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GENELINK INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[August 14, 2013]

GENELINK INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) 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 six month periods ended June 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 30,000 people is compelling evidence of the marketplace viability of the Company's approach to personalized health and wellness.

13 -------------------------------------------------------------------------------- Table of Contents 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 June 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 JUNE 30, 2013 AND THE THREE MONTHS ENDED JUNE 30, 2012 Revenues: Revenues increased $94,999 or 18% for three months ended June 30, 2013 as compared to the same three months in 2012. There are four primary reasons for the increase in revenue: · Revenue from marketing partner foru was responsible for a $54,192 increase in revenues quarter over quarter. The receipt of $150,000 in earn-out payments were offset by a reduction of $83,309 in product revenue and a $12,500 reduction in license fees.

· geneME product sales increased $29,826 or 304.6% for the second quarter over same period in 2012. The increase in sales is attributed to increased marketing efforts.

· Dermagenetics saw sales slip $26,441 or 84% in the second quarter of 2013 compared to the same quarter in 2012 due to a change in the sales force and a restructuring of the business plan. Although future sales are uncertain, significant progress has been made for a re-launch of the brand in the third quarter of 2013.

· Revenue from genetic assessments increased $31,523 or 73.1% as almost 1,200 DNA assessments were invoiced in the second quarter of 2013 compared to 700 in the same period in 2012. The number of DNA assessments invoiced is one of the many indicators of future growth in recurring product revenues.

Cost of Goods Sold: Cost of Goods Sold ("COGS") decreased $75,571 or 19.5% compared to the same quarter in 2012. As discussed above, although total revenues increased, $150,000 of the increase came from the earn-out payments which do not have any COGS associated with them. When combined with foru's decrease in product sales, foru accounted for $79,355 of the decrease in COGS. Assessments ($20,751 or 36.6%) and geneME ($11,781 or 215.7%) saw an increase in COGS due to the increase in the volume of assessments and product orders. The final offset was that shipping COGS decreased ($13,763 or 16.4%).

14 -------------------------------------------------------------------------------- Table of Contents Gross Profit: Gross Profit increased $170,570 or 123.2%. As outlined above, this was due to the receipt of the foru earn-out payment offset by the reduced foru product revenue along with a decrease in COGS.

Expenses: Total operating expenses were $354,906 or 39% lower in 2013 than the same period in 2012. The variances are broken down into several categories: · Legal - A decrease of $156,001 or 81.9% was realized because of the pending resolution of the investigation of the Company by the FTC.

· Wages and Benefits - Reductions in staff accounted for the decrease of $109,384 or 42.3%.

· Auditing and Corporate Fees - A decrease of 65,252 or 78.4% was due to larger fees in 2012 related to the unexpected resignation of the Company's previous auditor, a re-audit of 2011, and the resulting restatement thereof driving up 2012 costs.

· Research and Development - The decrease of $36,789 or 59.8% 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.

· Information Technology - Changes to the operations and ongoing cost cutting have afforded the opportunity for a decrease of $30,650 or 65.1% in IT related expenses.

Operating Losses: The Company incurred an operating loss of $240,257 for the three months ended June 30, 2013, as compared to an operating loss of $765,733 for the three months ended June 30, 2012, a positive change of $525,476 or 68.6%. The Company made a concerted effort to support its marketing partners in achieving their goals while at the same time focusing on containing expenses.

Net Income Losses: The Company incurred a net loss of $325,137 for the three months ended June 30, 2013 as compared to a net loss of $962,630 for the three months ended June 30, 2012, a decrease of $637,493 or 66%. The net loss in the second quarter of 2012 included a $90,000 additional charge related to the sale of GeneWize.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2013 AND THE SIX MONTHS ENDED JUNE 30, 2012 Revenues: Revenues decreased $276,769 or 21.3% for six months ended June 30, 2013 as compared to the same six months in 2012. There are four primary reasons for the decrease in revenue: · 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 $366,726 or 33.4%. $426,546 of the decrease is attributed to the sale of GeneWize and change in business model. This decrease coupled with approximately $90,000 in fewer product sales were offset by $150,000 in earn-out payments received in the second quarter of 2013.

15-------------------------------------------------------------------------------- Table of Contents · geneME product sales increased $57,968 or 592.1% over the same six month period in 2012. The increase in sales is attributed to increased marketing efforts.

· Dermagenetics saw sales slip $21,442 or 68.1% in the first six months of 2013 compared to the same period in 2012 due to a change in the sales force and a restructuring of the business plan. Although future sales are uncertain, significant progress has been made for a re-launch of the brand in the third quarter of 2013.

