10QSB 1 w86666e10qsb.txt FORM 10-QSB GENELINK, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 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 incorporation or organization) Identification No.) 100 S. Thurlow Street Margate, New Jersey 08402 ------------------------------ ------------- (Address of principal executive offices) 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 May 5, 2003 20,182,556 Transitional Small Business Disclosure Format Yes No X_ GENELINK, INC.
PART I. FINANCIAL INFORMATION Page No. ITEM 1. Financial Statements. Balance Sheets at March 31, 2003 (unaudited) and 3 December 31, 2002 Statements of Operations for the three months ended 4 March 31, 2003 and 2002 (unaudited) Statements of Cash Flows for the three months ended 5-6 March 31, 2003 and 2002 (unaudited) Notes to Financial Statements (unaudited) 7-9
-2- GENELINK, INC. BALANCE SHEETS ================================================================================
(UNAUDITED) MARCH 31, DECEMBER 31, 2003 2002 --------------------------------------------------------------------------------------- ASSETS Current assets Cash $ 26,669 $ 31,203 Accounts receivable 3,623 2,675 Inventory 26,027 26,180 Prepaid expenses 65,466 84,866 --------------------------------------------------------------------------------------- Total current assets 121,785 144,924 Property and equipment 70,452 70,881 Other assets 107,053 103,336 --------------------------------------------------------------------------------------- $ 299,290 $ 319,141 --------------------------------------------------------------------------------------- LIABILITIES Current liabilities Accounts payable & accrued expenses $ 330,010 $ 275,024 Accrued payroll taxes 28,767 20,774 --------------------------------------------------------------------------------------- Total current liabilities 358,777 295,798 Accrued compensation 369,757 332,531 Loans payable affiliates 53,000 53,000 --------------------------------------------------------------------------------------- 781,534 681,329 --------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 75,000,000 shares authorized, 20,058,756 and 19,123,130 shares issued, 19,862,556 and 18,926,950 outstanding as of March 31, 2003 201,588 191,232 and December 31, 2002, respectively Treasury stock, 196,180 shares as of March 31, 2003 and December 31, 2002 (205,860) (205,860) Additional paid in capital 6,127,853 6,031,368 Stock subscriptions receivable (981,687) (970,146) Stock warrants 941,477 779,877 Accumulated deficit (6,565,615) (6,188,659) --------------------------------------------------------------------------------------- (482,244) (362,188) --------------------------------------------------------------------------------------- $ 299,290 $ 319,141 ---------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -3- GENELINK, INC. STATEMENTS OF OPERATIONS (UNAUDITED) ================================================================================
THREE MONTHS ENDED MARCH 31, 2003 2002 --------------------------------------------------------------------------------------------- REVENUE $ 16,300 $ 5,848 COSTS OF GOODS SOLD 13,403 903 --------------------------------------------------------------------------------------------- GROSS PROFIT 2,897 4,945 --------------------------------------------------------------------------------------------- EXPENSES Selling, general & administrative 118,665 305,841 Consulting 34,110 41,406 Professional fees 143,610 22,788 Advertising & promotion 11,784 24,025 Amortization & depreciation 3,703 1,990 --------------------------------------------------------------------------------------------- 311,872 396,050 --------------------------------------------------------------------------------------------- NET LOSS BEFORE EXTRAORDINARY ITEM (308,975) (391,105) EXTRAORDINARY ITEM-WRITE-OFF OF ADVANCE TO RELATED PARTY 67,982 0 --------------------------------------------------------------------------------------------- NET LOSS BEFORE PROVISION FOR INCOME TAXES (376,952) (391,105) PROVISION FOR INCOME TAXES 0 0 --------------------------------------------------------------------------------------------- NET LOSS $ (376,957) $ (391,105) --------------------------------------------------------------------------------------------- NET LOSS PER SHARE, BASIC & DILUTED $ (0.02) $ (0.02) --------------------------------------------------------------------------------------------- Weighted average common shares and diluted potential common shares 19,156,800 16,945,946 ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -4- GENELINK, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) ================================================================================
THREE MONTHS ENDED MARCH 31, 2003 2002 ---------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (376,957) $ (391,105) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 3,703 1,990 Fair value of compensation related to vested options 0 200,000 Common stock issued for services 3,900 24,840 Common stock issued to related party 20,000 0 Fair value of options granted for consulting services 3,000 55,430 Changes in operating assets and liabilities Accounts receivable (948) (2,523) Inventory 153 723 Prepaid expenses 19,400 (10,385) Accounts payable & accrued expenses 54,986 35,270 Accrued payroll taxes 7,993 (9,680) Accrued compensation 37,226 65,718 ---------------------------------------------------------------------------------------- Net cash used in operating activities (227,544) (29,722) ---------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (6,990) (3,429) Increase in subscriptions receivable 0 (66,500) ---------------------------------------------------------------------------------------- Net cash used in investing activities (6,990) (69,929) ---------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds relating to issuance of common stock (net) 230,000 252,750 ---------------------------------------------------------------------------------------- Net cash provided by financing activities $ 230,000 $ 252,750 ----------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -5- GENELINK, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) ================================================================================
