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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File No. 000-30518

 

GENELINK, INC.

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(Exact name of registrant specified in its charter)

 

 

(800) 558-4363

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

 

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GENELINK, INC. AND SUBSIDIARIES

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GENELINK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

ASSETS

 

See Notes to Condensed Consolidated Financial Statements

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GENELINK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

See Notes to Consolidated Financial Statements

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GENELINK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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GENELINK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

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GENELINK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Financials should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (SEC). The results of operations for the three month and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2013 or for any future period.

NOTE 1 – ORGANIZATION

 

The Company is a Pennsylvania corporation that became a publicly traded company in 1999. It is listed on the OTC Exchange under the symbol “GNLK.” With corporate offices and manufacturing facilities located in Orlando, Florida, the Company is a leader in personalized, genetics-based health and wellness. The Company has developed targeted DNA assessments that measure some of an individual’s DNA variations. Certain gene variants, called SNP’s (“snips”), cause a gene to function differently from the norm by affecting biochemical pathways or altering the production of key proteins that regulate the way other processes in our bodies work. These SNPs may have a significant impact on overall wellness of an individual client or customer. The Company’s scientists use the information from the Company’s DNA assessments on each client to formulate customized products to address key areas of their health based on their individual DNA.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNT POLICIES

 

Principles of consolidation:

 

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

 

Use of estimates:

 

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

 

Cash and cash equivalents:

 

Highly liquid instruments, purchased with a maturity of three months or less, are considered to be cash equivalents.  At times, cash and cash equivalents may exceed federally insured limits. The Company has not experienced any losses on such accounts.  All non-interest bearing cash balances were fully insured at September 30, 2013.

 

Accounts receivable:

 

Accounts receivable includes amounts due from the Company’s market partners, foru and geneME.

 

Inventory:

 

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

 

Property and equipment:

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged against operations.  Renewals and betterments that materially extend the life of the assets are capitalized.  Depreciation is computed using the straight-line method over the estimated useful lives of 3 to 5 years of the related assets or the lesser of the expected life or term of the lease as to leasehold improvements.

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Intangible assets:

 

Intangible assets include costs incurred to apply and obtain patents for its products. Patents are amortized over the estimated useful life of the asset, on a straight-line basis.

 

Deferred loan costs:

 

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

 

Long lived assets:

 

The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable.  An impairment loss would be recognized when estimated future cash flows expected to result from the use of an asset and its eventual disposition is less than its carrying amount. The Company has not identified an impairment of any such assets for the nine months ended September 30, 2013 or the nine months ended September 30, 2012.

 

Revenue recognition:

 

The Company recognizes revenues in the following methods:

 

·

For product sales, revenue is recognized upon shipment of those products.

·

Licenses fees are recognized as earned and recorded based upon the terms of the underlying licensing agreements. Sales discounts are recognized and recorded based upon the terms of the underlying licensing agreements.

 

Research and Development:

 

Research and development costs are expensed as incurred.

 

Advertising:

 

The Company expenses advertising when incurred.

 

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

 

On July 1, 2013, the company issued a total of 2,600,000 stock options. Of those options issued, 1,250,000 options vested immediately. Such options were valued at $0.01 cents per option using a Black Scholes valuation model and the following assumptions, a risk free rate of 2.5%, a dividend rate of zero, annualized volatility of 205%, exercise price of $0.03, market price of $0.01 and an expected term of five years.  The total expense associated with this option issuance was $9,886.

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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:

 

 

Income taxes:

 

The Company has not recorded current income tax expense or benefit due to the generation of net operating losses and the consideration that the benefits of assets may not be realized. 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, 2009 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 recorded a beneficial conversion feature (“BCF”) related to the issuance of convertible debt instruments that have conversion features at fixed rates that were 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.

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·	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 September 30, 2013. 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 assets or liabilities.

 

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

 

During 2012, the Company issued warrants in connection with a license and distribution agreement (see Note 3) and engaged a third party to complete a valuation of those warrants which were recorded as Prepaid Sales Incentive on the accompanying balance sheet. The valuation was completed using Level 2 inputs.

