardi has also developed and received patents on
recombinant delivery vectors for potential use as vaccines and gene therapy. In addition, Dr.
Ricciardi discovered new replication proteins from human viruses that cause cancer (KSHV) and
possibly chronic fatigue (HHV-6). He is applying a rapid mechanistic assay he developed (US Patent)
that is being used to screen tens of thousands of compounds from chemical libraries in order to
discover therapeutics that will inhibit these and other disease related human viruses. Dr.
Ricciardi has served as a consultant to Childrens Hospital of Philadelphia, Smith Kline
Pharmaceuticals, the NIH, and was awarded a NATO Visiting Professorship at Ferrara Medical School
and has been an invitational speaker at numerous international scientific meetings and
universities. He has authored nearly 100 publications.
Dr. Harold H. Harrison M.D., Ph.D., F.C.A.P.
Dr. Harrison has served as Corporate Medical Director of Genetic Services for Quest Diagnostics,
and as overall Medical Director for the biochemical, molecular, cytogenetic, and HLA laboratories
of Genetrix, Inc., a national genetic services company that was acquired by Genzyme Genetics in
1997. A Clinical Pathologist with subspecialty training in all areas of genetic services and a
Ph.D. in biochemical genetics, Dr. Harrison is a Fellow of the College of American Pathologists and
a member of the American College of Medical Genetics and American Society of Human Genetics. He
holds medical licenses in six states (AZ, CA, IL, NJ, NV, and NY), and laboratory directors
licensure in NJ and NY. A former faculty member at the Univ. of Chicago Pritzker School of
Medicine, Dr. Harrison has 80 publications and abstracts, and several OMIM/GDB citations for his
and collaborators genetic discoveries. Dr. Harrison currently holds a clinical faculty appointment
with the University of Arizona Medical School.
Dr. Robert P.K. Keller, M.D.
Dr. Keller is Founder and Medical Director of The Keller Medical Institute. Dr. Keller began his
distinguished career in medicine over 30 years ago and has been a respected member of the Monterey
Peninsula medical community for 21 years. Residency trained as a trauma physician and surgeon, he
began repairing damaged skin in the late 1970s. Wanting to become more proactive in skin repair,
he took post-doctorate studies in cosmetic and anti-aging medicine and trained with some of the
worlds most renowned physicians. A former nationally syndicated television medical news
commentator, Dr. Keller has lectured internationally and is listed in the 2001 National Registry of
Whos Who. His patient list includes many of the most celebrated names in sports, entertainment and
business.
Dr. Donald J. Cannon, Ph.D.
Dr. Cannon received his B.A. in Chemistry from Harvard College and a M.A. in Medical Sciences and a
Ph.D in Biochemistry from Boston University. He has been on the faculty at the Medical Schools at
the University of Hawaii, University of Arkansas, and Marshall University where he has lectured to
medical, graduate, nursing and allied health students and was director of the Pathology residency
program at Marshall University. He has directed laboratories and performed research at the Boston
Biomedical Research Institute, the Little Rock, Arkansas VAMC and the Bethesda Hospitals in
Cincinnati. Dr. Cannon has
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served as Laboratory Director in Forensic Toxicology, National Manager of Operations Excellence and National Manager of Special Projects in Business
Ventures at Quest Diagnostics. He has over 130 publications and book chapters, and is an active
member of the American Association for Clinical Chemistry, the Association of Clinical Scientists
and the National Academy of Clinical Biochemistry. He has been invited and has continued to lecture
on a number of topics in various countries and locales. Dr. Cannon has received numerous awards
related to clinical laboratory medicine, laboratory management and teaching. He is currently
Professor of Chemistry and Director of the Forensic Sciences program at the University of Tampa.
Dr. James W. Simpkins, Ph.D.
Dr. James W. Simpkins received his B. S, and M. S. degrees from the University of Toledo and in
1977 received a Ph.D. Degree in Physiology from Michigan State University. He joined the faculty at
the University of Florida, College of Pharmacy in 1997 and rose through the ranks to the position
of Professor of Pharmacodynamics. He has served as Chairman of the Department of Pharmacodynamics,
Chairman of the Department of Pharmaceutics, Associate Dean for Research and Graduate Studies and
Director, Center for the Neurobiology of Aging at the University of Florida. In 1996, Dr. Simpkins
was appointed as the Frank Duckworth Professor of Drug Discovery at the University of Florida. He
has more than 295 peer-reviewed publications, a dozen patents for his discoveries and has edited
two texts on Alzheimers disease therapy. He also served as the Director of the University of
Florida Drug Discovery Group for Alzheimers disease, which has sustained funding by the National
Institute on Aging to support research in the pharmacotherapy for Alzheimers disease. In 1999 he
was appointed to the Medical and Scientific Advisory Council of the National Alzheimers
Association. In July of 2000, he became the Chair of the Department of Pharmacology and
Neuroscience and Director, Institute for Aging and Alzheimers Disease Research at the University
of North Texas Health Science at Fort Worth.
Dr. Robert Kagan, M.D. F.C.A.P.
Dr. Kagan is Board Certified in Clinical Pathology, Nuclear Medicine and Hyperbaric Medicine. He
received his medical degree from Georgetown University School of Medicine. He is Past President of
the Florida Association of Nuclear Physicians and Past Chairman of the Board of the Nuclear
Medicine Resource Committee of the College of American Pathologists.
Dr. Heather Mittiga, M.D.
Dr. Mittiga is a Board Certified Pediatrician. She received her medical degree from Case Western
Reserve University, College of Medicine, served her residency at the University of Pittsburgh
Childrens Hospital and fellowship at the Cincinnati Childrens Hospital Medical Center. Her
practice interests include pediatric wellness, child and adolescent nutrition. Dr. Mittiga assists
the GeneLink formulation team in determining proper nutrients, efficacy, and safety levels for
pediatric, youth, and teen products.
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Our business and the value of our shares are subject to the risks described above and certain risks
described below.
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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the development of adequate internal systems, manufacturing capabilities and laboratory
testing capabilities; |
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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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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, 2009 was $18,001,960. 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.
IF OUR OUTSIDE SUPPLIERS AND MANUFACTURERS FAIL TO SUPPLY RAW MATERIALS AND PRODUCTS IN SUFFICIENT
QUANTITIES AND IN A TIMELY FASHION, OUR BUSINESS COULD SUFFER.
Currently, we have one exclusive supplier of raw materials for our products. The loss of our
supplier or a significant disruption or interruption in our supply of raw materials could have a
material adverse affect on the manufacturing and packaging of our products. Furthermore, any
increases in the costs of raw materials would adversely affect our products margins if we are
unable to pass along such higher costs in the form of price increases, or to otherwise achieve cost
efficiencies in manufacturing distribution. We currently have one exclusive manufacturer of our
products and there is no assurance that this outside manufacturer will continue to reliably supply
finished products to us at the level of quality that we require. If our third-party manufacturer
were to become unable or unwilling to provide products in required volumes and quality levels to
us, we would be required to identify and obtain acceptable replacement manufacturing sources. As
we grow, we will be required to identify alternative sources for raw materials and for
manufacturing, and there is no assurance that we will be able to identify appropriate alternative
sources of raw materials and manufacturing that will be able to meet our needs.
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 DO NOT OWN OUR OWN CERTIFIED GENETIC LABORATORY, SO WE MUST RELY ON INDEPENDENT THIRD-PARTIES
FOR OUR LABORATORY SERVICES.
All genetic tests that are undertaken on our behalf in connection with the sale of our products and
services are undertaken by independent third-party laboratories that are certified in all
appropriate jurisdictions. There is no assurance that these outside laboratories will continue to
reliably provide laboratory services to us at the level of quality that we require or that such
laboratories will maintain their required certifications and licenses needed to provide such
services to us. If these laboratories stop providing such services to us, there is no assurance
that we would be able to obtain alternative laboratory services on a timely basis that will meet
the level of quality that we require. Any extensive interruption in the supply of laboratory
services to us would result in loss of sales.
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IF WE DEVELOP IN-HOUSE CAPABILITIES TO DEVELOP OUR OWN RAW MATERIALS, MANUFACTURING CAPABILITIES
AND/OR CERTIFIED GENETIC LABORATORY SERVICES, THERE WOULD BE REGULATORY, ECONOMIC AND OTHER RISKS
ASSOCIATED WITH SUCH VENTURES.
As we grow, we may decide to manufacture some or all of the raw materials and/or finished products
sold to our customers. In such event, we would be required to comply with the requirements and
directives of governmental agencies, including the FDA. We would also be subject to environmental
laws. Violation of any of these requirements could result in financial penalties and other
enforcement actions and could require us to halt our in-house manufacturing operations until
violations are cured. The costs required to cure any incidents of non-compliance, to resolve
enforcement actions that might be initiated by a government authority or to satisfy any new legal
or other requirements with respect to the manufacturing of our raw materials and products could
have a material adverse affect on our business, financial conditions and results of operations. If
we decide to acquire or build a laboratory to use for our in-house purposes, we would be subject to
the oversight of various federal and state governmental agencies, and we would be required to
become certified in various federal and state jurisdictions. The laboratory certification process
is a lengthy and costly process and there is no assurance that we will obtain any or all such
certifications. If we operate our own laboratory, such operations would be subject to power
failures, the breakdown, failure or substandard performance of equipment, the improper installation
or operation of equipment, and natural and other disasters, and there can be no assurance that the
occurrence of any of these or any other operational problems at any laboratories that we might
operate would not have a material adverse affect on our business, financial condition and results
of operations.
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 have entered into one licensing
arrangement with an alternative supplier and manufacturer and anticipate entering into additional
licensing arrangements. 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.
Any royalties that we receive from licensees will 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 will be 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.
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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. GeneWize is still relatively early in its
development and its ability to retain affiliates and customers has yet to be tested for any
significant period. Because of the short operating history, any forecasts and assurance of future
revenues continue to be less than certain. GeneWize has yet to create positive net cash flow, thus
continuing to require funding from GeneLink. A continued operating deficit could materially impact
our financial condition.
WE MAY NOT BE ABLE TO PAY ANY JUDGMENT AND COULD BE FORCED TO CEASE OUR OPERATIONS IF OUR FORMER
CHIEF EXECUTIVE OFFICER PREVAILS WITH RESPECT TO HIS LITIGATION AGAINST US.
