NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
The Company is a genetics-based,
personal healthcare firm that has developed DNA assessments measuring personal DNA tendencies that can have a significant impact
on overall wellness of an individual client or customer. These small differences in DNA, called SNP’s (“snips”)
can indicate genetic variants that may not be performing at optimal levels and can be linked to aging and other wellness issues.
GeneLink scientists use the DNA assessments information on each client and then formulate products to optimize health and wellness
within the normal ranges. As discussed further in Note 11, the Company divested its interest in its wholly-owned subsidiary, GeneWize
Life Sciences, Inc. (“GeneWize”), effective February 10, 2012 as part of a strategic realignment of its business to
offer its products through third-party market partners, and to refocus efforts on research, development and manufacturing of custom
products for those market partners.
|
Note 2.
|
Summary of Significant Accounting Policies
|
Principles of consolidation:
The consolidated financial statements include the
accounts of GeneLink, Inc. and its wholly-owned Subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the consolidation.
Use of estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents:
Highly liquid instruments purchased
with a maturity of three months or less are considered to be cash equivalents. At times, cash and cash equivalents may exceed federally
insured limits. The Company has not experienced any losses on such accounts. All non-interest bearing cash balances were fully
insured at
December 31, 2012
due to a temporary federal program in effect from December
31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning
2013, insurance coverage will revert to $250,000 per depositor at each financial institution, and the Company's non-interest bearing
cash balances may again exceed federally insured limits. The Company had $381,277 of interest-bearing amounts on deposit in excess
of federally insured limits at
December 31, 2011
and no excess of interest-bearing amounts
on deposit in excess of federally insured limits at December 31, 2012.
Accounts Receivable:
Trade accounts receivable primarily
represent amounts due from distributors of our products. The company performs credit evaluations of each customer on an ongoing
basis and generally does not require collateral or charge interest or fees on balances. As of December 31, 2012 and 2011,
the Company has not recorded an allowance for doubtful accounts as management determined all amounts are collectible.
Inventory:
Inventory is valued at the lower of cost
(using the first-in, first-out method) or market. Inventory consists primarily of raw materials for the custom nutritional
and skincare products sold by the Company. Cost is determined on a specific identification basis. Work in process and
finished goods inventory are insignificant in relation to the raw material inventory since production process is short and
goods are manufactured to order and shipped shortly after completion. The cost of finished goods inventory includes the cost
of materials, third-party contract manufacturing and overhead. In the event that the Company identifies excess, obsolete or
unsalable inventory, its value is written down to net realizable value.
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 or the lesser of the expected
life or term of the lease as to leasehold improvements as noted below:
Office furniture and equipment
|
3 - 5 years
|
Equipment
|
3 - 5 years
|
Leasehold improvements
|
5 years
|
Software
|
3 – 5 years
|
Intangible Assets:
Intangible assets include costs incurred to apply
and obtain patents for its products. Patents are amortized upon approval by regulatory authorities over the estimated useful life
of the asset, generally fifteen years on a straight-line basis.
Deferred Loan Costs:
Loan acquisition costs are amortized
over the term of the debt using the effective interest method.
Long lived assets:
The Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable.
An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual
disposition is less than its carrying amount. The Company recorded $65,517 of impairment loss from abandonment of patents in the
year ended December 31, 2012 and had not identified any such impairment losses during the year ended December 31, 2011.
Revenue recognition:
The Company recognizes revenues from the sales of
products upon shipment. Revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred and title
and risk of loss have transferred to the customer, the sales price is determinable and collectability is reasonably assured.
For direct sales to consumers by the Company’s
subsidiary, GeneWize, prior to its sale in 2012, revenue was reduced for refunds on certain products during the trial period which
is the first 60 days after the initial order is shipped. The Company recorded a reserve for refunds based on historical refunds
provided to customers which is recorded as a reduction of revenue and is included in accrued expenses on the accompanying balance
sheet. The Company received advance payments from these consumer sales which was recorded as deferred revenue until shipment occurs.
Prepaid sales incentives and
deferred revenue-license fees represent prepaid fees that are deferred and recognized over the term of the underlying agreement
with licensees.
The Company recognizes revenue
from licensing agreements as earned, which is generally when products are shipped from distributors, over the term of the agreement.
Research and Development:
Research and development costs are expensed as incurred.
Advertising
The Company expenses advertising when incurred. Advertising
expense was $28,924 and $57,825 for the years ended December 31, 2012 and 2011, respectively.
Stock-Based Compensation:
Stock-based compensation is recorded for recognition
of the cost of employee or director services received in exchange for an award of equity instruments in the financial statements
and is measured based on the grant date fair value of the award. The stock-based compensation expense is recognized over the period
during which an employee is required to provide service in exchange for the award (typically, the vesting period).
