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EX-32.1 - CERTIFICATION - GENELINK INCv310846_ex32-1.htm
EX-31.1 - CERTIFICATION - GENELINK INCv310846_ex31-1.htm
EX-31.2 - CERTIFICATION - GENELINK INCv310846_ex31-2.htm
EX-32.2 - CERTIFICATION - GENELINK INCv310846_ex32-2.htm








For the quarterly period ended March 31, 2012






For the transition period from ______ to ______


Commission File No. 000-30518




(Exact name of registrant specified in its charter)


PENNSYLVANIA   23-2795613
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
8240 Exchange Drive Suite C1   32809
Orlando, Florida   (Zip Code)
(Address of principal executive offices)    


(800) 558-4363
Registrant’s telephone number, including area code


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 No ¨


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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x


Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x


APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Number of Shares of Common Stock  
Outstanding on May 16, 2012 202,922,021






ITEM 1 Financial Statements.  
  Condensed Consolidated Balance Sheets (unaudited) at March 31, 2012  and December 31, 2011 3-4
  Condensed Consolidated Statements of Income (unaudited) for the three months ended March 31, 2012 and 2011 5
  Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011 6
  Notes to Condensed Consolidated Financial Statements 7-13









   March 31, 2012   December 31, 2011 
Cash and cash equivalents  $635,540   $740,769 
Accounts Receivable   166,363    235,458 
Inventory   529,540    562,191 
Prepaid Expenses   259,226    244,248 
Current portion of prepaid sales incentives   76,667    76,667 
Total Current Assets          
    1,667,336    1,859,333 
Property, plant and equipment   109,361    167,812 
Prepaid Sales Incentives   375,666    383,333 
Intangible Assets   233,930    235,587 
Loan Costs, net of accumulated amortization of $129,553 and $108,544   83,248    104,257 
Receivable from sale of subsidiary   164,358    - 
Other Assets   19,814    29,343 
Total Assets  $2,653,713   $2,779,665 


See Notes to Condensed Consolidated Financial Statements









   March 31, 2012   December 31, 2011 
Accounts payable  $1,007,644   $1,370,849 
Accrued interest   347,462    304,457 
Accrued compensation   17,340    94,188 
Other accrued expenses   83,735    103,370 
Deferred revenue   198,955    208,279 
Advances from Purchaser   -    204,500 
Due to shareholder   10,000    10,000 
Total current liabilities   1,665,136    2,295,643 
Non-refundable advance deposit   746,435    750,000 
Deferred  revenue – license fees   737,500    250,000 
Convertible notes payable, net of discounts   977,920    965,015 
Total liabilities   4,126,991    4,260,658 
Common stock, par value $0.01 per share; authorized 350,000,000 shares; issued:  206,442,200 and 204,944,485  shares; outstanding:  202,922,021 and  200,585,326  shares   2,064,422    2,049,448 
Additional paid in capital   21,680,522    21,582,109 
Accumulated deficit   (24,665,987)   (24,560,315)
Treasury stock, 4,359,159 shares, at cost   (552,235)   (552,235)
Total stockholders’ deficit   (1,473,278)   (1,480,993)
Total liabilities and stockholders’ deficit  $2,653,713   $2,779,665 


See Notes to Consolidated Financial Statements









   Three Months Ended March 31, 
   2012   2011
(As restated, See
Note 3)
   $771,664   $1,400,187 
Cost of goods sold   338,203    500,408 
Gross profit   433,461    899,779 
Operating Expenses:          
Selling, general and administrative   1,181,207    1,378,616 
Research and development   16,437    9,024 
Amortization and depreciation   24,285    37,737 
    1,221,929    1,425,377 
OPERATING LOSS   (788,468)   (525,598)
Interest expense   (77,064)   (66,933)
Interest income   805    308 
Gain on sale of subsidiary   759,054    - 
    682,795    (66,625)
NET LOSS  $(105,673)  $(592,223)
Loss per common share – basic and diluted:   (0.00)  $(0.00)
Weighted average common shares – basic and diluted   204,944,485    157,145,518 


