GeneLink 10Q 2008 Q2 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2008


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. 0-28077

GENELINK, INC.

(Exact name of registrant specified in its charter)


PENNSYLVANIA		23-2795613

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


317 Wekiva Spring Road, #200 Longwood, Florida		32779

(Address of principal executive offices)		(Zip Code)

(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. Yes þ No o

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. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

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 August 4, 2008			91,765,025


		Page
PART I.	FINANCIAL INFORMATION

ITEM 1	Financial Statements.

	Consolidated Balance Sheets at June 30, 2008 (unaudited)	3
	and December 31, 2007

	Consolidated Statements of Income for the three months	4
	and six months ended June 30, 2008 and 2007 (unaudited)

	Consolidated Statements of Cash Flows for the six months	5-6
	ended June 30, 2008 and 2007 (unaudited)

	Notes to Interim Consolidated Financial Statements	7-10

GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	June 30, 2008			December 31, 2007

ASSETS
Cash and cash equivalents	$	822,513		$	972,371
Accounts receivable		280,787			35,327
Inventory		149,904			3,646
Prepaid expenses		171,049			11,273

Total current assets		1,424,253			1,022,617

Property and equipment		189,464			38,476
Other assets		311,907			322,731

Total assets	$	1,925,624		$	1,383,824


LIABILITIES

Current maturity of capital lease obligation	$	28,544		$	0
Accounts payable and accrued expenses		571,286			439,399
Accrued compensation		90,000			144,168
Deferred revenue		1,145,349			100,922
Loans payable to officers		18,000			18,000

Total current liabilities		1,853,179			702,489

Convertible secured promissory notes payable, net of issuance of debt and stock conversion discounts		0			487,968

Total liabilities		1,853,179			1,190,457

SHAREHOLDERS’ EQUITY (DEFICIENCY)
Common stock, $.01 par value, 125,000,000 shares authorized as of June 30, 2008 and December 31, 2007, respectively; 96,026,291 shares and 66,673,591 shares issued as of June 30, 2008 and December 31, 2007 respectively; 91,667,122 shares and 66,267,422 shares outstanding as of June 30, 2008 and December 31, 2007, respectively		960,263			666,736
Additional paid in capital		11,594,728			8,277,692
Stock warrants		2,308,359			4,245,692
Accumulated deficit		(14,238,670	)		(12,681,698	)
Treasury stock, 4,359,169 shares and 406,169 shares as of June 30, 2008 and December 31, 2007 respectively, at cost		(552,235	)		(315,055	)

Total shareholders’ equity (deficiency)		72,445			193,367

Total liabilities and shareholders’ equity (deficiency)	$	1,925,624		$	1,383,824

The accompanying notes are an integral part of the consolidated financial statements

GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	For The			For The			For The			For The
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007

REVENUE	$	124,503		$	27,682		$	152,960		$	59,067
COST OF GOODS SOLD		109,172			20,747			137,502			45,870

GROSS PROFIT		15,331			6,935			15,458			13,197


EXPENSES
Selling, general and administrative		459,449			124,090			600,983			275,975
Debt conversion costs		229,025			0			229,025			0
Consulting		182,899			36,000			327,891			67,648
Professional fees		156,685			57,205			293,009			221,320
Advertising and promotion		71,057			662			84,459			4,896
Amortization and depreciation		23,695			14,174			37,063			28,348

		1,122,810			232,131			1,572,430			598,187


NET LOSS BEFORE PROVISION FOR INCOME TAXES		(1,107,479	)		(225,196	)		(1,556,972	)		(584,990	)

PROVISIONS FOR INCOME TAXES		0			0			0			0


NET LOSS	$	(1,107,479	)	$	(225,196	)	$	(1,556,972	)	$	(584,990	)


NET LOSS PER SHARE, BASIC AND DILUTED	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.01	)


Weighted average common shares and diluted potential common shares		70,518,164			44,703,974			67,634,734			42,998,189

The accompanying notes are an integral part of the consolidated financial statements

GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


Six months ended June 30	2008			2007


CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,556,972	)	$	(584,990	)
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization		37,063			28,348
Amortization of discounts on loans payable		240,844			40,478
Fair value of options granted		84,200			0
Changes in operating assets and liabilities
Accounts receivable		(245,460	)		994
Inventory		(146,258	)		1,491
Prepaid expenses		(159,776	)		3,148
Deposits		24,000			0
Accounts payable and accrued expenses		285,116			40,644
Deferred Revenue		1,044,427			(8,815	)
Accrued compensation		(54,168	)		64,308


Net cash used by operating activities		(446,984	)		(414,394	)


CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(144,740	)		(6,025	)
Patent acquisition costs		(25,488	)		(19,494	)


Net cash used by investing activities		(170,228	)		(25,519	)


CASH FLOWS FROM FINANCING ACTIVITIES

Principal payments on capital lease obligation		(2,456	)		332,875
Purchase of treasury stock		(237,180	)		0
Proceeds from exercise of stock warrants		706,990			0

Net cash provided by financing activities		467,354			332,875

The accompanying notes are an integral part of the consolidated financial statements

GENELINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


Six months ended June 30	2008			2007


NET DECREASE IN CASH AND CASH EQUIVALENTS		(149,858	)		(107,038	)

Cash and cash equivalents, beginning of period		972,371			149,695


Cash and cash equivalents, end of period	$	822,513		$	42,657


SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$	0		$	0

Non-cash financing transactions:
Equipment acquired under capital lease	$	31,000		$	0
Stock warrants granted for services	$	84,200		$	0
Common stock and stock warrants granted for fundraising	$	0		$	12,938
Conversion of notes payable and accrued interest into common stock	$	882,041		$	121,131

The accompanying notes are an integral part of the consolidated financial statements

GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

GeneLink, Inc. (the Company) and its subsidiaries, GeneWize Life Sciences, Inc. (“GeneWize”) and Dermagenetics, Inc., operate in Florida. The Company was organized under the laws of the Commonwealth of Pennsylvania GeneWize and Dermagenetics, Inc. were organized under the laws of the State of Delaware. The Company is the successor to a Delaware corporation organized under the same name on September 21, 1994. The Company’s offices are located in Longwood, Florida.

The Company was founded in response to the information being generated in the field of human molecular genetics. Scientists are discovering an increasing number of connections between genes and specific diseases or physical attributes and tendencies. These findings are a direct result of the National Institute of Health Genome Project.

The Company has developed proprietary SNP-based genetic profiles (named GeneLink Nutragenetic Profile ™ and Dermagenetics^® profiles. These profiles provide a means of predicting an individual’s inherent genetic capacity to combat such conditions as oxidative stress and other important selected areas of physiologic health. The profiles, for example, can measure a person’s potential to efficiently control oxygen free radical damage, eliminate hydrogen peroxide, protect and repair oxidized phospholipids and destroy harmful environmental compounds. The Company’s profile assessment enables nutritional and skin care companies and health care professionals to recommend a specific and targeted regime of antioxidant vitamins, nutrients or skin care formulations that have been specifically designed to compensate for predicted deficiencies and to help provide individuals the best of health and appearance. The Company received a U.S. patent in 2007 for its proprietary method for assessing skin health in humans.

The Company has also developed and received a skin patent on a DNA Collection Kit^® for the collection of DNA specimens for clients. The kit is classified as a non-medical devise.

2. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X relating to interim 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 consolidated financial statements and notes thereto included in the Annual Report on Form 10-KSB of GeneLink, Inc. and Subsidiaries for the year ended December 31, 2007.

In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the information set forth in the accompanying consolidated financial statements have been included. The results reported in these consolidated financial statements for the three-month and six-month period ended June 30, 2008 should not be regarded as necessarily indicative of results that may be expected for the year ended December 31, 2008.

GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. REVENUE RECOGNITION

Revenue from genetic testing services is recognized when there is persuasive evidence of an arrangement, service has been rendered, the sales price is determinable and collectability is reasonably assured. Service is deemed to be rendered when the results have been reported to the individual who ordered the test. To the extent that tests have been prepaid but results have not yet been reported, recognition of all related revenue is deferred.