On February 18, 2010, by Final Order, the Superior Court of Pennsylvania dismissed the appeal filed
by the Companys former CEO and President, John DePhillipo, and his wife (collectively, the
DePhillipos) against the Company, its subsidiary GeneWize Life Sciences, Inc., and several of the
Companys officers, directors and advisors (collectively, the GeneLink Parties). The Court also
awarded sanctions in favor of the GeneLink Parties against the DePhillipos and their counsel, with
the amount of such sanctions to be determined in the future by the Court of Common Pleas of
Pennsylvania, Philadelphia County. On March 3, 2010, the DePhillipos and their counsel filed a
motion asking the Superior Court of Pennsylvania to reconsider, and on March 15, 2010 the Superior
Court of Pennsylvania reinstated the DePhillipos appeal.
The DePhillipos appeal arose from the May 5, 2009 Order and Opinion of the Court of Common Pleas
of Pennsylvania, Philadelphia County wherein that Court dismissed the DePhillipos claims as
unviable. The DePhillipos had claimed that the GeneLink Parties defrauded them into settling a
lawsuit previously commenced by Mr. DePhillipo against the Company in the Superior Court of New
Jersey, Atlantic County, and sought the return of 3,953,000 shares of the Companys common stock
sold by the DePhillipos to the Company pursuant to that settlement, allegedly worth approximately
$20 million.
If the DePhillipos 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 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.
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, the 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.
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. 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 expanding our market presence.
Although we have developed our business model in an attempt to address these issues, our prospects
for profitability must be considered in light of our evolving business model.
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.
23
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. Over the past few months, we have taken significant steps to cut costs and
restructure our pricing, resulting in increasing margins. Further increases in margins are a major
focus of our management and our business plan, but there can be no assurance that we will be able
to realize any increase in margins.
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.
24
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.
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.
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.
25
DUE TO THE HIGH LEVEL OF COMPETITION IN OUR INDUSTRY, WE MIGHT FAIL TO DEVELOP NEW CHANNELS OF
DISTRIBUTION OR 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. Although at this time we do not know of any other companies
capable of providing an integrated product line of the type that we offer, 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. Our GeneWize subsidiary is 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.
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 adverse health conditions. The marketplace may never accept our products and services,
and we may never be able to sell our products and services at a profit. We believe that 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.
26
THE SALE OF OUR PRODUCTS INVOLVES PRODUCT LIABILITY AND RELATED RISKS THAT COULD EXPOSE US TO
SIGNIFICANT INSURANCE AND LOSS EXPENSES.
Although we have never received any product liability claim for our genetic tests or customized
products, 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.
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.
27
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, 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.
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 were either incomplete,
insufficient, and/or in process of being developed. Although we have allocated significant
resources to expanding our systems and infrastructure, there is no guarantee that such systems and
infrastructure will not prove to be insufficient unless further improved and expanded, especially
if we experience a large increase in business.
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.
28
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.
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.
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.
29
INCREASED HOLDBACKS BY CREDIT CARD PROCESSORS MAY ADVERSELY AFFECT OUR CASH FLOW AND FINANCIAL
CONDITION.
Due to the recent global credit crisis, some of the companies that process our credit card
transactions may 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.
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
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.
30
In an 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
(the GeneLink Parties). 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.
31
On February 18, 2010, the Superior Court of Pennsylvania dismissed the appeal filed by the
DePhillipos. The Court also awarded sanctions in favor of the GeneLink Parties against the
DePhillipos and their counsel, with the amount of such sanctions to be determined in the future by
the Court of Common Pleas of Pennsylvania, Philadelphia County. On March 3, 2010, the DePhillipos
and their counsel filed a motion asking the Superior Court of Pennsylvania to reconsider, and on
March 15, 2010 the Superior Court of Pennsylvania reinstated the DePhillipos appeal.
We have agreed to indemnify our officers, 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.
In September 2009, the Company brought action against two prior law firms, alleging that their
failure to timely provide legal services and make or authorize required filings caused the Company
to lose valuable Japanese and U.S. patent rights.
|
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|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
32
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 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
High |
|
|
Low |
|
1st Quarter |
|
$ |
0.17 |
|
|
$ |
0.07 |
|
2nd Quarter |
|
|
0.17 |
|
|
|
0.12 |
|
3rd Quarter |
|
|
0.16 |
|
|
|
0.09 |
|
4th Quarter |
|
|
0.19 |
|
|
|
0.10 |
|
As of March 15, 2010, there were 180 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.
33
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 |
|
|
7,125,000 |
(1) |
|
$ |
0.12 |
|
|
|
4,600,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
plans not
approved
by security
holders |
|
|
22,225,624 |
|
|
$ |
0.15 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29,350,624 |
|
|
$ |
0.14 |
|
|
|
4,600,000 |
|
|
|
|
(1) |
|
5,725,000 options were granted pursuant to the Companys 2007 Stock Option Plan and
1,400,000 options were granted pursuant to the Companys 2009 Stock Option Plan. |
RECENT SALES OF UNREGISTERED SECURITIES
During the nine months ended September 30, 2009, the Company sold an aggregate of $1,014,000
of shares of Common Stock in private offerings at a price of $0.10 per share. The shares of Common
Stock were sold on the dates and in the amounts set forth below to accredited investors only in
reliance upon the exemption provided in Section 4(2) of the Securities Act of 1933, as amended (the
Securities Act), and/or Rule 506 of Regulation D promulgated under the Securities Act. No form
of general solicitation or general advertising was conducted in connection with the issuances of
the shares and the shares were offered and sold only to accredited investors. The shares of Common
Stock contain restrictive legends preventing the sale, transfer or other disposition of such
shares, unless registered under the Securities Act, or sold pursuant to an exemption therefrom.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
$ of Common |
|
|
Shares of |
|
|
Number of |
|
Date |
|
Stock Sold |
|
|
Common Stock |
|
|
Investors |
|
January 8, 2009 |
|
$ |
60,000.00 |
|
|
|
600,000 |
|
|
|
2 |
|
January 15, 2009 |
|
$ |
5,000.00 |
|
|
|
50,000 |
|
|
|
1 |
|
January 26, 2009 1 |
|
$ |
500,000.00 |
|
|
|
5,000,000 |
|
|
|
1 |
|
June 12, 2009 |
|
$ |
22,500.00 |
|
|
|
225,000 |
|
|
|
2 |
|
June 17, 2009 |
|
$ |
20,000.00 |
|
|
|
200,000 |
|
|
|
1 |
|
June 29, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
|
1 |
|
July 10, 2009 |
|
$ |
500.00 |
|
|
|
5,000 |
|
|
|
1 |
|
July 23, 2009 |
|
$ |
12,500.00 |
|
|
|
125,000 |
|
|
|
1 |
|
July 24, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
|
1 |
|
July 28, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
|
1 |
|
July 31, 2009 |
|
$ |
500.00 |
|
|
|
5,000 |
|
|
|
1 |
|
August 18, 2009 |
|
$ |
70,000.00 |
|
|
|
700,000 |
|
|
|
2 |
|
August 20, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
|
1 |
|
August 26, 2009 |
|
$ |
3,000.00 |
|
|
|
30,000 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
1,014,000.00 |
|
|
|
10,140,000 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
This investor also received a warrant to acquire 750,000 shares of Common Stock at
an exercise price of $0.11 per share. |
The Company paid a total of $54,640 and issued warrants to acquire 684,500 shares of Common
Stock at an exercise price of $0.10 per share and warrants to acquire 37,500 shares of Common Stock
at an exercise price of $0.11 per share to First Equity Capital Securities, Inc., as placement
agent, in connection with the sale of some of the shares of Common Stock listed above. Kenneth R.
Levine, a holder of more than five percent of the equity securities of the Company, is an officer
and owner of First Equity Capital Securities, Inc.
During the quarter ended December 31, 2009, the Company sold an aggregate of $396,500 of units
(the Units) at a price of $0.10 per Unit, each Unit consisting of 1 share of Common Stock of the
Company and a 1/2 of a warrant to acquire one share of Common Stock of the Company at a price of
$0.15 per share. The Units were sold on the dates and in the amounts set forth below to accredited
investors only in reliance upon the exemption provided in Section 4(2) of the Securities Act and/or
Rule 506 of Regulation D promulgated under the Securities Act. No form of general solicitation or
general advertising was conducted in connection with the issuances of the Units and the Units were
only offered and sold to accredited investors. Each of the shares of Common Stock and Warrants
comprising the Units contains restrictive legends preventing the sale, transfer or other
disposition of such shares of Common Stock and Warrants, unless registered under the Securities
Act, or pursuant to an exemption therefrom.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Number of |
|
|
Number of |
|
Date |
|
$ of Units Sold |
|
|
of Common Stock |
|
|
Warrants Issued |
|
|
Investors |
|
October 12, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
|
50,000 |
|
|
|
1 |
|
November 12, 2009 |
|
$ |
110,500.00 |
|
|
|
1,105,000 |
|
|
|
552,500 |
|
|
|
4 |
|
November 17, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
|
750,000 |
|
|
|
2 |
|
November 20, 2009 |
|
$ |
87,500.00 |
|
|
|
875,000 |
|
|
|
437,500 |
|
|
|
3 |
|
December 7, 2009 |
|
$ |
18,500.00 |
|
|
|
185,000 |
|
|
|
92,500 |
|
|
|
3 |
|
December 9, 2009 |
|
$ |
20,000.00 |
|
|
|
200,000 |
|
|
|
100,000 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
396,500.00 |
|
|
|
3,965,000 |
|
|
|
1,982,500 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid a total of $17,860 and issued warrants to acquire 223,250 shares of Common
Stock at an exercise price of $0.10 per share and warrants to acquire 111,625 shares of Common
Stock at an exercise price of $0.15 per share to First Equity Capital Securities, Inc., as
placement agent, in connection with the sale of some of the Units listed above.
In 2009, the Company issued $1,250,000 in principal amount of convertible secured promissory notes
(the Convertible Notes) to accredited investors. Holders of the Convertible Notes will received
one and one-half (11/2) warrants to acquire shares of common stock (Common Stock) of the Company
for each $1.00 of Convertible Notes acquired by such holders. An aggregate of 1,875,000 warrants
were issued in connection with the Convertible Notes. The warrants are exercisable on or before
February 26, 2014. 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.