See Notes to Condensed Consolidated Financial Statements








   Three Months Ended March 31, 
   2012   2011
(As restated,
see Note 3)
Net loss  $(105,673)  $(592,223)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   24,285    37,737 
Amortization of debt discounts   33,915    38,883 
Common stock issued for services   74,861    27,000 
Stock-based compensation   38,525    62,330 
Amortization of fees and incentives   (8,399)   - 
Gain on sale of subsidiary   (759,054)   - 
Changes in assets and liabilities:          
Accounts receivable   (68,723)   7,404 
Inventory   34,818    (114,696)
Prepaid expenses   (80,132)   (18,085)
Other assets   9,500    (2,540)
Accounts payable and accrued expenses   (135,674)   34,090 
Accrued compensation   (21,139)   (39,300)
Deferred revenue   (1,578)   20,673 
Deferred revenues – license fees   500,000    - 
Net cash used in operating activities   (464,468)   (538,727)
Capital expenditures   (15,675)   (1,690)
Proceeds from sale of subsidiary   539,272    - 
Long-term receivable related to sale of subsidiary   (164,358)   - 
Net cash provided (used) in investing activities   359,239    (1,690)
Proceeds from issuance of common stock and warrants, net   -    338,191 
Principal payments on note        (15,089)
Net cash provided by financing activities   0    338,191 
Cash payments for interest  $-   $5,456 


See Notes to Condensed Consolidated Financial Statements





The accompanying condensed consolidated financial statements of GeneLink Inc., d/b/a GeneLink Biosciences, Inc. and subsidiaries (the “Company”) are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company’s financial position, results of operations, and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.


These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (SEC). The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2012 or for any future period.


Note 1. Organization


The Company is a genetics-based, personal healthcare firm that has developed DNA assessments measuring personal DNA variations that can have a significant impact on overall wellness of an individual client or customer. These small differences in DNA, called SNP’s (“snips”) can indicate disadvantaged genes that are not performing properly and can be linked to pre-dispositions to aging and other wellness issues. GeneLink scientists use the DNA assessments information on each client and then formulate products to address their clients DNA functionality issues. As discussed further in Note 4, the Company divested its interest in GeneWize effective February 10, 2012 as part of a strategic realignment of its business to offer its products through third-party market partners, and to refocus efforts on research, development and manufacturing of custom products for those market partners.


Note 2.Summary of Significant Accounting Policies


Principles of consolidation:


The condensed consolidated financial statements include the accounts of the GeneLink, Inc. and its wholly-owned Subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.


Use of estimates:


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


Cash and cash equivalents:


Highly liquid instruments purchased with a maturity of three months or less are considered to be cash equivalents. At times, cash and cash equivalents may exceed federally insured limits. The Company has not experienced any losses on such accounts. All non-interest bearing cash balances were fully insured at March 31, 2012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Company's non-interest bearing cash balances may again exceed federally insured limits. The Company had $392,529 of interest-bearing amounts on deposit in excess of federally insured limits at March 31, 2012.




Accounts Receivable:


Accounts receivable include amounts due from credit card service partners of which the majority represent reserves for potential charge-backs. As of March 31, 2012 and December 31, 2011, the Company has not recorded an allowance for doubtful accounts as management believes all amounts are collectible.




Inventory consists primarily of raw materials for the custom nutritional and skincare products sold by the Company. Inventory is valued at the lower of cost (using the first-in, first-out method) or market.


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 5 years of the related assets or the lesser of the expected life or term of the lease as to leasehold improvements.


Intangible Assets:


Intangible assets include costs incurred to apply and obtain patents for its products. Patents are amortized upon approval by regulatory authorities over the estimated useful life of the asset, generally fifteen years on a straight-line basis.


Deferred Loan Costs: Loan acquisition costs are amortized over the term of the debt using the effective interest method.


Long lived assets:


The Company reviews its long-lived assets and certain identifiable intangibles for impairment 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 is less than its carrying amount. The Company has not identified an impairment of any such assets for the three months ended March 31, 2012 or for the year ended December 31, 2011.


Revenue recognition:


The Company recognizes revenues from the sales of products upon shipment. Revenue 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.


Revenue is reduced for refunds on certain products during the trial period which is the first 60 days after the initial order is shipped. The Company records a reserve for refunds based on historical refunds provided to customers which is recorded as a reduction of revenue and is included in accrued expenses on the accompanying balance sheet.


The Company receives advance payments from customers on products ordered which is recorded as deferred revenue until shipment occurs.