Revenue from product sales is recognized when there is persuasive evidence of an arrangement, delivery has occurred and title and risk of loss have transferred to the customer, the sales price is determinable and collectability is reasonably assured. The Company has no consignment sales. Product revenue is reduced for allowances and adjustments, including returns, discontinued items, discounts, trade promotions and slotting fees.

Revenue from distributor sales and marketing kits is recognized when there is persuasive evidence of an arrangement, delivery has occurred and title and risk of loss have transferred to the customer, the sales price is determinable and collectability is reasonably assured. To the extent that kits have been received from distributors but the related products or services have not been fully delivered, recognition of all related revenue is deferred.

RELATED PARTY TRANSACTIONS, STOCKHOLDERS’ EQUITY TRANSACTIONS, AND CONVERTIBLE SECURED PROMISSORY NOTES

In June 2008, 1,562,500 warrants were exercised in cashless exercises in which the Company held back 425,564 warrants as payment for the exercise prices and issued 1,136,936 shares of Common Stock in connection with such exercises.

In June 2008, the holders of all of the outstanding convertible secured promissory notes (the “Notes”) issued by the company converted the Notes into shares of the Company’s Common Stock at a conversion price of $0.05 per share. The Notes were issued in consideration for certain loans provided to the Company by third parties between May 12, 2006 and June 6, 2007. $882,041 in principal and accrued interest of Notes were converted into 17,640,813 shares of Common Stock.

Effective May 9, 2008 through June 12, 2008, pursuant to a tender offer undertaken by the Company, holders of warrants, not including warrants issued to officers and directors of the Company in June 2007 and September 2007, were entitled to exercise their warrants at reduced exercise prices as follows:


Number of	Original Exercise Price	Revised
Existing Warrants	of Existing Warrants	Exercise Price

7,346,577	$0.075-$0.10	$0.05
4,872,704	$ 0.20-$0.25	$0.06
2,755,500	$ 0.40-$0.50	$0.08
2,246,250	$ 0.60-$1.00	$0.09

GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A total of 10,574,951 warrants were exercised in the tender offer for cash proceeds of $706,990.

Pursuant to an Order of Settlement dated May 13, 2008 (the “Settlement”), the Company and John R. DePhillipo settled all issues, claims and counterclaims each party may have with respect to the Action entitled,John R. DePhillipo v. GeneLink, Inc.(Superior Court of New Jersey Law Division: Atlantic County, Docket No. ATL-L-7479-05). Under the Settlement, the Company acquired 3,953,000 shares from Mr. DePhillipo and his family and paid Mr. DePhillipo and his family $0.06 per share, resulting in a purchase price of $237,180. Additionally, under the Settlement the Company paid Mr. DePhillipo $220,000. As part of the Settlement, the Company and Mr. DePhillipo delivered general releases to each other.

5. SUBSEQUENT EVENT

On August 1, 2008, GeneWize, a wholly-owned subsidiary of the Company, held its grand opening launch conference. At the time of the launch, over 4,700 independent marketing affiliates had signed up with GeneWize. As of the date of this filing, GeneWize has over 6,000 independent marketing affiliates.

Effective October 14, 2005, the Company terminated the employment of John R. DePhillipo, the Company’s former Chief Executive Officer and President and a former director of the Company. In 2005, Mr. DePhillipo commenced two lawsuits allegedly arising out of his termination by the Company for “cause,” as defined in his Employment Agreement with the Company.

In an Action filed in the United States District Court for the Eastern District of Pennsylvania,John R. DePhillipo v. Robert P. Ricciardi, Civil Action No. 05-5906, Mr. DePhillipo alleged that Dr. Ricciardi, a Director and Officer of the Company, (1) caused Mr. DePhillipo’s employment with the Company to be wrongfully terminated and therefore is personally liable for all severance owed Mr. DePhillipo, in the amount of at least $75,000; (2) was personally liable for Mr. DePhillipo’s unpaid back salary of $84,000 simply because Dr. Ricciardi is an officer and/or director of the Company; and (3) acted sufficiently maliciously to justify punitive damages being assessed against Dr. Ricciardi of $10,000,000. Counsel for Dr. Ricciardi entered an answer to this action and subsequently the action against Dr. Ricciardi was dismissed with prejudice against Mr. DePhillipo in March 2006.