The Company estimates the fair value of each option
award issued under its stock option plans on the date of grant using a lattice option-pricing model that uses the following assumptions:
|
a)
|
The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common
stock for a period commensurate with the expected life. These historical periods may exclude portions of time when unusual transactions
occurred.b)
|
|
b)
|
The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual
terms, vesting schedules and post-vesting forfeitures.
|
|
c)
|
For shares that vest contingent upon achievement of certain performance criteria, an estimate of the probability of achievement
is applied in the estimate of fair value. If the goals are not met, no compensation cost is recognized and any previously recognized
compensation cost is reversed.
|
|
d)
|
The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the
foreseeable future.
|
|
e)
|
The risk-free interest rate is based upon a treasury security with a maturity comparable to the contractual term of the options.
|
In addition, the Company separates the grants into homogeneous
groups and analyzes the assumptions for each group and computes the expense for each group utilizing these assumptions.
|
|
Assumptions for Awards
Granted in
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
180-182
|
%
|
|
|
144-203
|
%
|
Risk-free interest rate
|
|
|
4.50
|
%
|
|
|
4.5-5.0
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life in years
|
|
|
5.0-10.0
|
|
|
|
5.0 – 10.0
|
|
Earnings per share:
Basic loss per share is calculated using the weighted
average number of common shares outstanding for the period and diluted is computed using the weighted average number of common
shares and dilutive common equivalent shares outstanding. Given that the Company is in a net loss position, there is no difference
between basic and diluted weighted average shares since the common stock equivalents would be antidilutive.
The following common stock equivalents are excluded
from the loss per share calculation as their effect would have been antidilutive:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Options
|
|
|
21,980,833
|
|
|
|
19,631,833
|
|
Warrants
|
|
|
24,248,042
|
|
|
|
22,552,458
|
|
Debt conversion shares
|
|
|
16,794,583
|
|
|
|
15,544,583
|
|
Debt conversion warrants
|
|
|
1,875,000
|
|
|
|
1,875,000
|
|
Income taxes:
The Company has not recorded
current income tax expense due to the generation of net operating losses. Deferred income taxes are accounted for using the balance
sheet approach which requires recognition of deferred tax assets and liabilities for the expected future consequences of temporary
differences between the financial reporting basis and the tax basis of assets and liabilities. A valuation allowance is provided
when it is more likely than not that a deferred tax asset will not be realized.
The Company identifies and evaluates
uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not
probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized
tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for
uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating expenses. The Company’s remaining open tax years subject to examination
by the Internal Revenue Service include the years ended December 31, 2008 through December 31, 2012.
Derivative
Financial Instruments:
The Company does not use derivative
instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible debt and equity instruments
are reviewed to determine whether or not they contain embedded derivative instruments that are required to be accounted for separately
from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required
to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. An
evaluation of specifically identified conditions is made to determine whether the fair value of warrants issued is required to
be classified as equity or as a derivative liability.
Beneficial
Conversion and Warrant Valuation:
The Company records a beneficial conversion feature
(“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that are
in-the-money when issued. The Company also records the fair value of warrants issued in connection with debt instruments. The BCF
for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their
relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the
conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized for convertible debt
as interest expense over the term of the debt using the effective interest method.
Fair
Value of Financial Instruments:
The Company’s financial
instruments are recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
|
·
|
Level 1
–
Valuation based on quoted market prices in active markets for identical
assets and liabilities.
|
|
·
|
Level 2
–
Valuation based on quoted market prices for similar assets and liabilities
in active markets.
|
|
·
|
Level 3
–
Valuation based on unobservable inputs that are supported by little or no
market activity, therefore requiring management’s best estimate of what market participants would use as fair value.
|
Fair value estimates discussed
herein are based upon certain market assumptions and pertinent information available to management as of
December 31,
2012
. The Company uses the market approach to measure fair value of its Level 1 financial assets. The market approach uses
prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The respective carrying value
of certain on-balance-sheet financial instruments approximated their fair values due to the short-term nature of these instruments.
These financial instruments include cash, accounts receivable, accounts payable and accrued expenses. The fair value of the Company’s
convertible notes payable approximate their carrying value based upon current rates available to the Company.
In 2009, the Company issued
Convertible Notes and warrants to a group of accredited investors (see Note 9). The Company engaged a third party to complete a
valuation of the warrants issued to the placement agent and note holders and the conversion feature under the Convertible Notes
which are recorded as debt costs and debt discounts on the accompanying balance sheets. The valuation was completed using Level
2 inputs.
During 2011, the Company issued
warrants in connection with a license and distribution agreement (see Note 12) and engaged a third party to complete a valuation
of those warrants which were recorded as Prepaid Sales Incentive on the accompanying balance sheet. The valuation was completed
using Level 2 inputs.
Industry Risk and Concentration:
The business of marketing nutrition
and skin care products is highly competitive and sensitive to the introduction of new products which may rapidly capture a significant
share of the market. These market segments include numerous manufacturers, distributors, marketers, retailers and physicians that
actively compete for the business of consumers both in the United States and abroad. In addition, the Company anticipates that
it will be subject to increasing competition in the future from sellers that utilize electronic commerce. Many of these competitors
have longer operating histories, significantly greater financial, technical, product development, marketing and sales resources,
greater name recognition, larger established customer bases and better-developed distribution channels than does the Company.
The Company’s present
or future competitors may be able to develop products that are comparable or superior to those offered by the Company, adapt more
quickly than the Company does to new technologies, evolving industry trends and standards or customer requirements, or devote greater
resources to the development, promotion and sale of their products than does the Company. For example, if the Company’s competitors
develop skin care or nutritional treatments that prove to be more effective than our products, demand for our products could be
reduced. Accordingly, the Company may not be able to compete effectively in our markets and competition may intensify. The Company
is also subject to significant competition for the recruitment of distributors from other network marketing organizations, including
those that market nutritional supplements and skin care products as well as other types of products.