Prepaid sales incentives and deferred revenue-license fees represent prepaid fees that are deferred and recognized over the term of the underlying agreement with licensees.


The company recognizes revenue from licensing agreements as earned, which is generally when products are shipped from distributors, over the term of the agreement.




Research and Development:


Research and development costs are expensed as incurred.




The Company expenses advertising when incurred. Advertising expense was $24,032 and $47,683 for the three months ended March 31, 2012 and 2011, respectively.


Stock-Based Compensation:


Stock-based compensation is recorded for recognition of the cost of employee or director services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. The stock-based compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (typically, the vesting period).


The Company estimates the fair value of each option award issued under its stock option plans on the date of grant using a lattice option-pricing model that uses the assumptions noted below. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock for a period commensurate with the expected life. These historical periods may exclude portions of time when unusual transactions occurred. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. For shares that vest contingent upon achievement of certain performance criteria, an estimate of the probability of achievement is applied in the estimate of fair value. If the goals are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company separates the grants into homogeneous groups and analyzes the assumptions for each group and computes the expense for each group utilizing these assumptions.


   Assumptions for Awards
Granted for the Three
Months Ended March 31,
   2012   2011 
Expected volatility   180%   146-203%
Risk-free interest rate   4.5%   4.5%
Expected dividend yield   0%   0%


The Company granted 735,000 and 1,100,000 options during the three months ended March 31, 2012 and March 31, 2011, respectively.


Earnings per share


Basic loss per share is calculated using the weighted average number of common shares outstanding for the period and diluted is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Given that the Company is in a net loss position, there is no difference between basic and diluted weighted average shares since the common stock equivalents would be antidilutive.


The following common stock equivalents are excluded from the loss per share calculation as their effect would have been antidilutive:


   Three Months Ended March 31, 
   2012   2011 
Options   20,366,833    15,831,833 
Warrants   22,157,458    11,940,958 
Debt conversion shares   1,875,000    1,875,000 




Income taxes:


The Company has not recorded current income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance sheet approach which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.


The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination by the Internal Revenue Service include the years ended December 31, 2008 through December 31, 2011.


Derivative Financial Instruments:


The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt and equity instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. An evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to be classified as equity or as a derivative liability.


Beneficial Conversion and Warrant Valuation:


The Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that are in-the-money when issued. The Company also records the fair value of warrants issued in connection with debt instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized for convertible debt as interest expense over the term of the debt using the effective interest method.


Fair Value of Financial Instruments:


The Company’s financial instruments are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:


•           Level 1 – Valuation based on quoted market prices in active markets for identical assets and liabilities.


•           Level 2 – Valuation based on quoted market prices for similar assets and liabilities in active markets.


•           Level 3 – Valuation based on unobservable inputs that are supported by little or no market activity, therefore requiring management’s best estimate of what market participants would use as fair value.


Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2012. The Company uses the market approach to measure fair value of its Level 1 financial assets. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.


The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts receivable, accounts payable and accrued expenses. The fair value of the Company’s convertible notes payable approximate their carrying value based upon current rates available to the Company.




During 2011, the Company issued warrants in connection with a license and distribution agreement (see Note 4) and engaged a third party to complete a valuation of those warrants which were recorded as Prepaid Sales Incentive on the accompanying balance sheet. The valuation was completed using Level 2 inputs.


Note 3: 2011 Restatement


The accompanying financial statements for the interim period ended March 31, 2011 were restated for the following reasons:



·The Company determined that the amortization of the loan costs, warrant discount and BCF discount related to the convertible debt was improperly recorded and interest expense was understated by $25,308 in the three months ended March 31, 2011. These adjustments were related to the previously disclosed restatement of loan costs, warrant discounts and BCF discounts at December 31, 2010.


·The Company determined that depreciation expense was understated by $5,000 and amortization expense was overstated by $6,933 in the three months ended March 31, 2011.



·The Company improperly presented depreciation and amortization of $38,783 as other income (expense) during the three months ended March 31, 2011 which has been reclassified to operating expenses and increased the operating loss.


