10-Q 1 dskx_10q.htm QUARTERLY REPORT Quarterly Report

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q


(MARK ONE)

þ Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013

o Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______.

Commission File No. 000-53680

DS HEALTHCARE GROUP, INC.

(Exact name of registrant as specified in its charter)


Florida

20-8380461

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

1601 Green Road, Pompano Beach, Florida

33064

(Address of Principal Executive Offices)

(Zip Code)

 

 

(888) 404-7770

(Issuer’s Telephone Number, Including Area Code)

___________________________________________

(Former Name, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨


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.


Large accelerated filer £

Accelerated filer £

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

Smaller reporting company þ

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

There were 12,160,014 shares of common stock outstanding as of May 10, 2013.

 

 







PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

DS Healthcare Group, Inc. (formerly Divine Skin, Inc.)(d/b/a DS Laboratories) and Subsidiaries

 Condensed Consolidated Balance Sheets


 

 

March 31,

 

 

December 31,

 

 

 

2013

 

 

2012

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

 

$

196,513

 

 

$

412,488

 

Accounts receivable, net

 

 

2,368,864

 

 

 

2,125,641

 

Inventory

 

 

3,482,883

 

 

 

3,453,950

 

Prepaid expenses and other current assets

 

 

117,041

 

 

 

159,164

 

Total Current Assets

 

 

6,165,301

 

 

 

6,151,243

 

 

 

 

 

 

 

 

 

 

Furniture and Equipment, net

 

 

277,699

 

 

 

293,720

 

Advances to Related Parties

 

 

26,000

 

 

 

17,973

 

Intangible Assets, net

 

 

1,647,694

 

 

 

1,674,852

 

Other Assets

 

 

103,635

 

 

 

86,888

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

8,220,329

 

 

$

8,224,676

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,324,417

 

 

$

2,327,540

 

Accrued expenses

 

 

449,836

 

 

 

704,882

 

Credit facility

 

 

538,284

 

 

 

448,658

 

Shareholder loans

 

 

659,100

 

 

 

353,000

 

Other current liabilities

 

 

376,150

 

 

 

227,407

 

Total Current Liabilities

 

 

4,347,787

 

 

 

4,061,487

 

 

 

 

 

 

 

 

 

 

Long Term Debt

 

 

42,845

 

 

 

45,177

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

4,390,632

 

 

 

4,106,664

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 30 million shares authorized: 5,500,000 shares issued and outstanding at March 31, 2013 and December 31, 2012

 

 

5,500

 

 

 

5,500

 

Common stock, $0.001 par value, 300 million shares authorized:12,160,014 and 12,119,705 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

 

 

12,160

 

 

 

12,120

 

Additional paid-in-capital

 

 

9,342,958

 

 

 

9,244,748

 

Stock subscription

 

 

(30,000

)

 

 

(30,000

)

Accumulated deficit

 

 

(5,555,984

)

 

 

(5,097,990

)

Other comprehensive income

 

 

75,551

 

 

 

 

Total Shareholders' Equity

 

 

3,850,185

 

 

 

4,134,378

 

Non-Controlling Interest

 

 

(20,488

)

 

 

(16,366

)

Total Equity

 

 

3,829,697

 

 

 

4,118,012

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

8,220,329

 

 

$

8,224,676

 




See accompanying notes to condensed consolidated financial statements


1



DS Healthcare Group, Inc. (formerly Divine Skin, Inc.)(d/b/a DS Laboratories) and Subsidiaries

 Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)


 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

 

2012

 

Revenue:

 

 

 

 

 

 

Product sales

 

$

4,589,550

 

 

$

2,108,424

 

Less allowances

 

 

(624,185

)

 

 

(124,442

)

 

 

 

 

 

 

 

 

 

Net revenue

 

 

3,965,365

 

 

 

1,983,982

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

2,190,681

 

 

 

933,662

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

1,774,684

 

 

 

1,050,320

 

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

 

 

 

Commissions and consulting

 

 

259,769

 

 

 