In a separate Action filed by Mr. DePhillipo against the Company in November 2005 in the Superior Court of New Jersey, Law Division, Atlantic County,John R. DePhillipo v. GeneLink, Inc.,Docket No. ATL-L-7479-05, Mr. DePhillipo alleged that his termination by the Company “for cause” was improper and therefore he was entitled to in excess of $1,500,000 in severance pay under the terms of an employment agreement, allegedly entered into effective January 1, 2005 (the “Employment Agreement”) and an additional $84,000 in accrued and unpaid compensation. The Company filed an Answer denying the material allegations of the Complaint and asserted a number of affirmative defenses. The Company filed counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion, negligent misrepresentation, unjust enrichment and fraud while Mr.

GENELINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DePhillipo served as the Company’s Chief Executive Officer, President and Chief Financial Officer. The counterclaims sought recovery in excess of that sought by Mr. DePhillipo in the Complaint.

Pursuant to the Settlement, on May 13, 2008 the Company and Mr. DePhillipo settled all issues, claims and counterclaims each may have with respect to the Action. Under the Settlement, the Company acquired 3,953,000 shares from Mr. DePhillipo and his family and paid Mr. DePhillipo and his family $0.06 per share, resulting in a purchase price of $237,180. Additionally, under the Settlement the Company paid Mr. DePhillipo $220,000. As part of the Settlement, the Company and Mr. DePhillipo delivered general releases to each other.

On August 12, 2008, in an Action filed in the Philadelphia Court of Common Pleas,DePhillipo, et.al. v. GeneLink t/a GeneLink Biosciences, Inc., et. al., Philadelphia County Court of Common Pleas, August Term 2008 No. 1128, Mr. DePhillipo and Maria DePhillipo, his spouse, filed suit against the Company, GeneWize and certain of their officers, directors and advisors. Mr. and Mrs. DePhillipo allege, among other things, that the Company fraudulently and negligently induced Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo to sell their shares of common stock of the Company to the Company, that certain of the Company’s advisors and offices conspired to fraudulently induce Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo to sell their shares of common stock of the Company to the Company, that the Company and counsel to the Company fraudulently and negligently misrepresented the financial condition of the Company to induce Mr. DePhillipo to enter into the Settlement and to cause Mr. and Mrs. DePhillipo sell their shares of common stock of the Company to the Company, and that the Company failed to timely disclose information concerning the formation and operation of GeneWize. Mr. and Mrs. DePhillipo seek approximately $20 million in damages based upon an alleged value of GeneLink common stock of $5.00 per share. They also seek rescission of the Settlement and thus the return of the 3,953,000 shares of common stock of the Company sold by them to the Company pursuant to the Settlement.

The Company and its Board of Directors deny the claims set forth in the Action, intend to vigorously defend the baseless claims made by Mr. and Mrs. DePhillipo and are considering additional appropriate actions to take after further investigation and consultation with counsel.

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 six-month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

For the three month and six month periods ended June 30, 2008, the Company’s primary liquidity requirements have been the funding of its sales and marketing efforts, including the launch by one of the Company’s distributors of products based upon the Company’s technology and the funding of pre-launch activities relating to the commencement by GeneWize of its direct selling efforts; the funding of its research and development efforts; the payment of compensation to officers and other employees; and the funding of the settlement of all claims related to the lawsuit by its former Chief Executive Officer and President (as more fully described below).

On August 1, 2008, GeneWize, the first direct selling company to focus exclusively on marketing nutritional supplements and skin care products specifically tailored to an individual’s genetic makeup, held its grand opening launch conference. As of the August 1, 2008 launch date, over 4,700 affiliates have joined GeneWize’s marketing organization. In order to become a GeneWize affiliate, a person must purchase an affiliate kit, which includes a DNA assessment, one or more months of nutritional supplements, and materials to help in the marketing and sales of GeneWize products. An affiliate must sign an agreement to abide by all GeneWize policies regarding sales and distribution. In return, GeneWize commits to a structured compensation arrangement by which the affiliate earns commissions based on his or her sales as well as the sales of others he or she may recruit as affiliates.