THREE MONTHS ENDED MARCH 31, 2003 2002 -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (4,534) $153,099 Cash and cash equivalents, beginning of period 31,203 121,434 -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 26,669 $274,533 -------------------------------------------------------------------------------- SUPPLEMENTARY CASH FLOW INFORMATION Income taxes paid 0 0 Interest paid 0 0 NON-CASH FINANCING TRANSACTIONS: Accrued interest on subscriptions receivable 11,541 14,624 Issuance of common stock for services 13,900 24,840 Acquisition of treasury stock 0 96,000 Accrued interest on advance to related party 6,172 0 Issuance of common stock to related party 20,000 0
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -6- 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. The Company is the successor to a Delaware Corporation organized under the same name on September 21, 1994. The Company's offices are located in 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 created a proprietary methodology for SNPs (single nucleotide polymorphisms) based on nutragenetic and dermagenetic profiling. These profiles (patents pending) provide a means of predicting an individual's inherent genetic capacity to combat oxidative stress and other important selected areas of physiological health. These profile assessments enable nutritional and skin care companies to recommend a specific and targeted regime of antioxidant vitamins, nutrients or skin care formulations that have been specifically designed to compensate for predicted deficiencies. The Company's patented DNA Collection Kit will be used for these assessments. 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 -7- GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS -------------------------------------------------------------------------------- financial statements. Accordingly, they do not include all of the 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-K of GeneLink, Inc. for the year ended December 31, 2002. In the opinion of 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 ended March 31, 2003 should not be regarded as necessarily indicative of results that may be expected for the year ended December 31, 2003. 3 - SHAREHOLDERS' EQUITY TRANSACTIONS A. COMMON STOCK During the three months ended March 31, 2003, the Company issued 920,000 shares of common stock and 920,000 warrants to purchase common stock for cash consideration of $230,000. This is pursuant to the private placement offerings in 2002. Using the Black-Scholes methodology, the warrants were valued at $161,600. The Company issued 115,606 shares of common stock for services rendered, valued at $33,900 for the three months ended March 31, 2003. The Company issued 60,606 shares of common stock valued at $20,000 as part of a loan to a related party. B. STOCK OPTIONS AND WARRANTS During the quarter ended March 31, 2003, $3,000 was charged against consulting fees for options vested during the quarter that were issued in prior years pursuant to consulting agreements. 4 - TRANSACTIONS WITH RELATED PARTIES Pursuant to consulting agreements with two officers, compensation of $90,712 was accrued during the quarter ended March 31, 2003. Of the total accrued compensation, $53,485 was paid during the quarter. -8- GENELINK, INC. NOTES TO INTERIM FINANCIAL STATEMENTS -------------------------------------------------------------------------------- In connection with a Distribution Agreement entered into with NuGenix, LLC in April, 2002 and a related loan for $500,000, the Company advanced NuGenix $35,000 in cash, and 60,606 shares of common stock valued at $20,000 during the quarter ended March 31, 2003. As of March 31, 2003, $79,000 is still owed to NuGenix. 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. For the quarter ended March 31, 2003, NuGenix owes the Company $6,810 for royalties and genetic testing. 5 - EXTRAORDINARY ITEM For the quarter ended March 31, 2003 the Company had advanced to NuGenix $55,000 in stock and cash, and had interest receivable of $6,172. The total due the Company was $54,362, net of the accounts receivable of $6,810. At the present time, the Company believes that NuGenix does not possess the ability to be able to repay the advances. Therefore, management has determined that this amount should be written-off in the current period. -9- 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 three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the full fiscal year. LIQUIDITY AND CAPITAL RESOURCES For the three-month period ended March 31, 2003, the Company's primary liquidity requirements have been the implementation and funding of its sales and marketing efforts in the nutragenetics and dermagenetics fields, the payment of compensation to officers and other employees and the payment of accounts payable. In the first three months of 2003, the Company raised $230,000, through the issuance of common stock and warrants. Cash and cash equivalents at March 31, 2003 amounted to $26,669 as compared to $31,203 at December 31, 2002, a decrease of $4,534. During the first three months of 2003, the Company's operating activities utilized $227,544, as compared to $29,722 for the first three months of 2002, an increase of $197,822, primarily resulting from the reduction in deferred compensation charges from $200,000 for the three months ended March 31, 2002 to $0 for the three months ended March 31, 2003. Cash utilized during these periods resulted from Company's net losses for such periods. Investing activities utilized $6,990 for the three months ended March 31, 2003 as compared to utilizing $69,929 for the three months ended March 31, 2002, a decrease of $62,939. Financing activities provided $230,000 for the three month period ended March 31, 2003 as compared to $252,750 for the three months ended March 31, 2002, a decrease of $22,750. Financing