299,800

 

Other selling and marketing expenses

 

 

497,229

 

 

 

463,351

 

 

 

 

756,998

 

 

 

763,151

 

General and administrative

 

 

 

 

 

 

 

 

Salary and personnel costs

 

 

485,730

 

 

 

308,722

 

Professional fees and consulting costs

 

 

366,842

 

 

 

279,496

 

Other general and administrative expenses

 

 

656,103

 

 

 

127,138

 

 

 

 

1,508,675

 

 

 

715,356

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

 

2,265,673

 

 

 

1,478,507

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(490,989

)

 

 

(428,187

)

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

591

 

Interest expense

 

 

(19,745

)

 

 

 

Other

 

 

56,615

 

 

 

(12,741

)

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

36,870

 

 

 

(12,150

)

 

 

 

 

 

 

 

 

 

Loss Before Taxes

 

 

(454,119

)

 

 

(440,337

)

 

 

 

 

 

 

 

 

 

Income Tax

 

 

7,996

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(462,115

)

 

 

(440,337

)

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

(4,122

)

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Shareholders

 

$

(457,993

)

 

$

(440,337

)

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings per Share:

 

 

 

 

 

 

 

 

Weighted average shares

 

 

12,137,997

 

 

 

10,513,002

 

Loss per share

 

$

(0.04

)

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

$

75,551

 

 

$

 

Comprehensive loss

 

$

(382,442

)

 

$

 



See accompanying notes to condensed consolidated financial statements


2



DS Healthcare Group, Inc. (formerly Divine Skin, Inc.)(d/b/a DS Laboratories) and Subsidiaries

 Condensed Consolidated Statements of Changes in Equity

 For the Period From January 1, 2012 to March 31, 2013


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Subscription/

 

 

 

 

 

Other

 

 

Total

 

 

Non-

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid In

 

 

Stock

 

 

Accumulated

 

 

Comprehensive

 

 

Shareholders'

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

Income

 

 

Equity

 

 

Interest

 

 

Equity

 

January 1, 2012

 

  

10,000,000

 

 

$

10,000

 

 

  

10,502,961

 

 

$

10,503

 

 

$

6,606,668

 

 

$

(100,000

)

 

$

(1,506,893

)

 

$

 

 

$

5,020,278

 

 

$

(15,032

)

 

$

5,005,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold to private investors

 

 

 

 

 

 

 

 

 

 

292,000

 

 

 

292

 

 

 

731,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

732,000

 

 

 

 

 

 

 

732,000

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(146,400

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(146,400

)

 

 

 

 

 

 

(146,400

)

For services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

 

 

 

 

104,697

 

 

 

105

 

 

 

237,289

 

 

 

70,000

 

 

 

 

 

 

 

 

 

 

 

307,394

 

 

 

 

 

 

 

307,394

 

Employee/associate compensation

 

 

 

 

 

 

 

 

 

 

58,249

 

 

 

58

 

 

 

158,857

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158,915

 

 

 

 

 

 

 

158,915

 

Distributor award

 

 

 

 

 

 

 

 

 

 

78,704

 

 

 

79

 

 

 

234,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

234,138

 

 

 

 

 

 

 

234,138

 

Consulting

 

 

 

 

 

 

 

 

 

 

2,000

 

 

 

2

 

 

 

3,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

 

 

 

 

 

 

4,000

 

Purchase Mexican distributor

 

 

 

 

 

 

 

 

 

 

600,000

 

 

 

600

 

 

 

1,302,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,303,000

 

 

 

 

 

 

 

1,303,000

 

Fair value adjustment of Mexican distributors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,879

 

 

 

 

 

 

 

2,879

 

Purchase brand rights

 

 

 

 

 

 

 

 

 

 

15,385

 

 

 

15

 

 

 

49,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,000

 

 

 

 

 

 

 

50,000

 

Fractional shares from reverse split

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Cancelled / Surrendered:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issued in error and returned

 

 

 

 

 

 

 

 

 

 