The Company’s ability
to be competitive will depend, in significant part, on its success in recruiting and retaining market partners through the maintenance
of an attractive product portfolio and other incentives. The Company cannot ensure that its programs for recruitment and retention
of partners will be successful, and if they are not, the Company’s financial condition and operating results would be harmed.
The Company sells its products
through a limited number of distributors. Certain of these distributors, together with entities under their common control, each
individually accounted for greater than 10% of total revenues and greater than 10% of accounts receivable as follows: Revenues
for 2012 and accounts receivable as of December 31, 2012 from GeneWize, our former subsidiary were $1,476,000 and $77,811, respectively
which accounted for 69% of our net sales for the year and 100% of our outstanding accounts receivable at year end. No other customers
were more than 10% of sales and revenues generated outside the United States were less than 10% of total revenues for all years
presented.
The Company relies entirely on
a limited number of third parties to supply raw materials, manufacture our products and perform laboratory tests on the Company’s
behalf. In the event any of the Company’s third party suppliers, manufacturers or laboratories was to become unable or unwilling
to continue to provide the Company with services and products in required volumes and at suitable quality levels, the Company would
be required to identify and obtain acceptable replacement sources.
Recent accounting pronouncements
In July 2012, the Financial Accounting Standards
Board ompleted an accounting standards update
entitled "ASU 2012-02, Intangibles - Goodwill
and Other" that revises the requirements around how entities test indefinite-lived intangible assets, other than goodwill,
for impairment. The guidance will allow entities to first assess qualitative factors to determine whether it is necessary to perform
a quantitative impairment test. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived
intangible asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. The
Company will adopt this standard in the first quarter of 2013 and does not expect the adoption of this standard to have an impact
on its consolidated financial statements.
|
Note 3.
|
Property and Equipment
|
Property and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
4,135
|
|
|
$
|
85,651
|
|
Machinery & equipment
|
|
|
288,105
|
|
|
|
301,091
|
|
Leasehold improvements
|
|
|
169,629
|
|
|
|
6,781
|
|
Software
|
|
|
21,946
|
|
|
|
343,902
|
|
Less accumulated depreciation
|
|
|
(226,046
|
)
|
|
|
(569,613
|
)
|
|
|
$
|
257,769
|
|
|
$
|
167,812
|
|
Depreciation expense was $98,258 and $129,707 for
the years ended December 31, 2012 and 2011, respectively. For the year ended December 31, 2012, $38,003
of depreciation was included
in cost of goods sold. No depreciation expense was included in cost of goods sold for the year ended December 31, 2011 as manufacturing
operations were contracted to a third party vendor.
|
Note 4.
|
Intangible Assets
|
Intangible assets consisted of the following:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Patents approved
|
|
$
|
77,574
|
|
|
$
|
70,556
|
|
Patents pending
|
|
|
115,237
|
|
|
|
188,298
|
|
Less accumulated amortization
|
|
|
(137,906
|
)
|
|
|
(23,267
|
)
|
|
|
$
|
54,905
|
|
|
$
|
235,587
|
|
Amortization expense related to patents was $114,738
and $5,070 for the years ended December 31, 2012 and 2011, respectively. 2012 amortization expense includes a charge of $106,000
related to accelerated amortization as a result in the change of estimated useful lives of certain patents. In addition, $65,517
in patent costs were written off in the year ended December 31, 2012 due to impairment of their estimated future value.
The future estimated amortization expense on patents
and other intangible assets that will be charged to operations as of December 31, 2012 is as follows:
Year ending
|
|
|
|
December 31,
|
|
|
|
2013
|
|
$
|
11,901
|
|
2014
|
|
|
9,190
|
|
2015
|
|
|
8,235
|
|
2016
|
|
|
7,697
|
|
2017
|
|
|
2,758
|
|
Thereafter
|
|
|
15,124
|
|
|
|
$
|
54,905
|
|
Because of the Company's history
of net operating losses, it has not paid income taxes since its inception and the Company had no material unrecognized tax benefits
that could affect the Company's financial statements as of December 31, 2012 or 2011. The Company's deferred tax assets primarily
consist of net operating loss, or NOL, carryforwards, stock compensation items and deferred revenue. Realization of deferred tax
assets is dependent upon a number of factors, including future earnings
Components of deferred tax assets
(liabilities) are as follows:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Stock compensation
|
|
$
|
691,200
|
|
|
$
|
713,900
|
|
Other components
|
|
|
14,000
|
|
|
|
137,200
|
|
Net operating loss carryforwards
|
|
|
7,075,600
|
|
|
|
7,826,700
|
|
|
|
|
7,780,800
|
|
|
|
8,677,800
|
|
Valuation Allowance
|
|
|
(7,780,800
|
)
|
|
|
(8,677,800
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The reconciliation of income tax attributable to
operations computed at the United States federal statutory rate and the actual tax provision of zero results primarily from the
change in the valuation allowance.
