-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qn/9H2Jh/q1ljdJ+Z3Of0Z30WzZCuoIZnJzvx3KPqNDEit09zvBfvnOSiUP4bZ5V FT0RwwmHbQqEhZDV2be79w== 0000893220-07-001266.txt : 20070410 0000893220-07-001266.hdr.sgml : 20070410 20070410163634 ACCESSION NUMBER: 0000893220-07-001266 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070410 DATE AS OF CHANGE: 20070410 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENELINK INC CENTRAL INDEX KEY: 0000941020 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 232795613 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30518 FILM NUMBER: 07759172 BUSINESS ADDRESS: STREET 1: PO BOX 3212 CITY: MARGATE STATE: NJ ZIP: 08402 BUSINESS PHONE: 6098236991 MAIL ADDRESS: STREET 1: PO BOX 3212 CITY: MARGATE STATE: NJ ZIP: 08402 10KSB 1 w32810e10ksb.txt FORM 10KSB GENELINK, INC U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 COMMISSION FILE NO. 0-28077 GENELINK, INC. (Name of Small Business Issuer in its charter) PENNSYLVANIA 23-2795613 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.)
Newport Financial Center 113 Pavonia Avenue, #313 Jersey City, NJ 07310 (Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (800) 558-4363 Securities registered under Section 12(b) of the Exchange Act None Securities Registered under Section 12(g) of the Exchange Act Title of each class Common Stock, $.01 par value Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or amendment to this form 10-KSB. [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] State issuer's revenues for its most recent fiscal year. $175,674 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). $2,496,585. 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 February 28, 2007 44,104,055 Transitional Small Business Disclosure Format Yes No X --- --- Statements in this Annual Report on Form 10-KSB may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in such statements. TABLE OF CONTENTS
PAGE ---- ITEM 1. DESCRIPTION OF BUSINESS ......................................... 1 ITEM 2. PROPERTIES ...................................................... 12 ITEM 3. LEGAL PROCEEDINGS ............................................... 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 14 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........ 14 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ............................ 17 ITEM 7. FINANCIAL STATEMENTS ............................................ 22 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................................ 46 ITEM 8A. CONTROLS AND PROCEDURES ......................................... 46 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS ................................ 47 ITEM 10. EXECUTIVE COMPENSATION .......................................... 53 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .. 54 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 56 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K .......................... 56 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES .......................... 57
ITEM 1. DESCRIPTION OF BUSINESS. GENERAL GeneLink, Inc. (the "Company" or "GeneLink") is a publicly-held Pennsylvania corporation listed on the NASDAQ OTC Bulletin Board trading under the symbol "GNLK." GeneLink is a bioscience company and was originally organized to offer to the public the safe collection and preservation of a family's DNA material for later use by the family to identify and potentially prevent inherited diseases. More recently the Company has created a breakthrough methodology for SNP (single nucleotide polymorphism)-based genetic profiling (patents issued and pending) and intends to market and/or out-license these proprietary assessments to companies that manufacture or market to the nutraceutical, personal care, skin care and weight-loss industries. The Company has never achieved a profit, having realized net losses each year, including operating losses before provisions for income taxes of $2,114,619 in 2004, $1,281,157 in 2005 and $783,878 in 2006. There can be no assurance that the Company will ever realize significant sales or become profitable. The Company was founded in response to the explosion of information being generated in the field of human molecular genetics. Scientists are discovering an increasing number of connections between genes and specific diseases or physical attributes and tendencies. These findings are a direct result of the National Institutes of Health Genome Project. The Company's expansion into the bioscience field with its innovative genetic profiles help companies create and deliver more effective 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 best for their individual needs. The Company has developed and received a patent on a non-invasive DNA Collection Kit(R) for the collection of DNA specimens of clients. No licensing or training is necessary for the collection by a client of his or her DNA specimen. The DNA Collection Kit(R) consists of several swabs, collection accessories, complete instructions and a mailing envelope; the kit and kit elements are bar coded to facilitate tracking, control and confidentiality. The collection process is self administered and non-invasive (the DNA specimen is obtained by scraping the inside of the cheek) and takes less than five minutes to complete. The kit is classified as a non-medical device. The Company has also developed proprietary SNP-based genetic profiles (named GeneLink Nutragenetic Profile(TM) and Dermagenetics(R) 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 -1- skin care formulations that have been specifically designed to compensate for predicted deficiencies and to help provide individuals the best of health and appearance. In 2004, the Company formed a wholly owned subsidiary, Dermagenetics, Inc., to provide its genetically customized products and services to the skin and personal care market. OXIDATIVE STRESS PROFILES The Oxidative Stress (OS) Profile (US patent pending, Australian patent issued) provides a means of predicting an individual's inherent genetic capacity to combat oxidative stress. The profile 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. This profile information will enable nutritional and skin care companies 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. Thus, the OS profile can be used to make rational choices to help optimize nutritional and skin care needs to provide the best of health and appearance. The profile examines genes of the OS family for the existence of SNPs (naturally occurring variations in genes) that can result in an amino acid substitution in the protein that is encoded by that gene. If such a protein is an OS enzyme, it may be less efficient in enzymatic activity, in which case oxidative damage to cellular proteins and DNA accumulates over time. It appears that some tissues are more vulnerable than are others to oxidative stress. SNPs in other oxidative stress genes have been associated with heart disease, cancer, neurological degeneration and aging. A search for SNPs has the advantage of identifying genetic variations that reduce antioxidant defense capacity. It can detect changes that are life-long and predicted to chronically affect the ability to defend against oxidative stress, aging and age related disease. Genetic profiling information based on SNPs analyses can be used to design appropriate antioxidant vitamin, nutrient and skin-care formulations that are specifically tailored to each individual. OXIDATIVE STRESS FOR SKIN HEALTH AND SKIN AGING PROFILE Now, by simply swabbing the inside of one's mouth and sending the collected sample to GeneLink's laboratory, an individual can have a skin or personal care formulation specifically designed to compensate for associated deficiencies. Currently, when a person sees wrinkles or lines, he or she may begin to apply a variety of products and creams that contain antioxidants such as retinoids. This approach is only partially effective because it typically begins only after the signs of aging have appeared. A superior strategy is to predict certain causes of the aging of the skin and initiate a therapy that is designed to match the individual's genetic pattern and genetic risk of skin aging. For example, individuals with moderate or high risk of oxidative stress could be encouraged to initiate a therapy much earlier - even before outward signs of skin aging. -2- The Company's Skin Health test for skin aging looks for SNPs in several key genes that are associated with oxidative stress, skin irritation, photo aging and an individual's ability to naturally defend against environmental stresses. Skin health test results can be used to guide consumers to skin therapies or skin products containing unique active ingredients (SNPActives(TM)) and formulations designed to help alleviate specific oxidative stress and other potential deficiencies in the skin. OTHER SNP PROFILES DEVELOPED BY GENELINK The Company has also developed a Cardiovascular Risk Profile and an Osteopenia Susceptibility Profile. Cardiovascular disease claims more lives each year than the next five leading causes of death combined. The Company has recently developed a Cardiovascular Risk Profile, that analyzes a broad collection of genes believes to play an important part in heart health, according to the latest research. The Company's Cardiovascular Risk Profile is designed to identify SNPs associated with increased risk of developing high blood pressure, atherosclerosis, inflammation, problems with vascular integrity and coronary artery disease. Osteopenia is a condition that often leads to osteoporosis, a disease characterized by low bone density. Osteoporosis is responsible for 1.5 million fractures each year (including fractures of the vertebrae, forearms, wrists and hips). According to the National Osteoporosis Foundation, 1 in 3 women and at least 1 in 12 men will develop osteoporosis during their lifetime. The Company's Osteopenia gene test looks for SNPs in several key genes that are associated with bone density. Since osteoporosis can develop undetected for decades, this test may be a tool to help determine the future risk for fractures and related clinical conditions such as spinal column compression and bone breaks with or without falls and guide early interventions or therapies that help combat or prevent the condition. The Company has developed a NQ01 SNP profile. NQ01 is a protein that contributes to the recharging Coenzyme Q10. Coenzyme Q10 is a natural compound made by the human body that helps cells produce energy and protect against free radicals that can damage DNA and other molecules of the cell. DNA BANKING The Company has ceased actively marketing DNA banking, wherein specimens can be collected during an individual's lifetime or up to 36 to 40 hours after death using the Company's DNA Collection Kit(R) for long-term storage at the University of North Texas Health Science Center (the "Health Science Center"). The Health Science Center will continue to store the DNA specimen for 75 year intervals for all existing clients who have sent in DNA for banking. Upon a client's request, and upon the payment of a retrieval fee, the stored DNA specimen can be retrieved and sent to a laboratory for testing. The Health Science Center is no longer obligated to receive and store any additional DNA specimens. -3- AFFILIATES The Company has entered into agreements with several laboratories pursuant to which these laboratories perform SNP genotyping of samples provided by the Company for any genetics-based products that the Company may develop. The Company has collaborated with Arch Personal Care Division of Arch Chemicals, Inc. on the development of a new category of "genetic" skin care formulations and an associated, personalized skin-testing system. This collaboration occurred from late 2001 through 2005. Recently developed formulations feature a family of active ingredients known as "SNP-Derms(R)" designed to address some of the key, individual genetic characteristics that can accelerate skin aging, skin wrinkling and other specific oxidative stress deficiencies in the skin. The SNP-Derm(R) formulations may be offered in combination with the Dermagenetics(R) Profiles that provide a measure of a person's resistance to skin aging, skin irritation and tissue breakdown. Arch Chemicals, Inc., with annual sales of approximately $1 billion, is a global specialty chemicals company. The Company has a Distribution Agreement with Food Science Corporation to develop and market personalized nutritional products linked to the Company's genetic profiling technology. Food Science has been a leader in nutritional research by setting new standards of quality in the formulation of nutritional supplements created exclusively for health care professionals and their patients. Food Science focuses on innovation and product effectiveness and serves a loyal client base of over 12,000 medical doctors, chiropractors, osteopaths and nutritionists. In February 2006, the Company entered into a distribution agreement with Rejuvenation Plus Pty Ltd, an international skincare