NOTE 3 – 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 the Company.  Due to continuing involvement with GeneWize subsequent to the sale, this transaction was not accounted for as a discontinued operation.

The Company 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.

The Company, 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, the Company 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, the Company 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 September 30, 2013 the remaining balance in deferred revenue was $500,000 and $37,500 of the deferred revenue has been amortized into revenue during the third quarter of 2013.

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In connection with the LDA, the Company and Gene Elite entered into a Warrant Purchase Agreement dated October 13, 2011 pursuant to which the Company granted Gene Elite warrants to purchase (i) 6,000,000 shares of common stock of the Company at an exercise price of $0.10 per share and (ii) 2,000,000 shares of common stock of the Company 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 the Company 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 September 30, 2013, $314,327 of the prepaid sales incentive remained on the balance sheet as an asset and $23,001 was amortized into expense during the third quarter of 2013.

The non-performance warrants were valued using a Binomial Lattice Option Valuation Technique (“Binomial”) and the following assumptions:

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, the Company, 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.

During 2012, the Company received $165,000 of earn-out payments related to the sale of the GeneWize subsidiary. During the quarter ended September 30, 2013, the Company received an additional $150,000 of earn-out payment which was recorded in the gain on sale of subsidiary in other income in the periods received as the amount is deemed to be additional purchase price consideration. Additionally, earn-out of $150,000 for the quarter ended June 30, 2013 was reported in revenue for the second quarter but has since been reclassified and recorded in gain on sale of subsidiary in other income for the nine month period ending September 30, 2013, consistent with the third quarter presentation and bringing the total earn-out paid year-to-date September 30, 2013 to $300,000.

NOTE 4 – RELATED PARTIES

Consulting Fees:

The Company has a consulting agreement with a shareholder, director, and officer of the Company for scientific advisory services. The agreement provides for annual payments of $36,000, payable $3,000 per month plus expenses. As of September 30, 2013 amounts owed to the shareholder were $26,090 and were included in accounts payable.

The Company has a consulting agreement with a shareholder and officer of the Company for medical advisory services. The agreement provides for annual payments of $24,000, payable $2,000 per month plus expenses. As of September 30, 2013, amounts owed to the shareholder were $18,000 and were included in accounts payable.

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The Company also has a consulting agreement with a shareholder to provide strategic and business development assistance. In months where services are provided, the fee is $5,000 per month plus expenses for such services. At September 30, 2013, amounts owed to the shareholder for consulting fees were $78,196 and were included in accounts payable.  In connection with the stock offerings during the nine months ended September 30, 2013, the Company also issued warrants to acquire 750,000 shares of Common Stock at an exercise price of $0.03 per share to First Equity Capital Securities, Inc. (“First Equity”), as placement agent.  Such warrants were valued at $0.009 cents per warrant using a Black Scholes valuation model and the following assumptions, a risk free rate of 2%, a dividend rate of zero, annualized volatility of 221%, exercise price of $0.03, market price of $0.01 and an expected term of three years.  The total expense associated with the transaction was $6,320

Due to Shareholder:

A shareholder had previously advanced the Company $10,000.  Such advance does not bear interest and is due upon demand.

NOTE 5 - CONTINGENCIES

On October 26, 2012, the Company entered into a proposed consent order with the staff of the Federal Trade Commission with regard to the previously reported investigation of certain advertising and sales practices. On May 22, 2013 and again on August 7, 2013, the Commission orally informed counsel for the Company that the Commission desired to modify certain provisions of the proposed agreement. After review of the proposed modified provisions, the Company signed modified Agreements Containing Consent Order on June 7, 2013 and again on August 8, 2013. The pending consent order does not include any fine and/or economic redress. The proposed agreement is subject to approval by the full Commission.

In 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 failure to meet certain minimum volume requirements.  Although we believe that we have valid defenses to these claims and do not owe our former laboratory any amounts, there is no assurance that we will be able to resolve such a dispute amicably or on terms that are acceptable to us.