As of December 31, 2012, the Company had
net operating loss carry forwards for federal and state income tax purposes of approximately $19,748,000, which expire in
various amounts between 2018 and 2032. A portion of the net operating loss carryforwards may be subject to certain
limitations of the Internal Revenue Code section 382 which would restrict the annual utilization in future periods due to
changes in ownership in prior periods. The Company has evaluated its ability to realize the deferred tax assets on its
balance sheet and has established a valuation allowance at December 31, 2011 and 2012. The valuation allowance decreased by
$897,000 during 2012 primarily due to the sale of GeneWize and its related tax loss carryforward.
|
Note 6.
|
Stockholders' Equity
|
Common
Stock
During 2012, the Company sold an aggregate of 52,500,000
of shares of Common Stock in private placement offerings, at a price of $0.03 per share for net proceeds of $1,504,000. Costs incurred
in the offerings were $71,000. The Company issued warrants to purchase 5,041,667 shares of Common Stock at an exercise price of
$0.03 per share to First Equity Capital Securities, Inc., as placement agent. Kenneth R. Levine, a holder of more than five percent
of the equity securities of the Company, is an officer and owner of First Equity Capital Securities, Inc. and a member of the Scientific
Advisory Board.
During 2012, 400,000 warrants were issued as partner
incentives to Joel Guerin in connection with the Company’s distribution agreement with geneME.
During 2011, the Company sold an aggregate of 48,770,000
of shares of Common Stock in private placement offerings, at a price of $0.05 per share for net proceeds of $2,299,320. Costs incurred
in the offerings were $139,180. The Company issued warrants to purchase 3,104,500 shares of Common Stock at an exercise price of
$0.05 per share to First Equity Capital Securities, Inc., as placement agent. Kenneth R. Levine, a holder of more than five percent
of the equity securities of the Company, is an officer and owner of First Equity Capital Securities, Inc. and a member of the Scientific
Advisory Board.
As discussed in Note 11, during 2011 the Company
issued 8,000,000 non-performance warrants in connection with the license and distribution agreement.
The Company issued 1,497,226 shares of common stock
for services rendered, valued at $74,862 for the year ended December 31, 2012. The Company issued 300,000 shares of common stock
for services rendered, valued at $22,745 for the year ended December 31, 2011.
Warrants
Warrants outstanding as of December 31, 2012 are
as follows:
Warrant Description
|
|
Shares
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
Placement Agent Fees
|
|
|
12,490,542
|
|
|
|
$0.03-$0.15
|
|
|
|
2013-2017
|
|
Partner performance warrants
|
|
|
400,000
|
|
|
$
|
0.05
|
|
|
|
2017
|
|
License fees
|
|
|
8,000,000
|
|
|
|
$0.10-$0.45
|
|
|
|
2016
|
|
Private Placement warrants
|
|
|
3,357,500
|
|
|
|
$0.10-$0.15
|
|
|
|
2013-2016
|
|
Total warrants
|
|
|
24,248,042
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity of the
stock warrants outstanding for the years ended December 31, 2011 and 2012:
|
|
Shares Under
Warrant
|
|
|
|
|
|
Balance, January 1, 2011
|
|
|
13,087,958
|
|
Warrants Issued
|
|
|
11,104,500
|
|
Warrants Exercised
|
|
|
(1,640,000
|
)
|
Warrants Expired
|
|
|
-
|
|
Balance, December 31, 2011
|
|
|
22,552,458
|
|
Warrants Issued
|
|
|
5,441,667
|
|
Warrants Exercised
|
|
|
(100,000
|
)
|
Warrants Expired
|
|
|
(3,646,083
|
)
|
Balance, December 31, 2012
|
|
|
24,248,042
|
|
During 2012, 100,000 warrants
were exercised for 28,160 common shares.
Stock Option Plans
In 2007, the Company adopted a stock options plan
(the “2007 Plan”) that provides for the grant of incentive stock options and nonqualified stock options, and reserved
6,000,000 shares of the Company’s Common Stock for future issuance under the 2007 Plan. The option price must be at least
100% of market value at the date of the grant and the options have a maximum term of 10 years. Options granted vest over varying
terms at the discretion of the Board. The Company typically grants selected key employees, Board members and consultants to the
Company awards. As of December 31, 2012, options to purchase 5,050,000 shares of common stock were vested and exercisable under
the 2007 Plan.
On June 1, 2009, the Company adopted a stock option
plan (the “2009 Plan”) that provides for the grant of incentive stock options and nonqualified stock options, and reserved
6,000,000 shares of the Company’s Common Stock for future issuance under the 2009 Plan. The option price must be at least
100% of market value at the date of the grant and the options have a maximum term of 10 years. Options granted vest over varying
terms at the discretion of the Board. The Company typically grants stock options to selected key employees, Board members and consultants
to the Company. As of December 31, 2012, options to purchase 3,906,250 shares of common stock were vested and exercisable under
the 2009 Plan.
On May 20, 2011, the Company adopted a stock option
plan (the “2011 Plan”) that provides for the grant of incentive stock options and nonqualified stock options, and reserved
10,000,000 shares of the Company’s Common Stock for future issuance under the 2011 Plan. The option price must be at least
100% of market value at the date of the grant and the options have a maximum term of 10 years. Options granted vest at the discretion
of the Board, typically over a three year period or based on achievement of performance criteria. The Company typically grants
stock options to selected key employees, Board members and consultants to the Company. As of December 31, 2012, options to purchase
2,674,375 shares of common stock were vested and exercisable under the 2011 Plan.
