10QSB 1 w65538e10qsb.txt FORM 10-QSB FOR THE QUARTER ENDED 9/30/2002 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ` FORM 10-QSB QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 COMMISSION FILE NO. 0-28077 GENELINK, INC. ---------------------------------------------- (Name of Small Business Issuer in its charter) PENNSYLVANIA 23-2795613 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 S. Thurlow Street Margate, New Jersey 08402 ------------------- ----- (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER: (609) 823-6991 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of Shares of Common Stock Outstanding on November 1, 2002 18,775,283 ---------- Transitional Small Business Disclosure Format Yes [ ] No [X] 1 GENELINK, INC. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements. Balance Sheets at September 30, 2002 (unaudited) and December 30, 2001 Statements of Operations for the three months and nine months ended September 30, 2002 and 2001 (unaudited) Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited) Notes to Financial Statements 2 GENELINK, INC. BALANCE SHEETS
(Unaudited) September 30, December 31, 2002 2001 ----------- ----------- ASSETS Cash $ 2,060 $ 121,434 Accounts receivable 13,192 1,448 Inventory 29,032 10,089 Prepaid expenses 141,130 152,878 ----------- ----------- Total Current Assets 185,414 285,849 Property and equipment 73,662 55,662 Advance to related party 272,021 0 Other assets 32,358 23,881 ----------- ----------- $ 563,455 $ 365,392 =========== =========== LIABILITIES Accounts payable and accrued expenses $ 181,829 $ 88,816 Accrued payroll taxes 60,152 11,593 ----------- ----------- Total Current Liabilities 241,981 100,409 Accrued compensation 308,951 357,807 Loans payable-affiliates 53,000 58,000 ----------- ----------- 603,932 516,216 ----------- ----------- STOCKHOLDERS' DEFICIT Common stock, $.01 par value, 75,000,000 shares authorized 18,432,296 and 16,801,590 shares issued, 18,236,116 and 16,705,410 outstanding as of September 30, 2002 and December 31, 2001, respectively 184,323 168,015 Treasury stock, 196,180 and 96,180 shares as of September 30, 2002 and December 31, 2001, respectively (205,860) (109,860) Additional paid in capital 5,912,460 5,279,271 Stock subscriptions receivable (962,179) (920,189) Stock warrants 647,127 350,334 Deferred compensation 0 (200,000) Deficit (5,616,348) (4,718,395) ----------- ----------- (40,477) (150,824) ----------- ----------- $ 563,455 $ 365,392 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 3 GENELINK, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 2002 2001 ------------------------------- ---- ---- REVENUE $ 26,598 $ 2,488 COST OF GOODS SOLD 9,388 591 ------------ ------------ GROSS PROFIT 17,210 1,897 ------------ ------------ EXPENSES Selling, general and administrative 95,928 108,368 Consulting 56,350 2,461 Professional fees 43,917 45,323 Advertising and promotion 19,767 29,987 Amortization and depreciation 2,412 1,006 ------------ ------------ 218,374 187,145 ------------ ------------ INTEREST EXPENSE 0 236 ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (201,164) (185,484) ------------ ------------ PROVISIONS FOR INCOME TAXES 0 0 ------------ ------------ NET LOSS $ (201,164) $ (185,484) ============ ============ NET LOSS PER SHARE BASIC AND DILUTED $ (0.01) $ (0.01) ============ ============ Weighted average common shares and diluted potential common shares 18,233,341 14,969,447 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 4 GENELINK, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 2002 2001 ------------------------------ ---- ---- REVENUE $ 34,856 $ 13,951 COST OF GOODS SOLD 10,622 1,815 ------------ ------------ GROSS PROFIT 24,234 12,136 ------------ ------------ EXPENSES Selling, general and administrative 573,586 498,835 Consulting 159,872 17,353 Professional fees 109,005 107,910 Advertising and promotion 72,910 58,248 Amortization and depreciation 6,814 3,019 ------------ ------------ 922,187 685,365 ------------ ------------ INTEREST EXPENSE 0 53,382 ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM (897,953) (726,611) ------------ ------------ EXTRAORDINARY ITEM- FORGIVENESS OF DEBT 0 14,010 ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (897,953) (712,601) PROVISION FOR INCOME TAXES 0 0 ------------ ------------ NET LOSS $ (897,953) $ (712,601) ============ ============ NET LOSS PER SHARE BASIC AND DILUTED $ (0.05) $ (0.05) ============ ============ Weighted average common shares and diluted potential common shares 17,655,348 14,026,283 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 5 GENELINK ,INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 2002 2001 ------------------------------ ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (897,953) $ (712,601) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 6,814 3,019 Amortization of bond discount 0 36,243 Fair value of compensation related to vested options 200,000 200,000 Common stock issued for services 143,860 61,693 Fair value of options granted for consulting services 11,440 7,710 Changes in operating assets and liabilities Accounts receivable (11,744) 1,526 Inventory (18,943) 252 Prepaid expenses 11,748 (20,227) Deposits 0 112 Accounts payable and accrued expenses 63,013 84,270 Accrued payroll taxes 48,559 10,197 Accrued interest 0 13,517 Accrued compensation (48,856) 136,839 ---------- ---------- Net cash used by operating activities (492,062) (177,450) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (33,291) 