· Revenue from genetic assessments increased $49,994 or 73.9% as almost 1,900 DNA assessments were invoiced in the first six months of 2013 compared to 1,100 in the same period in 2012. The number of DNA assessments invoiced is one of the many indicators of future growth in recurring product revenues.

Cost of Goods Sold: Cost of Goods Sold ("COGS") decreased $106,234 or 14.6% compared to the same period in 2012. With foru's decrease in product sales along with bringing manufacturing in-house, foru accounted for $98,008 or 26.1% of the decrease in COGS. Assessments ($35,452 or 54.6%), geneME ($33,598 or 615.1%), and overhead ($64,954 or 124.9%) saw an increase in COGS due to the increase in the volume of assessments, product orders, and the allocation of overhead as a result of the conversion to in-house manufacturing. The final offset was that shipping COGS decreased ($101,647 or 54.6%) as a result of the sale of GeneWize.

Gross Profit: Gross Profit decreased $170,535 or 29.8%. As outlined above, this was due to the receipt of the foru earn-out payment offset by the reduced foru product revenue along with the sale of GeneWize and a decrease in COGS.

Expenses: Total operating expenses were $1,127,056 or 53% 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 including fewer employees as a result of the sale of GeneWize accounted for the decrease of $287,515 or 48.5%.

· Legal - A decrease of $218,800 or 81.0% was realized because of the pending resolution of the investigation of the Company by the FTC.

· Consultants - A decrease of $91,160 or 47.2% 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 have afforded the opportunity for a decrease of $83,148 or 67.6% in IT related expenses.

· Auditing and Corporate Fees - A decrease of $42,122 or 41.3% was due to larger fees in 2012 related to the unexpected resignation of the Company's previous auditor, a re-audit of 2011, and the resulting restatement thereof driving up 2012 costs.

· Research and Development - The decrease of $38,687 or 49.6% 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 $53,146 or 177.2% was spent in an effort to re-launch the product offerings.

· Facility Expenses - As a result of moving production in-house, the Company experienced $35,858 or an 82.8% increase in costs.

16 -------------------------------------------------------------------------------- Table of Contents Operating Losses: The Company incurred an operating loss of $597,680 for the six months ended June 30, 2013, as compared to an operating loss of $1,554,201 for the six months ended June 30, 2012, a positive change of $956,521 or 61.5%. The Company made a concerted effort to support its marketing partners in achieving their goals while at the same time focusing on containing expenses.

Net Income Losses: The Company incurred a net loss of $678,908 for the six months ended June 30, 2013 as compared to a net loss of $1,068,303 for the six months ended June 30, 2012, a decrease of $389,395 or 36.5%. The additional variance came from realizing $669,054 gain on the sale of GeneWize in 2012 while receiving a settlement of $87,500 in 2013 for an insurance claim settlement.

Pro Forma: Actual results for the six months ended June 30, 2013 compared to pro forma results for six months ended June 30, 2012 (excluding GeneWize through February 10, 2012): Six Months Ended June 30, 2012 (excluding GeneWize Six Months Ended through June 30, 2013 February 10, 2012) Revenues $ 1,021,818 $ 778,489 Gross Profit 401,346 221,564 Net Operating Loss (597,680 ) (1,477,972 ) Consistent with the change to the wholesale business model, the pro forma results show a reduction in operating losses of $880,292 or a 60% improvement.

LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 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 June 30, 2013 amounted to $1,443 as compared to $158,468 at December 31, 2012, a decrease of $157,025. The Company's operating activities utilized $301,025 of cash in the first six months of 2013 as compared to $979,427 in the first six months of 2012, a decrease of $678,402 or 69% in cash needs. This decrease in cash and cash equivalents needed is primarily related to the details outlined above describing the operating losses.

Investing activities provided $0 in proceeds for the six month period ended June 30, 2013 as compared to $221,835 provided for the three month period ended June 30, 2012. The financing activities provided $144,000 in proceeds related to sales of stock for the six month period ended June 30, 2013 as compared to $82,800 in proceeds provided for the six month period ended June 30, 2012.

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, for 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.

17 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION Assets of the Company decreased from $1,454,801 at December 31, 2012 to $1,273,348 at June 30, 2013, a decrease of $181,453. The lower cash at the end of the first quarter of 2013 accounted for $157,025 of the decrease with the remaining variance being attributed to inventory and accounts receivable.

Accounts receivable was up $136,667 for invoices to our market partners while inventory was reduced $100,123 as operations made some efficiency gains and accounted for some expired inventory.

Liabilities increased to $4,367,771 at June 30, 2013 from $4,116,154 on December 31, 2012, an increase of $251,617 or 6.1%. Accounts payable increased $196,056.

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.

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