In addition, the Board has, from time to time granted
stock options outside of the above named plans (“Board-designated options”). At December 31, 2012 and December 31,
2011, 4,945,833 shares were outstanding under Board-designated options. As of December 31, 2012, options to purchase 4,350,000
shares of common stock were vested and exercisable under the Board-designated options.
The average fair value of options granted at market
during 2012 and 2011 was $0.04 and $0.09 per option, respectively. The aggregate intrinsic value of the outstanding options at
December 31, 2012 was $0.
The following table summarizes activity of the stock
options outstanding for the years ended December 31, 2012 and 2011:
|
|
Shares Under
Option
|
|
|
Weighted
Average
Exercise Price
|
|
Balance, January 1, 2011
|
|
|
15,682,833
|
|
|
$
|
0.13
|
|
Options granted at market
|
|
|
4,900,000
|
|
|
|
0.09
|
|
Options exercised
|
|
|
(1,000
|
)
|
|
|
0.07
|
|
Options forfeited or expired
|
|
|
(950,000
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
19,631,833
|
|
|
|
0.12
|
|
Options granted at market
|
|
|
3,060,000
|
|
|
|
0.04
|
|
Options forfeited or expired
|
|
|
(711,000
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
21,980,833
|
|
|
$
|
0.11
|
|
Of the 21,980,833 options outstanding at December 31,
2012, 15,980,625 are vested and exercisable. At December 31, 2012, the weighted average exercise price of vested options
outstanding was $0.11, the weighted average remaining contractual term (in years) was 6.04 and the aggregate intrinsic value was
$0.
A summary of the non-vested shares as of December 31,
2012 and changes during the year ending December 31, 2012 and 2011 is presented below:
|
|
Non-Vested
Shares
|
|
|
Weighted
Average
Grant-
Date
Fair
Value
|
|
Non-vested at January 1, 2011
|
|
|
5,820,333
|
|
|
$
|
0.19
|
|
Granted
|
|
|
4,900,000
|
|
|
|
0.08
|
|
Vested
|
|
|
(3,412,000
|
)
|
|
|
0.16
|
|
Non-vested at January 1, 2012
|
|
|
7,308,333
|
|
|
$
|
0.14
|
|
Granted
|
|
|
3,060,000
|
|
|
|
0.04
|
|
Vested
|
|
|
(4,118,125
|
)
|
|
|
0.07
|
|
Cancelled
|
|
|
(250,000
|
)
|
|
|
0.08
|
|
Non-vested at December 31, 2012
|
|
|
6,000,208
|
|
|
$
|
0.07
|
|
As of December 31, 2012, the total future compensation
cost related to non-vested awards expected to vest is estimated to be approximately $323,400, $94,275 and $22,463 for the years
ending December 31, 2013, 2014, and 2015 respectively.
The total fair value of shares vested during the
years ended December 31, 2012 and 2011 was approximately $302,525 and $552,935, respectively.
No tax benefit was recognized related to share-based
compensation expense since the Company has never reported taxable income and has established a full valuation allowance to offset
all of the potential tax benefits associated with its deferred tax assets.
The Company leases its office space and manufacturing
facility under various operating leases which have terms expiring on various dates from 2012 through 2017.
Future minimum lease payments with terms in excess
of one year as of December 31, 2012 are as follows:
Year ending
|
|
|
|
December 31,
|
|
|
|
2013
|
|
$
|
202,404
|
|
2014
|
|
|
208,476
|
|
2015
|
|
|
214,730
|
|
2016
|
|
|
221,172
|
|
2017
|
|
|
93,287
|
|
|
|
$
|
940,069
|
|
Rent expense during the years ended December 31,
2012 and 2011 was approximately $135,680 and $64,900, respectively.
|
Note 8.
|
Convertible Notes Payable – Related Parties
|
In February 2009, the Company entered into Convertible
Note agreements (the “Convertible Notes”) with a limited number of accredited investors who are shareholders of the
company. Pursuant to the Convertible Notes, the Company sold an aggregate of $1,250,000 in principal and 1,875,000 warrants (the
“2009 Note Warrants”) to purchase shares of the Company’s common stock. The Convertible Notes are payable in
full on February 26, 2014 and incurred simple interest, payable monthly, at the rate of 8.0% per year through February
26, 2011, and thereafter incur simple interest at the rate of 10.0% per year through maturity. The Convertible Notes may only be
prepaid upon approval of the holders and are convertible at the option of the holders. A mandatory conversion of the Convertible
Notes will occur if the closing price of the Company’s Common Stock is at least $0.50 per share for 30 consecutive trading
days. The conversion price on the Convertible Notes is $0.10 per share, subject to adjustment under standard anti-dilution provisions,
as defined in the agreements.
The 2009 Note Warrants are exercisable at any time
at an exercise price of $0.11 per share and expire on February 26, 2014. The 2009 Note Warrants become immediately exercisable
upon the occurrence of a Change in Control Event, as defined in the warrant agreement. The 2009 Note Warrants contain a cashless
exercise provision.
Using a simulation model of discounted cash flows,
the relative fair value of the Convertible Notes was calculated to be $1,328,325. The fair value of the 2009 Note Warrants was
calculated to be $204,750. The fair value of the 2009 Note Warrants was calculated using binomial lattice valuation model with
the following assumptions: Expected life in years: 5; Estimated volatility: 138% - 163%; Risk-free interest rate: 4.98%; Dividend
yield: 0%.