activities in the three months ended March 31, 2003 resulted from the issuance of common stock and warrants. The Company will require an additional $79,000 to fund its obligations to NuGenix, LLC ("NuGenix"). On April 24, 2002, the Company entered into a Distribution Agreement with 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 in the direct selling market within North America. The Distribution Agreement granted 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 product within North America through the direct selling market. In connection with entering into the Distribution Agreement, the Company agreed to loan NuGenix $500,000 to fund NuGenix's operations, of which $421,000 was advanced by the Company to NuGenix through March 31, 2003. The loan is for a three year term, accrues interest at the rate of six percent per year and grants the Company the -10- 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 the DePhillipo Family, LLC which in turn is owned 100% 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. The Company will require approximately $1,500,000 to implement its sales and marketing strategy for the balance of 2003 and to fund its research and development efforts for the balance of 2003. The Company has developed a proprietary genetic test (the Program for Genetic Profiling of Oxidative Stress((TM)), for which patents are pending) that provides a means of predicting an individual's genetic capacity to combat oxidative stress. The Company's patented DNA Collection Kit(R) 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. The Company intends to raise funds through a private placement of 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 it is unlikely that it will be able to continue operations. RESULTS OF OPERATIONS The following table sets forth certain operating information regarding the Company:
THREE MONTH PERIOD THREE MONTH PERIOD ENDED MARCH 31, 2003 ENDED MARCH 31, 2002 (UNAUDITED) (UNAUDITED) Revenues $ 16,300 $ 5,848 Net loss before extraordinary items (308,975) (391,105) Net loss per share $ (0.02) $ (0.02)
The following summary table presents comparative cash flows of the Company for the three months ended March 31, 2003 and 2002.
THREE MONTH THREE MONTH PERIOD ENDED PERIOD ENDED MARCH 31, 2003 MARCH 31, 2002 (UNAUDITED) (UNAUDITED) Net cash used in operating activities $ (227,544) $ (29,722) Net cash provided (used) by investing activities (6,990) (69,929) Net cash provided by financing activities $ 230,000 $ 252,750
-11- The Company had cash balances totaling $26,669 at March 31, 2003 and $274,533 at March 31, 2002. COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED MARCH 31, 2002 FINANCIAL CONDITION Assets of the Company decreased from $319,141 at December 31, 2002 to $299,290 at March 31, 2003, a decrease of $19,851. This decrease was primarily due to a decrease in prepaid expenses from $84,866 at December 31, 2002 to $65,466 at March 31,2003, a decrease of $19,400. Liabilities of the Company increased from $681,329 at March 31, 2002 to $781,534 at March 31, 2003, an increase of $100,208. This increase was primarily due to an increase in accounts payable from $275,024 at December 31, 2002 to $330,010 at March 31, 2003 and an increase in accrued compensation from $332,531 at December 31, 2002 to $369,757 at March 31, 2003. CURRENT YEAR PERFORMANCE AND EARNINGS OUTLOOK Revenues. Total revenues for the three months ended March 31, 2003 were $16,300 as compared to $5,848 for the three months ended March 31, 2002, an increase of $10,452, or 178%, primarily resulting from the Company realizing revenues from its nutragenetics and dermagenetics business. Expenses. Total expenses for the three months ended March 31, 2003 were $311,872 as compared to $396,050 for the three months ended March 31, 2002, a decrease of $84,178, primarily resulting from a decrease in selling general and administrative expenses from $305,841 for the three months ended March 31, 2002 to $118,665 for the three months ended March 31, 2003, a decrease of $187,176, primarily resulting from the reduction in deferred compensation charges from $200,000 for the three months ended March 31, 2002 to $0 for the three months ended March 31, 2003, as partially offset by an increase in professional fees from $27,788 for the three months ended March 31, 2002 to $143,610 for the three months ended March 31, 2003, primarily resulting from litigation expenses associated with the Company's intellectual property. Losses. The Company incurred a loss of $308,975 prior to extraordinary items for the three months ended March 31, 2003 as compared to a loss of $391,105 prior to extraordinary items for the three months ended March 31, 2002, a decrease of $82,130. This decrease in the amount of losses incurred is primarily due to a reduction in expenses of $84,178 for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS There are a number of factors that affect the Company's business and the result of its operations. These factors include general economic and business conditions; the level of acceptance of the Company's products and services; the rate and commercial applicability of -12- advancements and discoveries in the genetics field; and the Company's ability to enter into strategic alliances with companies in the genetics, pharmaceutical and nutrition industries; the ability of the Company to raise the financing necessary to fund its business and marketing plan, fund its research and development to pay salaries to its officers and employees and to pay its accounts payable. 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 curing 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: March 13, 2003 By: /s/ John R. DePhillipo ------------------------------------ John R. DePhillipo, Chief Executive Officer and Chief Financial Officer -13- 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 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: March 13, 2003 By: /s/ John R. DePhillipo ------------------------------------ John R. DePhillipo, Chief Executive Officer and Chief Financial Officer -14-