and cosmetics company, pursuant to which that company has been granted the exclusive right to distribute products based upon the Company's technology in Australia and New Zealand. The Company formed a subsidiary known as "Dermagenetics, Inc." which has created and is distributing DNA UltraCustom skin cream, genetically designed to an individual's needs, specifically to the Spa industry. The Company appointed Dr. Robert P.K. Keller to the Company's Medical Advisory Board, and along with Dr. Robert Keller, Dermagenetics has been appearing at Spa conventions and has marketed the Company's DNA UltraCustom skin cream to Spas in the United States. Currently, the Company is reevaluting its marketing efforts and plans related to the Spa industry. -4- INTELLECTUAL PROPERTY The Company has received a patent on the Company's method of DNA gathering (Patent #6,291,171). There is no assurance that the patent will prevent others from gathering DNA in a similar manner. The Company has received trademark protection for the Company's name and logo and for the name "DNA Collection Kit(R)." The Company has filed a series of U.S. patent applications relating to the Company's DNA Collection Kit(R) and methods for assessing a human subject's susceptibility to various medical conditions, including skin health, oxidative damage, osteoporosis and other bone density disorders and obesity and for methods of selecting and measuring the dosage of preventative agents for such conditions. There can be no assurance that the Company will receive patent protection on the Company's methods or procedures. The Company is negotiating licensing these proprietary assessments to companies that manufacture or market to the $100 billion plus nutraceutical, personal care, skin care, and weight-loss industries. The Company's believes its gene profiles offer marketing companies the information they need to create and sell more effective products tailored to their customer's individual needs - based on the science of genetics. By simply swabbing the inside of one's mouth (using the Company's patented DNA Collection Kit(R)) and sending the collected sample to the Company's laboratories - consumers can be directed to personalized products - specifically formulated to help compensate for their predicted deficiencies. The Company has received Australian Patent #2002230953 "Kits and Methods for Assessing Oxidative Stress; Trademark: Dermagenetics #78398892 and 78398898 (for the Dermagenetics face design) and #78412723 for SNP Actives. COMPETITION The Company's potential competitors in the United States and abroad in the field of personalized nutrition and skin care are numerous and include, among others, major pharmaceutical and diagnostic companies, specialized biotechnology firms, universities and other research institutions. Many of the Company's potential competitors have considerably greater financial technical, marketing and other resources than the Company has which may allow these competitors to discover important genes or successfully commercialize these discoveries before the Company. The business of manufacturing, distributing and marketing nutritional supplements and personalized skin care and skin health products is highly competitive. Many of the Company's competitors are substantially larger and have greater financial resources with which to manufacturer and market their products. The barriers to competition are low in these markets because the products are generally not protected by patents. The Company's ability to remain competitive depends on the successful introduction, marketing, promotion, and addition of new offerings to its product line. -5- GOVERNMENT REGULATION Pursuant to a letter dated January 23, 1996, the Food and Drug Administration has determined that the Company's kit is a device, but is not subject to active regulations by the Center for Devices and Radiological Health. However, any change in the current regulations could result in the kit becoming a regulated device. EMPLOYEES AND LABOR RELATIONS The Company consider its labor relations to be good, and none of its employees is covered by a collective bargaining agreement. As of December 31, 2006, the Company employed or engaged individuals in the following areas:
Number of Category Employees and Consultants - --------------------------- ------------------------- Sales and Marketing 3 General and Administration, including Customer Service 5 Research and Development 6
RISK FACTORS The Company's business and the value of its shares are subject to the risk described above and certain additional risks described below. IF OUR FORMER CHIEF EXECUTIVE OFFICER PREVAILS WITH RESPECT TO HIS LITIGATION AGAINST THE COMPANY, THE COMPANY MAY NOT BE ABLE TO PAY ANY JUDGMENT AND COULD BE FORCED TO CEASE ITS OPERATIONS. On October 14, 2005, the Company terminated the employment of John R. DePhillipo, the former Chief Executive Officer of the Company. In November 2005, Mr. DePhillipo brought suit against the Company alleging, among other things, that he was terminated without cause, that the Company breached the terms of his employment agreement and that he is entitled to receive $84,000 of back salary and at least $1,500,000 of salary throughout the remainder of the term set forth in such employment agreement. The Company has denied such allegations and has brought counterclaims against Mr. DePhillipo alleging that Mr. DePhillipo was terminated for cause, that Mr. DePhillipo breached his fiduciary duty to the Company and alleging conversion, negligent misrepresentation and unjust enrichment. If Mr. DePhillipo prevails in this litigation and obtains a judgment against the Company for all or any substantial portion his claim, it is likely that the Company will not be able to pay any such judgment and may be forced to cease operations. As all of the Company's assets have been pledged to its secured creditors, it is unlikely that the shareholders of the Company would receive any distributions if the Company were forced to cease its operations and liquidate in the event of Mr. DePhillipo prevailing in the litigation. See "Litigation". -6- IF THIS COMPANY DEFAULTS ON ITS OBLIGATIONS WITH RESPECT TO ITS SECURED OR UNSECURED DEBT, ITS LENDERS AND CREDITORS COULD FORECLOSE UPON THE COMPANY'S ASSETS. In 2006, the Company entered into a series of secured convertible loan financings pursuant to which it has pledged all of its assets as collateral for the repayment of the secured convertible loan obligations. The secured convertible loan obligations mature on May 12, 2011. As of December 31, 2006, $866,624 of principal and interest were outstanding on the secured convertible loans. If the conditions to converting these loans are not met, it is unlikely that the Company would be able to repay these loans without refinancing, extending, modifying or converting such obligations. If the Company is unable to repay its obligations with respect to such loans or to refinance, extend, modify or convert such loans, the Lenders would be entitled to foreclose against such collateral, and in such event the Company would be required to cease operations. Additionally, the Company owed $656,155 as of December 31, 2006 to Robert Ricciardi for acquired compensation earned but not yet paid, and owed $365,590 of accounts payable and accrued expenses as of December 31, 2006. If the Company is unable to generate sufficient revenues or raise sufficient funds to meet these obligations as they become due, it may default upon these obligations and may be required to cease its operations. THE COMPANY NEEDS TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, TO CONTINUE ITS OPERATIONS. The Company has spent, and expects to continue to spend in the future, substantial funds to complete its planned product development efforts and expand its sales and marketing activities. The Company needs to raise additional funds to implement its business plan, and cannot be certain that it will be able to obtain additional financing on favorable terms or at all. Currently, the Company has sufficient funds to support its operations through May 2007. If the Company cannot obtain $500,000 of financing to support its operations for the balance of 2007, the Company may not be able to continue its business and may be forced to cease operations. The Company will require approximately $600,000 additional funds to finance marketing efforts throughout the balance of 2007. The Company is in discussions with multiple potential funding sources and anticipates receiving sufficient funding to continue operations. There can be no assurance that the Company will be able to obtain this required financing on favorable terms or at all. The Company's future capital requirements and the adequacy of available funds will depend on numerous factors, including: - the successful commercialization of the Company's existing products and services; - progress in the Company's product development efforts; - progress with regulatory affairs activities; -7- - 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 the Company's products. If funds generated from the Company's operations, together with its existing capital resources, are insufficient to meet current or planned operating requirements, the Company will have to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through other sources. The Company does 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. Additionally, for so long as the Company's litigation with its former chief executive officer remains outstanding, it is unlikely that the Company will be able to obtain any financing on acceptable terms. If adequate funds are not available, the Company 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 the Company's rights to certain of its technologies, product candidates, products or potential markets. Therefore, the inability to obtain adequate funds could have a material adverse impact on the Company's business, financial condition, and results of operations and its ability to remain in business. EXPECTED FUTURE DILUTION TO SHAREHOLDERS. As discussed above, the Company believes it is likely that it will be required to raise substantial 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. THE COMPANY HAS A HISTORY OF LOSSES AND EXPECT CONTINUED LOSSES FOR THE FORESEEABLE FUTURE. The Company commenced operations in 1994. The Company has incurred significant losses to date and revenues have been limited. The Company's expenses have exceeded revenues in each year since inception. Given planned levels of operating expenses, the Company expects to continue to incur losses for the foreseeable future. The Company's accumulated deficit as of December 31, 2006 was $11,114,084. The Company incurred a net loss of $577,671 for the fiscal year ended December 31, 2006. The Company's expenses have consisted principally of research and development, salaries and for general and administrative expenses incurred while building its business infrastructure. The Company expects to continue to experience significant operating losses in the future as it continues research and development efforts and expands its marketing and sales force in an effort to commercialize the Company's products and services. The Company plans to increase operating expenses in anticipation of increasing revenues. If the Company's revenue growth is slower than anticipated or operating expenses exceed expectations, the Company's losses will significantly increase. Even if the Company were to achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. -8- IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME WIDESPREAD, WE MAY HAVE LESS DEMAND FOR THE COMPANY'S 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 the Company's services and products. THE COMPANY HAS LIMITED SALES AND MARKETING EXPERIENCE. The Company has limited sales and marketing experience and may be unable to successfully establish and maintain a significant sales and marketing organization. Due to the relatively limited market awareness of the Company's products, the Company believes that the marketing effort may be a lengthy process. THE COMPANY'S INDUSTRY IS HIGHLY COMPETITIVE AND IT MAY NOT HAVE THE RESOURCES REQUIRED TO SUCCESSFULLY COMPETE. The biosciences and medical diagnostic industries are highly competitive. The Company competes with companies in the United States and abroad that are engaged in these fields: They include - biotechnology, pharmaceutical, chemical and other companies; - academic and scientific institutions; - governmental agencies; and - public and private research organizations. The Company's potential competitors in the United States and abroad are numerous and include among others, major pharmaceutical and diagnostic companies, consumer products companies, specialized biotechnology firms, universities and other research institutions. Many of the Company's competitors have considerably greater financial, technical, marketing and other resources than does the Company. Furthermore, many of these competitors are more experience than the Company is in discovering, commercializing and marketing