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EX-21 - EXHIBIT 21 - GENELINK INCc98623exv21.htm
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EX-31.1 - EXHIBIT 31.1 - GENELINK INCc98623exv31w1.htm
Table of Contents

 
 
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
     
o   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)
     
Pennsylvania   23-2795613
State of Incorporation   I.R.S. Employer I.D. No.
317 Wekiva Springs Road, #200
Longwood, FL 32779

(Address of principal executive offices)
Registrant’s 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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s 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):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
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 issuer’s common stock, $.01 par value, outstanding.
 
 

 

 


 

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 Exhibit 21
 Exhibit 31.1
 Exhibit 32.1

 

 


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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 management’s 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.   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 individual’s 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 Company’s 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 individual’s 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 person’s 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 individual’s 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.
GeneLink’s 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 world’s 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 GeneLink’s 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 GeneLink’s 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 GeneLink’s developmental pipeline incorporates important research areas such as genetic assessments for early detection of Alzheimer’s 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 GeneLink’s 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. GeneLink’s scientists have spent over a decade pursuing pharmacogenomic research, resulting in a significant pipeline of research and future opportunities.
GeneLink analyzes each person’s 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 individual’s 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 individual’s 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
GeneLink’s 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 they’re using and why. Many times this shot-gun approach leads to the over (or under) consumption of vitamins, minerals and active ingredients.
GeneLink’s 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 individual’s 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:
  what they need,
 
  in the right amount, and
 
  not pay for or consume what they don’t need.
Utilizing genetics, GeneLink adds a completely unique preventative dimension — the ability to address an individual’s genetic deficiencies, hopefully before they become symptomatic. In addition to GeneLink’s own proprietary science and discoveries, in order to protect its Customers, GeneLink uses only:
  Genetic variations (SNPs) independently verified by world-recognized medical and scientific institutions
 
  Ingredients already generally accepted as safe by the FDA; and
 
  Ingredients independently verified to be efficacious in addressing the deficiencies identified through the SNPs.
Thus, although GeneLink’s 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 layman’s 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. GeneLink’s 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 1990’s, GeneLink’s 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 GeneLink’s genetic profiles. Although GeneLink’s 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 public’s 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 GeneLink’s 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 Company’s Nutritional System™ to Solgar’s health food and specialty natural food retailers North America. Although launched commercially in the spring of 2008, shortly after the death of Solgar’s 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 individual’s genetic makeup.
GeneWize’s 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. GeneLink’s 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 customer’s 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 GeneWize’s 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
GeneLink’s 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 person’s 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:
  Oxidative Stress Assessment
GeneLink’s Oxidative Stress Assessment is a DNA-based tool designed to help measure an individual’s inherent genetic capacity to combat oxidative stress. This assessment measures and helps predict the body’s 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.
  Lipid Metabolism Assessment/Metabolic Syndrome
GeneLink’s Lipid Metabolism Assessment was designed to help predict an individual’s 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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GeneLink’s 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.
  Bone Density Assessment
GeneLink’s Bone Health Assessment looks for SNPs in several key genes associated with bone density and bone loss and is designed to help predict an individual’s 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.
GeneLink’s Bone Health Assessment is an important predictive tool that can be used as a guide to help determine an individual’s genetic propensity for bone density loss, and to help create a therapeutic strategy that minimizes in-born health risks.
  GeneLink Healthy Aging Assessment®
GeneLink’s 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.
  GeneLink Nutragenetic Profile®
GeneLink’s 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.
  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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GeneLink’s 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.
  Skin Health Assessment (also know as Dermagenetics® Skin Health Assessment)
GeneLink’s 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 skin’s 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 individual’s 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.
  DNA Collection System
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 — it’s about as straight forward as brushing one’s 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 GeneLink’s 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:
  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.
GeneLink’s 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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GeneLink’s 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.
  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.
GeneLink’s 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 individual’s DNA.
  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.
GeneLink’s 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 individual’s DNA.
Development Pipeline
GeneLink’s scientists continue to research and develop DNA assessments and products for a growing list of condition-specific products:
  Dementia and Alzheimer’s Assessment
 
  Metabolic Syndrome Assessment
 
  Macular Degeneration Assessment

 