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. The Convertible Notes and warrants were sold to accredited investors only in reliance upon
the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D
promulgated under the Securities Act. No form of general solicitation or general advertising was
conducted in connection with the issuances of the Convertible Notes and warrants and the
Convertible Notes and warrants were only offered and sold to accredited investors. Each
Convertible Note and warrant contains restrictive legends preventing the sale, transfer or other
disposition of such Convertible Notes and warrants, unless registered under the Securities Act, or
pursuant to an exemption therefrom.
The Company issued First Equity Capital Securities, Inc., as placement agent for the note offering,
warrants to purchase 1,250,000 shares of Common Stock at an exercise price of $0.10 per share and
warrants to purchase 187,500 shares of Common Stock at an exercise price of $0.11 per share. The
Company also paid First Equity Capital Securities, Inc. a cash fee of $100,000. Kenneth R. Levine,
a holder of more than 5% of the equity securities of the Company, is an officer and owner of First
Equity Capital Securities, Inc.
36
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. These shares of Common Stock were sold to accredited
investors only in reliance upon the exemption provided in Section 4(2) of the Securities Act and/or
Rule 506 of Regulation D promulgated under the Securities Act. No form of general solicitation or
general advertising was conducted in connection with issuance of the shares, and the shares were
offered and sold only to accredited investors. The shares of Common Stock contain restrictive
legends preventing the sale, transfer or other disposition of such shares, unless registered under
the Securities Act or sold pursuant to an exemption therefrom.
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. The
shares of Common Stock contain restrictive legends preventing the sale, transfer or other
disposition of such shares, unless registered under the Securities Act or sold pursuant to an
exemption therefrom.
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. The shares of Common Stock contain restrictive legends preventing the sale, transfer or
other disposition of such shares, unless registered under the Securities Act or sold pursuant to an
exemption therefrom.
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.
37
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 the exemption provided in Section
4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.
The shares of Common Stock contain restrictive legends preventing the sale, transfer or other
disposition of such shares, unless registered under the Securities Act or sold pursuant to an
exemption therefrom. 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 of Common Stock and warrants
were sold only to accredited investors in reliance upon the exemption provided in Section 4(2) of
the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act. No form of
general solicitation or general advertising was conducted in connection with issuance of the shares
and warrants. The shares of Common Stock and warrants contain restrictive legends preventing the
sale, transfer or other disposition of such shares and warrants, unless registered under the
Securities Act or sold pursuant to an exemption therefrom.
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 upon the exemption provided in Section
4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act. No
form of general solicitation or general advertising was conducted in connection with issuance of
the notes and shares, and the notes and shares were offered and sold only to accredited investors.
The notes and shares of Common Stock contain restrictive legends preventing the sale, transfer or
other disposition of such notes and shares, unless registered under the Securities Act or sold
pursuant to an exemption therefrom.
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. The shares of Common Stock contain restrictive legends preventing the sale,
transfer or other disposition of such shares, unless registered under the Securities Act or sold
pursuant to an exemption therefrom.
38
|
|
|
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
2009 proved to be a foundation-building year for the Company. The vision of being a leader in
genetically-guided health, beauty and wellness products grew toward reality as our GeneWize
subsidiary ended this year with a base of over 5,400 monthly recurring orders, new customer
enrollments of more than 9,000, and a rebranding of the LifeMap me Nutrition and LifeMap me Skin
Serum . Revenues generated in 2009 were up 34% over 2008. We finished the year having performed
more than 10,800 DNA assessments.
In 2009, the Company had a number of significant milestones:
|
|
We engaged a California-compliant lab which opened up an enormous market on hold at the end
of 2008 due to then-new regulatory compliance requirements |
|
|
|
We launched LifeMap me Skin Serum for an outside-in approach to anti-aging, complementing
the LifeMap me Nutritions inside-out solution. |
|
|
|
We significantly enhanced our LifeMap me Nutrition product to add additional active
ingredients, enabling a 30% list price increase on new customer product orders. |
|
|
|
We retained key experienced direct sales leadership. |
|
|
|
We rebranded products to the LifeMap me (made exclusively) brand. |
Despite the firm foundation laid, we were unable to achieve positive cash flow during the year. In
2009, we raised $2,660,500 of Convertible Notes and equity to meet our continuing needs.
Fundraising continues into 2010 with an additional $220,000 in private-placement stock sales raised
in 2010 through the date of this filing. We believe the success in raising capital in a
challenging economy and financial environment supports the vision of the future of nutrigenomics
and personalization in the health, wellness and beauty products.
39
Results of Operations
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2009 TO FISCAL YEAR ENDED DECEMBER 31, 2008.
Assets
The Companys assets decreased by $664,429 from $2,545,226 to $1,880,797, due largely to decreases
in cash of $238,340, accounts receivable of $247,785 and inventory of $244,778. Cash decreased to
fund operating losses. Inventory decreased as excess inventory at December 31, 2008 was used for
order fulfillment. Accounts receivable dropped as a result of the Company receiving better terms
from its credit card processors and reserve requirements were reduced.
Liabilities
The Companys liabilities increased by $127,605, primarily due to the issuance of $1,250,000 of
Convertible Notes in 2009. At December 31, 2009, the amount reflected on the Companys balance
sheet for the Convertible Notes was $893,395, which is net of debt issuance costs of $230,891 and
stock conversion discounts of $125,714. This increase in liabilities was partially offset by a
decrease in accounts payable and accrued expenses of $844,613.
Equity
The Company raised additional funds through three fundraising efforts during the year ended
December 31, 2008. During the initial nine months of 2009, the Company sold $1,014,000 of shares
of Common Stock in private offerings at $0.10 per share. In the fourth quarter of 2009, the
Company sold $396,500 of units consisting of common stock and warrants. Additionally, the Company
sold $1,250,000 of Convertible Notes in 2009.
Revenues
The Company saw revenues increase from $6,377,443 in 2008 to $8,561,455 in 2009, an increase of
$2,184,012, or 34.2%. The growth is attributable to the establishment of GeneWize and its
completion of its first year of operations. Recurring revenues from automatic monthly shipments
accounted for $808,921, or 13% of revenues in 2008, compared to $4,821,025 and 56% in 2009. Sales
from new customer enrollments was 76% in 2008, compared to 30% in 2009. Sales of other products
make up the balance of 11% and 14%, respectively, in 2008 and 2009. The high percentage of new
enrollment revenues in 2008 is reflective of the GeneWize initial launch in 2008.
Cost of Goods Sold
Cost of Good Sold increased from $1,812,488 in 2008 to $3,654,745 in 2009, an increase of
$1,842,257. Gross margin decreased from 71.6% in 2008 to 57.3% in 2009. Costs of goods sold
include laboratory costs, LifeMap ingredients, processing, packaging and outbound shipping related
to the products.
40
Gross Margin
Gross margin increased from $4,564,955 in 2008 to $4,906,710 in 2009 due to sales growth. As a
percent-of-revenue, however, the gross margin dropped from 71% in 2008 to 57% in 2009. This is
largely due to enrollments during the initial launch period which were priced at a premium during
most of 2008. Additionally, as revenue from monthly recurring sales grew, related lower margins
pricing was steeply discounted. In September 2009, GeneWize announced a nutrition product
enhancement, the launch of higher-margin skin serum, and an increase in list price on monthly
shipments from $99/month to $129. The price shift was almost exclusively realized in the fourth
quarter.
Expenses
Expenses increased due to the growth of our GeneWize subsidiary. The most significant expense item
is customer acquisition and commissions paid to sales affiliates totaling $3,106,062 in 2008 and
$3,147,020 in 2009. Overall commissions were approximately 49% of GeneWizes sales for 2008 and
37% in 2009. This number is higher as a percent of revenue in 2008 due to the fact that most of
the sales in this initial period included a substantial first order commission during the launch
period. As recurring and subsequent sales increased, the impact of first-order commissions was
reduced as it is averaged with the normal commissions from recurring revenues. As part of the
strategic product and pricing repositioning in September 2009, first order commissions were made
equal to recurring commissions.
Furthermore, the Company continued to incur significant legal costs in 2009 in defending itself
from litigation brought against it by its former CEO. Litigation costs in 2009 were $189,000.
Losses
The Company continued to incur an operating loss, largely related to early-stages costs related to
GeneWize and its sales, marketing and operating costs. The Company continued to incur an operating
loss in 2009, in an amount of $2,462,227, an increase of $228,826 from operating losses in 2008.
Total losses increased from $2,603,509 in 2008 to $2,716,753 in 2009. Of those losses, $384,081
and $288,117 resulted from non-cash charges relating to the granting of options and warrants in
2008 and 2009, respectively.
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.
41
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 $0.10.
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.
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.
42
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.
43
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, 2009, including intercompany revenues and expense of
$366,859:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
GeneWize Life |
|
|
|
Inc. |
|
|
Inc. |
|
|
Sciences, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
432,756 |
|
|
$ |
69,892 |
|
|
$ |
8,425,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,919,909 |
|
|
|
15,916 |
|
|
|
9,715,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense |
|
|
2,778 |
|
|
|
0 |
|
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,484,375 |
) |
|
|
53,976 |
|
|
|
(1,286,354 |
) |
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our
segments for the year ended December 31, 2008, including intercompany revenues and expense of
$130,004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
GeneWize Life |
|
|
|
Inc. |
|
|
Inc. |
|
|
Sciences, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
291,206 |
|
|
$ |
29,738 |
|
|
$ |
6,186,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,973,028 |
|
|
|
40,113 |
|
|
|
7,111,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
12,238 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,669,584 |
) |
|
|
(10,375 |
) |
|
|
(923,550 |
) |
Liquidity and Capital Resources
For 2009, 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. In 2009, the Company raised $1,250,000 through the issuance of
Convertible Notes and $1,410,500 from the issuance of Common Stock and warrants.
Cash and Cash Equivalents
On December 31, 2009, the Companys cash and cash equivalents amounted to $196,857 as compared to
$435,197 at December 31, 2008, a decrease of $238,340. This decrease resulted from a net use of
cash from operations. During 2009, the Companys operating activities utilized $2,549,537 as
compared to utilizing $1,450,900 in 2008, an increase of $1,098,637. Cash utilized during these
periods resulted from the Companys net losses for such periods and the payment of accounts
payable.
Investing activities utilized $120,793 in 2009, as compared to utilizing $281,408 in 2008.
Financing activities provided $2,431,990 in 2009, primarily through the issuance of $1,250,000
of Convertible Notes and $1,410,500 of Common Stock and warrants less cash costs associated with
such offerings, as compared to providing $1,195,134 in 2008.