The following table summarizes the impact of the adjustments and restatements for the period ended March 31, 2011:


Statements of Operations

Three Months ended March 31, 2011 (Unaudited)


   As Previously             
   Reported   Adjustments   Reclassification   As Restated 
Operating Loss   (488,051)   1,046    (38,593)   (525,598)
Interest Expense   41,625    24,810    498    66,933 
Net Loss   (568,459)   (23,764)   -    (592,223)
Earnings per share   (0.00)   (0.00)   -    (0.00)


Note 4: Sale of GeneWize


On October 13, 2011, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Capsalus Corp. (“Capsalus”), pursuant to which the Company agreed to sell 100% of the stock of its wholly-owned subsidiary, GeneWize Life Sciences, Inc. (“GeneWize”). The Stock Purchase Agreement provides for a purchase price of $500,000 payable at the closing, plus an earn-out of between $1.5 million and $4.5 million, subject to the performance of GeneWize after the closing. The earn-out amount is calculated as the greater of $300,000 per year or 10% of sales revenue, payable monthly through April, 2017. The effective date of the closing was February 10, 2012, the date approval of the shareholders of GeneLink was obtained and final documents were completed. Due to continuing involvement with Genewize subsequent to the sale, this transaction was not accounted for as a discontinued operation.




GeneLink recorded a gain on sale of subsidiary as of February 10, 2012. Consideration for the sale included the $500,000 cash received from Capsalus and an additional $39,272 for working capital. Additional consideration included the earn-out amount which was valued at $164,358, the Company’s estimate of net present value of probable cash collections under the agreement. The total consideration of $703,630 was offset by net liabilities and related costs of sale resulting in a gain on sale of $759,054.


GeneLink, GeneWize and Capsalus also entered into an Interim Management Agreement dated October 13, 2011, pursuant to which Capsalus managed the operation of GeneWize until the closing date of February 10, 2012. Pursuant to the Interim Management Agreement, Capsalus was responsible for all expenses and received all revenues of GeneWize from October 1, 2011 through the date of closing. Capsalus advanced $204,500 to GeneWize prior to December 31, 2011 to fund operations which was recorded as “Advances from Purchaser” on the accompanying balance sheet at December 31, 2011 and an additional $75,000 was advanced to Genewize by Capsalus prior to the closing of the sale of GeneWize. This amount was assumed by Genewize in February 2012 upon the closing of the sale of GeneWize.


On October 13, 2011, GeneLink entered into a License and Distribution Agreement (the “LDA”) with Gene Elite LLC (“Gene Elite”) which expires in 2017 with successive five-year renewal options provided Gene Elite meets sales and performance criteria. Pursuant to the LDA, GeneLink granted Gene Elite the exclusive right to GeneLink’s propriety technology to sell skin care and nutrition products in the direct sales, multi- level marketing (MLM) and athletic formula channels. Pursuant to the LDA, the Company received $1,500,000 in license fees, of which $1,000,000 (the “Up-front fee”) was received during 2011 and $500,000 was received on February 10, 2012, the closing date of the sale of GeneWize. The LDA provides for $750,000 of the Up-front fee as a Nonrefundable Advance Deposit which accrues interest at 4% per year and will be paid through product credits or issuance of common stock at market price, at the discretion of Gene Elite. The remaining $750,000 of the license fees was recorded as “Deferred Revenue - License Fees” on the accompanying balance sheet, which will be recognized over the term of the LDA beginning on February 10, 2012.


In connection with the LDA, GeneLink and Gene Elite entered into a Warrant Purchase Agreement dated October 13, 2011 pursuant to which GeneLink granted Gene Elite warrants to purchase 6,000,000 shares of common stock of GeneLink at an exercise price of $0.10 per share and 2,000,000 shares of common stock of GeneLink at an exercise price of $0.45 per share (collectively, the “non-performance warrants”). In addition, and, subject to certain performance requirements being satisfied, Gene Elite was granted warrants to purchase 6,000,000 shares of common stock of GeneLink at an exercise price of $0.20 per share (the “performance warrants”). The 8,000,000 shares of non-performance warrants, valued at $460,000 at issue date, are accounted for as “Prepaid Sales Incentives” on the accompanying balance sheet and will be amortized over the life of the licensing agreement. The non-performance warrants were valued using a Binomial Lattice Option Valuation Technique (“Binomial”) and the following assumptions:


Fair market value of asset  $0.06 
Exercise price  $0.10 – .0.45 
Expected life   5.0 Years 
Equivalent volatility   164%
Expected dividend yield   0%
Risk-free rate   4.5%


The issuance date of the performance warrants was the date of closing, February 10, 2012, and management currently does not expect the performance warrants to be earned.