(20,000

)

 

 

(20

)

 

 

(55,980

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56,000

)

 

 

 

 

 

 

(56,000

)

Surrendered

 

 

 

 

 

 

 

 

 

 

(5,000

)

 

 

(5

)

 

 

(16,795

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,800

)

 

 

 

 

 

 

(16,800

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants and Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested for trading symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128,000

 

 

 

 

 

 

 

128,000

 

Exercised

 

 

 

 

 

 

 

 

 

 

40,700

 

 

 

41

 

 

 

4,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,070

 

 

 

 

 

 

 

4,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred shares converted

 

 

(4,500,000

)

 

 

(4,500

)

 

 

450,000

 

 

 

450

 

 

 

4,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposal of Brazil distribution joint venture

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,647

 

 

 

 

 

 

 

15,647

 

 

 

15,032

 

 

 

30,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012 Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,606,744

)

 

 

 

 

 

 

(3,606,744

)

 

 

(16,366

)

 

 

(3,623,110

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2012

 

 

5,500,000

 

 

$

5,500

 

 

 

12,119,705

 

 

$

12,120

 

 

$

9,244,748

 

 

$

(30,000

)

 

$

(5,097,990

)

 

$

 

 

$

4,134,378

 

 

$

(16,366

)

 

$

4,118,012

 


(Continued)



See accompanying notes to condensed consolidated financial statements


3



DS Healthcare Group, Inc. (formerly Divine Skin, Inc.)(d/b/a DS Laboratories) and Subsidiaries

 Condensed Consolidated Statements of Changes in Equity (Continued)

 For the Period From January 1, 2012 to March 31, 2013


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Subscription/

 

 

 

 

 

Other

 

 

Total

 

 

Non-

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid In

 

 

Stock

 

 

Accumulated

 

 

Comprehensive

 

 

Shareholders'

 

 

Controlling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

Income

 

 

Equity

 

 

Interest

 

 

Equity

 

December 31, 2012

 

  

5,500,000

 

 

$

5,500

 

 

  

12,119,705

 

 

$

12,120

 

 

$

9,244,748

 

 

$

(30,000

)

 

$

(5,097,990

)

 

$

 

 

$

4,134,378

 

 

$

(16,366

)

 

$

4,118,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

20

 

 

 

43,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44,000

 

 

 

 

 

 

 

44,000

 

Distributor award

 

 

 

 

 

 

 

 

 

 

15,300

 

 

 

15

 

 

 

38,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,250

 

 

 

 

 

 

 

38,250

 

Board of Directors

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

5

 

 

 

15,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,000

 

 

 

 

 

 

 

16,000

 

Fractional shares from reverse split

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,551

 

 

 

75,551

 

 

 

 

 

 

 

75,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013 Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(457,993

)

 

 

 

 

 

 

(457,993

)

 

 

(4,122

)

 

 

(462,115

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2013 (Unaudited)

 

 

5,500,000

 

 

$

5,500

 

 

 

12,160,014

 

 

$

12,160

 

 

$

9,342,958

 

 

$

(30,000

)

 

$

(5,555,984

)

 

$

75,551

 

 

$

3,850,185

 

 

$

(20,488

)

 

$

3,829,697

 





See accompanying notes to condensed consolidated financial statements


4



DS Healthcare Group, Inc. (formerly Divine Skin, Inc.)(d/b/a DS Laboratories) and Subsidiaries

 Condensed Consolidated Statements of Cash Flows

 (Unaudited)


 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

 

2012

 

 

  

                      

  

  

                      

  

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net Loss

 

$

(462,115

)

 

$

(440,337

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

143,284

 

 

 

47,682

 

Bad debt allowance (recovery)

 

 

201,622

 

 

 

(36,758

)

Change in inventory allowance

 

 

(47,031

)

 

 

20,000

 

Stock issued for services

 

 

98,250

 

 

 

119,182

 

Warrants issued for other services

 

 

 

 

 

48,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(444,845

)

 

 

480,688

 