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  Neurological Health Panel
 
  DNA Integrity and Repair Panel
 
  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 Company’s 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.
GeneLink’s 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 Company’s 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.
GeneLink’s 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 Administration’s (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. GeneLink’s 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 world’s 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 Company’s 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 organization’s highly successful monthly tabloid magazine. Dr. Kasten’s 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 SIGA’s 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. Ricciardi’s 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 Children’s 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 director’s 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 1970’s. 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 world’s 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 Who’s 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 Alzheimer’s disease therapy. He also served as the Director of the University of Florida Drug Discovery Group for Alzheimer’s disease, which has sustained funding by the National Institute on Aging to support research in the pharmacotherapy for Alzheimer’s disease. In 1999 he was appointed to the Medical and Scientific Advisory Council of the National Alzheimer’s Association. In July of 2000, he became the Chair of the Department of Pharmacology and Neuroscience and Director, Institute for Aging and Alzheimer’s 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 Children’s Hospital and fellowship at the Cincinnati Children’s 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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ITEM 1A.   RISK FACTORS
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:
  the successful commercialization of our existing products and services;
 
  the development of adequate internal systems, manufacturing capabilities and laboratory testing capabilities;
 
  progress in our product development efforts;
 
  progress with regulatory affairs activities;
 
  the growth and success of effective sales and marketing activities;
 
  the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and
 
  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 Company’s 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 Company’s 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 Company’s 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.

 

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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.
GeneWize’s 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 organization’s 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.

 

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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 GeneWize’s 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.

 

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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.

 

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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.

 

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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 management’s 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.

 

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THE FAILURE TO RECRUIT, MAINTAIN AND MOTIVATE A LARGE BASE OF PRODUCTIVE INDEPENDENT DISTRIBUTORS COULD LIMIT GENEWIZE’S 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 GeneWize’s ability to attract, motivate and retain independent distributors.
We anticipate that GeneWize’s 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 GeneWize’s revenues and could adversely affect GeneWize’s ability to attract other independent distributors.
ADVERSE PUBLICITY ASSOCIATED WITH GENEWIZE’S PRODUCTS, INGREDIENTS OR NETWORK MARKETING PROGRAM, OR THOSE OF SIMILAR COMPANIES, COULD HARM GENEWIZE’S 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 GeneWize’s 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.

 

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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
ITEM 2.   PROPERTIES
The Company leases its principal offices in Longwood, Florida. The lease is for a term of three (3) years, ending December 2010, and provides for monthly rental payments of $5,500.48.
ITEM 3.   LEGAL PROCEEDINGS
Effective October 14, 2005, we terminated the employment of John R. DePhillipo, our former Chief Executive Officer and President and a former director. In 2005, Mr. DePhillipo commenced two lawsuits allegedly arising out of his termination by us for “cause,” as defined in his Employment Agreement with us.

 

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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 Company’s 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 Company’s common stock to the Company, that the Company and its counsel fraudulently and negligently misrepresented the Company’s financial condition to induce Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo sell their shares of the Company’s 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 Company’s 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 Company’s common stock sold by them to us pursuant to the Settlement.

 

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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.
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

 

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PART II
ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company’s 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 Company’s common stock for the past 2 years, when the Company’s 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 Company’s 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 Company’s financial condition and other factors deemed relevant to the Board of Directors. In addition, the Company’s ability to pay dividends may become limited under future loan agreements which may restrict or prohibit the payment of dividends.

 

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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 Company’s 2007 Stock Option Plan and 1,400,000 options were granted pursuant to the Company’s 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.

 

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            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.

 

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            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.

 

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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 Company’s 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.

 

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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.

 

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ITEM 6   SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.   MANAGEMENT’S 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 Nutrition’s 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.

 

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Results of Operations
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2009 TO FISCAL YEAR ENDED DECEMBER 31, 2008.
Assets
The Company’s 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 Company’s 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 Company’s 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.

 

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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 GeneWize’s 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 Company’s 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.

 

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Liabilities
The Company’s liabilities increased by $1,393,839 due to payables created from operations of GeneWize and its related impact on GeneLink’s 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.

 

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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 GeneWize’s 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.

 

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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 Company’s primary liquidity requirement was the funding of the Company’s sales and marketing efforts, funding improvements in the Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

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The Company believes that it needs approximately $1,500,000 of working capital to fund the Company’s 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 customer’s 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.

 

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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 customer’s 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.

 

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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 management’s estimate of the amount of possible credit losses in the Company’s 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.

 

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTS
INDEX TO FINANCIAL STATEMENTS
         
    Page  
    49  
 
       
Financial Statements
    50-51  
 
       
       
 
       
    52  
 
       
    53  
 
       
    54-55  
 
       
    56-79  

 

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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. Management’s 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

 

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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

 

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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

 

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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

 

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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

 

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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

 

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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

 

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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 Company’s 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 individual’s 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 person’s potential to efficiently control oxygen free radical damage, eliminate hydrogen peroxide, protect and repair oxidized phospholipids and destroy harmful environmental compounds. The Company’s 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 individual’s genetic makeup.

 

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GeneWize’s 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. GeneLink’s 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 customer’s 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 company’s 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 Company’s interim quarterly period beginning July 1, 2009. The adoption of the ASC did not have an impact on the Company’s 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.

 

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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 customer’s 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.

 

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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 management’s estimate of the amount of possible credit losses in the Company’s 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.

 

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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 Company’s 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.

 

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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.

 

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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 Company’s 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).