Note 5: Related Parties


Consulting Fees


The Company entered into a consulting agreement with a shareholder and officer of the Company for scientific advisory services. The agreement provides for annual payments of $30,000, payable $2,500 per month. As of March 31, 2011, amounts due the officer were $2,500, and are included in accounts payable on the accompanying balance sheets. At March 31, 2012 not amounts were due for these services.


The Company also entered into a consulting agreement with a shareholder to provide strategic and business development assistance. The agreement provides for annual payments of $60,000 payable $5,000 per month. On March 2, 2012, the shareholder converted all amounts then owed to 1,487,220 shares of common stock. No fees were owed at March 31, 2012.




Due from Shareholder


A shareholder advanced the Company $10,000 which was due as of March 31, 2012. Such advance does not bear interest and is due upon demand.


Note 6. Contingencies


On March 25, 2011, the Company received interrogatories and a request to produce documents from the FTC as part of its investigation into unnamed persons engaged directly or indirectly in the advertising or marketing of dietary supplements, foods, drugs, devices, or any other product or service intended to provide a health benefit or to affect the structure or function of the body. The Company is continuing to comply with this request. The conclusions and results of the inquiry are not certain, however they could result in an imposition of operating restrictions and/or payment of penalties.


Note 7. Going Concern and Management’s Plans


The Company has has incurred recurring operating losses since inception including a loss of $105,673 in the three months ending March 31, 2012 and had an accumulated deficit at March 31, 2012 of $24,665,987. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.


The Company's ability to continue as a going concern is dependent upon the achievement of its marketing plans to enhance sales and its ability to raise capital. Management continues to work with existing market partners as well as pursuing additional distribution opportunities. Management also believes it has the opportunities before it to increase sales which will provide a foundation for raising additional capital. The Company’s financial statements have been prepared on the basis that it is a going concern, which assumes continuity of operations and the realization of assets and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments that might result if the Company was forced to discontinue its operations






Statements in this Report that relate to future results and events are based on the Company’s current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting the Company’s business and prospects, see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors Affecting the Company’s Business and Prospects” in the 2011 Form 10-K.


Operating results for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year.




The Company has created a breakthrough methodology for SNP (single nucleotide polymorphism) based genetic profiling (patents issued and pending) and the Company is marketing and/or licensing these proprietary assessments to companies that manufacture or market to the nutraceutical, personal care and skin care industries, as well as developing our own proprietary products for sale based on its profiling system.


The Company’s expansion into the bioscience field with its innovative genetic profiles help companies create and deliver customized products – personalized wellness and “quality of life” products tailored to their customer’s individual needs – based on the science of genetics, thereby allowing the consumer and/or their health care provider to determine what vitamin/nutritional supplements, skin-care products, and health care or weight loss regimens are indicated for their individual needs.




In the first quarter of 2012, the Company continued to as a leading solution provider in the genetically customized nutritional and personal care marketplace. On February 10, 2012 the Company completed its divestiture of direct selling subsidiary GeneWize to Capsalus Corp. From January 1, 2012 until February 10, 2012, GeneWize operated under Capsalus management and GeneLink ownership. As of March 31, 2012 GeneWize continued as a distributor of the Company’s products under its new ownership. Revenues declined, in part as GeneWize retail revenues were only includable through February 10, 2012. For the balance of the quarter, revenues are recognized by GeneLink as wholesale provider. More details are provided below in Results of Operations.


Results of Operations




Revenues. The three months ended March 31, 2012 includes GeneWize retail sales from January 1, 2012 through February 10, 2012 when the sale of GeneWize was consummated. Total revenues for the three months ended March 31, 2012 were $771,664 as compared to $1,400,187 for the three months ended March 31, 2011, a decrease of $628,523 or 44%. The drop is attributable to a reduction in GeneWize of new affiliate enrollments as well as the transition from retail to wholesale revenues for the period February 11, 2012 to March 31, 2012 resulting from the sale of GeneWize.