In the fourth quarter of 2007, the Company signed a multi-year exclusive retail licensing and distribution agreement with Solgar Vitamin and Herb of Leonia, New Jersey. Solgar provides the Company with revenue streams from the purchase of DNA kits, DNA assessments for Solgar customers, and a royalty from all sales of Solgar’s Nutrigenomx™ genetically-guided nutritional supplements. The agreement calls for Solgar to distribute Nutrigenomx™ exclusively via its extensive health food and specialty natural food retailers in North America. Since the signing of the agreement in December 2007, the Company has received $162,000 as an advance on royalties. The Company has had limited kit and assessment sales from the agreement as Solgar is still in its early stages of product release.

Pursuant to the Settlement, on May 14, 2008 the Company acquired 3,953,000 shares from Mr. DePhillipo and his family at a price of $0.06 per share, resulting in an aggregate purchase price of $237,180. Additionally, under the Settlement the Company paid Mr. DePhillipo $220,000 on

June 18, 2008. As part of the Settlement, the Company and Mr. DePhillipo delivered general releases to each other.

Cash and cash equivalents at June 30, 2008 amounted to $822,513 as compared to $972,371 at December 31, 2007, a decrease of $149,858, primarily resulting from utilizing $446,984 of cash to fund operating expenses, from funding the Company’s $457,180 of payments under the Settlement and from utilizing $170,228 in investing activities, primarily relating to capital expenditures surrounding the GeneWize launch, as partially offset by the $706,990 of gross proceeds realized by the Company in connection with its tender offer of outstanding warrants. During the first six months of 2008, the Company’s operating activities utilized $449,411, as compared to $414,394 for the first six months of 2007, an increase of $35,017. Cash utilized during the six month period ended June 30, 2008 partially funded losses for such period.

Financing activities provided $467,354 in net proceeds for the six months ended June 30, 2008, as compared to $332,875 for the six months ended June 30, 2007, an increase of $134,479. Financing activities for the six months ended June 30, 2008 primarily related to the Company’s completion in June 2008 of its tender offer with respect to its outstanding warrants to acquire common stock of the Company. A total of 10,574,951 warrants were exercised by warrant holders for an aggregate exercise price of $706,990, and the Company issued 10,574,951 shares of its restricted common stock to such warrant holders. The receipt of these funds was partially offset by the $237,180 paid by the Company to redeem the shares of Common Stock of the Company held by John DePhillipo and his family in accordance with the Settlement.

COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2008 TO SIX MONTHS ENDED JUNE 30, 2007

Financial Condition

Assets of the Company increased from $1,383,824 at December 31, 2007 to $1,925,624 at June 30, 2008, an increase of $541,800. This increase was primarily due to an increase in accounts receivable from $35,327 and December 31, 2007 to $280,787 at June 30, 2008, an increase of $245,460, an increase in inventory from $3,646 at December 31, 2007 to $149,904 at June 30, 2008, an increase of $146,258, an increase in prepaid expenses from $11,273 at December 31, 2007 to $171,049 at June 30, 2008, an increase of $159,776, and an increase in property and equipment from $38,476 at December 31, 2007 to $189,464 at June 30, 2008, an increase of $150,988. The increases in accounts receivable, inventory and property and equipment primarily relate to GeneWize’s pre-launch activities during the six months ended June 30, 2008, and the increase in prepaid expenses primarily relate to costs associates with the deferred revenues relating to GeneWize’s pre-launch activities during the six months ended June 30, 2008.

Liabilities increased from $1,190,457 at December 31, 2007 to $1,853,179 at June 30, 2008, an increase of $662,722. This increase in liabilities was primarily due to an increase in deferred revenue from $100,922 at December 31, 2007 to $1,145,349 at June 30, 2008, an increase of $1,044,427, relating to monies received from GeneWize distributors for products, tests and marketing materials through June 30, 2008. As more fully described below, it is anticipated that this deferred revenue will be recognized as the products, tests and marketing materials are delivered by GeneWize commencing with the third quarter of 2008. This increase in liabilities was partially offset by a decrease in convertible secured promissory notes payable, net of issuance of debt and stock conversion discounts, from $487,968 at December 31, 2007 to $0 at

June 30, 2008, as all outstanding notes were converted in June 2008 into equity at a price of $0.05 per share.