44
The Company believes that it needs approximately $1,500,000 of working capital to fund the
Companys sales and marketing efforts and infrastructure improvement and to pay existing
obligations for the balance of 2010. 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.
Critical Accounting Policies
Stock options:
FASB Accounting Standards Codification Topic 718, 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. As
permitted by FASB ASC 718, the Company accounts for stock option awards using the calculated value
method. As required, the Company has adopted FASB ASC 718 for the years ended December 31, 2009
and 2008.
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.
45
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 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 primarily customized products and ships on an as-requested basis.
As a consequence of customization, there is no little 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, and
some non-customized nutrition and skincare product, but the amounts were immaterial for purposes of
allowances. The Company does provide a refund policy on nutrition and skin products for up to 90
days after the customers initial enrollment.
The Company analyzes sales returns in accordance with FASB Accounting Standards Codification Topic
605 guidance regarding 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.
46
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, 2009 and 2008, 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.
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.
47
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTS |
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
49 |
|
|
|
|
|
|
Financial Statements |
|
|
50-51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54-55 |
|
|
|
|
|
|
|
|
|
56-79 |
|
48
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, 2009 and 2008, 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, 2009 and 2008, 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, 2010
49
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
ASSETS
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
196,857 |
|
|
$ |
435,197 |
|
Accounts receivable |
|
|
465,780 |
|
|
|
713,565 |
|
Inventory |
|
|
494,737 |
|
|
|
739,515 |
|
Prepaid expenses |
|
|
141,397 |
|
|
|
53,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,298,771 |
|
|
|
1,941,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT |
|
|
302,887 |
|
|
|
281,984 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
279,139 |
|
|
|
321,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,880,797 |
|
|
$ |
2,545,226 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
50
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Current maturity of long-term debt |
|
$ |
36,079 |
|
|
$ |
60,269 |
|
Accounts payable and accrued expenses |
|
|
1,189,709 |
|
|
|
2,034,322 |
|
Accrued compensation |
|
|
206,272 |
|
|
|
218,664 |
|
Deferred revenue |
|
|
277,132 |
|
|
|
161,727 |
|
Loans payable |
|
|
18,000 |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,727,192 |
|
|
|
2,492,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible secured promissory notes payable,
net of debt issuance and stock conversion
discounts |
|
|
893,395 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,620,587 |
|
|
|
2,492,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY (DEFICIENCY) |
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share;
authorized: 250,000,000 and 125,000,000 shares
as of December 31, 2009 and 2008, respectively;
issued: 118,766,291 and 104,561,291 shares as
of December 31, 2009 and 2008, respectively;
outstanding: 114,407,132 and 100,202,132 shares
as of December 31, 2009 and 2008, respectively |
|
|
1,188,617 |
|
|
|
1,045,613 |
|
Additional paid in capital |
|
|
12,969,561 |
|
|
|
12,235,833 |
|
Stock warrants |
|
|
3,656,227 |
|
|
|
2,608,240 |
|
Accumulated deficit |
|
|
(18,001,960 |
) |
|
|
(15,285,207 |
) |
Treasury stock, 4,359,159 shares as of
December 31, 2009 and 2008, at cost |
|
|
(552,235 |
) |
|
|
(552,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficiency) |
|
|
(739,790 |
) |
|
|
52,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
(deficiency) |
|
$ |
1,880,797 |
|
|
$ |
2,545,226 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
51
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
8,561,455 |
|
|
$ |
6,377,443 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
3,654,745 |
|
|
|
1,812,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,906,710 |
|
|
|
4,564,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
7,324,149 |
|
|
|
6,749,406 |
|
Research and development |
|
|
44,788 |
|
|
|
48,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,368,937 |
|
|
|
6,798,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(2,462,227 |
) |
|
|
(2,233,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES |
|
|
|
|
|
|
|
|
Debt conversion costs |
|
|
0 |
|
|
|
229,025 |
|
Amortization and depreciation |
|
|
125,622 |
|
|
|
87,053 |
|
Interest expense |
|
|
128,904 |
|
|
|
57,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,526 |
|
|
|
370,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS BEFORE PROVISION FOR INCOME TAXES |
|
|
(2,716,753 |
) |
|
|
(2,603,509 |
) |
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
|
(2,716,753 |
) |
|
|
(2,603,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted: |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and
diluted potential common shares |
|
|
111,837,694 |
|
|
|
82,530,959 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
52
GENELINK, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity (Deficiency)
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL |
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
TREASURY |
|
|
PAID IN |
|
|
STOCK |
|
|
ACCUMULATED |
|
|
|
|
|
|
SHARES |
|
|
AMOUNT |
|
|
STOCK |
|
|
CAPITAL |
|
|
WARRANTS |
|
|
DEFICIT |
|
|
TOTAL |
|
Balance, December 31, 2007 |
|
|
66,673,603 |
|
|
|
666,736 |
|
|
|
(315,055 |
) |
|
|
8,277,692 |
|
|
|
4,245,696 |
|
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock warrants related to
convertible secured promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,342 |
|
|
|
|
|
|
|
175,342 |
|
Stock conversion discount related to
convertible secured promissory notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
Stock warrants issued for fundraising services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,730 |
) |
|
|
272,730 |
|
|
|
|
|
|
|
0 |
|
Issuance of common stock and warrants
pursuant to private placement offerings |
|
|
14,105,000 |
|
|
|
141,050 |
|
|
|
|
|
|
|
951,309 |
|
|
|
318,141 |
|
|
|
|
|
|
|
1,410,500 |
|
Commissions paid for fundraising costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,320 |
) |
|
|
|
|
|
|
|
|
|
|
(124,320 |
) |
Fair value of vested stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,617 |
|
|
|
|
|
|
|
225,617 |
|
Exercise of stock warrants |
|
|
23,404 |
|
|
|
234 |
|
|
|
|
|
|
|
6,109 |
|
|
|
(6,343 |
) |
|
|
|
|
|
|
0 |
|
Issuance of common stock for services |
|
|
172,000 |
|
|
|
1,720 |
|
|
|
|
|
|
|
23,360 |
|
|
|
|
|
|
|
|
|
|
|
25,080 |
|
Issuance of stock warrants for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,500 |
|
|
|
|
|
|
|
62,500 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,716,753 |
) |
|
|
(2,716,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,300,404 |
|
|
|
143,004 |
|
|
|
|
|
|
|
733,728 |
|
|
|
1,047,987 |
|
|
|
(2,716,753 |
) |
|
|
(792,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
118,861,347 |
|
|
$ |
1,188,617 |
|
|
$ |
(552,235 |
) |
|
$ |
12,969,561 |
|
|
$ |
3,656,227 |
|
|
$ |
(18,001,960 |
) |
|
$ |
(739,790 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
53
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,716,753 |
) |
|
$ |
(2,603,509 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
125,622 |
|
|
|
87,053 |
|
Amortization of discounts on loans payable |
|
|
48,735 |
|
|
|
240,844 |
|
Common stock issued for services |
|
|
25,080 |
|
|
|
0 |
|
Fair value of options granted for services |
|
|
288,117 |
|
|
|
384,081 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
247,785 |
|
|
|
(678,238 |
) |
Inventory |
|
|
244,778 |
|
|
|
(735,869 |
) |
Prepaid expenses |
|
|
(87,709 |
) |
|
|
(42,415 |
) |
Other assets |
|
|
16,408 |
|
|
|
13,700 |
|
Deferred revenue |
|
|
115,405 |
|
|
|
60,805 |
|
Accounts payable and accrued expenses |
|
|
(844,613 |
) |
|
|
1,748,152 |
|
Accrued compensation |
|
|
(12,392 |
) |
|
|
74,496 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,549,537 |
) |
|
|
(1,450,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(120,243 |
) |
|
|
(244,393 |
) |
Patent acquisition costs |
|
|
(550 |
) |
|
|
(37,015 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(120,793 |
) |
|
|
(281,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable |
|
|
1,250,000 |
|
|
|
54,582 |
|
Proceeds from insurance notes payable |
|
|
95,460 |
|
|
|
0 |
|
Proceeds from issuance of common stock and warrants, net |
|
|
1,410,500 |
|
|
|
726,455 |
|
Purchase of treasury stock |
|
|
0 |
|
|
|
(237,180 |
) |
Proceeds from exercise of stock warrants |
|
|
0 |
|
|
|
706,989 |
|
Principal payments on capital lease obligations |
|
|
(36,177 |
) |
|
|
(25,222 |
) |
Principal payments on note payable |
|
|
(83,473 |
) |
|
|
(30,490 |
) |
Commissions paid for fundraising costs |
|
|
(204,320 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,431,990 |
|
|
|
1,195,134 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
54
GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(238,340 |
) |
|
|
(537,174 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
435,197 |
|
|
|
972,371 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
196,857 |
|
|
$ |
435,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
0 |
|
|
$ |
2,988 |
|
Non-cash financing transactions: |
|
|
|
|
|
|
|
|
Common stock issued for services |
|
$ |
25,080 |
|
|
$ |
0 |
|
Stock warrants granted for services |
|
$ |
62,500 |
|
|
$ |
303,616 |
|
Common stock and warrants granted for fundraising |
|
$ |
272,729 |
|
|
$ |
80,465 |
|
See Notes to Consolidated Financial Statements
55
GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
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 adverse health conditions 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.
On May 1, 2007, The Company received a U.S. patent for its proprietary method for
assessing skin health in humans.
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.
56
GeneWizes product offering in 2009 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
The Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB
Accounting Standards Codification (ASC) as the single source of authoritative
generally accepted accounting principles (GAAP) to be applied to nongovernmental
entities. The ASC is a new structure which took existing accounting pronouncements
and organized them by accounting topic. Relevant authoritative literature issued by
the Securities and Exchange Commission (SEC) and select SEC staff interpretations
and administrative literature was also included in the ASC. All other accounting
guidance not included in the ASC is non-authoritative. The ASC was effective for the
Companys interim quarterly period beginning July 1, 2009. The adoption of the ASC
did not have an impact on the Companys consolidated financial position results of
operations or cash flows.
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.
57
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 3 to 39 years of the related assets.
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.
58
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.
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 FASB Accounting Standards
Codification Topic 605 guidance regarding 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, 2009 and 2008, the Company has not recorded any reserve
for bad debts from trade or credit receivables.
59
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.
Shipping and Handling Costs:
The Company classifies freight billed to customers as sales revenue and the
related
freight costs as cost of sales.