Gross Profit. Gross profit decreased from $899,779 for the three months ended March 31, 2011 to $433,461 for the three months ended March 31, 2012. Gross profit margin decreased from 64% to 56% for the three months ended March 31, 2011 and March 31, 2012, respectively. Gross profit margins decreased due to a transition from retail to wholesale revenues during the period after the sale of GeneWize was finalized.


Expenses. Operating expenses for the three months ended March 31, 2012 were $1,221,929 as compared to $1,425,377 for the three months ended March 31, 2011, a decrease of $203,448 or 14%. The decrease in expenses for the three months ended March 31, 2012 primarily resulted from decreased commissions attributable to the sale of GeneWize. Savings were offset by increased legal expenses required for regulatory compliance with the FTC inquiry noted in Recent Regulatory Developments noted below. Sales commission expenses paid to sales affiliates totaled $146,551 for the three months ended March 31, 2012, as compared to $456,905 for the three months ended March 31, 2011. Such commission expense represented 19% and 33% of Company revenues for the three months ended March 31, 2012 and 2011, respectively. Additional legal costs related to regulatory compliance totaled approximately $140,000 in the three months ended March 31, 2012.




Operating Losses. The Company incurred an operating loss of $788,468 for the three months ended March 31, 2012, as compared to an operating loss of $592,223 for the three months ended March 31, 2011, an increase of $262,870, resulting largely from increased legal fees and reductions in gross profit as a result of the sale of GeneWize. The loss for the three months ended March 31, 2012 and 2011 includes $38,525 and $62,300, respectively, of non-cash expenses related to stock and option grants that were issued during such quarter or that vested from prior periods.


Net Losses. The Company incurred a net loss of $105,673 for the three months ended March 31, 2012 as compared to a net loss of $592,223 for the three months ended March 31, 2011, a decrease of $486,550 or 69%. The decreased net loss is due to the gain on sale of GeneWize of $759,054.


Comparative Pro-forma Results for three months ended March 31, 2012


   Excluding GeneWize   As Reported, including
GeneWize through
February 10, 2012
Revenues  $421,075   $771,664 
Gross Profit   93,075    433,461 
Net Operating Loss   (693,896)   (788,468)
Net Loss   (32,444)   (105,673)




For the three months ended March 31, 2012, the Company’s primary liquidity requirements have been the funding of its corporate overhead, including the payment of staff compensation, operating expenses and accounts payable. In addition the Company expended resources toward tenant improvements for new facilities.


Cash and cash equivalents at March 31, 2012 amounted to $635,540 as compared to $740,769 at December 31, 2011, a decrease of $105,229. During the first three months of 2012, the Company’s operating activities utilized $464,468 as compared to $558,727 for the first three months of 2011, a decrease of $74,259. This decrease in cash and cash equivalents is primarily related to receipt of funds related to the licensing agreements related to the sale of GeneWize, offset by cash utilized during these periods to fund the Company’s operating losses.


Investing activities provided $359,239 in proceeds for the three month period ended March 31, 2012 as compared to $1,690 in use of funds for the three month period ended March 31, 2011, an increase of $360,929. The increase in funds from financing activities was primarily due to the receipt of funds for the sale of GeneWize, offset by increases in long-term notes receivable related to the sale. Financing activities provided no funds during the three months ended March 31, 2012 as compared to providing $338,191 in the three months ended March 31, 2011 primarily from sales of restricted common stock, less costs associated with such offerings.


The Company will require approximately $1,500,000 of additional funds to further implement its sales and marketing strategy, enhancements to manufacturing, for research and development and for other working capital needs. If the Company is not able to secure such additional required funding, it will continue to realize negative cash flow and losses and may not be able to continue operations.


Financial Condition


Assets of the Company decreased from $2,779,665 at December 31, 2011 to $2,653,713 at March 31, 2012, a decrease of $125,952. This decrease was primarily due to decreases in accounts receivable and property, plant and equipment due to the sale of GeneWize offset by increases in long-term receivables and deferred sales incentives related to the sale of GeneWize.




Liabilities decreased from $4,260,658 at December 31, 2011 to $4,126,991 March 31, 2012, a decrease of $133,667. The decrease is attributable to liabilities assumed by the purchaser of GeneWize offset by increases in deferred license fees related to the licensing of GeneWize sales. The $977,920 amount of convertible promissory notes payable reflected on the March 31, 2012 balance sheet is net of debt issuance costs and stock conversion discounts amounting to $272,080. As of March 31, 2012, $1,250,000 principal amount of convertible secured promissory notes were outstanding.