Current Year Performance and Earnings Outlook

Revenues. Total revenues for the three months ended June 30, 2008 were $124,503, as compared to $27,682 for the three months ended June 30, 2007, an increase of $96,821, which increase was primarily caused by the commencement of sales by one of the Company’s third party licensees of products based upon the Company’s technology and related sales by the Company of its genetic assessment technology. Costs of goods sold increased from $20,747 for the three months ended June 30, 2007 to $109,172 for the three months ended June 30, 2008, an increase of $88,425, resulting in an increase in gross profit from $6,935 for the three months ended June 30, 2007 to $15,331 for the three months ended June 30, 2008, an increase of $8,396.

Total revenues for the six months ended June 30, 2008 were $152,960 as compared to $59,067 for the six months ended June 30, 2007, an increase of $93,893, which increase was primarily caused by commencement of sales by one of the Company’s third party licensees of products based upon the Company’s technology and related sales by the Company of its genetic assessment technology. Costs of goods sold increased from $45,870 for the six months ended June 30, 2007 to $137,502 for the six months ended June 30, 2007, an increase of $91,632, resulting in an increase in gross profit from $13,197 for the six months ended June 30, 2007 to $15,458 for the six months ended June 30, 2008, an increase of $2,261.

Expenses.Total expenses for the three months ended June 30, 2008 were $1,122,810 as compared to $232,131 for the three months ended June 30, 2007, an increase of $890,679. This increase in expenses primarily resulted from an increase in selling, general and administrative expenses from $124,090 for the three months ended June 30, 2007 to $459,449 for the three months ended June 30, 2008, an increase of $335,359. This increase was primarily caused by expensing the amounts paid in the Settlement. This increase in expenses was also partially caused by accelerating the issuance of debt and stock conversion discounts associated with the convertible secured promissory notes converted into Common Stock of the Company by the holders of such notes in June 2008, which caused debt conversion costs of $229,025 to be incurred in the three months ended June 30, 2008. The increase in expenses was also caused by an increase in consulting expenses from $36,000 for thee three months ended June 2007 to $182,899 for the three months ended June 30, 2008, an increase of $146,899, an increase in advertising and promotion expenses from $662 for the three months ended June 30, 2007 to $71,057 for the three months ended June 30, 2008, an increase of $70,395, and an increase in professional fees for $57,205 for the three months ended June 30, 2007 to $156,685 to the three months ended June 30, 2008, an increase of $99,480. The increased consulting expenses and advertising and promotional expenses primarily relate to the pre launch activities of GeneWize during the quarter ended June 30, 2008. The increase in professional fees primarily relate to the legal fees incurred in defending the litigation brought against the Company by its former chief executive officer and president and in negotiating the Settlement.

Total expenses for the six months ended June 30, 2008 were $1,572,430, as compared to $598,187 for the six months ended June 30, 2007, an increase of $974,243, primarily resulting from an increase in selling, general and administrative expenses from $275,975 for the six months ended June 30, 2007 to $600,983 for the months ending June 30, 2008, an increase of $325,008, which increase was primarily caused by expensing the amounts paid in the Settlement. The increase in expenses was also partially caused by accelerating the issuance of

debt and stock conversion discounts associated with the convertible secured promissory notes converted into Common Stock of the Company by the holders of such notes in June 2008, which caused debt conversion costs of $229,025 to be incurred during the six months ended June 30, 2008. The increase in expenses for the six months ended June 30, 2008 was also caused by an increase in consulting fees from $67,648 for the six months ended June 30, 2007 to $327,891 for the six months ended June 30, 2008, an increase of $260,243, and an increase in advertising and promotion expenses from $4,896 for the six months ended June 30, 2007 to $84,459 for the six months ended June 30, 2008, an increase of $79,563. These increased costs primarily relate to the pre-launch activities of GeneWize during the six months ended June 30, 2008. Furthermore, professional fees increased from $221,320 for the six months ended June 30, 2007 to $293,009 for the six months ended June 30, 2008, an increase of $71,689, primarily relating to legal fees incurred in defending the litigation brought against the Company by its former chief executive officer and president and in negotiating the Settlement.