Presentation of Sales Taxes:
The Company pays various state sales taxes on sales to non-exempt customers. The
Company collects that sales tax from customers and remits the entire amount to the
appropriate State. The Companys accounting policy is to exclude the tax collected
and remitted to the State from revenues and cost of sales.
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 FASB Accounting Standards
Codification Topic 740 guidance regarding accounting for income taxes and accounting
for uncertainty in income taxes, 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.
60
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, 2009 and 2008.
Per share data:
Effective November 12, 1998, the Company adopted FASB Accounting Standards
Codification Topic 260 guidance regarding earnings per share that 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 2009 and 2008 excludes any effect from
such securities, as their inclusion would be antidilutive.
Stock-Based Compensation:
The Company accounts for its stock-based compensation expense in accordance with
FASB Accounting Standards Codification Topic 718. FASB ASC 718 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. FASB
ASC 718 requires the Company to expense SBP awards with compensation cost for SBP
transactions measured at fair value. FASB ASC 718 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 FASB ASC 718. 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.
61
Recent Accounting Pronouncements:
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
which is now included in FASB Accounting Standards Codification
Topic 820 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 now included in FASB Accounting Standards Codification Topic 825, 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), which is now included in FASB Accounting Standards
Codification Topic 730. FASB ASC 730 clarifies the accounting for nonrefundable
advance payments for goods or services that will be used or rendered for research and
development activities. FASB ASC 730 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. FASB ASC 730
is effective for fiscal years beginning after December 15, 2007. The Company is
currently evaluating the effect of FASB ASC 730 on its financial statements but does
not expect the adoption of FASB ASC 730 to have a material effect on the Companys
financial position or results of operations.
In December 2007, the FASB issued Statement No. 141R, Business Combinations, which is
now included in FASB Accounting Standards Codification Topic 805, and 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) which is now
included in FASB Accounting Standards Codification Topic 808. The guidance
in FASB ASC 808 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).
62
The consensus in FASB ASC 808 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 FASB ASC 808 effective January 1, 2009 and
retrospectively apply the requirements of this consensus to its collaborative
arrangements in existence on that date.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3) which is now included in FASB
Accounting Standards Codification Topic 350. FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine useful
life of a recognized intangible asset under Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). The objective
of this FSP is to improve consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure
the fair value of the asset under SFAS 141R. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those fiscal years. We are currently evaluating the potential impact
that the adoption of FSP 142-3 may have on our consolidated financial statements. We
currently use the simplified method to estimate the expected term for employee option
grants, as adequate historical experience is not available to provide a reasonable
estimate. SAB 110 is effective for employee options granted after December 31, 2007.
We adopted SAB 110 effective January 1, 2008 and will continue applying the simplified
method until enough historical experience is readily available to provide a reasonable
estimate of the expected term for employee option grants.
In November 2008, the FASB issued EITF Issue No. 08-7, Accounting for Defensive
Intangible Assets, or EITF 08-7 which is now included in FASB Accounting Standards
Codification Topic 350. EITF 08-7 seeks clarify how to account for defensive
intangible assets, or those intangible assets acquired in a business combination that
an entity does not intend to actively use but does intend to prevent others from
using, subsequent to initial measurement. EITF 08-7 is effective for all intangible
assets acquired during the first fiscal year beginning on or after December 15, 2008.
Early adoption is not permitted. The impact of the adoption of EITF 08-7 will be
dependent upon the type and structure of any transactions that the Company may make in
the future.
63
In June 2009, the FASB Accounting Standards Codification Topic 810 guidance for
consolidation accounting was updated to require an entity to perform a qualitative
analysis to determine whether the enterprises variable interest gives it a
controlling financial interest in a VIE. The analysis identifies a primary
beneficiary of a VIE as
the entity that has both of the following characteristics: (i) the power to direct the
activities of a VIE that most significantly impact the entitys economic performance
and (ii) the obligation to absorb losses or receive benefits from the entity that
could potentially be significant to the VIE. The updated guidance is effective for
the Companys fiscal year beginning January 1, 2010. The Company is evaluating the
potential impact of adopting this guidance on the Companys consolidated financial
position, results of operations and cash flows.
In January 2010, the FASB Accounting Standards Codification Topic 820 guidance for
fair value measurements and disclosure was updated to required additional disclosures
related to: i) transfers in and out of level 1 and 2 fair value measurements and ii)
enhanced detail in the level 3 reconciliation. The guidance was amended to provide
clarity about : i) the level of disaggregation required for assets and liabilities and
ii) the disclosures required for inputs and valuation techniques used to measure fair
value for both recurring and nonrecurring measurements that fall in either level 2 or
level 3. The updated guidance is effective for the Companys fiscal year beginning
January 1, 2010, with the exception of the level 3 disaggregation, which is effective
for the Companys fiscal year beginning January 1, 2011. The Company is evaluating
the potential impact of adopting the guidance on the Companys consolidated financial
position, results of operations and cash flows.
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, 2009 and 2008, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment |
|
$ |
81,050 |
|
|
$ |
82,803 |
|
Equipment |
|
|
157,003 |
|
|
|
143,421 |
|
Leasehold improvements |
|
|
6,781 |
|
|
|
6,781 |
|
Software |
|
|
342,563 |
|
|
|
234,147 |
|
|
|
|
|
|
|
|
|
|
|
587,397 |
|
|
|
467,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
and amortization |
|
|
284,510 |
|
|
|
185,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
302,887 |
|
|
$ |
281,984 |
|
|
|
|
|
|
|
|
Depreciation expense was $99,342 and $62,284 for the years ended December 31, 2009 and
2008, respectively.
64
Note 4. Other Assets
As of December 31, 2009 and 2008, other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Patents and trademarks |
|
$ |
395,035 |
|
|
$ |
394,485 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
14,693 |
|
|
|
31,101 |
|
|
|
|
|
|
|
|
|
|
Less accumulated
amortization |
|
|
130,589 |
|
|
|
104,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
279,139 |
|
|
$ |
321,277 |
|
|
|
|
|
|
|
|
Amortization expense was $26,280 and $24,769 for the years ended December 31, 2009 and
2008, respectively.
The future estimated minimum amortization expense that will be charged to
operations as of December 31, 2009
is as follows:
|
|
|
|
|
Year ending |
|
|
|
|
December 31, |
|
|
|
|
2010 |
|
$ |
27,199 |
|
2011 |
|
|
27,199 |
|
2012 |
|
|
27,199 |
|
2013 |
|
|
27,199 |
|
2014 |
|
|
27,199 |
|
Thereafter |
|
|
128,451 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
264,446 |
|
|
|
|
|
Note 5. Income Taxes
At December 31, 2009 and 2008, the Company had federal and state tax net operating
loss carry forwards of approximately $22,300,000 and $19,569,000, 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 $4,460,000 and $3,910,000 at December 31,
2009 and 2008, 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 $550,000 for the year ended December
31, 2009 and $1,730,000 for the year ended December 31, 2008.
65
The federal income tax returns of the Company for 2006, 2007 and 2008 are subject to
examination by the IRS, generally for three years after they were filed.
Note 6. Stockholders Equity Transactions
Common Stock
During the nine months ended September 30, 2009, the Company sold an aggregate
of $1,014,000 of shares of Common Stock in private offerings at a price of $0.10 per
share. The shares of Common Stock were sold on the dates and in the amounts set forth
below to accredited investors only in reliance upon the exemption provided in Section
4(2) of the Securities Act of 1933, as amended (the Securities Act), and/or Rule 506
of Regulation D promulgated under the Securities Act. No form of general solicitation
or general advertising was conducted in connection with the issuances of the shares and
the shares were offered and sold only to accredited investors. The shares of Common
Stock contain restrictive legends preventing the sale, transfer or other disposition of
such shares, unless registered under the Securities Act, or sold pursuant to an
exemption therefrom.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
$ of Common |
|
|
Shares of |
|
|
Number of |
Date |
|
Stock Sold |
|
|
Common Stock |
|
|
Investors |
January 8, 2009 |
|
$ |
60,000.00 |
|
|
|
600,000 |
|
|
2 |
January 15, 2009 |
|
$ |
5,000.00 |
|
|
|
50,000 |
|
|
1 |
January 26, 2009 1 |
|
$ |
500,000.00 |
|
|
|
5,000,000 |
|
|
1 |
June 12, 2009 |
|
$ |
22,500.00 |
|
|
|
225,000 |
|
|
2 |
June 17, 2009 |
|
$ |
20,000.00 |
|
|
|
200,000 |
|
|
1 |
June 29, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
1 |
July 10, 2009 |
|
$ |
500.00 |
|
|
|
5,000 |
|
|
1 |
July 23, 2009 |
|
$ |
12,500.00 |
|
|
|
125,000 |
|
|
1 |
July 24, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
1 |
July 28, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
1 |
July 31, 2009 |
|
$ |
500.00 |
|
|
|
5,000 |
|
|
1 |
August 18, 2009 |
|
$ |
70,000.00 |
|
|
|
700,000 |
|
|
2 |
August 20, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
1 |
August 26, 2009 |
|
$ |
3,000.00 |
|
|
|
30,000 |
|
|
1 |
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
1,014,000.00 |
|
|
|
10,140,000 |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
This investor also received a warrant to acquire 750,000 shares of Common Stock at
an exercise price of $0.11 per share. |
The Company paid a total of $54,640 and issued warrants to acquire 684,500
shares of Common Stock at an exercise price of $0.10 per share and warrants to
acquire 37,500 shares of Common Stock at an exercise price of $0.11 per share to
First Equity Capital Securities, Inc., as placement agent, in connection with the
sale of some of the shares of Common Stock listed above. Kenneth R. Levine, a
holder of more than five percent of the equity securities of the Company, is an
officer and owner of First Equity Capital Securities, Inc.