 

Previously, the Company reported on a claim pending in the Circuit Court of the 11^th Judicial Circuit in and for Miami – Dade County, Florida by a former consultant, alleging breach of contract and unjust enrichment.  On October 31, 2013, the court denied our Motion to Dismiss their Second Amended Complaint (our third motion to dismiss). The court announced that we had 20 days to file our answer and affirmative defenses.  Currently, the parties are participating in the discovery phase of the litigation. Although we believe that the amount in dispute is likely to be less than $25,000, we are unable at this time to determine the amount alleged to be owed by us to the former consultant.

NOTE 6 – 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 $1,471,311 as of September 30, 2013. Although the Company continues to work on reducing a deficit, the Company also understands that there is still a deficit and many variables contribute to that deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company also has a concern about the ability of the purchaser and operator of GeneWize to pay the earn-out related to the purchase.  As of the date of this document, it is estimated that GeneLink is owed over $500,000 in earn out.

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.

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NOTE 7 – SUBSEQUENT EVENTS

Effective November 12, 2013, the Board of Directors of the Company appointed Michael G. Smith the Chief Operating Officer and Interim Chief Financial Officer. Prior to that, Michael G. Smith held the title of Sr. Vice President of Operations for the Company since September 1, 2012.

Statements in this Report that relate to future results and events are based on the Company’s current expectations.  Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties.  For a discussion of factors affecting the Company’s business and prospects, see “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors Affecting the Company’s Business and Prospects” in the 2012 Form 10-K.

 

Operating results for the three-month and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year.

MANAGEMENT OVERVIEW

Genomic science took a formal and important step forward in 1990 with the establishment of the Human Genome Project. This enormous undertaking was the combined effort between the United States Department of Energy and the National Institutes of Health. The project was based on the mission of pursuing a greater understanding of individual health risks. The Human Genome Project showed that our physical uniqueness is largely due to variations in our DNA called single nucleotide polymorphisms or SNPs. The DNA between any two humans is about 99.1% identical. Except for identical twins, variations in just a small fraction of our DNA account for the major ways in which one human is different from another. Scientists have identified about 1.4 million locations where single-base DNA differences occur in humans.

Founded in 1994, the Company initially was a developmental stage company engaged in the development of genetics-based assessments for pharmaceutical applications and DNA storage (banking) for that purpose. Beginning in 1999, the Company expanded its focus to include non-medical, consumer-oriented applications of its proprietary genetic assessments. The Company filed a series of patents starting in 2001 which support the Company’s proprietary position in genetic-based assessments and products. The Company determined that the better business model was to provide products to customers that provided quality, user-level assessment capabilities and nutrition-based and topical-based solutions from resulting DNA-based findings.

The Company’s innovations have led the Company to develop a proprietary mass-customization product manufacturing system for nutritional supplements and skin care product delivery. This mass-customization is the process of manufacturing “one at a time” formulations based on an individual’s DNA.

The Company is an industry game-changer, well-positioned in a market searching for solutions to soaring healthcare costs. It is truly a wellness company in a sea of disease-treatment companies. In its simplest form, the Company delivers a new generation of nutrition and skin care products in personally-customized forms, manufactured specifically to key elements of the individual’s DNA.

In doing so, the Company utilizes some of the most significant, highest quality and most scientifically supported ingredients available. In the case of nutrition, the current DNA-customized nutritional supplement product may utilize up to 89 ingredients. The Company skin serum currently contains up to 16 naturally-derived plant-based ingredients. Each user gets what he or she needs, avoids ingredients he or she may not need, and can now know what could work best for his or her individual body - saving cost, eliminating guesswork, and providing peace of mind. The Company’s history since 2008 of providing genetically customized nutrition and skin care solutions to more than 40,000 people is compelling evidence of the marketplace viability of the Company’s approach to personalized health and wellness.