products. These greater resources may allow its competitors to discover important genes or genetic markers before the Company does. If the Company does not discover genes that are linked to a health risk, characterize their functions, develop genetic tests and related information services based on such discoveries, obtain regulatory and other approvals and launch these services or products before its competitors, then the Company's ability to generate sales and revenue will be reduced or eliminated, and could make the Company's services and products obsolete. The Company expects competition to intensify in its industry as technical advances are made and become more widely known. -9- THE MARKET FOR THE COMPANY'S PRODUCTS AND SERVICES IS UNPROVEN. The market for the Company's products and services is at an early state of development and may not continue to grow. The general scientific community, including the Company, has only a limited understanding of the role of genes in predicting disease. The marketplace may never accept the Company's products and services, and it may never be able to sell its products and services at a profit. The Company's efforts to commercialize its intellectual property have had limited success to date. The Company can achieve broad market acceptance only with substantial education about the benefits and limitations of its products and services. IF THE COMPANY IS UNSUCCESSFUL IN ESTABLISHING STRATEGIC ALLIANCES, ITS ABILITY TO DEVELOP AND MARKET PRODUCTS AND SERVICES MAY BE DAMAGED. Entering into strategic alliances for the development and commercialization of products and services based on the Company's discoveries is an important element of its business strategy. The Company faces significant competition in seeking appropriate partners. If the Company fails to establish strategic alliances or other alternative arrangements, then its ability to develop and market products and services will be damaged. In addition, the terms of any future strategic alliances may be unfavorable to the Company or these strategic alliances may be unsuccessful. THE COMPANY HAS SIGNIFICANT FIXED OPERATING COSTS AND THE COMPANY'S OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS. A high percentage of the Company's operating expenses, particularly personnel, are fixed in advance of any particular year. As a result, unanticipated variations in the number, or progress toward completion of the Company's projects, or in employee utilization rates may cause significant variations in operating results in any particular year and could result in greater than expected losses for such year. VOLATILITY OF COMMON STOCK PRICE AND THIN TRADING MARKET. Although the Company's Common Stock is listed on the NASDAQ OTC Bulletin Board, recently daily trading volume of the Company's Common Stock has generally been limited. The prices for securities of biosciences companies have historically been volatile. The trading price of the Common Stock has experienced considerable fluctuation since the Company began public trading in 1998. THE COMPANY MAY NOT BE ABLE TO ATTRACT AND RETAIN PROFESSIONAL STAFF. The Company's success will depend in large part upon its ability to attract, retain, train and motivate highly skilled employees. The Company cannot be certain that it will be successful in attracting a sufficient number of highly skilled employees in the future, or that it will be successful in retaining, training and motivating the employees it is able to attract. Any inability to retain, train and motivate employees could impair the Company's ability to adequately manage and complete its existing projects and to bid for or obtain new projects. Hiring, training, motivating, retaining and managing employees with the strategic, technical and creative skills the -10- Company needs is both time consuming and expensive. If the Company's employees are unable to achieve expected performance levels, its business, financial condition and results of operations could be adversely affected. THE COMPANY IS DEPENDENT ON KEY PERSONNEL. The Company's 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 the Company's 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 the Company's business, financial condition and results of operations. In the event of the loss of any such personnel, there can be no assurance that the Company would be able to prevent the unauthorized disclosure or use of its technical knowledge, practices or procedures by such personnel. THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED IF IT IS UNABLE TO PROTECT ITS PROPRIETARY TECHNOLOGY OR SOMEONE CLAIMS THAT THE COMPANY IS INFRINGING ON THEIR PROPRIETARY TECHNOLOGY. The Company's success depends, in part, upon its proprietary methodologies and other intellectual property rights. There can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. In addition, although the Company believes that its 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 the Company in the future, or that if asserted any such claim will be successfully defended. A successful claim against the Company could materially and adversely affect its business, financial condition and results of operations. The Company's success will depend on its ability to obtain and protect patents on its technology and to protect its trade secrets. The Company's patents, which have been or may be issued, may not afford meaningful protection for its technology and products. Others may challenge the Company's patents and, as a result, the Company's patents could be narrowed, invalidated or unenforceable. In addition, the Company's 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 the Company's that do not conflict with the Company's patents. In order to protect or enforce the Company's patent rights, the Company 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. The Company may also provoke third parties to assert claims against us. The Company has received notice of an alleged patent infringement from an Australian bioscience company, Genetic Technologies Limited (GTG), that they have certain rights under filed patents to which GeneLink may be infringing upon. Although it is the opinion of the Company's patent counsel that there is no infringement, and that in the event there is an infringement, it will not effect the Company's business because GTG's patents are not material to the Company's technology, no assurance can be given that GTG would not prevail if it brings -11- legal action against the Company or that the result of any such action would not have a material adverse effect on the Company's business and prospects. CONCENTRATION OF OWNERSHIP OF THE COMPANY'S COMMON STOCK AMONG THE COMPANY'S EXISTING EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS. The Company's executive officers, directors and beneficial owners of 5% or more of the Company's common stock and their affiliates, in aggregate, beneficially own in excess of 26.3% of the Company's outstanding common stock. As a result, if these persons act together, they would have the ability to influence the outcome of all matters submitted to the Company's shareholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Company's assets. In addition, such persons, if they act together, would have the ability to control the management and affairs of the Company. Accordingly, this concentration of ownership may harm the market price of the Company's common stock by: - delaying, deferring or preventing a change in control of the Company; - impeding a merger, consolidation, takeover or other business combination involving the Company; or - discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company. THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS COULD DELAY OR DISCOURAGE A TAKEOVER ATTEMPT. The Company's 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 the Company's 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 2. PROPERTIES The Company leases its principal offices in Jersey City, New Jersey. The lease is for a term of six (6) months. -12- ITEM 3. LEGAL PROCEEDINGS Effective October 14, 2005, the Company terminated the employment of John R. DePhillipo, the Company's former Chief Executive Officer and Chief Financial Officer and a former director of the Company. Mr. DePhillipo commenced two lawsuits allegedly arising out of his termination by the Company for "cause," as defined in his Employment Agreement with the Company. In an Action filed in the United States District Court for the Eastern District of Pennsylvania, John R. DePhillipo v. Robert P. Ricciardi, Civil Action No. 05-5906, Mr. DePhillipo alleged that Dr. Ricciardi, a Director and Officer of the Company, (1) caused Mr. DePhillipo's employment with the Company to be wrongfully terminated and therefore is personally liable for all severance owed Mr. DePhillipo, in the amount of at least $75,000; (2) was personally liable for Mr. DePhillipo's unpaid back salary of $84,000 simply because Mr. Ricciardi is an officer and/or director of the Company; and (3) acted sufficiently maliciously to justify punitive damages being assessed against Dr. Ricciardi of $10,000,000. Under the terms of the Company's By-laws and Pennsylvania law, the Company is obligated both to reimburse Mr. Ricciardi for his costs of defending this action and is required to advance him the costs of the expense of such a defense. Counsel for Dr. Ricciardi entered an answer to this action and subsequently the action against Dr. Ricciardi was dismissed with prejudice in March 2006. There is thus no further contingent liability with regard to this matter. In a separate 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 has alleged that his termination by the Company "for cause" was improper and therefore he is 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 has filed an Answer denying the material allegations of the Complaint and asserting a number of affirmative defenses. The Company believes Mr. DePhillipo's claims are without merit and intends to vigorously defend against those claims. The Company has also filed counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion, negligent misrepresentation and unjust enrichment while Mr. DePhillipo served as the Company's Chief Executive Officer, President and Chief Financial Officer. The counterclaims seek recovery in excess of that sought by Mr. DePhillipo in the Complaint. On January 18, 2007, Mr. DePhillipo resigned as a director of the Company. Mr. DePhillipo in a letter to the Board of Directors of the Company alleged that the Company has not properly accounted for or disclosed its source for funding the costs of the litigation described above and alleged that a third party must be funding the litigation; alleged that the terms of the recent financing undertaken by the Company are unfair to the Company's shareholders and amounted to the sale of the Company without shareholder approval; and alleged that the use of the proceeds of the financings are not adequately described, including any use of the proceeds to fund the costs of the litigation. The Board of Directors categorically denies each of Mr. DePhillipo's unsubstantiated allegations and states that they are completely unfounded. The Board of Directors expressly -13- confirms that the Company has not entered into an agreement with any third party to fund the litigation or taken any steps which would amount to a sale of the Company without shareholder approval. The Board of Directors further notes that Mr. DePhillipo's resignation was pre-textual and tendered only after notice to Mr. DePhillipo that he was not part of the proposed slate of nominees to a newly constituted Board of Directors and after a meeting of the Board of Directors during which Mr. DePhillipo was not appointed and elected as a nominee to remain on the Board of Directors following the 2007 Annual Meeting of Shareholders. The Company has received a notice of an alleged patent infringement from an Australian bioscience company, Genetic Technologies Limited (GTG), that they have certain rights under filed patents to which GeneLink may be infringing upon. It is the opinion of the Company's patent counsel that there is no infringement, and that in the event there is an infringement, it will not effect the Company's business because GTG's patents are not material to the Company's technology. The Company received this notice in 2004, and there has been no further action or contact on this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. 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.
2006 High Low - ---- ----- ----- 1st Quarter $0.13 $0.05 2nd Quarter 0.09 0.04 3rd Quarter 0.06 0.03 4th Quarter 0.07 0.04
2005 High Low - ---- ----- ----- 1st Quarter $0.32 $0.19 2nd Quarter 0.26 0.12 3rd Quarter 0.22 0.12 4th Quarter 0.17 0.06
As of February 28, 2007, there were 158 holders of record of the Company's Common Stock. The Company has never paid dividends and do not anticipate paying any dividends in the future. The Company anticipates that it will retain all future revenues for working capital purposes. -14- 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. EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining Number of available for future securities to be issuance under 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 holders 0 -- 6,000,000 Equity compensation plans not approved by security holders 0 -- 0 --- --- --------- Total 0 -- 6,000,000