66
During the quarter ended December 31, 2009, the Company sold an aggregate of
$396,500 of units (the Units) at a price of $0.10 per Unit, each Unit consisting of
1 share of Common Stock of the Company and a 1/2 of a warrant to acquire one share of
Common Stock of the Company at a price of $0.15 per share. The Units were sold on
the dates and in the amounts set forth below to accredited investors only in
reliance upon the exemption provided in Section 4(2) of the Securities Act and/or
Rule 506 of Regulation D promulgated under the Securities Act. No form of general
solicitation or general advertising was conducted in connection with the issuances
of the Units and the Units were only offered and sold to accredited investors. Each
of the shares of Common Stock and Warrants comprising the Units contains restrictive
legends preventing the sale, transfer or other disposition of such shares of Common
Stock and Warrants, unless registered under the Securities Act, or pursuant to an
exemption therefrom.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Number of |
|
|
Number of |
Date |
|
$ of Units Sold |
|
|
of Common Stock |
|
|
Warrants Issued |
|
|
Investors |
October 12, 2009 |
|
$ |
10,000.00 |
|
|
|
100,000 |
|
|
|
50,000 |
|
|
1 |
November 12, 2009 |
|
$ |
110,500.00 |
|
|
|
1,105,000 |
|
|
|
552,500 |
|
|
4 |
November 17, 2009 |
|
$ |
150,000.00 |
|
|
|
1,500,000 |
|
|
|
750,000 |
|
|
2 |
November 20, 2009 |
|
$ |
87,500.00 |
|
|
|
875,000 |
|
|
|
437,500 |
|
|
3 |
December 7, 2009 |
|
$ |
18,500.00 |
|
|
|
185,000 |
|
|
|
92,500 |
|
|
3 |
December 9, 2009 |
|
$ |
20,000.00 |
|
|
|
200,000 |
|
|
|
100,000 |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
396,500.00 |
|
|
$ |
3,965,000 |
|
|
|
1,982,500 |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid a total of $17,860 and issued warrants to acquire 223,250
shares of Common Stock at an exercise price of $0.10 per share and warrants to
acquire 111,625 shares of Common Stock at an exercise price of $0.15 per share to
First Equity Capital Securities, Inc., as placement agent, in connection with the
sale of some of the Units listed above.
In 2009, the Company issued $1,250,000 in principal amount of convertible secured promissory notes (the Convertible Notes) to accredited investors. Holders
of the Convertible Notes will received one and one-half (11/2) warrants to acquire shares of common stock (Common Stock) of the Company for each $1.00 of Convertible
Notes acquired by such holders. An aggregate of 1,875,000 warrants were issued in connection with the Convertible Notes. The warrants are exercisable on or before
February 26, 2014. 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. 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
67
a stock split,
combination, reclassification, reorganization or similar
event. The Convertible Notes and warrants were sold to accredited investors only in
reliance upon the exemption provided in Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the
Securities Act. No form of general solicitation or general advertising was
conducted in connection with the issuances of the Convertible Notes and warrants and
the Convertible Notes and warrants were only offered and sold to accredited
investors. Each Convertible Note and warrant contains restrictive legends
preventing the sale, transfer or other disposition of such Convertible Notes ad
warrants, unless registered under the Securities Act, or pursuant to an exemption
therefrom.
During 2009, 50,000 warrants were exercised with the Company receiving proceeds of
$12,500.
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.
68
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.
The Company issued 172,000 and 0 shares of common stock for services rendered,
valued at $25,080 and $0 for the years ended December 31, 2009 and 2008,
respectively.
During the years ended December 31, 2009 and 2008, the Company issued $62,500 and
$303,616 in stock warrants for services.
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.
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
FASB Accounting Standards Codification Topic 718, 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.
FASB ASC 718 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.
69
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, 2009 and 2008 is $288,117
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.
70
A summary of the status of the Companys stock options and warrants as of
December 31, 2009 and 2008, and changes during the years ending of those dates
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Exercise |
|
|
Average |
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options/warrants outstanding
at beginning of year |
|
|
23,023,331 |
|
|
$ |
0.17 |
|
|
|
31,043,535 |
|
|
$ |
0.19 |
|
Granted |
|
|
9,310,875 |
|
|
|
0.12 |
|
|
|
7,112,249 |
|
|
|
0.37 |
|
Exercised |
|
|
(50,000 |
) |
|
|
(0.25 |
) |
|
|
(12,137,453 |
) |
|
|
(0.06 |
) |
Expired |
|
|
(125,000 |
) |
|
|
(0.20 |
) |
|
|
(2,995,000 |
) |
|
|
(0.44 |
) |
Cancelled |
|
|
(150,000 |
) |
|
|
(0.15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/warrants outstanding
at end of year |
|
|
32,009,206 |
|
|
$ |
0.16 |
|
|
|
23,023,331 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options/warrants exercisable
at end of year |
|
|
24,002,535 |
|
|
|
|
|
|
|
15,039,162 |
|
|
|
|
|
Weighted-average fair value
of options granted during
the year |
|
|
|
|
|
$ |
0.10 |
|
|
|
|
|
|
$ |
0.38 |
|
The following table summarizes information about stock options and warrants
outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
|
|
Exercise |
|
Outstanding |
|
|
Contractual Life |
|
|
Exercisable |
|
Price |
|
at 12/31/09 |
|
|
(Years) |
|
|
Warrants |
|
0.05 |
|
|
1,915,000 |
|
|
|
1.70 |
|
|
|
1,915,000 |
|
0.075 |
|
|
2,310,200 |
|
|
|
5.85 |
|
|
|
2,310,200 |
|
0.08 |
|
|
8,700,000 |
|
|
|
7.58 |
|
|
|
7,622,494 |
|
0.10 |
|
|
4,043,633 |
|
|
|
3.39 |
|
|
|
4,043,633 |
|
0.11 |
|
|
4,833,750 |
|
|
|
4.66 |
|
|
|
3,833,750 |
|
0.12 |
|
|
2,900,000 |
|
|
|
8.55 |
|
|
|
1,775,000 |
|
0.15 |
|
|
2,294,125 |
|
|
|
5.29 |
|
|
|
2,144,125 |
|
0.16 |
|
|
25,000 |
|
|
|
9.42 |
|
|
|
25,000 |
|
0.20 |
|
|
250,000 |
|
|
|
.15 |
|
|
|
250,000 |
|
0.50 |
|
|
4,737,498 |
|
|
|
8.58 |
|
|
|
83,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,009,206 |
|
|
|
|
|
|
|
24,002,535 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
138 - 170 |
% |
71
Note 7. Net Loss Per Share
Earnings per share is calculated under the provisions of FASB Accounting Standards
Codification Topic 260 guidance regarding 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.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,716,753 |
) |
|
$ |
(2,603,509 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding for computing basic earning per share |
|
|
111,837,694 |
|
|
|
82,530,959 |
|
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 |
|
|
111,837,694 |
|
|
|
82,530,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Warrants and stock options |
|
|
32,009,206 |
|
|
|
23,023,331 |
|
|
|
|
|
|
|
|
Note 8. Advertising
The Company expenses the production costs of advertising when incurred. Advertising
expense was $3,575 and $62,230 for the years ended December 31, 2009 and 2008,
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.
72
The future minimum lease payments that will be charged to operations as of
December 31, 2009 is as follows:
|
|
|
|
|
Year ending |
|
|
|
|
December 31, |
|
|
|
|
2010 |
|
$ |
66,000 |
|
|
|
|
|
|
|
|
$ |
66,000 |
|
|
|
|
|
Note 10. Related Party Transactions and Convertible Secured Promissory Notes
During the nine months ended September 30, 2009, the Company sold an aggregate of
$1,014,000 of shares of Common Stock in private offerings at a price of $0.10 per
share. The Company paid a total of $54,640 and issued warrants to acquire 684,500
shares of Common Stock at an exercise price of $0.10 per share and warrants to acquire
37,500 shares of Common Stock at an exercise price of $0.11 per share to First Equity
Capital Securities, Inc., as placement agent, in connection with the sale of some of
the shares of Common Stock listed above. Kenneth R. Levine, a holder of more than
five percent of the equity securities of the Company, is an officer and owner of First
Equity Capital Securities, Inc.
During the quarter ended December 31, 2009, the Company sold an aggregate of $381,500
of units of Common Stock and warrants. The Company paid a total of $17,060 and issued
warrants to acquire 213,250 shares of Common Stock at an exercise price of $0.10 per
share and warrants to acquire 106,625 shares of Common Stock at an exercise price of
$0.15 per share to First Equity Capital Securities, Inc., as placement agent, in
connection with the sale of some of the Units listed above.
In 2009, the Company issued $1,250,000 of Convertible Notes. In connection with the
issuance of the Convertible Notes, the Company issued First Equity Capital Securities,
Inc., as placement agent for the note offering, warrants to purchase 1,250,000 shares
of Common Stock at an exercise price of $0.10 per share and warrants to purchase
187,500 shares of Common Stock at an exercise price of $0.11 per share. The Company
also paid First Equity Capital Securities, Inc. a cash fee of $100,000. 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.
73
Short Term Loans Payable
As of December 31, 2009, the Company has various shareholders of the Company who
provided short term obligations, as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
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 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.
74
Convertible Secured Promissory Notes Payable
As of December 31, 2009, the Company had various shareholders of the Company who
provided convertible secured promissory note obligations, as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Notes payable, due February 26, 2011 with interest
at 8% through February 11, 2011 and thereafter at
10%. All interest and principal due at maturity.
All Company assets pledged as collateral. |
|
$ |
1,250,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Debt issue discount |
|
|
230,891 |
|
|
|
|
|
Less: Stock conversion discount |
|
|
125,714 |
|
|
|
|
|
|
|
|
|
|
|
|
Total short term loans payable |
|
$ |
893,395 |
|
|
$ |
|
|
|
|
|
|
|
|
|
In connection with issuance of the convertible secured promissory notes, the
Company has recognized a debt issuance discount as of December 31, 2009 and 2008 of
$230,891 and $0, respectively, that is being amortized over the term of the notes.
As of December 31, 2009 and 2008, the unamortized debt issuance discount is
$230,891 and $0, respectively.
In connection with issuance of the convertible secured promissory notes, the
Company has recognized a stock conversion discount as of December 31, 2009 and 2008
of $125,714 and $0, respectively, that is being amortized over the term of the
notes. As of December 31, 2009 and 2008, the unamortized stock conversion discount
is $125,714 and $0, respectively.
Interest expense related to notes payable is $120,243 and $283,036 for the years
ended December 31, 2009 and 2008, respectively.
In June 2008, the holders of all of the outstanding convertible secured promissory
notes issued by the company converted such 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.