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In layman’s terms, over time the Company should be able to see deeper and deeper into the layers of health issues revealed by genetic information - then deliver more and more finely-tuned formulations. Aside from a continual expansion of its initial product offering, this process will result in the ultimate goal of “condition specific” nutraceuticals - much like the vast array of pharmaceutical medicines we are familiar with today, but with targeted accuracy and without the effects of synthesized chemicals that often have severe and unwanted side effects.

As of September 30, 2013, the Company continued to be a leading solution provider in the genetically customized nutritional and personal care marketplace. In 2012, the Company shifted its focus to become a wholesale provider of science, technology, and DNA personalized products. Approximately one year after moving production in-house and fifteen months after completing the sale of GeneWize. The Company recorded significantly reduced losses. This was due in part to a combination of cost cutting and process improvement programs which were implemented, resulting with significantly lower expense. More details are provided below in Results of Operations.

In the quarter, the Company focused on supporting its two primary marketing partners, foru and geneME. These partners account for 88% and 11% of total revenues respectively. This included expanding development of new products as well as refinement of internal operations, including manufacturing, information technology, partner care, and compliance with the goal being to increase revenue and lower costs. The Company also concentrated on working with our marketing partners to refine their marketing materials and approach to support anticipated sales efforts and also to comply with the proposed consent orders with the Federal Trade Commission.

The Company also continued to pursue additional licensing agreements both in the US and internationally while aggressively working on initiatives to increase distribution of our Dermagenetics line of products.

RESULTS OF OPERATIONS

 

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2013 AND THE THREE MONTHS ENDED SEPTEMBER 30, 2012

 

Revenues:

 

Revenues decreased $130,334 or 31% for three months ended September 30, 2013 as compared to the same three months in 2012. There are four primary reasons for the decrease in revenue:

 

·

Revenue from marketing partner foru was responsible for an $88,650 or 35% decrease in revenues in the quarter over the same period in 2012. Management changes at foru and a move from the GeneWize brand to foru slowed the sales efforts of the field. Additionally, delays and lost orders due to failure of foru to make the required payments contributed to the decline in revenue.

 

·

geneME product sales increased $23,541 for the quarter over same period in 2012. The increase in sales is attributed to increased marketing efforts.

 

·

Dermagenetics saw sales decrease $6,986 or 61% in the quarter over the same period in 2012. The decrease was a result to a change in the sales force and a restructuring of the business plan. Although future sales are uncertain, significant progress continues to be made for the re-launch of the brand.

 

·

Revenue from genetic assessments and shipping for the quarter decreased $17,005 or 31% and $33,734 or 43%, respectively, over the same period in 2012. foru’s decrease in new orders attributed to the variance.

 

Cost of Goods Sold:

 

Cost of Goods Sold (“COGS”) decreased $292,589 or 57% in the third quarter of 2013 compared to the same period in 2012. foru accounted for $90,261 or 47% of the decrease in COGS that coincided with their decreased unit sales. The cost of goods associated with geneME increased $12,417 or 380% relative to the increase in revenue for the quarter. Assessments accounted for $53,894 or 60% of the reduction. In 2012, the Company incurred additional costs associated with processing the assessments due to low volumes. A $123,983 inventory adjustment was recorded in the third quarter of 2012. The adjustment was due to reconciliation of inventory after moving inventory from a third-party to in-house. Shipping was $16,530 or 33% lower in the third quarter of 2013 compared to the same period in 2012 as a result of lower volume of orders.

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Gross Profit:

 

Gross Profit decreased $162,255 or 33%. The reduction in COGS mentioned above more than offsets the reduction in revenue decreasing the variance for the third quarter of 2013 as compared to the same period in 2012.

Expenses:

 

Total operating expenses were $126,468 or 16% lower in the third quarter of 2013 than the same period in 2012. The variances are broken down into several categories:

 

·

Legal – A decrease of $45,585 or 59% was realized due to the lower demand of legal services primarily as a result of pending resolution of the investigation of the Company by the FTC.

 

·

Wages and Benefits – Reductions in staff accounted for the decrease of $40,934 or 22%.