RECENT SALES OF UNREGISTERED SECURITIES. The Company issued 510,000, 466,170 and 303,000 shares of Common Stock for consulting services rendered to the Company valued at $96,476, $97,184 and $90,720 for the years ended December 31, 2006, 2005 and 2004, respectively. These shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. During the year ended December 31, 2006, the Company issued $827,890 principal amount of convertible secured promissory notes and issued 4,139,452 shares of restricted Common Stock in connection with the issuance of the notes. The aggregate amounts recorded in connection with the issuance of the notes and the stock were $1,008,788, representing the $827,890 of gross proceeds of notes plus debt issuance costs related to the stock issuance of $180,898. The notes and shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. In January 2006, the Company issued $200,000 of bridge notes in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. The bridge notes were refinanced in June 2006 upon issuance of the convertible secured promissory notes referenced above. -15- During the year ended December 31, 2005, the Company issued stock in settlement of a debt agreement. The Company issued 640,369 shares of common stock to settle $75,000 of debt and interest accrued on the note. These shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. The Company issued 510,000 and 466,170 shares of common stock for services rendered, valued at $96,476 and $97,184 for the years ended December 31, 2006 and 2005, respectively. These shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. During the year ended December 31, 2005, the Company issued 2,250,000 shares of common stock and 1,500,000 warrants to purchase common stock for aggregate cash consideration of $450,000. These shares and warrants were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. During the year ended December 31, 2005, the Company issued 640,369 shares in exchange for the satisfaction of $75,000 principal amount of debt, plus accrued interest. These shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. During the year ended December 31, 2004, the Company issued 1,825,000 shares of common stock and 1,825,000 warrants to purchase Common Stock for cash consideration of $365,000. These shares and warrants were issued as private placements in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. The Company has in prior public filings described certain related party transactions as follows: On June 29, 2003, the Company issued 2,722,345 shares to John DePhillipo, the Company's Chief Executive Officer and President and a member of the Company's board of directors, and 723,530 shares to Maria DePhillipo, the spouse of John DePhillipo in satisfaction of accrued and unpaid salary. As of June 29, 2003, the Company owed John DePhillipo $544,469 and Maria DePhillipo $144,706 for accrued but unpaid salaries. As of December 31, 2003, John DePhillipo owed the Company $697,664, plus interest, on account of subscriptions receivable and advances. Effective March 24, 2003, the Company's Board of Directors decided to grant John DePhillipo additional compensation to reflect the Board's desire to treat the shares issued June 29, 2003 not as an issuance in satisfaction of accrued and unpaid salary but as additional compensation. Following this decision, the Company again owed John DePhillipo an aggregate of $544,469 for accrued but unpaid salary. The loan to Mr. DePhillipo was repaid in April 2004. These shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act of 1933. Mr. DePhillipo's employment with the Company was terminated by the Company on October 14, 2005. The transactions described above, which are being investigated by the Company, are the subject of counterclaims filed by the Company in the New Jersey Superior Court proceeding. -16- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. CRITICAL ACCOUNTING POLICIES STOCK OPTIONS: The Financial Accounting Standards Board has issued SFAS No. 123R, which defines a fair value based method of accounting for an employee stock option and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also temporarily allowed an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must make proforma disclosures of net income (loss) and, if presented, earnings (loss) per share, as if the fair value based method of accounting defined in SFAS 123R had been adopted. As required, the Company has adopted SFAS No. 123R for the year ended December 31, 2006. 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 name, logo, and the name "DNA Collection Kit(R)." 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: Revenues are recorded when the kits are sold for GeneLink, Inc.'s products. The Company receives a non-refundable fee for the DNA kits and provides DNA analysis testing at that time, then stores the specimen for up to 75 years. If the client requests the DNA specimen back at any time during the storage period, they will be entitled to receive the specimen upon payment of an additional retrieval fee but will not be entitled to any refund of the original storage fee. Direct costs related to sale of kits include the purchase of kits, samples, and delivery expenses. The direct costs of kits are recognized at time of sale to customers as opposed to the time of purchase by GeneLink, Inc. from its vendors. Kits purchased by GeneLink, Inc. and not yet sold remain in inventory. Revenues from the proprietary genetic indicator tests are recognized partially when the kits are sold, and subsequently when they are presented to the lab for testing. The Company formed a subsidiary known as "Dermagenetics, Inc." which has created and is distributing DNA UltraCustom skin cream, genetically designed to an individual's needs, specifically to the Spa industry. Dermagenetics has been appearing at Spa conventions and is currently selling the Company's DNA UltraCustom skin cream to Spas in the United States. Revenues are recorded when the skin cream kits are sold for Dermagenetics Inc.'s products. -17- 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-KSB for information on our judicial, regulatory and arbitration procedures. RESULTS OF OPERATIONS COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2006 TO FISCAL YEAR ENDED DECEMBER 31, 3005. Assets. The Company's assets increased from $445,276 at December 31, 2005 to $714,393 at December 31, 2006, an increase of $269,117. This increase was primarily due to an increase in cash from $15,275 at December 31, 2005 to $149,695 at December 31, 2006, and an increase in prepaid debt issuance costs from $0 at December 31, 2006 to $165,912 at December 31, 2006, related to the convertible secured promissory notes financing. As of December 31, 2006, the Company had not received all proceeds from the convertible secured promissory notes payable. Accordingly, the Company has reduced the balance sheet liability for the Notes by $205,000 at December 31, 2006. In connection with issuance of the Notes, the Company has recognized debt issuance costs of $180,898 that are being amortized over the term of the Notes. As of December 31, 2006, the unamortized debt issuance costs are $165,912 and are included in "Other assets" on the balance sheet. Liabilities. The Company's liabilities increased from $1,057,879 at December 31, 2005 to $1,732,284 at December 31, 2006, an increase of $674,405. This increase in liabilities was primarily due to an increase in long term loans payable from $0 at December 31, 2005 to $622,890 at December 31, 2006 in connection with the Company's issuance of convertible secured promissory notes in 2006. Losses. The Company incurred an operating loss of $786,586 for the fiscal year ended December 31, 2006, as compared to an operating loss of $1,281,157 for the fiscal year ended December 31, 2005, a decrease of $494,571. This decrease in losses was primarily due to a decrease in general and administrative expenses from $802,984 for the fiscal year ended December 31, 2005 to $476,539 for the fiscal year ended December 31, 2006, as the Company did not pay any compensation to or expenses of its former chief executive officer and president or his wife in 2006, and a decrease in advertising and promotion expenses $209,370 for the fiscal -18- year ended December 31, 2005 to $14,369 for the fiscal year ended December 31, 2006, as the Company focused on the change in management and on obtaining sufficient funding to develop and implement its new business plan. This decrease in expenses was accompanied by a decrease in revenues from $396,923 for the fiscal year ended December 31, 2005 to $175,674 for the fiscal year ended December 31, 2006. The Company's gross margin dropped from $167,528 for the fiscal year ended December 31, 2005 to $110,253 for the fiscal year ended December 31, 2006. Gross profit margin increased from 42% to 63%. Revenues. The Company's total operating revenues for the fiscal year ended December 31, 2006 were $175,674, as compared to $396,923 for the fiscal year ended December 31, 2005, a decrease of $221,249. Expenses. Total expenses for fiscal year ended December 31, 2006 were $962,260, as compared to $1,678,080 for the fiscal year ended December 31, 2005, a decrease of $715,820. This decrease in expenses is primarily due to a decrease in general and administrative expenses from $802,984 for the fiscal year ended December 31, 2005 to $476,539 for the fiscal year ended December 31, 2006, as the Company did not pay any compensation to or expenses of its former chief executive officer and president or his wife in 2006, and a decrease in advertising and promotion expenses $209,370 for the fiscal year ended December 31, 2005 to $14,369 for the fiscal year ended December 31, 2006, as the Company focused on the change in management and on obtaining sufficient funding to develop and implement its new business plan. 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, 2006:
GENELINK DERMAGENETICS INC. INC. --------- ------------- NET REVENUES $ 57,333 $118,341 OPERATING EXPENSES 765,815 196,445 OTHER INCOME 2,011 697 PRE-TAX EARNINGS (LOSS) (706,471) (77,407)
The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments for the year ended December 31, 2005:
GENELINK DERMAGENETICS INC. INC. ----------- ------------- NET REVENUES $ 108,053 $ 288,870 OPERATING EXPENSES 1,242,348 435,732 OTHER INCOME -- -- PRE-TAX EARNINGS (LOSS) (1,134,295) (146,862)
-19- COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 2005 TO FISCAL YEAR ENDED DECEMBER 31, 2004. Assets. The Company's assets decreased from $565,305 at December 31, 2004 to $445,276 at December 31, 2005, a decrease of $120,029. This decrease was primarily due to a decrease in cash from $155,689 at December 31, 2004 to $15,275 at December 31, 2005, a decrease of $140,414, as cash was used to partially fund operating losses. Liabilities. The Company's liabilities increased from $764,599 at December 31, 2004 to $1,057,879 as of December 31, 2005, an increase of $293,280. This increase in liabilities was primarily due to an increase in accrued compensation from $432,937 at December 31, 2004 to $593,399 at December 31, 2005, an increase of $160,462, and an increase in accounts payable and accrued expenses from $95,800 at December 31, 2004 to $429,165 at December 31, 2005, an increase of $333,365, resulting from the Company's inability to timely pay its obligations, as partially offset by a decrease in loans payable from $213,899 at December 31, 2004 to $27,861 at December 31, 2005, a decrease of $186,038. Losses. The Company incurred an operating loss of $1,281,157 for the fiscal year ended December 31, 2005, as compared to an operating loss of $2,114,619 for the fiscal year ended December 31, 2004, a decrease of $833,462. This decrease was primarily due to a decrease in general and administrative expenses from $1,517,005 for the year ended December 31, 2004 to $802,984 for the year ended December 31, 2005, a decrease of $714,021, primarily resulting from a $544,465 compensation expense charged to the Company's former Chief Executive Officer in 2004 (the "Additional Compensation Payment") which was used to partially repay a receivable of $1,016,635 owed by such officer, which charge was not incurred in 2005. Losses for the Company for the year ended December 31, 2005 were $1,052,870 as the Company realized $228,287 from the sale of New Jersey net operating losses in December 2005. The company's gross margin dropped from 70% for the fiscal year and December 31, 2004 to 42% for the fiscal year ended December 31, 2005, as certain new agreements entered into by the Company provided for lower margins than in prior years. This decrease in gross margin reflects revenues realized by the Company from its DNA UltraCustom skin cream, which has substantially lower gross margins