Inventory

 

 

18,098

 

 

 

(618,662

)

Prepaid expenses and other current assets

 

 

5,175

 

 

 

(3,700

)

Accounts payable

 

 

(3,123

)

 

 

10,578

 

Accrued expenses

 

 

(255,045

)

 

 

 

Other current liabilities

 

 

148,743

 

 

 

27,379

 

Net cash used in operating activities

 

 

(596,987

)

 

 

(345,948

)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of furniture and equipment

 

 

(12,037

)

 

 

(14,360

)

Purchase of injection molds

 

 

(35,139

)

 

 

 

Advances to related parties

 

 

(8,027

)

 

 

 

Disposal of Brazil Joint Venture

 

 

 

 

 

4,678

 

Security deposits

 

 

 

 

 

(3,000

)

Net cash used in investing activities

 

 

(55,203

)

 

 

(12,682

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net proceeds of credit facility

 

 

89,626

 

 

 

 

Proceeds of shareholders' loans

 

 

310,000

 

 

 

 

Repayment of loans and notes

 

 

(6,232

)

 

 

 

Net cash provided by financing activities

 

 

393,394

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

42,821

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash

 

 

(215,975

)

 

 

(358,630

)

Cash, Beginning of Period

 

 

412,488

 

 

 

1,284,343

 

 

 

 

 

 

 

 

 

 

Cash, End of Period

 

$

196,513

 

 

$

925,713

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

19,745

 

 

$

 




See accompanying notes to condensed consolidated financial statements


5





DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

 

Terms and Definitions

 

  

AICPA

American Institute of Certified Public Accountants

  

ASC

Accounting Standards Codification

  

ASU

Accounting Standards Update

  

FASB

Financial Accounting Standards Board

  

FIFO

First-in, First-out

  

GAAP (US)

Generally Accepted Accounting Principles as applied in the United States

  

IFRS

International Financial Reporting Standards

  

SEC

Securities Exchange Commission

  

SFAS or FAS

Statement of Financial Accounting Standards

  

13-QTR

Three months ended March 31, 2013

  

12-QTR

Three months ended March 31, 2012

  

VIE

Variable Interest Entity


Organization and Nature of Business


DS Healthcare Group, Inc. (formerly Divine Skin, Inc.) (d/b/a DS Laboratories) (the “Company”, “DS Laboratories”, ”DSKX”, “we”, “us” or “our”) was organized under the laws of the State of Florida in January 2007. Through its predecessors, the Company has been developing and marketing hair care, skin care and personal care products for over fifteen years. The Company has grown steadily over the last few years with a network of top specialty retailers and distributors throughout North America, Europe, Asia and South America. The Company researches and develops its own products, which management believes keeps the Company at the forefront of innovation. Management believes the Company is currently a leading innovator of “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the action of the active ingredients in our products. We currently offer products are within the following broad product categories:


·

Hair Care

·

Skin Care

·

Health and Personal Care

 

History of the Company

 

The Company was incorporated in January 2007 and capitalized with the assets recovered from a terminated predecessor New York corporation. DS Laboratories, Inc. (a Florida corporation) was also incorporated in January 2007. The companies were founded by common shareholders.


In the first quarter of 2009,

 

·

the Company acquired 100% of the outstanding shares of DS Laboratories, Inc. (a Florida corporation) and Sigma Development and Holding Co., Inc. (a Florida corporation) (Sigma), both for a nominal amount. DS Laboratories has been idle since its inception in 2007.

·

Sigma was founded as an upscale brand addition to the Companys product portfolio.

·

Polaris Labs, Inc. (a Florida corporation) was founded to distribute versions of the Company’s products that, for marketing purposes, are sold through physicians and foreign distributors under the Polaris brand.

 

The primary operating entity is DS HealthCare Group, Inc. (formerly Divine Skin, Inc.) and currently conducts its business under the “DS Laboratories” and “Divine Skin” trade names.