In July 2010, the FDA held a public workshop on its proposal to extend formal regulatory oversight to laboratory developed tests (LDTs). In the public meeting notice the FDA cited a variety of safety concerns related to current LDTs, noting that the tests have become increasingly complex and utilized for significant medical decisions, sometimes in place of similar tests that have been reviewed and approved by the FDA. It is possible that the FDA may require all LDTs to undergo some form of pre-market clearance as a medical device. However, no formal guidance has yet been issued discussing the nature of the changes the FDA may make with respect to the regulation of LDTs, nor the scope of potential regulation. Legislation has also been introduced in Congress that could affect the framework for regulatory approval of LDTs.


As part of the FDA’s evolving position on the regulation of LDTs, the FDA has begun issuing letters to a number of companies that primarily related to direct to consumer (DTC) genetic testing products. On September 13, 2010, GeneWize received such a letter. In these letters, the FDA expresses concern about consumers making medical decisions in reliance on genetic tests that have not undergone the FDA’s premarket review. GeneLink and GeneWize filed a timely response to the FDA’s request, expressing the Company’s position and belief that its assessment does not constitute a regulated medical device. The FDA has not responded to the Company on the matter.


The U.S. Government Accounting Office (GAO) issued a report in July 2010 to the effect that DTC tests are misleading to consumers and that the test results are further complicated by deceptive marketing practices. Later that month, the U.S. House of Representatives Committee on Energy and Commerce held a hearing on the public health implications of DTC genetic testing. In the course of broader public testimony at the hearing, representatives from GAO made reference to allegedly improper marketing practices utilized by an independent distributor of GeneWize products. The Federal Trade Commission (FTC) may also examine aspects of marketing of DTC tests.


The Company continues to closely monitor potential changes to the overall regulatory environment to ensure its activities are compliant with applicable requirements. This regulatory environment includes federal as well as state matters regarding DTC testing. The Company has engaged in discussions with the FDA in order to assure compliance, and will pursue additional opportunities for discussion as warranted.


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.


In March 2011, we received interrogatories and a request to produce documents from the FTC as part of its investigation into unnamed persons engaged directly or indirectly in the advertising or marketing of dietary supplements, foods, drugs, devices, or any other product or service intended to provide a health benefit or to affect the structure or function of the body.   We believe that this request is related to the July 2010 GAO report referenced above.  We have expended significant resources since 2011 in an attempt to comply with this request and continue to do so.




Statements included in this Report on Form 10-Q, including within the Management’s Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature, are intended to be and are hereby identified as “forward looking statements” for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements due to several factors. The Company undertakes no obligation to publicly release any revisions to these forward looking statements or reflect events or circumstances after the date hereof.




There are a number of factors that affect the Company’s business and the result of its operations. These factors include general economic and business conditions; the success of the Company’s recent launch of its direct selling efforts; the level of acceptance of the Company’s products and services; the rate and commercial applicability of advancements and discoveries in the genetics field; and the Company’s ability to enter into strategic alliances with companies in the genetics industry.


  Not Applicable.


Disclosure Controls and Procedures


The Company’s Chief Executive Officer and the Chef Financial Officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)), that such disclosure controls and procedures were effective as of the end of the period covered by this report.


Changes in Internal Control Over Financial Reporting


There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




Item 1


In September 2009, the Company brought action against two prior law firms in New Jersey Superior Court, 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. In March 2010, the Company voluntarily dismissed one of the law firms from the action. In August 2010, the remaining law firm filed a counterclaim for alleged unpaid legal fees owed to it by the Company. The defendant attempted to remove the matter to U.S. District Court, but in it was remanded back to the New Jersey Superior Court. The defendant appealed the remand decision, but in 2012 the Federal Circuit dismissed the defendants appeal. The case is now in the discovery phase.


  Not applicable.






Item 6


Exhibit No.   Description
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


* * * * * *

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Date: May 21, 2011 By:       s/ Bernard L. Kasten, Jr., M.D.
    Bernard L. Kasten, Jr., M.D., Chief Executive
    Officer and Principal Financial Officer