0 Advance to related party (272,021) 0 ---------- ---------- Net cash used by investing activities (305,312) 0 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds (Repayments) of loans payable (5,000) 4,770 Proceeds relating to issuance of common stock (net) 683,000 160,000 ---------- ---------- Net cash provided by financing activities $ 678,000 $ 164,770 ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 6 GENELINK, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30 2002 2001 ------------------------------ ---- ---- NET DECREASE IN CASH AND CASH EQUIVALENTS $ (119,374) $ (12,680) Cash and cash equivalents, beginning of period 121,434 13,804 ---------- ---------- Cash and cash equivalents, end of period $ 2,060 $ 1,124 ---------- ---------- SUPPLEMENTARY CASH FLOW INFORMATION Income taxes paid 0 0 Interest paid 0 0 NON-CASH FINANCING TRANSACTIONS Conversion of debt and accrued interest to stock 0 506,112 Accrued interest on subscriptions receivable 43,428 38,786 Issuance of common stock for services 143,860 0 Acquisition of treasury stock 96,000 0 Conversion of accounts payable to stock 37,000 30,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 7 GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS 1 - DESCRIPTION OF ORGANIZATION BUSINESS ORGANIZATION GeneLink, Inc. (the Company), operating in New Jersey, was organized under the laws of the Commonwealth of Pennsylvania to offer to the public the safe collection and preservation of a family's DNA material for later use by the family to determine genetic linkage. The Company is the successor by merger to a Delaware corporation organized under the same name on September 21, 1994. The Company's executive offices are located in Margate, New Jersey. BUSINESS DESCRIPTION The Company was founded in response to the information being generated in the field of human molecular genetics. Management believes future generations could benefit from the DNA store of knowledge, as scientists are discovering an increasing number of connections between genes and specific diseases. For this reason, the Company has created a DNA banking service that stores DNA before and after an individual dies. This genetic history can help families determine if they are at risk for certain inherited diseases. DNA banking shifts the emphasis from diagnosis and treatment to detection and prevention. The Company has developed a patented DNA Collection Kit for the collection of DNA specimens of its clients. The DNA will be stored for 75-year intervals. Upon a client's request, and upon the payment of a retrieval fee, the stored DNA specimen can be retrieved and sent to a laboratory for testing. The Company has also developed three proprietary genetic indicator tests (GeneLink's Genesis 1 Program) and has filed three patent applications. These tests are designed to measure genes that can contribute to disease and aging, predict an individual's risk for skin aging, and predict an individual's susceptibility to obesity. The Company's patented DNA Collection Kit will be used for the Program, which can assist nutritional companies and medical, health, and anti-aging practitioners to offer a "more targeted" and improved approach to wellness/nutritional therapies. 2 - BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared by the Company in accordance with the instructions to Form 10-QSB and Article 10 of Regulation S-X relating to interim financial statements. Accordingly, they do not include all of the 8 GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-KSB of GeneLink, Inc. for the year ended December 31, 2001. In the opinion of the management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the information set forth in the accompanying financial statements have been included. The results reported in these financial statements for the three-month period and nine month period ended September 30, 2002 should not be regarded as necessarily indicative of results that may be expected for the year ended December 31, 2002. 3 - INCOME TAXES At September 30, 2002, the Company had significant federal and state tax net operating loss carryforwards of approximately $7,225,000. The difference between the operating loss carryforwards on a tax basis and a book basis is due principally to differences in depreciation, amortization, and treatment of stock options. The federal carryforwards will begin to expire in 2009 and the state carryforwards will begin to expire in 2005. The Company had a net deferred tax asset of $817,000 at September 30, 2002 primarily from net operating loss carryforwards. A valuation allowance was recorded to reduce the net deferred tax asset to zero. 4 - SHAREHOLDERS' EQUITY TRANSACTIONS A. COMMON STOCK During the nine months ended September 30, 2002, the Company issued 1,384,366 shares of common stock and 804,366 warrants to purchase common stock for an aggregate cash consideration of $683,000. Using the Black-Scholes methodology, the warrants were valued at $296,793. The Company issued 246,340 shares of common stock for services rendered, valued at $143,860, for the nine months ended September 30, 2002. B. STOCK OPTIONS AND WARRANTS During the nine months ended September 30, 2002, an officer of the Company was granted options to acquire 1,200,000 shares of 9 GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS common stock at $.82 per share. The options vest in three equal annual installments beginning in April, 2003. With respect to stock options granted to officers of the Company in 1997, $200,000 of deferred compensation was amortized during the nine months ended September 30, 2002. During the nine months ended September 30, 2002, $52,250 and $11,440 was charged against additional paid in capital and consulting fees, respectively, for options vested during the period that were issued in prior years pursuant to consulting agreements. C. TREASURY STOCK During the nine months ended September 30, 2002, 100,000 shares of common stock valued at $96,000 was returned to the Company and recorded as treasury stock. The stock was issued during 2001 for services rendered. 