than its DNA Collection Kits and genetic tests. The Company hopes that its DNA UltraCustom skin cream will result in repeat business from consumers, which would result in higher revenues and profits, notwithstanding the lower gross margin realized by the Company for this product. Revenues. The Company's total operating revenues for the fiscal year ended December 31, 2005 were $396,923, compared to $304,637 for the fiscal year ended December 31, 2004, an increase of $92,286, or 30%. This increase in revenues is primarily due to the Company realizing additional sales in 2005 from Dermagenetics(R) products and services, including the Company's DNA UltraCustom skin cream. Expenses. Total expenses for fiscal year ended December 31, 2005 were $1,678,080, a decrease of $741,176 from the Company's total expenses of $2,419,256 for the fiscal year ended December 31, 2004. Decreased expenses are primarily due to a decrease in general and -20- administrative expenses from $1,517,005 for the year ended December 31, 2004 to $802,984 for the year ended December 31, 2005, a decrease of $714,021, primarily resulting from the Additional Compensation Payment in 2004. The decrease in loss was also attributable to a decrease in consulting fees from $393,961 for the year ended December 31, 2004 to $177,633 for the year ended December 31, 2005, a decrease of $216,328, and was partially offset by an increase in costs of goods sold from $91,152 for the fiscal year ended December 31, 2004 to $229,395 for the fiscal year ended December 31, 2005, an increase of $138,243, or 152%. LIQUIDITY AND CAPITAL RESOURCES For 2006, the Company's primary liquidity requirement was the implementation and funding of sales and marketing efforts and funding working capital. For 2007, the Company's primary liquidity requirement will be the funding of the Company's sales and marketing efforts and the payment of past obligations of the Company. Cash and Cash Equivalents. On December 31, 2006, the Company's cash and cash equivalents amounted to $149,695 as to compared to $15,275 at December 31, 2005, an increase of $134,420. During 2006, the Company's operating activities utilized $345,957 as compared to utilizing $321,272 in 2005, an increase of $24,685. Cash utilized during these periods resulted from the Company's net losses for such periods and the payment of accounts payable. Investing activities utilized $42,646 in 2006, as compared to utilizing $117,661 in 2005. Financing activities provided $523,023 in 2006, as compared to $298,519 in 2005, primarily through the issuance of convertible secured promissory notes (the "Notes"). The Company issued 4,139,452 shares of restricted Common Stock in connection with the issuance of the Notes. The Notes mature on May 12, 2011 and accrue interest at a rate of 12% per year. The Notes convert at any time at the option of the holders at a price of $0.05 per share and automatically convert at a price of $0.05 per share when contingent liabilities of the Company are less than $100,000. As of December 31, 2006, the Company had not received all proceeds from the convertible secured promissory notes payable. Accordingly, the Company has recognized an asset "Convertible secured promissory notes proceeds receivable" of $205,000 at December 31, 2006. In connection with issuance of the Convertible Secured Promissory Notes, the Company has recognized debt issuance costs of $180,898 that are being amortized over the term of the notes. As of December 31, 2006, the unamortized debt issuance costs are $165,912 and are included in "Other assets" on the balance sheet. The Company will require approximately $1.1 million to fund the Company's sales and marketing efforts and to pay existing obligations for the balance of 2007. If the Company cannot obtain this required financing, it is unlikely that the Company will be able to continue its operations and/or be able to fully implement its business plan. -21- ITEM 7. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ----- Report of Independent Registered Public Accounting Firm 23 Financial Statements Consolidated Balance Sheets 24-25 Consolidated Statements of Operations 26 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 27 Consolidated Statements of Cash Flows 28-29 Notes to Consolidated Financial Statements 30-45
-22- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM GeneLink, Inc. and Subsidiary Jersey City, New Jersey We have audited the accompanying consolidated balance sheets of GeneLink, Inc. and Subsidiary as of December 31, 2006 and 2005, 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 Subsidiary as of December 31, 2006 and 2005, 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 and has a net capital deficiency, which raise 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 April 5, 2007 -23- GENELINK, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND 2005 ASSETS
2006 2005 -------- -------- CURRENT ASSETS Cash and cash equivalents $149,695 $ 15,275 Accounts receivable 32,185 32,651 Inventory 5,772 3,261 Prepaid expenses 14,421 37,435 -------- -------- Total current assets 202,073 88,622 -------- -------- PROPERTY AND EQUIPMENT 131,645 147,519 -------- -------- OTHER ASSETS 380,675 209,135 -------- -------- Total assets $714,393 $445,276 ======== ========
See Notes to Consolidated Financial Statements. 24 GENELINK, INC. AND SUBSIDIARY LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) DECEMBER 31, 2006 AND 2005
2006 2005 ------------ ------------ CURRENT LIABILITIES Accounts payable and accrued expenses $ 365,590 $ 429,165 Accrued payroll taxes 0 7,454 Accrued compensation 725,804 593,399 Loans payable to officers 18,000 27,861 ------------ ------------ Total current liabilities 1,109,394 1,057,879 Convertible secured promissory notes payable 622,890 0 ------------ ------------ Total liabilities 1,732,284 1,057,879 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIENCY) Common stock, par value $0.01 per share; authorized: 75,000,000 shares as of December 31, 2006 and 2005 respectively; issued: 2006 41,739,000 shares and 2005 36,689,550 shares; outstanding: 2006 41,332,831 shares and 2005 36,283,381 shares 417,390 366,896 Additional paid in capital 6,982,849 6,910,160 Stock warrants 3,011,009 2,961,809 Accumulated deficit (11,114,084) (10,536,413) Treasury stock, 406,169 shares as of December 31, 2006 and 2005, respectively, at cost (315,055) (315,055) ------------ ------------ Total stockholders' equity (deficiency) (1,017,891) (612,603) ------------ ------------ Total liabilities and stockholders' equity (deficiency) $ 714,393 $ 445,276 ============ ============
See Notes to Consolidated Financial Statements 25 GENELINK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 ----------- ----------- REVENUES: $ 175,674 $ 396,923 COST OF GOODS SOLD: 65,421 229,395 ----------- ----------- GROSS PROFIT 110,253 167,528 ----------- ----------- EXPENSES: General and administrative 476,539 802,984 Consulting 179,449 177,633 Professional fees 173,590 222,475 Advertising and promotion 14,369 209,370 Amortization and depreciation 52,892 36,223 ----------- ----------- 896,839 1,448,685 ----------- ----------- OPERATING LOSS (786,586) (1,281,157) OTHER INCOME: 2,708 0 Loss before provision for income taxes (783,878) (1,281,157) PROVISION FOR INCOME TAXES: -- -- DEFERRED INCOME TAX BENEFIT 206,207 228,287 ----------- ----------- NET LOSS $ (577,671) $(1,052,870) =========== =========== LOSS PER SHARE, BASIC AND DILUTED: $ (0.01) $ (0.03) =========== =========== Weighted average common shares and diluted potential common shares 38,861,637 35,806,407 =========== ===========
See Notes to Consolidated Financial Statements 26 GENELINK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED DECEMBER 31, 2006 AND 2005
COMMON STOCK ADDITIONAL --------------------- TREASURY PAID IN STOCK ACCUMULATED SHARES AMOUNT STOCK CAPITAL WARRANTS DEFICIT TOTAL ----------- -------- --------- ---------- ---------- ------------ ----------- BALANCE, DECEMBER 31, 2004 33,133,011 $331,330 $(315,055) $6,635,552 $2,632,422 $ (9,483,543) $ (199,294) ========== ======== ========= ========== ========== ============ =========== Issuance of common stock and stock warrants related to loan conversion 640,369 6,404 0 44,826 94,877 0 146,107 Fair value of options granted for services 0 0 0 0 11,520 0 11,520 Fundraising costs incurred 0 0 0 (32,500) 0 0 (32,500) Fair value of options granted for fundraising services 0 0 0 (79,050) 27,900 0 (51,150) Fair value of options granted for services 0 0 0 0 16,000 0 16,000 Issuance of common stock related to loan agreement 200,000 2,000 0 400 0 0 2,400 Issuance of common stock and stock warrants for services 466,170 4,662 0 85,932 6,590 0 97,184 Issuance of common stock and stock warrants pursuant to private placement offerings 2,250,000 22,500 0 255,000 172,500 0 450,000 Net loss 0 0 0 0 0 (1,052,870) (1,052,870) ---------- -------- --------- ---------- ---------- ------------ ----------- 3,556,539 35,566 0 274,608 329,387 (1,052,870) (413,309) ---------- -------- --------- ---------- ---------- ------------ ----------- BALANCE, DECEMBER 31, 2005 36,689,550 $366,896 $(315,055) $6,910,160 $2,961,809 $(10,536,413) $ (612,603) ========== ======== ========= ========== ========== ============ =========== Issuance of common stock and stock warrants related to convertible secured promissory notes 4,539,450 45,394 0 160,063 0 0 205,457 Fair value of options granted for services 0 0 0 0 0 0 0 Commissions paid for fundraising costs 0 0 0 (129,550) 0 0 (129,550) Issuance of common stock and stock warrants for fundraising services 410,000 4,100 0 18,850 49,200 0 72,150 Issuance of common stock and stock warrants for services 100,000 1,000 0 23,326 0 0 24,326 Net loss 0 0 0 0 0 (577,671) (577,671) ---------- -------- --------- ---------- ---------- ------------ ----------- 5,049,450 50,494 0 72,689 49,200 (577,671) (405,288) ---------- -------- --------- ---------- ---------- ------------ ----------- BALANCE, DECEMBER 31, 2006 41,739,000 $417,390 $(315,055) $6,982,849 $3,011,009 $(11,114,084) $(1,017,939) ========== ======== ========= ========== ========== ============ ===========
See Notes to Consolidated Financial Statements 27 GENELINK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 --------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(577,671) $(1,052,870) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 52,892 36,223 Common stock issued for fundraising services 72,150 97,184 Common stock issued for services 24,324 0 Common stock issued for loan agreement 0 2,400 Warrants issued for services 0 16,000 Fair value of options granted for consulting services 0 39,420 (Increase) decrease in assets: Accounts receivable 466 (9,412) Inventory (2,511) 16,430 Prepaid expenses 23,014 35,287 Deposits and trademark 0 18,748 Increase (decrease) in liabilities: Accounts payable and accrued expenses (63,574) 333,365 Accrued payroll taxes (7,454) (14,509) Accrued compensation 132,405 160,462 --------- ----------- Net cash used in operating activities (345,957) (321,272) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (19,756) (72,473) Patent acquisition costs (22,890) (45,188) --------- ----------- Net cash used in investing activities (42,646) (117,661) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Repayments of loans and notes payable (19,861) (186,038) Proceeds from convertible secured promissory notes payable 466,977 0 Common stock issued for bridge loans conversion 205,457 0 Common stock issued for loan conversion 0 146,107 Commissions paid for fundraising costs (129,550) 0 Private placement fundraising costs 0 (111,550) Proceeds from issuance of common stock 0 450,000 --------- ----------- Net cash provided by financing activities 523,023 298,519 --------- ----------- Net increase (decrease) in cash 134,420 (140,414)
See Notes to Consolidated Financial Statements 28 GENELINK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 -------- -------- Cash and cash equivalents: Beginning $ 15,275 155,689 -------- -------- Ending $149,695 $ 15,275 ======== ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest: $ 98,300 $ 54,114 ======== ======== Non-cash financing transactions: Common stock issued for services $ 96,476 $ 97,184 ======== ======== Refinancing of bridge loans payable $200,000 $ 0 ======== ======== Debt issuance costs related to convertible secured promissory notes $165,912 $ 0 ======== ========