 

·

Consultants – The same trend continued as fewer consultants were utilized resulting in $95,491 or 76% in decreased expenses.

 

·

Research and Development – The decrease of $44,793 or 62% was due to having one fewer employee assigned to R&D in 2013. The Company continues to employ a full-time Genomic Scientist as well as support a 10 person scientific board and outside consultants to work on genetic research and formulations of new products.

 

·

Information Technology – IT related costs continued to drop as compared to 2012 resulting in a decrease of $23,757 or 61%.

 

·

Stock Based Compensation - $87,654 or 58% additional stock based compensation was recorded.

 

Operating Losses:

 

The Company incurred an operating loss of $603,317 for the three months ended September 30, 2013, as compared to an operating loss of $892,040 for the three months ended September 30, 2012, a positive change of $288,723 or 32%. The Company made a concerted effort to support its marketing partners in achieving their goals while at the same time focusing on containing expenses. Although revenues declined in the third quarter of 2013 as compared to the same period in 2012, the ability to contain COGS and expenses enabled the positive change.

 

Net Income Losses:

 

The Company incurred a net loss of $539,292 for the three months ended September 30, 2013 as compared to a net loss of $974,386 for the three months ended September 30, 2012, a decrease of $435,094 or 45%. The net loss in the third quarter of 2013 was reduced by $150,000 due to receipt of earn-out payments as a result of the sale of GeneWize.

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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2012

 

Revenues:

 

Revenues decreased $557,103 or 32% for nine months ended September 30, 2013 as compared to the same period in 2012. The reason for the decrease is as follows:

 

·

As previously discussed, the sale of GeneWize was complete in the first quarter of 2012. Revenue from GeneWize while still owned by the Company and marketing partner foru decreased $609,055 or 48%. $426,546 of the decrease is attributed to the sale of GeneWize and change in business model. The remaining decrease was attributed to lower sales.

 

·

geneME product sales increased $81,509 over the same nine month period in 2012. The increase in sales is attributed to increased marketing efforts.

 

Cost of Goods Sold:

 

Cost of Goods Sold (“COGS”) decreased $398,823 or 32% in the third quarter of 2013 compared to the same period in 2012. foru accounted for $188,629 or 33% of the decrease in COGS that coincided with their decreased revenues and converting to the wholesale business model. $123,983 inventory adjustment was recorded in the third quarter of 2012. The adjustment was due to reconciliation of inventory after moving inventory from a third-party to in-house. Shipping was $118,177 or 50% lower in the third quarter of 2013 compared to the same period in 2012 as a result of lower volume of orders and converting to the wholesale business model.

 

Gross Profit:

 

Gross Profit decreased $158,281 or 33%. $353,083 of the gross profit variance is attributed to the sale of GeneWize. The pro forma below details the Revenue, COGS, and Net Loss without the sale of GeneWize.

 

Expenses:

 

Total operating expenses were $1,253,524 or 43% lower in 2013 than the same period in 2012. The variances are broken down into several categories:

 

·

GeneWize Affiliates – $498,513 of expenses were recorded in 2012 for GeneWize affiliates. Since the sale of GeneWize, the Company no longer has affiliate expenses.

 

·

Wages and Benefits – Reductions in staff as a result of attrition and employee cut backs as a result of the sale of GeneWize and internal reorganization accounted for the decrease of $328,449 or 42%.

 

·

Legal – A decrease of $264,385 or 76% was realized primarily because of the pending resolution of the investigation of the Company by the FTC.

 

·

Consultants – A decrease of $186,651 or 58% was a result of reducing the number of consultants engaged in 2013 as compared to 2012. Additionally, consultants were used during the first quarter of 2012 to assist in the sale of GeneWize and those services were not needed in 2013.

 

·

Information Technology – Changes to the operations and ongoing cost cutting resulted in a decrease of $106,305 or 66% in IT related expenses.

 

·

Research and Development – The decrease of $83,480 or 56% was due to having one fewer employee assigned to R&D in 2013. The Company continues to employ a full-time Genomic Scientist as well as support a 10 person scientific board.