The proceeds from the Convertible Notes have been
discounted for the relative fair value of the 2009 Note Warrants of $166,395, which was recorded as additional paid-in capital.
The warrant discount is being amortized over the life of the Convertible Notes using the effective interest method. For the years
ended December 31, 2011 and 2012, $34,248 and $37,536 of the warrant discount was amortized to interest expense, respectively.
The total fair value allocated to the Convertible Notes was $1,083,605, of which $406,395 was allocated to a beneficial conversion
feature (“BCF”) and was recorded in additional paid-in capital. A BCF is recorded as a debt discount when the consideration
allocated to the convertible security, divided by the number of common shares into which the security converts, is below the fair
value of the common stock at the date of issuance of the convertible instruments. The BCF is being amortized to interest expense
over the life of the Convertible Notes using the effective interest method. Amortization of the BCF amounted to $79,379 and $86,997
during the years ended December 31, 2011 and 2012, respectively.
The Company paid $80,000 cash to the placement agent
in conjunction with the Convertible Notes issuance. The placement agent also received 1,265,000 warrants at an exercise price of
$.11 per share as additional compensation. The fair value of the warrants issued to the placement agent totaled $132,800, the value
of which, along with the $80,000 in cash, was recorded by the Company as debt issuance costs. The debt issuance costs are being
amortized over the life of the Convertible Notes using the effective interest method. For the years ended December 31, 2011
and 2012, $41,565 and $45,554 of the debt issuance costs was amortized to interest expense. The remaining unamortized debt issuance
costs balance was $104,256 and $58,703 for the years ended December 31, 2011 and 2012, respectively.
The total principal balance outstanding on the 2009
Notes was $1,250,000 at both December 31, 2011 and 2012. The total unamortized discounts resulting from the warrant and BCF were
$284,985 and $160,453 at December 31, 2011 and 2012, respectively.
|
Note 9.
|
Related Party Transactions
|
Placement Agent Fees
As discussed in Note 7, in connection with private
placement offerings of its common stock during 2012 and 2011, the Company paid its placement agent, a company owned by a more than
5% stockholder and officer of the Company, $71,000 and $78,720, respectively. In addition, during 2011 this placement agent was
issued warrants to purchase 3,104,500 shares of Common Stock at an exercise price of $0.05 per share and during 2012 warrants to
purchase 5,041,667 shares of Common Stock at an exercise price of $0.03 per share.
Consulting Fees
The Company entered into a consulting agreement with
a shareholder and officer of the Company for scientific advisory services. The agreement provides for annual payments of $30,000,
payable $2,500 per month. As of December 31, 2012, amounts owed to the shareholder were $2,500 and were included in accounts payable.
The Company also entered into a consulting agreement
with a shareholder to provide strategic and business development assistance. The agreement provides for annual payments of $60,000
payable $5,000 per month. At December 31, 2012, amounts owed to the shareholder for consulting fees were $30,000 and were included
in accounts payable. As of December 31, 2011, amounts owed to the shareholder for consulting fees were $59,861 and were included
in accounts payable. On March 2, 2012, the shareholder converted the amounts owed as of such date for accrued fees to 1,197,220
shares of common stock.
Due to Shareholder
A shareholder advanced the Company $10,000 which
was due as of December 31, 2012 and 2011. Such advance does not bear interest and is due upon demand.
|
Note 10.
|
Segment Information
|
In 2011 and 2012, the Company distinguished its two
main operating segments by entity and the types of products they sell. GeneLink develops and manufactures genetically customized
supplements and skin care products for sale in a variety of market channels. GeneWize was the marketing subsidiary which sells
GeneLink’s products in the multi-level direct selling channel. As noted in Note 11, GeneWize was sold on February 10, 2012.
Subsequent to the sale of GeneWize, the company only operates in one reporting segment. The following table sets forth the net
revenues, operating expenses and pre-tax earnings of our segments for the years ended December 31, 2012 and 2011
|
|
GeneLink
|
|
|
GeneWize*
|
|
|
Inter-Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,785,346
|
|
|
$
|
520,098
|
|
|
$
|
(169,302
|
)
|
|
$
|
2,136,142
|
|
Less: Intersegment revenue
|
|
|
(169,302
|
)
|
|
|
|
|
|
|
169,302
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
1,616,044
|
|
|
$
|
520,098
|
|
|
|
-
|
|
|
$
|
2,136,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,975,518
|
)
|
|
$
|
(76,229
|
)
|
|
|
-
|
|
|
$
|
(3,051,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
169,048
|
|
|
$
|
5,945
|
|
|
|
-
|
|
|
$
|
174,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
241,966
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
241,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets at December 31, 2012
|
|
$
|
1,454,801
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,454,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,879,441
|
|
|
$
|
4,661,886
|
|
|
$
|
(1,856,749
|
)
|
|
$
|
4,684,577
|
|
Less: Intersegment revenue
|
|
|
(1,856,749
|
)
|
|
|
|
|
|
$
|
1,856,749
|
|
|
|
-
|
|
Revenue from external customers
|
|
$
|
22,692
|
|
|
$
|
4,661,886
|
|
|
|
-
|
|
|
$
|
4,684,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,153,389
|
)
|
|
$
|
(676,807
|
)
|
|
|
-
|
|
|
$
|
(3,830,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
51,104
|
|
|
$
|
83,673
|
|
|
|
-
|
|
|
$
|
134,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
41,355
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
41,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets at December 31, 2011
|
|
$
|
2,304,929
|
|
|
$
|
585,692
|
|
|
|
-
|
|
|
$
|
2,779,665
|
|
*2012 amounts are for the period from January 1, 2012 through
the sale on February 10, 2012
|
Note 11:
|
Sale of Subsidiary and Licensing Agreements
|
On October 13, 2011, the Company entered into a Stock
Purchase Agreement (the “Stock Purchase Agreement”) with Capsalus Corp. (“Capsalus”), pursuant to which
the Company agreed to sell 100% of the stock of its wholly-owned subsidiary, GeneWize Life Sciences, Inc. (“GeneWize”).