See Notes to Consolidated Financial Statements 29 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 NOTE 1. ORGANIZATION GeneLink, Inc. (the "Company") and its subsidiary, Dermagenetics, Inc., operate in New Jersey. The Company was organized under the laws of the Commonwealth of Pennsylvania and Dermagenetics, Inc. was 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 Jersey City, New Jersey. The Company was founded in response to the information being generated in the field of human molecular genetics. Scientists are discovering an increasing number of connections between genes and specific diseases or physical attributes and tendencies. These findings are a direct result of the National Institutes of Health Genome Project. The Company has developed and received a patent on a DNA Collection Kit(R) for the collection of DNA specimens of clients. The kit is classified as a non-medical device. The Company has also developed proprietary SNP-based genetic profiles (named GeneLink Nutragenetic Profile(TM) and Dermagenetics(R) 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. In December 2004, the Company formed a wholly owned subsidiary, Dermagenetics, Inc., to service the custom skin care market. As of December 31, 2004 the subsidiary had no significant operations. The subsidiary commenced full operations during the first quarter of 2005. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its Subsidiary, both of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in the consolidation. 30 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Highly liquid debt instruments purchased with a maturity of three months or less are considered to be cash equivalents. At times, cash and cash equivalents may exceed insured limits. The Company maintains certain cash balances with Merrill Lynch, which is SIPC insured up to $500,000. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the life of the assets are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years of the related assets. REVENUE AND COST RECOGNITION: Revenues are recorded when the kits are sold for GeneLink, Inc.'s products. The Company receives a non-refundable fee for the DNA kits and provides DNA analysis testing at that time, then stores the specimen for up to 75 years. If the client requests the DNA specimen back at any time during the storage period, they will be entitled to receive the specimen upon payment of an additional retrieval fee but will not be entitled to any refund of the original storage fee. Direct costs related to sale of kits include the purchase of kits, samples, and delivery expenses. The direct costs of kits are recognized at time of sale to customers as opposed to the time of purchase by GeneLink, Inc. from its vendors. Kits purchased by GeneLink, Inc. and not yet sold remain in inventory. Revenues from the proprietary genetic indicator tests are recognized partially when the kits are sold, and subsequently when they are presented to the lab for testing. The Company formed a subsidiary known as "Dermagenetics, Inc." which has created and is distributing DNA UltraCustom skin cream, genetically designed to an individual's needs, specifically to the Spa industry. Dermagenetics has been appearing at Spa conventions and is currently selling the Company's DNA UltraCustom skin cream to Spas in the United States. Revenues are recorded when the skin cream kits are sold for Dermagenetics Inc.'s products. 31 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 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(R)." 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(R)." INVENTORY: Inventory consists of kits held for resale. Inventory is valued at the lower of cost (using the first-in, first-out method) or market. The shelf life of the DNA kits is estimated by the Company to be in excess of 30 years. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which requires the use of an asset and liability approach for financial accounting and reporting for income taxes. 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. In December 2006 and 2005, the Company sold net operating losses through the New Jersey Technology Business Tax Certified Transfer Program. See Note 5. 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, 2006 and 2005. PER SHARE DATA: Effective November 12, 1998, the Company adopted SFAS No. 128, "Earnings Per Share." The provisions of SFAS 128 establish standards for computing and presenting earnings per share (EPS). This standard replaces the presentation of primary EPS with a presentation of basic EPS. Additionally, it requires dual presentation of basic and diluted EPS for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the diluted EPS 32 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 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 2006 and 2005 excludes any effect from such securities, as their inclusion would be antidilutive. STOCK OPTIONS: The Financial Accounting Standards Board has issued SFAS No. 123R, which defines a fair value based method of accounting for an employee stock option and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also temporarily allowed an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must make proforma disclosures of net income (loss) and, if presented, earnings (loss) per share, as if the fair value based method of accounting defined in SFAS 123R had been adopted. As required, the Company has adopted SFAS No. 123R for the year ended December 31, 2006. RECENT ACCOUNTING DEVELOPMENTS: In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 clarifies the accounting treatment for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Generally, it prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is in the process of studying the potential financial impact from the adoption of FIN No. 48. 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, 2006 and 2005, property and equipment consisted of the following: 33 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 -------- -------- Office furniture $ 1,154 $ 1,154 Office equipment 57,494 57,494 Leasehold improvements 85,420 85,420 Software 96,079 76,323 -------- -------- 240,147 220,391 Less accumulated depreciation and amortization 108,502 72,872 -------- -------- $131,645 $147,519 ======== ========
Depreciation and amortization expense was $36,170 and $21,471 for the years ended December 31, 2006 and 2005, respectively. NOTE 4. OTHER ASSETS As of December 31, 2006 and 2005, other assets consisted of the following:
2006 2005 -------- -------- Patents and trademarks $273,279 $250,389 Debt issuance costs 180,898 0 Organization costs 86,976 86,976 -------- -------- 541,153 337,365 Less accumulated amortization 160,478 128,230 -------- -------- $380,675 $209,135 ======== ========
Amortization expense was $31,708 and $14,752 for the years ended December 31, 2006 and 2005, respectively. The future estimated minimum amortization expense that will be charged to operations as of December 31, 2006 is as follows: 34 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005
Year ending December 31, - ------------ 2007 $ 54,642 2008 54,642 2009 54,642 2010 54,642 2011 30,954 Thereafter 131,153 -------- $380,675 ========
35 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 NOTE 5. INCOME TAXES At December 31, 2006 and 2005, the Company had federal and state tax net operating loss carry forwards of approximately $15,230,000 and $14,650,000, 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 $1,955,000 and $1,880,000 at December 31, 2006 and 2005, 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 $75,000 for the year ended December 31, 2006 and $210,000 for the year ended December 31, 2005. During December 2006, the Company received proceeds from the sale of net operating losses through the New Jersey Technology Business Tax Certified Transfer Program (the "Tax Transfer Program"). Through the Tax Transfer Program, the Company sold $224,160 of net operating loss benefits and received $206,207 of net proceeds from this sale. During December 2005, the Company received proceeds from the sale of net operating losses through the New Jersey Technology Business Tax Certified Transfer Program (the "Tax Transfer Program"). Through the Tax Transfer Program, the Company sold $265,450 of net operating loss benefits and received $228,287 of net proceeds from this sale. NOTE 6. STOCKHOLDERS' EQUITY TRANSACTIONS Common Stock The Company issued 510,000 and 466,170 shares of common stock for services rendered, valued at $96,476 and $97,184 for the years ended December 31, 2006 and 2005, respectively. During the year ended December 31, 2006, the Company issued $827,890 principal amount of convertible secured promissory notes and issued 4,139,452 shares of restricted Common Stock in connection with the issuance of the notes. During the year ended December 31, 2005, the Company issued 2,250,000 shares of common stock and 1,500,000 warrants to purchase common stock for cash 36 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 consideration of $450,000. This is pursuant to the private placement offerings in 2005. Using the Black-Scholes methodology, the warrants were valued at $300,000. Stock Options and Warrants The Financial Accounting Standards Board has issued SFAS No. 123R, which defines a fair value based method of accounting for an employee stock option and similar equity instruments and requires all entities to adopt that method of accounting for all of their employee stock compensation plans. However, during 2005 it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 made proforma disclosures of net income (loss) and, if presented, earnings (loss) per share, as if the fair value based method of accounting defined in SFAS 123R had been adopted. The Company has elected to account for its stock-based compensation plans under APB 25 during 2005, but has adopted SFAS 123R for options transactions during 2006 and forward. During 2005, the Company relieved its Chief Executive Officer and President of his duties and all outstanding options, both vested and unvested, were cancelled in accordance with their terms. During the quarter ended March 31, 2005, the Company issued 200,000 options to acquire common stock at $0.25 per share for fundraising. In addition, the Company issued 128,000 options to buy stock at $.040 per share for consulting services. These options vest in equal monthly installments for 24 months beginning in February 2005. Consulting expense of $0 and $11,520 were charged to the options for 2006 and 2005, respectively. In the quarter ending June 30, 2005, the Company issued 200,000 options to buy stock at $0.50 per share for consulting services. The options vest in equal monthly installments for 24 months beginning in May, 2005. Consulting expense related to this issuance was $16,000. A summary of the status of the Company's stock options and warrants as of December 31, 2006 and 2005, and changes during the years ending of those dates are presented below: 37 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 --------------------- --------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ---------- -------- ---------- -------- Options/warrants outstanding at beginning of year 16,905,821 $ 0.44 20,818,937 $ 0.51 Granted 1,640,000 0.05 3,010,704 0.23 Exercised -- -- -- -- Expired (3,552,834) (0.49) (3,323,820) (0.31) Cancelled -- -- (3,600,000) (0.79) ---------- ------ ---------- ------ Options/warrants outstanding at end of year 14,992,987 $ 0.38 16,905,821 $ 0.44 ========== ====== ========== ====== Options/warrants exercisable at end of year 14,954,306 16,703,149 Weighted-average fair value of options granted during the year $ 0.04 $ 0.11
The following table summarizes information about stock options and warrants outstanding at December 31, 2006:
Weighted- Average Number Remaining Exercise Outstanding Contractual Exercisable Price at 12/31/06 Life (Years) Warrants - -------- ----------- ------------ ----------- 0.05 1,640,000 4.61 1,640,000 0.20 4,307,704 3.07 4,307,704 0.25 565,000 2.71 565,000 0.40 2,953,000 1.54 2,947,659 0.45 920,000 1.12 920,000 0.50 1,169,167 1.49 1,135,827 0.60 2,206,250 1.89 2,206,250 0.75 387,500 0.77 387,500 1.00 844,366 0.44 844,366 ---------- ---------- 14,922,987 14,954,306 ========== ==========
Had compensation cost of GeneLink, Inc.'s incentive stock options issued to officers been determined based on the fair value of options at the dates of award under the fair value method of SFAS 123, the Company's net loss and net loss per common share would have been reduced to the proforma amounts indicated below: 38 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005 --------- ----------- Net loss: As reported $(577,761) $(1,052,870) Additional stock-based compensation -- -- Proforma (577,761) $(1,052,870) Net loss per common share: As reported $ (0.01) $ (0.03) Additional stock-based compensation -- -- Proforma (0.01) (0.03)
Significant assumptions used to calculate the fair value of all options issued for services are as follows: Risk free interest rate of return 7% Expected option life 4-5.5 yrs. Expected dividends $0.00 Expected volatility 50%
Private Placement Offerings In March 2005, the Company issued a confidential private offering memorandum of up to 2,000,000 shares at $.20 per unit and a warrant to acquire 1/2 share of common stock at $.20 per share pursuant to Rule 506 of Regulation D of the Securities Act of 1933. NOTE 7. NET LOSS PER SHARE Earnings per share is calculated under the provisions of Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." Basic EPS is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Given that the Company is in a loss position, there is no difference between basic EPS and diluted EPS since the common stock equivalents would be antidilutive.