 

·

Dermagenetics – An increase of $58,551 or 71% was due to an increased effort to re-launch the product offerings.

 

·

Facility Expenses – As a result of moving production in-house, the Company experienced $38,720 or a 45% increase in costs.

 

·

Stock Based Compensation - $134,492 or 64% additional stock based compensation was recorded.

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Operating Losses:

 

The Company incurred an operating loss of $1,350,998 for the nine months ended September 30, 2013, as compared to an operating loss of $2,446,241 for the nine months ended September 30, 2012, a positive change of $1,095,243 or 45%. The Company made a concerted effort to support its marketing partners in achieving their goals while at the same time focusing on containing expenses. This effort coupled with the sale of GeneWize and move to a wholesale business model accounting for the variance.

 

Net Income Losses:

 

The Company incurred a net loss of $1,218,199 for the nine months ended September 30, 2013 as compared to a net loss of $2,042,689 for the nine months ended September 30, 2012, a decrease of $824,490 or 40%. The additional variance came from realizing $669,054 gain on the sale of GeneWize in 2012 while receiving $300,000 in earn-out payments.  Additionally, the Company received a settlement of $87,500 in 2013 for a claim against its former auditors.

 

Pro Forma:

 

Actual results for the nine months ended September 30, 2013 compared to pro forma results for nine months ended September 30, 2012 (excluding GeneWize through February 10, 2012):

Consistent with the change to the wholesale business model, the pro forma results show a reduction in operating losses of $1,019,014 or a 43% improvement.

LIQUIDITY AND CAPITAL RESOURCES

 

For the nine months ended September 30, 2013, the Company’s primary liquidity requirements have been the funding of its corporate overhead, including the payment of staff compensation, operating expenses, and accounts payable.

Cash and cash equivalents at September 30, 2013 amounted to $127,559 as compared to $158,468 at December 31, 2012, a decrease of $30,909. The Company’s operating activities utilized $366,909 of cash in the first nine months of 2013 as compared to $1,619,124 in the first nine months of 2012, a decrease of $1,252,215 or 77%.  This decrease in cash and cash equivalents needed is primarily related to the details outlined above describing the operating losses.

Investing activities in 2012 included $539,272 in proceeds from the sale of GeneWize being offset by $237,461 in capital expenditures to move the production facility in-house.

The Company continues to monitor all aspects of the business. The immediate priority of the Company is to achieve a level where cash flow from operating activities is at worst break-even. The Company is evaluating if additional funds are needed to further implement its sales and marketing strategy, enhancements to manufacturing, research and development, and for other working capital needs. If the Company determines it needs additional funding and is not able to secure such additional funding, it will continue to realize negative cash flow and losses and may not be able to continue operations.

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·

Cash and cash equivalents decreased from $158,468 to $127,559. A variance of $30,909 or 20%.

 

·

Accounts receivable increased from $77,966 to $146,350. A variance of $68,384 or 88%. We are in continuous discussion with our market partners to ensure timely payment of invoices.

 

·

Inventory decreased $56,006 or 14%. $36,380 of that variance was due to expired inventory being written off in the first two quarters of 2013.

 

·

Property and plant depreciation accounted for a $54,330 or 21% decrease and the assets are being depreciated.

 

·

Prepaid sales incentive decreased $69,003 or 24% as the non-performance warrants are being amortized.

 

·

Loan costs amortization decreased $37,013 or 63%.

 

Liabilities increased $371,764 or 9% for the nine months ended 2013 as compared to the same period in 2012. The primary reason for the variance is as follows:

 

·

Accounts payable was up $293,642 or 29%. $92,000 was due to legal expenses as related to the FTC investigation. $62,000 was due to accruing expenses for the consultants mentioned in Related Party Transactions in Note 4 of this filing. $71,000 of the increase was due to the Company’s lab supplier in 2012 accruing penalties for failing to reach required minimums and $49,000 of the increase in accounts payable was due to the Company’s new lab.