6



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS (Continued)


In the fourth quarter of 2009, we completed an agreement with DS Laboratories Brazil, LTDA to distribute our products and additional future products specifically tailored for the Brazilian market. The costs associated with procuring this agreement have been capitalized and are amortized over the life of the agreement.

In the first quarter of 2011, we began distribution of Nutra Origin brand nutraceutical products under an exclusive distribution agreement with the manufacturer. Our Chief Executive Officer’s father is part owner and COO of the manufacturer of Nutra Origin brand products.

In the third quarter of 2011, the Company finalized discussions with DS Laboratories Brazil, LTDA, to modify its joint venture distribution agreement. In exchange for 100% ownership in the joint venture, our Brazilian distributor has fully funded the product development and licensing of our products in Brazil. We will remain the license holder once the license is granted and we retain our exclusivity for Brazilian distribution. We commenced sales in the fourth quarter 2012. As of December 31, 2012, the Company had invested $26,000 in this venture which will be repaid by our distributor.

In the second quarter of 2012, we engaged in negotiations to license or acquire the Nutra Origin brand. Negotiations were completed and closed in the fourth quarter of 2012 whereby we pay $7,500 per month for an exclusive 10 year license to use the Nutra Origin brand. As part of the closing, we issued $50,000 in DSKX stock and granted a 7% equity interest in a newly formed subsidiary, Nutra Origin, Inc. We also acquired the 100% of the Pure Guild brand license (see Note 7).

In the fourth quarter of 2012, we closed on the acquisition of Divine Skin Laboratories, S.A. de CV, our Mexican Distributor (“DS Mexico”) (see Note 20).

During the fourth quarter of 2012, we also completed a 10:1 reverse split and effected a name change to DS Healthcare Group, Inc. All share and per share information contained in this report gives retroactive effect to the 10:1 reverse split.

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The consolidated financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting conforms to accounting principles generally accepted in the United States of America.

The consolidated financial statements include the accounts of the Company and its wholly owned operating subsidiaries DS Laboratories, Inc., Sigma Development and Holding Co., Inc., Polaris Labs, Inc., Nutra Origin, Inc. and Divine Skin Laboratories, S.A. de CV. Also included in the consolidated financial statements are the activities of Velocity Storage and Packaging, LLC, and Wally Group, LLC which are accounted for as VIEs. All significant intercompany balances and transactions have been eliminated in consolidation.

Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements, notes and accounting policies included in the Company’s Annual Report. In the opinion of management, all adjustments which are necessary to provide a fair presentation of financial position as of March 31, 2013 and the related operating results and cash flows for the interim periods presented have been made. All adjustments are of a normal recurring nature. The results of operations, for the periods presented are not necessarily indicative of the results to be expected for future periods or for the year ending December 31, 2013.




7



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Prior Period Reclassifications

Certain prior period amounts that were combined in the December 31, 2012 consolidated financial statements (accounts payable and accrued expenses, and shareholder loans and other current liabilities) have been reclassified for comparability with the March 31, 2013 presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these consolidated financial statements include:

·

Estimates of allowances for uncollectable accounts receivable,

·

Estimates of inventory obsolescence and overhead and labor cost allocations,

·

Estimates assuming future earning capacity of our exclusive Brazilian distribution agreement,

·

Estimates of value of equity transactions for services rendered,

·

Estimates of returned or damaged product, and

·

Estimates made in our deferred income tax calculations.

·

Estimates made with respect to the fair values of assets acquired and liabilities assumed in our acquisition of DS Mexico.


Risks and Uncertainties

The Company’s business could be impacted by price pressure on its product manufacturing, acceptance of its products in the market place, new competitors, changes in federal and/or state legislation and other factors. The Company also has been experiencing significant growth which puts serious strains on its cash availability requirements. If the Company is unsuccessful in securing adequate liquidity, its plans may be curtailed. Adverse changes in these areas could negatively impact the Company’s financial position, results of operations and cash flows.

Cash

Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations.