The Stock Purchase Agreement provided for a purchase price of $500,000 payable at the closing, plus an earn-out of between $1.5
million and $4.5 million, subject to the performance of GeneWize after the closing. The earn-out amount is calculated as the greater
of $25,000 per month or 10% to 15% of GeneWize monthly gross revenues, payable monthly through April, 2017. The effective date
of the closing was February 10, 2012 which was the date final documents were completed following approval of the transaction by
the shareholders of GeneLink. Due to continuing involvement with GeneWize subsequent to the sale, this transaction was not accounted
for as a discontinued operation.
GeneLink recorded a gain on sale of subsidiary as of
February 10, 2012. Consideration for the sale included the $500,000 cash received from Capsalus and an additional $39,272 for working
capital. Additional consideration included the earn-out amount which was valued at $164,358, the Company’s estimate of net
present value of probable cash collections under the agreement. The total consideration of $703,630 was offset by net liabilities
and related costs of sale resulting in a gain on sale of $669,054.
GeneLink, GeneWize and Capsalus also entered into an
Interim Management Agreement dated October 13, 2011, pursuant to which Capsalus managed the operation of GeneWize until the closing
date of February 10, 2012. Pursuant to the Interim Management Agreement, Capsalus was responsible for all expenses and received
all revenues of GeneWize from October 1, 2011 through the date of closing. Capsalus advanced $204,500 to GeneWize prior to December
31, 2011 to fund operations which was recorded as “Advances from Purchaser” on the accompanying balance sheet at December 31,
2011 and an additional $75,000 was advanced to GeneWize by Capsalus prior to the closing of the sale of GeneWize. This amount was
assumed by GeneWize in February 2012 upon the closing of the sale of GeneWize.
On October 13, 2011, GeneLink entered into a License
and Distribution Agreement (the “LDA”) with Gene Elite LLC (“Gene Elite”) which expires in 2017 with successive
five-year renewal options provided Gene Elite meets sales and performance criteria. Pursuant to the LDA, GeneLink granted Gene
Elite the exclusive right to sell certain skin care and nutrition products in the direct sales, multi- level marketing (MLM) and
athletic formula channels. Pursuant to the LDA, the Company received $1,500,000 in license fees, of which $1,000,000 (the “Up-front
fee”) was received during 2011 and $500,000 was received on February 10, 2012, the closing date of the sale of GeneWize.
The LDA provides for $750,000 of the Up-front fee as a Nonrefundable Advance Deposit which accrues interest at 4% per year and
will be paid through product credits or issuance of common stock at market price, at the discretion of Gene Elite. The remaining
$750,000 of the license fees was recorded as “Deferred Revenue - License Fees” on the accompanying balance sheet, which
will be recognized over the term of the LDA beginning on February 10, 2012. As of December 31, 2012 the remaining balance in deferred
revenue was $612,500 and $137,500 of the deferred revenue has been amortized into revenue during 2012.
In connection with the LDA, GeneLink and Gene Elite
entered into a Warrant Purchase Agreement dated October 13, 2011 pursuant to which GeneLink granted Gene Elite warrants to purchase
(i) 6,000,000 shares of common stock of GeneLink at an exercise price of $0.10 per share and (ii) 2,000,000 shares of common stock
of GeneLink at an exercise price of $0.45 per share (collectively, the “non-performance warrants”). In addition, and,
subject to certain performance requirements being satisfied, Gene Elite was granted warrants to purchase 6,000,000 shares of common
stock of GeneLink at an exercise price of $0.20 per share (the “performance warrants”). The 8,000,000 shares underlying
the non-performance warrants, valued at $460,000 at issue date, are accounted for as “Prepaid Sales Incentives” on
the accompanying balance sheet and will be amortized over the life of the licensing agreement. As of December 31, 2012, $383,330
of the prepaid sales incentive remained on the balance sheet as an asset and $76,670 was amortized into expense during 2012.
The non-performance warrants were valued using a Binomial
Lattice Option Valuation Technique (“Binomial”) and the following assumptions:
Fair market value of asset
|
|
$
|
0.06
|
|
Exercise price
|
|
$
|
0.10 - .0.45
|
|
Expected life
|
|
|
5.0 Years
|
|
Equivalent volatility
|
|
|
164
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Risk-free rate
|
|
|
4.5
|
%
|
The issuance date of the performance warrants was
the date of closing, February 10, 2012, and management currently does not expect the performance warrants to be earned.