2006 2005 ----------- ------------ Net loss $ (577,671) $ (1,052,870) Weighted average number of common shares outstanding for computing basic earning per share 38,861,637 35,806,407 Dilutive effect of warrants and stock options after application of the treasury stock method -- --
39 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 Weighted average number of common shares out- standing for computing diluted earnings per share 38,861,637 35,806,407 =========== ============ Net loss per share - basic and diluted $ (0.01) $ (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 ----------------------- 2006 2005 ---------- ---------- Warrants and stock options 14,922,987 16,905,821 ========== ==========
NOTE 8. ADVERTISING The Company expenses the production costs of advertising when incurred. Advertising expense was $14,369 and $209,370 for the years ended December 31, 2006 and 2005, respectively. NOTE 9. RENT The Company leases its offices in Jersey City, New Jersey on a month-to-month basis. NOTE 10. RELATED PARTY TRANSACTIONS AND CONVERTIBLE SECURED PROMISSORY NOTES PAYABLE In January 2006, the Company entered into an Exclusivity and Indemnity Agreement with First Equity Capital Securities, Inc. ("First Equity"), pursuant to which the Company granted First Equity the exclusive right to assist the Company in raising between $200,000 and $2,000,000 in debt financing and agreed to indemnify First Equity from any claims made as a result of First Equity providing services to or on behalf of the Company. This exclusive arrangement continued through May 2006. Kenneth R. Levine, a holder of greater than five percent (5%) of the Company's outstanding common stock, is a principal and officer of First Equity. In May 2006, December 2006 and January 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 $877,890 principal amount of Notes. The Company issued to First Equity Capital Securities, Inc., as Administrative Agent under the Loan Agreement, an aggregate of 435,000 shares of restricted Common Stock of the Company and warrants to acquire 1,740,000 shares of restricted Common Stock of the Company at an exercise price of $0.05 per share in connection with the issuance of the Notes. The Company also paid First Equity Capital Securities, Inc. a 40 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 placement fee of $60,900, equal to 7% of all loans raised pursuant to the Loan Agreement. Kenneth R. Levine, a holder of more than five percent of the equity securities of the Company, is an officer and principal of First Equity Capital Securities, Inc. Mr. Levine purchased $56,578.08 of Notes and received 282,890 shares of restricted Common Stock of the Company in connection with the issuance of the Notes. Robert Hoekstra, a director of the Company, purchased and holds $50,789.04 principal amount of Notes and Bernard L. Kasten, Jr., a director of the Company, purchased and holds $116,578.08 principal amount of Notes. Short Term Loans Payable As of December 31, 2006, the Company has various shareholders of the Company who provided short term obligations, as follows:
2006 2005 ------- ------- Note payable, due July 27, 2005 with interest at 6%. All interest and principal due at maturity. Repayment terms extended past due date by agreement $ -- $12,586 Note payable, due January 1, 2005 with interest at 6%. All interest and principal due at maturity -- -- Note payable, due July 28, 2005 with interest at 6%. All interest and principal due at maturity. Repayment terms extended past due date by agreement -- 5,275 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 -- ------- ------- 18,000 27,681 Less: Discount for warrants issued (--) (--) ------- ------- Total short term loans payable $18,000 $27,861 ======= =======
Employees and Consultants The Company is dependent on the services of Monte E. Taylor, Jr., its Chief Executive Officer. The Company is in the process of negotiating an employment 41 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 agreement with Mr. Taylor. A new agreement has not been signed. His current arrangement provides for annual compensation of $90,000 per year. 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. As of December 31, 2006 and 2005, $710,323 and $593,399, respectively was owed to Dr. Ricciardi for services rendered under the consulting agreement. Convertible Secured Promissory Notes Payable As of December 31, 2006, the Company has various shareholders of the Company who provided convertible secured promissory note obligations, as follows:
2006 2005 --------- ---- Notes payable, due May 12, 2011 with interest at 12% All interest and principal due at maturity. All Company assets pledged as collateral $ 827,890 $-- --------- --- 827,890 -- Less: debt proceeds not received (205,000) -- --------- --- Total convertible secured promissory notes payable $ 622,890 -- ========= ===
In connection with issuance of the convertible secured promissory notes, the Company has recognized debt issuance costs of $180,898 that are being amortized over the term of the notes. As of December 31, 2006, the unamortized debt issuance costs are $165,912 and are included in "Other assets" on the balance sheet. As of December 31, 2006, the Company has not received all proceeds from the notes payable. Accordingly, the Company has reduced the balance sheet liability for the convertible secured promissory notes by $205,000 at December 31, 2006. NOTE 11. SEGMENT INFORMATION The Company distinguishes its two main operating segments by entity and the types of products they sell. 42 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 The following table sets forth the net revenues, operating expenses and pre-tax earnings of our segments for the year ended December 31, 2006 and 2005:
GENELINK DERMAGENETICS INC. INC. ----------- ------------- 2006 NET REVENUES $ 57,333 $ 118,341 OPERATING EXPENSES 765,815 196,445 OTHER INCOME 2,011 697 PRE-TAX EARNINGS (LOSS) (706,471) (77,407) 2005 NET REVENUES $ 108,053 $ 288,870 OPERATING EXPENSES 1,242,348 435,732 OTHER INCOME -- -- PRE-TAX EARNINGS (LOSS) (1,134,295) (146,862)
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 operating loss of $577,671 and $1,052,870 for the years ended December 31, 2006 and 2005, respectively. The Company reported a deficit of $11,114,084 and $10,536,413 as of December 31, 2006 and 2005, 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, the Company's former Chief Executive Officer and Chief Financial Officer and a former director of the Company. Mr. DePhillipo commenced two lawsuits allegedly arising out of his termination by the Company. In an Action filed in the United States District Court for the Eastern District of Pennsylvania John R. DePhillipo v. Robert P. Ricciardi, Civil Action No. 05-5906, 43 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005 Mr. DePhillipo alleged that Dr. Ricciardi, a Director and Officer of the Company, (1) caused Mr. DePhillipo's employment with the Company to be wrongfully terminated and therefore is personally liable for all severance owed Mr. DePhillipo, in the amount of at least $75,000; (2) was personally liable for Mr. DePhillipo's unpaid back salary of $84,000 simply because Dr. Ricciardi is an officer and/or director of the Company; and (3) acted sufficiently maliciously to justify punitive damages being assessed against Dr. Ricciardi of $10,000,000. Under the terms of the Company's By-laws and Pennsylvania law, the Company is obligated both to reimburse Dr. Ricciardi for his costs of defending this action and is required to advance him the costs of the expense of such a defense. Counsel for Dr. Ricciardi entered an answer to this action and subsequently the action against Dr. Ricciardi was dismissed with prejudice in March 2006. There is thus no further contingent liability with regard to this matter. In a separate 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 has alleged that his termination by the Company "for cause" was improper and therefore he is 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 has filed an Answer denying the material allegations of the Complaint and asserting a number of affirmative defenses. The Company believes Mr. DePhillipo's claims are without merit and intends to vigorously defend against those claims. The Company has also filed counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion, negligent misrepresentation and unjust enrichment while Mr. DePhillipo served as the Company's Chief Executive Officer, President and Chief Financial Officer. The counterclaims seek recovery in excess of that sought by Mr. DePhillipo in the Complaint. The Company has received a notice of an alleged patent infringement from an Australian bioscience company. It is the opinion of patent counsel that there is no infringement, and that in the event there is an infringement, management believes it will not have a material effect on the Company's business and financial position. NOTE 14. SUBSEQUENT EVENTS In January 2007, the Company received $205,000 on account of the convertible secured promissory notes receivable and sold an additional $50,000 of Notes and issued 275,000 shares in connection therewith. In January 2007, holders of Notes converted $121,131 of Notes into 2,422,625 shares of Common Stock at a conversion price of $0.05 per share. NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Below is a summary of the quarterly results of operations for each quarter of the years ended December 31, 2006 and 2005: 44 GENELINK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2006 AND 2005
First Second Third Fourth --------- --------- --------- -------- 2006 Sales $ 47,711 $ 35,642 $ 59,122 $ 33,199 Gross profit 30,962 14,556 33,206 31,529 Net income (loss) (229,491) (255,928) (138,698) 46,456 Net income (loss) per common share (0.01) (0.01) (0.008) (0.001) 2005 Sales $ 55,581 $ 133,602 $ 76,850 $130,890 Gross profit 125,674 76,126 37,400 (71,672) Net income (loss) (371,488) (361,123) (282,574) (37,685) Net income (loss) per common share (0.01) (0.01) (0.008) (0.001)
45 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and 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, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. With the participation of management, the Company's Chief Executive Officer and Acting Chief Financial Officer evaluated the effectiveness of the design and operation of its disclosure controls and procedures at the conclusion of the fiscal quarter ended December 31, 2006. Based upon this evaluation, the acting Chief Executive Officer and Chief 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 significant changes in the Company's internal controls or, to the knowledge of the Company's management, in other factors that could significantly affect internal controls subsequent to the date of the Company's most recent evaluation of its disclosure controls and procedures utilized to compile information included in this filing. 46 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS. Information with respect to each of the executive officers and current directors of the Company is set forth below
Name Age Position - ---- --- ----------------------------------------- Monte E. Taylor 56 Chief Executive Officer, Acting Chief Financial Officer, Director Robert P. Ricciardi, Ph.D. 60 Chairman, Secretary, Chief Science Officer, Director Dr. Bernard L. Kasten, Jr. 60 Executive Chairman of the Board, Director Robert Hoekstra 56 Director John H. Souza 44 Director
Mr. Taylor currently is the Chief Executive Officer and Acting Chief Financial Officer and a director of the Company. Mr. Taylor joined the Company as Director of Business Development in 2001. In such role, Mr. Taylor has focused his efforts in rolling at the Company's products and technologies to the skin-care, skin health and nutrition industries worldwide. Prior to joining the Company, Mr. Taylor was a senior management consultant specializing in strategic marketing plans, business development and marketing communications for mid-size and Fortune 500 companies. Mr. Taylor received a masters degree in business administration from the Crummer School of Business at Rollins College. Dr. Ricciardi is currently the Chief Science Officer and a director of the Company. Dr. Robert Ricciardi is also Professor of Microbiology at the University of Pennsylvania. Dr. Ricciardi received his Ph.D. from the University of Illinois at Urbana and went on to Brandeis University and Harvard Medical School in the Department of Biological Chemistry where he was a Fellow of the American Cancer Society and a Charles A. King Trust Fellow. He developed one of the first techniques in molecular biology that has been widely used to map genes. While most of his research has centered on mechanisms of cancer, Dr. Ricciardi has developed and patented recombinant delivery systems for use as vaccines and new methods for identifying chemical therapeutics. Dr. Ricciardi has served as a consultant to The National Institutes of Health, Smith Kline and Beckman's Department of Molecular Genetics, and Children's Hospital of Philadelphia's Department of Infectious Disease. He has authored 85 publications and was a NATO Visiting Professor at Ferrara Medical School in Italy. Dr. Ricciardi has been an invitational speaker at numerous scientific meetings and universities. 47 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 is Chairman of the Board of Cleveland Bio Labs Inc. [NASDAQ-CBLI], and also serves on the Board of Directors of SeraCare Life Sciences, CytoLogic Inc, Lexi-Comp Inc, Riggs-Heinrich Media Inc, Highway Composites LLC, Monroeville Industrial Molding Inc, PIPO Inc and Cleveland Bio Labs Inc. Mr. Hoekstra is 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. Souza has been a business consultant with the Company since October 2004, working primarily with the Company's Dermagenetics, Inc. subsidiary as Director of Business Development. In the past 20 years, Mr. Souza has owned and operated manufacturing and distribution companies in the packaging and cosmetics fields, doing business with Fortune 100 and 500 companies as well as retail spa outlets. Mr. Souza has held executive management positions in both the public and private sectors where he was responsible for operations, business development and mergers and acquisitions, and also has an extensive background in sales and marketing. Mr. Souza received a Bachelor of Science from Rochester Institute of Technology. Mr. Souza is also a Nationally Certified PT/NC. 48 Audit Committee The entire Board of Directors acted as the Audit Committee for the fiscal year ended December 31, 2006. The Audit Committee does not have an audit committee financial expert. The Company has not been able to attract qualified members to serve on its Board of Directors who would qualify as financial experts. For the fiscal year ending December 31, 2007, the Audit Committee will consist of Dr. Kasten and Mr. Hoekstra, each of whom is independent. 