 

·

Accrued interest was up $116,188 or 25% due to interest accruing on the convertible note.

 

·

License fees being received and amortized over the life of the agreement to sell GeneWize accounted for a $112,500 or 24% decrease in liabilities.

 

·

Notes payable increased $101,183 or 9% as the beneficial conversion and warrant discount is being amortized over the term.

 

FACTORS AFFECTING THE COMPANY’S BUSINESS AND PROSPECTS

 

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

 

There are a number of factors that affect the Company’s business and the result of its operations. These factors include economic, business, and regulatory conditions; the financial health and success of the Company’s existing marketing partners; the level of acceptance of the Company’s products and services; the rate and commercial applicability of advancements and discoveries in the genetics field; and the Company’s ability to enter into strategic alliances with companies in the consumer products and genetics industry.

 

As part of ongoing negotiations, inter alia, GeneLink has agreed, for a limited period of time. to provide foru with certain discounts on wholesale product pricing in exchange for timely payment of the monthly earn out. The Company remains concerned about the ability of the purchaser and operator of GeneWize to pay the earn-out related to the purchase.  As of the date of this document, it is estimated that GeneLink is owed over $500,000.  If these payments cannot be made, then this will raise substantial doubt about the Company’s ability to continue as a going concern.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Dr. Bernard L Kasten, Jr., the Company’s Chief Executive Officer and Michael G. Smith, the Company’s Interim Chief Financial Officer has concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15€ and 15d-15€), that such disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There has been no change in the Company’s internal controls over financial reporting during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

THE COMPANY, INC. AND SUBSIDIARIES

 

 

ITEM 1 – LEGAL PROCEEDINGS

 

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 January of 2013 the parties exchanged an executed Settlement Agreement and Mutual Releases as well as a Stipulation dismissing all claims against each other with prejudice.

On October 26, 2012, the Company entered into a proposed consent order with the staff of the Federal Trade Commission with regard to the previously reported investigation of certain advertising and sales practices. On May 22, 2013 and again on August 7, 2013, the Commission orally informed counsel for the Company that the Commission desired to modify certain provisions of the proposed agreement. After review of the proposed modified provisions, the Company signed modified Agreements Containing Consent Order on June 7, 2013 and again on August 8, 2013. The pending consent order does not include any fine and/or economic redress. The proposed agreement is subject to approval by the full Commission.

In 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 failure to meet certain minimum volume requirements.  Although we believe that we have valid defenses to these claims and do not owe our former laboratory any amounts, there is no assurance that we will be able to resolve such a dispute amicably or on terms that are acceptable to us.

 

Previously, the Company reported on a claim pending in the Circuit Court of the 11^th Judicial Circuit in and for Miami – Dade County, Florida by a former consultant, alleging breach of contract and unjust enrichment.  On October 31, 2013, the court denied our Motion to Dismiss their Second Amended Complaint (our third motion to dismiss). The court announced that we had 20 days to file our answer and affirmative defenses.  Currently, the parties are participating in the discovery phase of the litigation. Although we believe that the amount in dispute is likely to be less than $25,000, we are unable at this time to determine the amount alleged to be owed by us to the former consultant.

 

ITEM 1A – RISK FACTORS

 

None.

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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In the quarter ended September 30, 2013, the Company sold an aggregate of 6,666,667 shares of Common Stock at a price of $0.03 per share pursuant to a Confidential Private Offering Memorandum and received gross proceeds of $200,000 from an investor as described below.

 

In connection with the above offering, the Company incurred a total of $8,000 in placement fees and expenses and issued warrants to acquire 333,333 shares of Common Stock at an exercise price of $0.03 per share to First Equity Capital Securities, Inc., as placement agent, in connection with the sale of these units.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – (REMOVED AND RESERVED)

 

ITEM 5 – OTHER INFORMATION

 

None.

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THE COMPANY, INC. AND SUBSIDIARIES

 

 

 

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

* * * * * *

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

(Registrant)

 

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