On February 10, 2012, GeneLink, Gene Elite and GeneWize
entered into a sub-licensing and distribution agreement (SLDA) which grants GeneWize the exclusive rights contained in the LDA
to market and sell certain skin care and nutrition products in the direct sales, multi- level marketing (MLM) and athletic formula
channels. The term of the SLDA is concurrent with the term of the LDA including the successive renewal options granted under the
LDA.
Through December 31, 2012, Capsalus has paid $165,900
of the earn-out amount. Capsalus has failed to pay any earn-out due subsequent to June 30, 2012. The Company is in discussions
with Capsalus regarding this receivable.
Note 12. Contingencies
In March 2011, the Company received a Civil Investigative
Demand (“CID”) consisting of interrogatories and a request to produce documents from the FTC as part of its investigation
into unnamed persons engaged directly or indirectly in the advertising or marketing of dietary supplements, foods, drugs, devices,
or any other product or service intended to provide a health benefit or to affect the structure or function of the body. The Company
expended significant resources in 2011 and into 2012 in an attempt to comply with this request.
During 2012, the staff of the FTC (the “staff”)
investigated the Company for potential violations of Sections 5 and 12 of the Federal Trade Commission Act, 15 U.S.C. Sections
45 and 52, in connection with the advertising, marketing and sale of its DNA Assessments and genetically customized nutritional
supplements and skin repair serum products. The Company strongly believes its advertising and marketing are lawful and appropriate.
Following additional discussions with the staff,
on October 26, 2012, in order to resolve this matter, the Company entered into a proposed consent decree with the Federal Trade
Commission with regard to the FTC’s investigation. The proposed order is subject to approval by the full Commission.
The resolution of this matter may involve limitations
on GeneLink’s activities, including but not limited to restrictions on the Company’s marketing claims and practices
and the institution of monitoring obligations. These restrictions are also anticipated to apply to the marketing claims and practices
of GeneLink’s marketing partners and distributors. The pending consent agreement does not include any fine and/or economic
redress.
In September 2009, the Company brought action against
two prior law firms in New Jersey Superior Court, alleging that their failure to timely provide legal services and make or authorize
required filings caused the Company to lose valuable Japanese and U.S. patent rights. In March 2010, the Company voluntarily dismissed
one of the law firms from the action. In August 2010, the remaining law firm filed a counterclaim for alleged unpaid legal fees
owed to it by the Company. The defendant attempted to remove the matter to U.S. District Court, but in it was remanded back to
the New Jersey Superior Court. The defendant appealed the remand decision, but in 2012 the Federal Circuit dismissed the defendants
appeal. In July 2012 the parties have agreed to mutually dismiss all claims against each other with prejudice.
In the fourth quarter of 2012, we switched our provider
of genetic testing laboratory services. Our former provider of genetic testing laboratory services claims that we owe it approximately
$150,000 under our arrangement with such company due to the alleged failure to meet certain minimum volume requirements. We believe
that we have valid defenses to these claims and do not owe our former laboratory such amounts.
In November 2012, we were sued in the Circuit Court
for the 11
th
Judicial Circuit in and for Miami – Dade County, Florida by a former consultant, alleging breach
of contract and unjust enrichment. In January 2013, we filed a motion to dismiss the complaint. The complaint that was filed does
not state an amount that the former consultant is seeking from us. We believe that this amount is less than $25,000.
Note 13. Going Concern and Management’s Plans
The opinions of the Company’s
independent registered public accounting firm on the audited financial statements as of and for the years ended December 31, 2012
and 2011 contain an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going
concern.
The Company has a working capital
deficit of $1,066,784, has incurred recurring operating losses since inception including a loss of $3.0 million in 2012 and had
an accumulated deficit at December 31, 2012 of $27,612,062. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
To execute the Company's growth
plans, it may need to seek additional funding through public or private financings, including debt or equity financings, and through
other means, including collaborations and license agreements. Additional financing may not be available when needed, or if available,
the Company may not be able to obtain financing on favorable terms. The Company's ability to continue as a going concern is dependent
upon the achievement of its marketing plans to enhance sales and its ability to raise capital. Management continues to work with
existing market partners as well as pursuing additional distribution opportunities. Management also believes it has the opportunities
before it to increase sales which will provide a foundation for raising additional capital. The Company’s financial statements
have been prepared on the basis that it is a going concern, which assumes continuity of operations and the realization of assets
and satisfaction of liabilities in the ordinary course of business. The financial statements do not include any adjustments that
might result if the Company was forced to discontinue its operations.
Note 14. Subsequent
Events
On
January 28, 2013 GeneLink accepted the resignation of Susan Hunt as Interim Chief Financial Officer of the Company effective as
of February 8, 2013. An interim Chief Financial Officer, Dr. Bernard L. Kasten, Jr., M.D. was appointed effective February 8,
2013.
In
November 2012, we were sued in the Circuit Court for the 11th Judicial Circuit in and for Miami – Dade County, Florida by
a former consultant, alleging breach of contract and unjust enrichment. In January 2013, we filed a motion to dismiss the
complaint. The complaint that was filed does not state an amount that the former consultant is seeking from us. Although
we believe that this amount is less than $25,000, we are unable at this time to determine the amount alleged to be owed by us
to the former consultant.
On March 14, 2013,
the Court granted GeneLink’s Motion to Dismiss or in the Alternative a More Definite Statement. No additional amount has
been accrued as of December 31, 2012 related to this suit.