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. 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 49 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, 2006 were filed on a timely basis. 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 change upon request therefor. Compensation of Directors and Meeting of Directors Directors of the Company are not paid any fees for service as directors of the Company. The Board of Directors met six (6) times in 2006. 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., 113 Pavonia Avenue, #313, Jersey City, NJ 07310. Any communications received will be forwarded to all Board members. Material Proceedings with Directors, Officers and Holders of More Than Five Percent of the Common Stock of the Company; Resignation of Directors Effective October 14, 2005, the Company terminated the employment of John R. DePhillipo, the Company's former Chief Executive Officer and Chief Financial Officer and a former member of the Board of Directors of the Company. Mr. DePhillipo commenced a lawsuit against the Company allegedly arising out of his termination by the Company for "cause," as defined in his Employment Agreement with the Company. 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 has alleged that his termination by the Company "for cause" was improper and therefore he is entitled to in excess of $1,500,000 in 50 severance pay under the terms of an employment agreement that Mr. DePhillipo alleges was entered into effective January 1, 2005 (the "Employment Agreement"), and an additional $84,000 in accrued and unpaid compensation. The Company has filed an Answer denying the material allegations of the Complaint and asserting a number of affirmative defenses. The Company believes Mr. DePhillipo's claims are without merit and intends to vigorously defend against those claims. The Company has also filed counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion, negligent misrepresentation and unjust enrichment while Mr. DePhillipo served as the Company's Chief Executive Officer, President and Chief Financial Officer. The counterclaims seek recovery in excess of that sought by Mr. DePhillipo in the Complaint. On January 18, 2007, Mr. DePhillipo resigned as a director of the Company. Mr. DePhillipo in a letter to the Board of Directors of the Company alleged that the Company has not properly accounted for or disclosed its source for funding the costs of the litigation described above and alleged that a third party must be funding the litigation; alleged that the terms of the recent financing undertaken by the Company are unfair to the Company's shareholders and amounted to the sale of the Company without shareholder approval; and alleged that the use of the proceeds of the financings are not adequately described, including any use of the proceeds to fund the costs of the litigation. The Board of Directors categorically denies each of Mr. DePhillipo's unsubstantiated allegations and states that they are completely unfounded. The Board of Directors expressly confirms that the Company has not entered into an agreement with any third party to fund the litigation or taken any steps which would amount to a sale of the Company without shareholder approval. The Board of Directors further notes that Mr. DePhillipo's resignation was pre-textual and tendered only after notice to Mr. DePhillipo that he was not part of the proposed slate of nominees to a newly constituted Board of Directors and after a meeting of the Board of Directors during which Mr. DePhillipo was not appointed and elected as a nominee to remain on the Board of Directors following the Annual Meeting. REPORT FROM THE AUDIT COMMITTEE The entire Board of Directors acts as the Audit Committee for the year ended December 31, 2006. The Audit Committee does not have an audit committee financial expert. The Company has not been able to attract qualified members to serve on its Board of Directors who would be independent and who would qualify as financial experts. 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, 2006, 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. 51 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, 2006. 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-KSB for year ended December 31, 2006. Robert Hoekstra Dr. Bernard L. Kasten, Jr. Robert P. Ricciardi, Ph.D. John H. Souza Monte E. Taylor, Jr. 52 ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
Salary All Other Name and Principal Position Year ($) Compensation($) Total($) - --------------------------- ---- ----------- --------------- -------- Monte E. Taylor, Jr. Chief Executive Officer(1) 2006 $ 90,000 $22,486(2) $112,486 2005 $ 90,000 $20,795(2) $110,796 Robert P. Ricciardi, Ph.D., Chief Science Officer 2006 $116,924(3) -- $116,924 2005 $106,294(3) -- $106,294
(1) Mr. Taylor was appointed Chief Executive Officer effective October 14, 2005. (2) Represents the cost of health insurance premiums provided from the Company. (3) This amount has accrued but has not been paid. As of December 31, 2006, the Company owed Dr. Ricciardi an aggregate of $656,155 for compensation earned but not received. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END The named executive officers did not receive any option or other equity awards in 2006 and do not hold any options or other equity awards as of December 31, 2006. DIRECTOR COMPENSATION Directors are not compensated for their service as directors of the Company. Employment Agreements with Executive Officers The company entered into a consulting agreement with Dr. Ricciardi on February 24, 1998, which provides for annual compensation of $116,924 in 2006, a ten percent (10%) increase in compensation each year, continues for year to year, and requires Dr. Ricciardi to perform eight (8) hours of consulting services per week. The company has never had sufficient funds to pay Dr. Ricciardi his compensation and as of December 31, 2006, the company owed Dr. Ricciardi $656,155 in accrued compensation. Dr. Ricciardi's consulting agreement provides for a change in control payment equal to two times the compensation in effect. 53 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS Security Ownership of Management and Certain Beneficial Owners The following table sets forth certain information as of February 28, 2007 regarding the ownership of Common Stock (i) by each person known by the Company to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) by each current officer and director of the Company, (iii) by each nominee for director, and (iv) by all current officers and directors of the Company as a group. The beneficial owners and amount of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, includes all shares of the Company's Common Stock that may be acquired by such beneficial owners within 60 days of February 28, 2007 upon the exercise or conversion of any options, warrants or other convertible securities. This table has been prepared based on 44,104,055 shares of Common Stock outstanding on February 28, 2007. 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.
Number of Shares Approximate Percentage Name Beneficially Owned Of Stock Outstanding - ------------------------------- ---------------------- ---------------------- John R. and Maria D. DePhillipo 4,716,585(1) 10.7% 100 S. Thurlow Avenue Margate, New Jersey 08402 3,512,859(2) 7.5% Dr. Bernard L. Kasten, Jr 113 Pavonia Avenue, #313 Jersey City, New Jersey 07310 Kenneth R. Levine 2,935,632(3) 6.7% 1776 Broadway Suite 2000 New York, New York 10019 Robert Hoekstra 2,784,696(4) 6.1% 113 Pavonia Avenue, #313 Jersey City, New Jersey 07310 Robert P. Ricciardi, Ph.D 2,710,000 6.1% 113 Pavonia Avenue, #313 Jersey City, New Jersey 07310 John H. Souza 1,490,331(5) 3.3% 113 Pavonia Avenue, #313 Jersey City, New Jersey 07310
54 Monte E. Taylor, Jr 27,750(6) * 113 Pavonia Avenue, #313 Jersey City, New Jersey 07310 Directors and Officers as a 10,525,636(2)(4)(5)(6) 21.4% Group
(1) Includes 3,235,885 shares of Common Stock held by John R. DePhillipo and 1,010,700 shares of Common Stock held by Maria D. DePhillipo, his wife. Mr. DePhillipo disclaims beneficial ownership of the shares held by Maria D. DePhillipo. Includes 470,000 shares of Common Stock held by various family trusts for which Mrs. DePhillipo is the trustee, and each of Mr. and Mrs. DePhillipo disclaim any beneficial ownership of those shares. (2) Includes 2,533,299 shares of Common Stock issuable upon the conversion of Notes. As of February 28, 2007 Dr. Kasten held $126,664.92 of principal and accrued interest of Notes, which convert into Common Stock at $0.05 per share. (3) Includes 435,000 shares of Common Stock held by First Equity Capital Securities, Inc., of which Mr. Levine is a principal. (4) Includes 1,113,296 shares of Common Stock issuable upon the conversion of Notes. As of February 28, 2007, Mr. Hoekstra held $55,664.79 of principal and accrued interest of Notes, which convert into Common Stock at $0.05 per share. Includes currently exercisable warrants to acquire 270,455 shares of Common Stock. Includes 647,000 shares of Common Stock and warrants to exercise 500,000 shares of Common Stock held by a family trust for which Mr. Hoekstra is a trustee. Mr. Hoekstra disclaims beneficial ownership of those shares and warrants. (5) Includes currently exercisable warrants to acquire 605,661 shares of Common Stock. (6) Include 16,000 shares held by Mr. Taylor and various family members in joint tenancy. (*) Less than 1%. 55 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In May 2006, December 2006 and January 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 $877,890.40 principal amount of Notes. The Company issued to First Equity Capital Securities, Inc., as Administrative Agent under the Loan Agreement, an aggregate of 435,000 shares of restricted Common Stock of the Company and warrants to acquire 1,740,000 shares of restricted Common Stock of the Company at an exercise price of $0.05 per share in connection with the issuance of the Notes. The Company also paid First Equity Capital Securities, Inc. a placement fee of $60,900, equal to 7% of all loans raised pursuant to the Loan Agreement. Kenneth R. Levine, a holder of more than five percent of the equity securities of the Company, is an officer and principal of First Equity Capital Securities, Inc. Mr. Levine purchased $56,578.08 of Notes and received 282,890 shares of restricted Common Stock of the Company in connection with the issuance of the Notes. Robert Hoekstra, a director of the Company, purchased and holds $50,789.04 principal amount of Notes and Bernard L. Kasten, Jr., a director of the Company, purchased and holds $116,578.08 principal amount of Notes. ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K (1) Financial Statements. The financial statements required to be filed are presented beginning on page 21. (2) Exhibits. The following Exhibits have been filed pursuant to Item 601 of Regulation S-B.
Exhibit Number Description - ------- ----------- 31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
56 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Buckno, Lisicky & Company was the Company's independent public accountant for 2006 and 2005. FEES FOR INDEPENDENT AUDITORS FOR FISCAL YEARS 2006 AND 2005 Set forth below are the fees billed for services rendered by Buckno, Lisicky & Company in 2006 and 2005.
2005 2006 ------- ------- 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-QSB 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 function(s) of the audit committee are currently performed by the full Board of Directors. The Board of Directors 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 Board of Directors with material changes to any service engagement and related fee estimates as compared to amounts previously approved. During 2006, all audit and non-audit services performed by our independent accountants were pre-approved by the Board of Directors in accordance with the foregoing procedures. 57 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: April 9, 2007 By: /s/ Monte E. Taylor, Jr. ------------------------------------ Monte E. Taylor, Jr., 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/ Monte E. Taylor, Jr. Principal Executive Officer, April 9, 2007 - -------------------------- Principal Financial Officer Monte E. Taylor and Director Chief Executive Officer /s/ Robert P. Ricciardi Director April 9, 2007 - -------------------------- Robert P. Ricciardi, Ph.D. Director /s/ Bernard L. Kasten, Jr. Executive Chairman and Director - -------------------------- Dr. Bernard L. Kasten, Jr. /s/ Robert Hoekstra Director April 9, 2007 - -------------------------- Robert Hoekstra /s/ John H. Souza Director April 9, 2007 - -------------------------- John H. Souza
58 EX-31.1 2 w32810exv31w1.txt CERTIFICATION OF MONTE E. TAYLOR, JR. EXHIBIT 31.1 CERTIFICATION I, Monte E. Taylor, Jr., certify that: 1. I have reviewed this annual report on Form 10-KSB of GeneLink, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Paragraph omitted pursuant to SEC Release 33-8238]; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: April 9, 2007 By: /s/ Monte E. Taylor, Jr. ------------------------------------ Monte E. Taylor, Jr., Chief Executive Officer and Acting Chief Financial Officer 2 EX-32.1 3 w32810exv32w1.txt CERTIFICATION PURSUANT TO SECTION 906 SARBANES-OXLEY EXHIBIT 32.1 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of GeneLink, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Monte E. Taylor, Jr., as Chief Executive Officer and Acting Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods shown in such report. Date: April 9, 2007 By: /s/ Monte E. Taylor, Jr. ------------------------------------ Monte E. Taylor, Jr., Chief Executive Officer and Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----