Accounts Receivable

Accounts receivable are reported at their net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. The Company also provides for allowances against accounts receivables for product returns and cooperative advertising allowances. At March 31, 2013 and December 31, 2012, the allowance for uncollectable accounts was $525,602 and $323,981 respectively. At March 31, 2013 and December 31, 2012, the Company provided $210,000 at both dates for defectives and product returns and $60,000 at both dates for advertising credits.

Inventory

Inventory is reported at the lower of cost or market on the first-in, first-out (“FIFO”) method. Our inventory is subject to expiration and obsolescence, accordingly quantities purchased and sell through rates are periodically monitored for potential overstocking or pending expiration as a basis for establishing the appropriate reserve for any estimated expiration or obsolescence.



8



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Furniture and Equipment

Furniture and equipment are recorded at cost and depreciation is provided using the straight line depreciation method over the estimated useful lives of the assets, which range from 5 to 7 years. The Company recorded $28,058 and $5,865 in depreciation expense during the three months ended March 31, 2013 and 2012, respectively. Accumulated depreciation was $179,691 and $151,633 at March 31, 2013 and December 31, 2012, respectively. Expenditures for repairs and maintenance of equipment are charged to expense as incurred. Major replacements and betterments are capitalized and depreciated over the remaining useful lives of the assets.

Long-Lived Assets

The Company has adopted ASC 360-10, “Accounting for Impairment or Disposal of Long-Lived Assets”, which requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Long Term Debt

Interest expense is recognized on the outstanding loan obligation as incurred and is recorded in “Interest Expense”. The Company entered into a loan agreement to purchase certain warehouse equipment on December 10, 2012. (see Note 11).

Non-Controlling Interest

Non-controlling interest consists of the minority owned portion of the following:

Nutra Origin, Inc. – During the fourth quarter of 2012 the Company completed its license of the Nutra Origin brand. In addition, the Company established a new subsidiary to operate the Nutra Origin brand. As part of the license agreement, the licensor was granted a 7% non-controlling interest in the newly formed subsidiary.

Revenue Recognition

Revenue is recognized when a product is shipped and risk of loss is transfered. The Company manages the collection process for transactions processed on its website, but it outsources its fulfillment (delivery) process to third parties.

The Company’s revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition”, which establishes criteria that must be satisfied before revenue is realized or realizable and earned. The Company recognizes revenue when all of the following four criteria are met:

·

persuasive evidence of a sales arrangement exists,

·

delivery has occurred,

·

the sales price is fixed or determinable and

·

collectability is probable.

Shipping and handling charges related to sales transactions are recorded as sales revenues when billed to customers or included in the sales price in accordance with ASC Topic 605, “Accounting for Shipping and Handling Fees and Costs”. Shipping and handling costs are included in cost of goods sold.



9



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Research and Development

The Company currently maintains a functional laboratory employing two full time chemists, a part time chemist/consultant and a lab technician that identify new technology, test product alternatives and improve existing formulations. In addition, our founder and CEO devotes a substantial portion of his time in identifying new technologies and formulations to develop new products and improve existing products with the newest technology available. ASC Topic 730, “Accounting for Research and Development Costs” requires such activities be expensed in the year incurred. Such costs include laboratory supplies, salaries, materials and consultant fees. These costs are classified as product development, salaries, selling, general and administrative expenses in the condensed consolidated statements of operations, and amounted to $28,998 and $43,415 for the three months ended March 31, 2013 and 2012, respectively.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded when it is more likely than not that some portion or all of a deferred tax asset will not be realized.  Income tax expense is the result of Mexican operations.

Earnings per share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. Vested warrants for 253,893 shares and vested options for 32,633 shares were excluded from the earnings per share calculation because they would be anti-dilutive.

Segment Information

ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. Management has determined that the Company operates in one business segment, which is the commercialization and development of personal care products.

Fair Value of Financial Instruments

Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. We currently do not have any financial assets and liabilities that are recurring that would require us to disclose them at fair value.