5 - TRANSACTIONS WITH RELATED PARTIES Pursuant to employment and consulting agreements with two officers, compensation of $197,154 was accrued during the nine months ended September 30, 2002. During the nine months ended September 30, 2002, the Company paid John R. DePhillipo, the Chief Executive Officer and President of the Company, $246,010 of the accrued compensation owed to him. As of September 30, 2002, the Company owed an aggregate of $308,951 of accrued compensation to officers. COMMITMENT On April 24, 2002, the Company entered into a Distribution Agreement with NuGenix, LLC ("NuGenix"), pursuant to which it granted NuGenix the right to distribute vitamin and nutritional supplement products and regimens developed utilizing the Company's proprietary genetic profiling technology (the "Products") in the direct selling market with North America. The Distribution Agreement grants to NuGenix an exclusive right through January 31, 2003 and a non-exclusive right for a period of five years thereafter to market and sell the Products within North American through the direct selling market. Revenues from NuGenix were $15,187 for the nine months ended September 30, 2002. In connection with entering into the Distribution Agreement, the 10 GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS Company has agreed to loan NuGenix $500,000 to fund NuGenix's operations, of which $268,000 was lent by the Company to NuGenix as of September 30, 2002. The loan is for a three year term, accrues interest at the rate of six percent (6%) per year and grants the Company the right to convert the principal balance of the loan into an equity position in NuGenix. To secure NuGenix's obligations with respect to the loan, NuGenix has granted the Company a first priority security interest in all of its assets and the members of NuGenix have pledged their membership interests in NuGenix to the Company. NuGenix is entirely owned by DePhillipo Family, LLC, which in turn is owned by the adult children of John R. DePhillipo, the Chief Executive Officer and President and a member of the Board of Directors of the Company. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Report that relate to future results and events are based on the Company's current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting the Company's business and prospects, see "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting the Company's Business and Prospects." Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the full fiscal year. LIQUIDITY AND CAPITAL RESOURCES For the nine month period ended September 30, 2002, the Company's primary liquidity requirements have been research and development, funding of its sales and marketing efforts, the payment of compensation to officers and other employees and the payment of accounts payable. In the first nine months of 2002 the Company has raised $630,750 primarily through the issuance of common stock and warrants. Cash and cash equivalents at September 30, 2001 amounted to $2,060 as compared to $121,434 at December 31, 2001, an a decrease of $119,374. During the first nine months of 2002, the Company's operating activities utilized $492,062, as compared to $177,450 for the first nine months of 2001. Cash utilized during these periods resulted from Company's net losses for such periods. Financing activities provided $678,000 for the nine month period ended September 30, 2002 as compared to $164,770 for the nine months ended September 30, 2001. Financing activities in the nine months ended September 30, 2002 resulted primarily from the issuance of $683,000 of common stock and warrants throughout the first nine months of 2002, as the Company required additional funds for working capital purposes. The Company will require approximately $1,000,000 for research and development and to fund its sales and marketing strategy. The Company intends to raise funds through the private placement of its securities. Unless the Company can increase its revenues and increase its stock price, it is unlikely that the Company will be able to secure such financing. If the Company is not able to secure such additional required capital, it will continue to realize negative cash flow and losses and may not be able to continue operations. 12 RESULTS OF OPERATIONS The following table sets forth certain operating information regarding the Company:
NINE MONTH PERIOD NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 ENDED SEPTEMBER 30, 2001 ------------------------ ------------------------ (UNAUDITED) (UNAUDITED) ----------- ----------- Revenues $ 34,856 $ 13,951 Cost of Goods Sold $ 10,622 $ 1,815 Net Earnings (Loss) $(897,953) $(712,601) Net Earnings (Loss) Per Share $ (0.05) $ (0.05)
The following summary table presents comparative cash flows of the Company for the nine months ended September 30, 2002 and 2001.