75
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, 2009 and 2008, including
intercompany activity of $366,859 and $130,004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeneWize Life |
|
|
|
GeneLink |
|
|
Dermagenetics |
|
|
Sciences |
|
|
|
Inc. |
|
|
Inc. |
|
|
Inc. |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
432,756 |
|
|
$ |
69,892 |
|
|
$ |
8,425,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,919,909 |
|
|
|
15,916 |
|
|
|
9,715,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
2,778 |
|
|
|
0 |
|
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,484,375 |
) |
|
|
53,976 |
|
|
|
(1,286,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
291,206 |
|
|
$ |
29,738 |
|
|
$ |
6,186,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
1,973,028 |
|
|
|
40,113 |
|
|
|
7,110,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
12,238 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings (loss) |
|
|
(1,669,584 |
) |
|
|
(10,375 |
) |
|
|
(923,550 |
) |
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 $2,716,753 and $2,603,509 for the years ended December 31, 2009 and
2008, respectively. The Company reported a deficit of $18,001,960 and $15,285,207 as
of December 31, 2009 and 2008, 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.
Note 13. Commitments and Contingencies
Effective October 14, 2005, the Company 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 the
Company.
76
In an Action filed by Mr. DePhillipo against the Company 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 the Company 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. The Company filed an Answer denying the
material allegations of the Complaint and asserted a number of affirmative defenses.
The Company filed counterclaims against Mr. DePhillipo for breach of fiduciary duty,
conversion, negligent misrepresentation, unjust enrichment and fraud while Mr.
DePhillipo served as the Chief Executive Officer, President and Chief Financial Officer
of the Company. The counterclaims sought recovery in excess of that sought by Mr.
DePhillipo in the Complaint.
Pursuant to the Settlement, on May 13, 2008 the Company and Mr. DePhillipo settled
all issues, claims and counterclaims each may have with respect to the Action. 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.
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 (the GeneLink Parties). 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.
On February 18, 2010, the Superior Court of Pennsylvania dismissed the appeal filed by
the DePhillipos. The Court also awarded sanctions in favor of the GeneLink Parties
against the DePhillipos and their counsel, with the amount of such sanctions to be
determined in the future by the Court of Common Pleas of Pennsylvania, Philadelphia
County. On March 3, 2010, the DePhillipos and their counsel filed a motion asking the
Superior Court of Pennsylvania to reconsider, and on March 15, 2010, the Superior Court
of Pennsylvania reinstated the DePhillipos appeal.
77
The Company has agreed to indemnify its officers, 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.
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, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
Sales |
|
$ |
1,972,038 |
|
|
$ |
2,113,177 |
|
|
$ |
2,134,504 |
|
|
$ |
2,341,736 |
|
Gross profit |
|
|
997,264 |
|
|
|
1,175,645 |
|
|
|
1,265,176 |
|
|
|
1,468,625 |
|
Net income (loss) |
|
|
(560,229 |
) |
|
|
(820,637 |
) |
|
|
(783,794 |
) |
|
|
(552,093 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
per
common share |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
(0.006 |
) |
|
|
(0.006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Note 15. Subsequent Events
From January 1, 2010 through March 30, 2010, the Company issued $220,000 of units at a
price of $0.10 per unit, each unit consisting of shares of Common Stock and warrants
to acquire shares of Common Stock at an exercise price of $0.15 per share. A total
of 2,200,000 shares of Common Stock and 1,100,000 warrants were issued in connection
with the sale of such units. The Company paid a total of $9,600 and issued warrants to
acquire 120,000 shares of Common Stock at an exercise price of $0.10 per share and
warrants to acquire 60,000 shares of Common Stock at an exercise price of $0.15 per
share to First Equity Capital Securities, Inc., as placement agent, in connection with
the sale of some of these units.
On March 17, 2010, the Company signed a joint marketing agreement with a
healthcare-related marketing and sales organization to complement its current sales
efforts. Revenues from this agreement are anticipated to begin in the third quarter
of 2010.
78
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.
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.
79
|
|
|
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 Principal
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, 2009. Based
upon this evaluation, the Chief Executive Officer and Principal 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, 2009.
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,
2009 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, 2009,
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.
80
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 |
|
|
|
|
|
Bernard L. Kasten, Jr. M.D. |
|
63 |
|
Executive Chairman of the Board, Director |
|
|
|
|
|
Gary J. Beeman |
|
56 |
|
Chief Executive Officer |
|
|
|
|
|
Douglas Boyle |
|
42 |
|
Director |
|
|
|
|
|
Robert Hoekstra |
|
60 |
|
Director |
|
|
|
|
|
James Monton |
|
63 |
|
Director |
|
|
|
|
|
Robert P. Ricciardi, Ph.D. |
|
62 |
|
Secretary, Chief Science Officer, Director |
|
|
|
|
|
John H. Souza |
|
47 |
|
Chief Operating Officer, Director |
Dr. Kasten is the Executive Chairman of the Board. Dr. Kasten has been a scientific advisor
to the Company since 1999 and a member of the Companys 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 has been Chairman of the Board of Directors of Cleveland Bio Labs Inc. [NASDAQ-CBLI] since
2006, and also serves on the Board of Directors of Enzo Biochem [NYSE-ENZ].
81
Mr. Beeman was appointed the Chief Executive Officer and President of the Company effective
February 17, 2010. Prior to joining the Company, Mr. Beeman, most recently served as
CEO and a founder of Bay Hill Ventures, a private capital firm. Mr. Beeman has served as an
advisor to the Companys Board of Directors since 2008. Mr. Beeman holds a Bachelor of Science
degree from Iowa State University in electrical engineering and psychology.
Mr. Boyle is currently a director of the Company. 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).
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.
82
Dr. Ricciardi is the founder of GeneLink and is a Professor of Microbiology at the University of
Pennsylvania, where he is a Graduate Group Chairman. He received his Ph.D. from the University of
Illinois at Urbana. He was a Postdoctoral Fellow at Brandeis University and Harvard Medical School
in the Department of Biological Chemistry where he was awarded Fellowships by the American Cancer
Society, National Institutes of Health and the Charles A. King Trust. He developed one of the
first genomic technologies, which was used widely to discover and map many hundreds of genes by
identifying the proteins they encode. Most of Dr. Ricciardis research has centered on
understanding basic mechanisms of cancer. He identified one of the first gene activators from a
virus that can make cells cancerous by enabling them to escape the immune system. These studies, in
turn, disclosed a key mechanism that modulates NF-kappa-B, the master regulator of the immune
system. Dr. Ricciardi has also developed and received patents on recombinant delivery vectors for
potential use as vaccines and gene therapy. In addition, Dr. Ricciardi discovered new replication
proteins from human viruses that cause cancer (KSHV) and possibly chronic fatigue (HHV-6). He is
applying a rapid mechanistic assay he developed (US Patent) that is being used to screen tens of
thousands of compounds from chemical libraries in order to discover therapeutics that will inhibit
these and other disease related human viruses. Dr. Ricciardi has served as a consultant to
Childrens Hospital of Philadelphia, Smith Kline Pharmaceuticals, the NIH, and was awarded a NATO
Visiting Professorship at Ferrara Medical School and has been an invitational speaker at numerous
international scientific meetings and universities. He has authored nearly 100 publications.
Mr. Souza joined the Company in 2004 and is currently Chief Operating Officer and a director
of the Company. Over the past 20 years, Mr. Souza has owned and operated manufacturing and
distribution companies in the packaging and cosmetics industries, doing business with Fortune 100
and 500 companies as well as retail spa/cosmetic outlets. Mr. Souza has held executive management
positions in both the public and private sectors where he was responsible for operations, business
and product development, mergers and acquisitions. Additionally, he has an extensive background in
sales and marketing. Mr. Souza received a Bachelor of Science from Rochester Institute
of Technology and is also a Nationally Certified Fitness and Nutritional Consultant.
Audit Committee
Mr. Boyle (Chair) and Mr. Monton, who both are independent members of the Board of Directors,
served on the Audit Committee for the fiscal year ended 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.
83
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.
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, 2009 were filed on a timely basis.
84
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 14 times in 2009. 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.
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, 2009, 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, 2009.
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, 2009.
Douglas M. Boyle (Chief)
James Monton
85
|
|
|
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.
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 2010 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.
Executive Compensation Components
For the year ended December 31, 2009, the principal components of compensation for the named
executive officers were annual base salary, stock options and other benefits.
86
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. |
87
Deductibility of Compensation Expenses
Pursuant to Section 162(m) under the Internal Revenue Code, certain compensation paid to
executive officers in excess of $1 million is not tax deductible, except to the extent such excess
constitutes performance-based compensation. The Compensation Committee has and will continue to
carefully consider the impact of Section 162(m) when establishing incentive
compensation plans and could, in certain circumstances, approve and authorize compensation
that is not fully tax deductible.
Accounting and Tax Considerations
We consider the accounting implications of all aspects of our executive compensation program.
Our executive compensation program is designed to achieve the most favorable accounting (and tax)
treatment possible as long as doing so does not conflict with the intended plan design or program
objectives.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee of our Board of Directors currently consists of Mr. Monton (Chair)
and Mr. Boyle. The Compensation Committee is responsible for considering and making recommendations
to the Board of Directors regarding executive compensation and is responsible for administering our
stock option and executive incentive compensation plans.
The Compensation Committee has reviewed and discussed with management the Compensation
Discussion and Analysis included in this report. Based on the review and discussion with
management, the Compensation Committee recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in the Companys Annual Report on Form 10-K.