10



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Functional Currency

The U.S. dollar is the functional currency of our consolidated entities operating in the United States. The functional currency for our consolidated entity operating outside of the United States is the Mexican peso. We translate their financial statements into U.S. dollars as follows:

·

Assets and liabilities are translated at the exchange rate in effect as of the financial statement date.

·

Income statement accounts are translated using the weighted average exchange rate for the period.

We include translation adjustments from currency exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of shareholders’ equity. There are currently no transactions of a long-term investment nature, nor any gains or losses from non-U.S. currency transactions.

NOTE 3. – LIQUIDITY

As of March 31, 2013, we had $196,513 in cash. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation as a going concern. We have sustained substantial operational losses since our inception, and such operational losses have continued through March 31, 2013. We have financed our operations primarily through the issuance of shares of our common stock, a line of credit and the issuance of promissory notes. At March 31, 2013, we had an accumulated deficit of approximately $5,555,984. The Company cannot predict how long it will continue to incur further losses or whether it will ever become profitable which is dependent upon the reduction of certain operating expenses and success of new and existing products. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. We have commenced implementing, and will continue to implement, various measures to address our financial condition, including:

·

Continuing to seek debt and equity financing. However, there can be no assurances that the Company will be able to raise additional capital on favorable terms, or at all.

·

Curtailing our rate of expansion until our cash flow improves and we can recommence these activities with appropriate working capital or funding.

·

Curtailing operations where feasible to conserve cash through deferring certain of our marketing activities until our cash flow improves and we can recommence these activities with appropriate working capital of funding.

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB amended its guidance to require an entity to present the effect of certain significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. The new accounting guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance is effective prospectively for fiscal years beginning after December 15, 2012.  The Company adopted these new provisions for the quarter beginning January 1, 2013. As the guidance requires additional presentation only, there was no impact to the Company’s consolidated results of operations or financial position.



11



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 5. – INVENTORY


Significant components of inventory at March 31, 2013 and December 31, 2012 consist primarily of:

 

 

2013

 

 

2012

 

 

 

(Unaudited)

 

 

 

 

Bulk product and raw materials

 

$

2,516,357

 

 

$

2,402,331

 

Work in process

 

 

293,772

 

 

 

237,284

 

Merchandise inventory

 

 

1,121,483

 

 

 

1,074,833

 

Inventory in transit

 

 

4,240

 

 

 

239,502

 

Less: Allowance

 

 

(452,969

 

 

(500,000

 

 

$

3,482,883

 

 

$

3,453,950

 

 

Bulk product and raw materials – Bulk product consists of completed product formulations that have not yet been packaged in market ready packaging. Raw materials consist of bulk quantities of the various chemical components of our product along with bottles, pumps, labels and other packaging materials.

Work in process – Work in process inventory consists of merchandise inventory currently in interim production stage that is partially completed and not yet market ready.

Merchandise inventory – Merchandise inventory consists of completed formulations in market ready packaging. Our formulations are batch controlled and subject to various government regulations which, among other things, govern the purity and safety of our product.

Inventory in transit – In transit inventory consists of primarily bulk product and raw materials where title has transferred to the Company but the inventory has yet to arrive in a designated warehouse facility either Company owned or under contract.

Management evaluated the inventory at March 31, 2013 and December 31, 2012. At March 31, 2013 and December 31, 2012, a $452,696 and $500,000 allowance, respectively, for slow moving and obsolete inventory was considered necessary and recorded by the Company. The allowance applies primarily to chemical components that have expired and packaging components that are usable and in good condition except that they may no longer be used in current production due to packaging changes or were ordered in excess quantities based on current production consumption. Generally, finished goods does not require a reserve.

NOTE 6. – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets at March 31, 2013 and December 31, 2012 consist primarily of:

 

 

2013

 

 

2012

 

 

 

(Unaudited)

 

 

 

 

 

Prepaid rent

 

$

 

 

$

21,200

 

Prepaid insurance

 

 

27,777

 

 

 

24,304

 

Deferred issuance costs, net of amortization

 

 

49,463

 

 

 

61,828

 

Prepaid VAT

 

 

7,960

 

 

 

30,228

 

Other prepaid

 

 

31,841

 

 

 

21,604

 

 

 

$

117,041

 

 

$

159,164

 


Prepaid rent – Represents the temporary timing of rent payments.