NINE MONTH PERIOD NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002 ENDED SEPTEMBER 30, 2001 ------------------------ ------------------------ (UNAUDITED) (UNAUDITED) ----------- ----------- Net cash used by operating activities $492,062 $177,450 Net cash used by investing activities $305,312 $ 0 Net cash provided by financing activities $678,000 $164,770
The Company had a cash balance totaling $2,060 at September 30, 2002. COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 FINANCIAL CONDITION Assets of the Company increased from $365,392 at December 31, 2001 to $563,455 at September 30, 2002, an increase of $198,063. This increase was primarily due to an increase in advances to related party from $0 at December 31, 2001 to $272,021 at September 30, 2002, resulting from the loan to NuGenix, LLC, an increase in inventory from $10,089 at December 31, 2001 to $29,032 at September 30, 2002 and an increase in accounts receivable from $1,448 at December 31, 2001 to $13,192 at September 30, 2003, both resulting from increased sales, as partially offset by a decrease in cash from $121,034 at December 31, 2001 to $2,060 at September 30, 2002 as a result of cash utilized to fund operating losses. 13 Liabilities increased from $516,216 at December 31, 2001 to $603,932 at September 30, 2002, an increase of $87,716. This increase in liabilities primarily resulted from an increase in accounts payable and accrued expenses from $88,916 at December 31, 2001 to $181,829 at September 30, 2002 and an increase in accrued payroll taxes from $11,593 at December 31, 2002 to $60,152 at September 30, 2002, as partially offset by a decrease in accrued compensation from $357,807 at December 31, 2001 to $308,951 at September 30, 2002, as the Company paid a portion of accrued compensation owed to officers during the nine months ended September 30, 2002. CURRENT YEAR PERFORMANCE AND EARNINGS OUTLOOK Revenues. The total revenues for the nine months ended September 30, 2002 were $34,856 as compared to $13,951 for the nine months ended September 30, 2001, an increase of $20,905, or 150%. Total revenues for the three months ended September 30, 2002 were $26,598 as compared to $2,488 for the three months ended September 30, 2001, an increase of $24,110, or 969%. Expenses. Total expenses for the nine months ended September 30, 2002 were $922,187 as compared to $685,385 for the nine months ended September 30, 2001, an increase of $236,822 primarily resulting from an increase in consulting expenses from $17,353 for the nine months ended September 30, 2001 to $159,872 for the nine months ended September 30, 2002, an increase of $142,519, relating to the Company's research and development activities, and an increase in selling, general and administrative expenses from $498,835 for the nine months ended September 30, 2001 to $573,586 for the nine months added September 30, 2002, an increase of $74,751. Total expenses for the three months ended September 30, 2002 were $218,374 as compared to $187,145 for the three months ended September 30, 2001, an increase of $31,229, primarily resulting from an increase in consulting expenses from $2,461 for the three months ended September 30, 2001 to $56,350 for the three months ended September 30, 2002, relating to the Company's research and development activities. Losses. The Company incurred a loss before extraordinary items of $897,953 for the nine months ended September 30, 2002 as compared to a loss of $726,611 for the nine months ended September 30, 2001, an increase of $181,342 or 25%. The Company incurred a loss of $201,164 for the three months ended September 30, 2002, as compared to a loss of $185,484 for the three months ended September 30, 2001, an increase of $15,680 or 85%. FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS There are a number of factors that affect the Company's business and the results of its operations. These factors include general economic and business conditions; 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 funeral home and genetics industries; the ability of the Company to raise the financing necessary to implement its business and marketing plan, to pay salaries to its officers and employees and to pay its accounts payable. 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. * * * * * * 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. GENELINK, INC. -------------- (Registrant) Date: November 12, 2002 By: /s/ John R. DePhillipo ----------------------------------- John R. DePhillipo, Chief Executive Officer and Chief Financial Officer 15 I, John R. DePhillipo, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of GeneLink, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial date and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 16 6. The registrant's other certifying officers and I have indicted in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By: /s/ John R. DePhillipo ------------------------------------- John R. DePhillipo, Chief Executive Officer and Chief Financial Officer 17