 

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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.

 

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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 enterprise’s 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 entity’s 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 Company’s fiscal year beginning January 1, 2010. The Company is evaluating the potential impact of adopting this guidance on the Company’s 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 Company’s fiscal year beginning January 1, 2010, with the exception of the level 3 disaggregation, which is effective for the Company’s fiscal year beginning January 1, 2011. The Company is evaluating the potential impact of adopting the guidance on the Company’s consolidated financial position, results of operations and cash flows.
Reclassifications:
Certain amounts in the prior year’s financial statement have been reclassified to conform with the current year’s 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.

 

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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.

 

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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.

 

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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

 

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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 Company’s 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.

 

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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 Company’s 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.

 

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During 2007 the Company granted options to Board members, executives and advisors in lieu of compensation in accordance with the Company’s 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 Company’s 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.

 

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A summary of the status of the Company’s 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 %

 

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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.

 

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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.

 

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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 Company’s 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. DePhillipo’s 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. DePhillipo’s 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.

 

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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 Company’s 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.

 

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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 Company’s 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.

 

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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 Company’s 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 Company’s common stock to the Company, that the Company and its counsel fraudulently and negligently misrepresented the Company’s financial condition to induce Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo sell their shares of the Company’s 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 Company’s 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 Company’s 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.

 

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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.

 

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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 Company’s 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 Company’s 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 Company’s 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 Company’s programs for recruitment and retention of distributors will be successful, and if they are not, the Company’s 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 Company’s behalf. In the event any of the Company’s 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.

 

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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 Commission’s 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 issuer’s 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 Company’s 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 Company’s 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 Company’s internal controls over financial reporting or, to the knowledge of the Company’s 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.
Management’s 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 Company’s 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 Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B   OTHER INFORMATION
Not applicable.

 

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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 Company’s 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 organization’s highly successful monthly tabloid magazine. Dr. Kasten’s 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 SIGA’s 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].

 

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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 Company’s 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&G’s key beauty care patents. He led a number of successful projects including the launch of Pantene Pro V, which has become the world’s 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&G’s Latin American organization from 1984 to 1988, he managed projects in the health, beauty, cleaning, and food industries. Mr. Monton worked at P&G’s Asian headquarters in Kobe, Japan from 1996 to 2001, leading much of P&G’s Asian Beauty Care organization and serving on the China Beauty Care Management Leadership Team. From 2001 until 2005, he was a Director in P&G’s External Relations Department where he led much of the company’s 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 University’s 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.

 

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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. Ricciardi’s 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 Children’s 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 year’s 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.

 

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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 Company’s 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 individual’s 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 Company’s 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 Company’s officers and directors, the Company believes that all reports required to be filed pursuant to the 1934 Act with respect to transactions in the Company’s Common Stock through December 31, 2009 were filed on a timely basis.

 

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Code of Ethics.
The Company has adopted a code of conduct that applies to all employees, including the Company’s principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A copy of the Company’s 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 management’s 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 Company’s audited financial statements, and reviewing and approving the Company’s internal accounting controls and discussing such controls with the independent accountants.
In connection with the audit of the Company’s financial statements for the year ended December 31, 2009, the Audit Committee met with representatives from Buckno, Lisicky & Company, the Company’s independent auditors. The Audit Committee reviewed and discussed with the Company’s 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 Company’s management the Company’s 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 Company’s financial statements audited by Buckno, Lisicky & Company be included in the Company’s Annual Report on Form 10-K for year ended December 31, 2009.
Douglas M. Boyle (Chief)
James Monton

 

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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 officer’s 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.

 

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Annual Base Salary
In general, base salary for each employee, including the named executive officers, is established based on the individual’s 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.

 

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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 Company’s Annual Report on Form 10-K.
COMPENSATION COMMITTEE
James Monton (Chair)
Douglas M. Boyle

 

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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.

 

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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
OPTION AWARDS
                                         
                    Equity Incentive Plan              
                    Awards: Number of              
                    Securities              
            Number of Securities     Underlying              
    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.

 

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DIRECTOR COMPENSATION
Directors to not receive any cash compensation for their service as directors of the Company or for attending any meetings.
DIRECTOR COMPENSATION
                                                         
                                    Change in              
                                    Pension              
                                    Value              
                                    and              
                            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.

 

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(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. Ricciardi’s 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 Company’s 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.

 

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    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%

 

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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 Company’s independent public accountant for 2009 and 2008.

 

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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 Company’s independent accountant for the audit of the Company’s 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.
ITEM 15.   EXHIBITS
  (1)   Financial Statements. The financial statements required to be filed are presented beginning on page 36.
  (2)   Exhibits. The following Exhibits have been filed pursuant to Item 601 of Regulation S-K.
         
Exhibit Number   Description
       
 
  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.

 

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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
 
       
 
John H. Souza
  Director     

 

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