COMPENSATION COMMITTEE
James Monton (Chair)
Douglas M. Boyle
88
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
|
|
|
Incentive Plan |
|
|
Deferred |
|
|
All Other |
|
|
|
|
Name and |
|
|
|
|
|
|
|
|
|
Bonus |
|
|
Awards |
|
|
Option |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
|
|
principal position |
|
Year |
|
|
Salary ($) |
|
|
($) |
|
|
($) |
|
|
Awards ($) |
|
|
($) |
|
|
Earnings ($) |
|
|
($) |
|
|
Total ($) |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
|
(i) |
|
|
(j) |
|
Monte E. Taylor, Jr. |
|
|
2009 |
|
|
$ |
150,169 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
45,000 |
3 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10,556 |
4 |
|
$ |
205,725 |
|
Chief Executive
Officer 1 |
|
|
2008 |
|
|
$ |
131,442 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
57,000 |
3 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
9,562 |
4 |
|
$ |
198,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David L. Macdonald |
|
|
2009 |
|
|
$ |
4,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
11,000 |
5 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
15,000 |
|
Interim Chief
Executive
Officer2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John A. Souza |
|
|
2009 |
|
|
$ |
114,373 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
37,000 |
6 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,307 |
4 |
|
$ |
159,680 |
|
Vice President of
Business
Development |
|
|
2008 |
|
|
$ |
91,506 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
49,000 |
6 |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
8,455 |
2 |
|
$ |
148,961 |
|
|
|
|
1 |
|
M. Taylor served as Chief Executive Officer of the Company until December 28,
2009 and served as Chief Executive Officer of GeneWize Life Sciences, Inc., a wholly-owned
subsidiary of the Company, until January 29, 2010. |
|
2 |
|
On December 28, 2009, Mr. Macdonald became Interim Chief Executive Officer of the
Company. |
|
3 |
|
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. |
|
4 |
|
Represents the cost of health insurance premiums provided from the Company. |
|
5 |
|
On December 28, 2009, Mr. Macdonald received fully vested options to acquire 100,000
shares of common stock at an exercise price of $0.11 per share. |
|
6 |
|
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. 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. |
89
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
OPTION AWARDS
|
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|
|
|
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|
Equity Incentive Plan |
|
|
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|
|
|
|
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|
|
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|
Awards: Number of |
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|
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|
Securities |
|
|
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|
|
|
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|
|
|
Number of Securities |
|
|
Underlying |
|
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|
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|
|
|
Number of Securities Underlying |
|
|
Underlying Unexercised |
|
|
Unexercised |
|
|
Option |
|
|
|
|
|
|
Unexercised Options (#) |
|
|
Options (#) |
|
|
Unearned Options |
|
|
Exercise Price |
|
|
Option Expiration |
|
Name |
|
Exercisable |
|
|
Unexercisable |
|
|
(#) |
|
|
($) |
|
|
Date |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
Monte E. Taylor, Jr. |
|
|
2,135,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.08 |
|
|
April 29, 2010 |
|
|
|
350,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.12 |
|
|
April 29, 2010 |
David L. Macdonald |
|
|
100,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.11 |
|
|
December 25, 2019 |
John H. Souza |
|
|
1,825,000 |
|
|
|
275,000 |
(1) |
|
|
0 |
|
|
$ |
0.08 |
|
|
June 1, 2017 |
|
|
|
350,000 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
0.12 |
|
|
May 20, 2018 |
|
|
|
0 |
|
|
|
1,150,000 |
(2) |
|
|
333,333 |
(3) |
|
$ |
0.50 |
|
|
July 28, 2018 |
|
|
|
(1) |
|
275,000 options vest on June 1, 2010. |
|
(2) |
|
383,333 options vest on each of July 28, 2011 and July 28, 2012, 383,334
options vest on July 28, 2013. |
|
(3) |
|
These options vest upon the Company becoming listed on the NASDAQ
National Market or national stock exchange. |
90
DIRECTOR COMPENSATION
Directors to not receive any cash compensation for their service as directors of the Company
or for attending any meetings.
DIRECTOR COMPENSATION
|
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|
Change in |
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|
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|
Pension |
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|
Value |
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and |
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|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
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|
Non-Equity |
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
Fees |
|
|
Stock |
|
|
Options |
|
|
Incentive Plan |
|
|
Deferred |
|
|
All Other |
|
|
|
|
|
|
Earned |
|
|
Awards |
|
|
Awards |
|
|
Compensation |
|
|
Compensation |
|
|
Compensation |
|
|
Total |
|
Name |
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
(a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
Bernard L. Kasten,
Jr. M.D. |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
17,000 |
(1) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
17,000 |
|
Douglas M. Boyle |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6,000 |
(2) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6,000 |
|
Robert Hoekstra |
|
|
0 |
|
|
|
0 |
|
|
$ |
14,000 |
(3) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
$ |
14,000 |
|
James Monton |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10,500 |
(4) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
10,500 |
|
Robert P.
Ricciardi, Ph.D. |
|
$ |
27,500 |
|
|
$ |
0 |
|
|
$ |
4,000 |
(5) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
31,500 |
|
|
|
|
(1) |
|
On June 1, 2007, Dr. Kasten received a fully-vested amount to acquire
750,000 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. |
|
(2) |
|
On September 30, 2009, Mr. Boyle received options to acquire 200,000
shares of Common Stock at an exercise price of $0.11 per share, of which 50,000 options vested on
September 30, 2009 and 50,000 options vest on each of September 30, 2010, September 30, 2011 and
September 30, 2012. |
|
(3) |
|
On May 20, 2008, Mr. Hoekstra received options to acquire 500,000 shares
of Common Stock, an exercise of which 200,000 options vested on May 20, 2008, 100,000 options
vested on May 20, 2009, and 100,000 options vest on each of May 20, 2010 and May 20, 2011. |
91
|
|
|
(4) |
|
On August 17, 2009, Mr. Monton received options to acquire 100,000 shares
of Common Stock at an exercise price of $0.12 per share, of which 25,000 options vested on August
17, 2009, and 25,000 shares vest on each of August 17, 2010, August 17, 2011 and August 17, 2012. |
|
(5) |
|
On June 1, 2007, Dr. Ricciardi received a fully-vested option 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. |
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors currently consists of James Monton (Chief) and
Douglas M. Boyle. These individuals were not officers or employees of the Company during 2009. 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.
|
|
|
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 15, 2010 (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, and (iii) 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 15, 2010 upon the exercise or conversion of any options, warrants or other convertible
securities. This table has been prepared based on 116,972,025 shares of Common Stock outstanding
on March 15, 2010. 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.
92
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
Approximate Percentage |
|
Name |
|
Beneficially Owned |
|
|
Of Stock Outstanding |
|
Chesed Congregation of America |
|
|
11,463,090 |
(1) |
|
|
9.0 |
% |
One State Street Plaza, 29th Floor
New York, NY 10004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth R. Levine |
|
|
6,302,046 |
(2) |
|
|
5.4 |
% |
2 Oaklawn Road
Short Hills, NJ 07078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Hoekstra |
|
|
6,160,104 |
(3) |
|
|
5.2 |
% |
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard L. Kasten, Jr. M.D. |
|
|
5,659,929 |
(4) |
|
|
4.8 |
% |
4380 27th Court, SW #104
Naples, FL 34116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. Ricciardi, Ph.D. |
|
|
4,260,000 |
(5) |
|
|
3.6 |
% |
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John H. Souza |
|
|
3,642,005 |
(6) |
|
|
3.1 |
% |
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Monton |
|
|
610,000 |
(7) |
|
|
* |
|
11489 Grandstone Lane
Cincinnati, Ohio 45249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas M. Boyle |
|
|
50,000 |
(8) |
|
|
* |
|
111 Weatherly Street
Dalton, Pennsylvania, 18414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary J. Beeman |
|
|
0 |
|
|
|
* |
|
317 Wekiva Spring Road, #200
Longwood, Florida 32779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Officers as a Group |
|
|
18,882,038 |
(3)(4)(5)(6)(7)(8) |
|
|
15.3 |
% |
|
|
|
(1) |
|
Includes 10,838,090 shares of Common Stock issuable upon the conversion of
convertible notes as of March 15, 2010. Chesed holds $1,000,00 principal balance of convertible
notes, which have accrued $83,809 of interest through March 15, 2010 and convert at a conversion
price of $0.10 per share. |
|
(2) |
|
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. |
|
(3) |
|
Includes currently exercisable options and warrants to acquire 725,000 shares of Common Stock.
Includes 2,550,000 shares of Common Stock and warrants to acquire 250,000 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. |
|
(4) |
|
Includes currently exercisable options and warrants to acquire 1,412,500 shares of Common
Stock. |
|
(5) |
|
Includes currently exercisable options and warrants to acquire 1,550,000 shares of Common
Stock. |
|
(6) |
|
Includes currently exercisable warrants to acquire 2,175,000 shares of Common Stock. |
|
(7) |
|
Includes currently exercisable options and warrants to acquire 75,000 shares of Common Stock. |
|
(8) |
|
Includes currently exercisable options and warrants to acquire 50,000 shares of Common Stock |
|
(*) |
|
Less than 1% |
93
|
|
|
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.
During the nine months ended September 30, 2009, the Company sold an aggregate of $1,014,000
of shares of Common Stock in private offerings at a price of $0.10 per share. The Company paid a
total of $54,640 and issued warrants to acquire 684,500 shares of Common Stock at an exercise price
of $0.10 per share and warrants to acquire 37,500 shares of Common Stock at an exercise price of
$0.11 per share to First Equity Capital Securities, Inc., as placement agent, in connection with
the sale of some of the shares of Common Stock listed above.
During the quarter ended December 31, 2009, the Company sold an aggregate of $381,500 of units
(the Units) at a price of $0.10 per Unit, each Unit consisting of 1 share of Common Stock of the
Company and a 1/2 of a warrant to acquire one share of Common Stock of the Company at a price of
$0.15 per share. The Company paid a total of $17,060 and issued warrants to acquire 213,250 shares
of Common Stock at an exercise price of $0.10 per share and warrants to acquire 106,625 shares of
Common Stock at an exercise price of $0.15 per share to First Equity Capital Securities, Inc., as
placement agent, in connection with the sale of some of the Units listed above.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Buckno, Lisicky & Company was the Companys independent public accountant for 2009 and 2008.
94
Fees for Independent Auditors for Fiscal Years 2009 and 2008
Set forth below are the fees billed for services rendered by Buckno, Lisicky & Company in 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
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.
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.
|
(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 |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the Registrant |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer and Principal
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. |
95
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.
|
|
|
|
|
|
GENELINK, INC.
Registrant
|
|
Date: March 30, 2010 |
/s/ Gary J. Beeman
|
|
|
Chief Executive 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/ Gary J. Beeman
Gary J. Beeman
|
|
Principal Executive
Officer, Principal
Financial Officer and
Principal Accounting
Officer
|
|
March 30, 2010 |
|
|
|
|
|
/s/ Douglas M. Boyle
Douglas M. Boyle
|
|
Director
|
|
March 30, 2010 |
|
|
|
|
|
/s/ Robert Hoekstra
Robert Hoekstra
|
|
Director
|
|
March 30, 2010 |
|
|
|
|
|
/s/ Bernard L. Kasten, Jr. M.D.
Bernard L. Kasten, Jr. M.D.
|
|
Chairman and Director
|
|
March 30, 2010 |
|
|
|
|
|
/s/ James Monton
James Monton
|
|
Director
|
|
March 30, 2010 |
|
|
|
|
|
/s/ Robert P. Ricciardi
Robert P. Ricciardi, Ph.D.
|
|
Director
|
|
March 30, 2010 |
|
|
|
|
|
|
|
Director |
|
|
96