Losses. The Company incurred a loss $1,556,972 for the six months ended June 30, 2008 as compared to a loss of $584,990 for the six months ended June 30, 2007, an increase of $971,982, and a loss of $1,107,479 for the three months ended June 30, 2008, as compared to $225,196 for the three months ended June 30, 2007, an increase of $882,283.

GeneWize Life Sciences, Inc. Pre-Launch Activities

During the three months and six months ended June 30, 2008, the Company prepared for the third quarter launch of GeneWize, its wholly owned subsidiary, which was still in its pre-launch preparations. In the three months and six months ended June 30, 2008, GeneWize did not solicit or accept any product orders from non-marketing affiliate customers.

GeneWize commenced accepting marketing affiliates and fees from marketing affiliates in May 2008. As of June 30, 2008, GeneLink has not recorded any revenue from GeneWize due to revenue recognition rules regarding partially filled orders. It is anticipated that GeneWize, and thus GeneLink, will begin recognizing revenue in the third quarter as multi-component affiliate kit orders are completed and customer (i.e. non-affiliate) orders are received and fulfilled.

In terms of numbers of affiliates as of the August 1, 2008 launch, GeneWize has far exceeded its plan and expectations. This unanticipated and extraordinary demand will put additional pressure on infrastructure, including laboratories, manufacturing and customer service.

In addition to challenges of growth, the nascent genetics testing industry has come under increased scrutiny by state legislatures and regulators. The Company, with the assistance of members of its Scientific Advisory Board, continues to work with these emerging regulatory parameters with appropriate cooperation. In particular, the Company has voluntarily stopped processing DNA samples for customers residing in California and New York on a temporary basis to enable the Company to modify its processes in an effort to ensure full compliance with all applicable regulations in those states. The Company anticipates recommencing the processing of DNA samples for customers residing in California and New York in September 2008.

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 general economic and business conditions; the success of the GeneLink’s recent launch of its direct selling efforts; 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 genetics industry.

Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

Item 4T.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s Chief Executive Officer (who is currently acting as both the Company’s principal executive officer and principal 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(e) and 15d-15(e)), that such disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1LEGAL PROCEEDINGS

the amount of at least $75,000; (2) was personally liable for Mr. DePhillipo’s unpaid back salary of $84,000 simply because Dr. Ricciardi is an officer and/or director of the Company; and (3) acted sufficiently maliciously to justify punitive damages being assessed against Dr. Ricciardi of $10,000,000. Counsel for Dr. Ricciardi entered an answer to this action and subsequently the action against Dr. Ricciardi was dismissed with prejudice against Mr. DePhillipo in March 2006.

In a separate Action filed by Mr. DePhillipo against the Company in November 2005 in the Superior Court of New Jersey, Law Division, Atlantic County,John R. DePhillipo v. GeneLink, Inc., Docket No. ATL-L-7479-05, Mr. DePhillipo alleged that his termination by the Company “for cause” was improper and therefore he was entitled to in excess of $1,500,000 in severance pay under the terms of an employment agreement, allegedly entered into effective January 1, 2005 (the “Employment Agreement”) and an additional $84,000 in accrued and unpaid compensation. The Company filed an Answer denying the material allegations of the Complaint and asserted a number of affirmative defenses. The Company filed counterclaims against Mr. DePhillipo for breach of fiduciary duty, conversion, negligent misrepresentation, unjust enrichment and fraud while Mr. DePhillipo served as the Company’s Chief Executive Officer, President and Chief Financial Officer. The counterclaims sought recovery in excess of that sought by Mr. DePhillipo in the Complaint.

Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3DEFAULTS UPON SENIOR SECURITIES

None.

Item 4SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

Not applicable.

Item 5OTHER INFORMATION

Not applicable.

Item 6.EXHIBITS AND REPORTS ON FORM 8-K.


Exhibit No.		Description
31.1		Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* * * * * *

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: August 15, 2008	By:	s/ Monte E. Taylor, Jr.
		Monte E. Taylor, Jr., Chief Executive Officer and Chief Financial Officer

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GeneLink (GNLKQ) Inactive 10-Q2008 Q2 Quarterly report

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