Prepaid insurance – Represents the temporary advance of deposits and scheduled premium payments made in excess of premiums expensed over the policy period. These advances totaled approximately $98,568 of which $70,791 was expensed over the policy year to date including $25,665 that was expensed during the first quarter of 2013.

Deferred issuance costs – These amounts were made in connection with obtaining financing arrangements from our asset based lender discussed more fully in Note 11, which consisted of loan origination fees, legal and due diligence fees. These deferred issuance costs totaled approximately $98,924 of which $49,461 has been amortized since origination of the financing during the second quarter of 2012. $12,365 was amortized during the first quarter of 2013.



12



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 7. – INTANGIBLE ASSETS


Significant components of intangible assets at March 31, 2013 and December 31, 2012 consist primarily of:

 

 

 

2013

 

 

2012

 

 

 

 

(Unaudited)

 

 

 

 

 

Distribution rights in Brazil

 

$

750,000

 

 

$

750,000

 

Less: Accumulated amortization

 

 

(262,500

)

 

 

(243,750

)

Net distribution rights

 

 

487,500

 

 

 

506,250

 

 

 

 

 

 

 

 

 

 

Pure Guild brand rights

 

 

159,086

 

 

 

159,086

 

Less: Accumulated amortization

 

 

(81,485

)

 

 

(77,790

)

Net brand right

 

 

77,601

 

 

 

81,296

 

 

 

 

 

 

 

 

 

 

Nutra Origin license

 

 

144,307

 

 

 

144,307

 

Less: Accumulated amortization

 

 

(18,526

)

 

 

(6,500

)

Net license

 

 

125,781

 

 

 

137,807

 

 

 

 

 

 

 

 

 

 

DS Mexico Customer list

 

 

981,819

 

 

 

932,000

 

Less: Accumulated amortization

 

 

(61,293

)

 

 

(16,945

)

Net customer list

 

 

920,526

 

 

 

915,055

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

36,286

 

 

 

34,444

 

 

 

$

1,647,694

 

 

$

1,647,852

 

 

Brazilian distribution rights – During 2009, the Company issued 300,000 shares of common stock to a Brazilian distributor in exchange for a 10 year exclusive distribution agreement in Brazil. The transaction was valued at $2.50 per share. The Company, through its exclusive distributor and former joint venture partner, is currently developing a generic Minoxidil product along with appropriate packaging for the Brazilian market, which was introduced in the 4th quarter of 2012. $18,750 was amortized during both 13-QTR and 12-QTR. During, the 3rd quarter of 2011, due to the costs involved, the Company entered into agreement with its former joint venture partner, whereby the former joint venture partner agreed to provide all required financing for the product in exchange for 100% ownership of the joint venture. The Company retained its distribution rights.

Pure Guild brand rights – During the 3rd quarter of 2009, we were approached by a customer/distributor to develop a private label brand of premium products and associated packaging materials. The Pure Guild brand of products was the result. As part of this project we obtained a 50% interest in the Pure Guild brand and the permanent exclusive rights to manufacture the Pure Guild products. In exchange for these rights, we provided $106,666 of product representing approximately 70% the initial stocking order. These rights were being amortized over 5 years, representing the basic term of the supplier agreement.

During the second quarter of 2012, we acquired the remaining 50% ownership of the Pure Guild brand from our customer/distributor in exchange for release from the exclusive supplier agreement so that we may pursue promotion of the brand through our existing distributor network. As a convenience, we also accepted return of their remaining Pure Guild inventory, which amounted to $50,000, based on the original sales price. Because we have begun to revitalize the brands position in the market, we will modify the amortization term to appropriately reflect the remaining unamortized brand rights combined with the additional brand rights acquired, to 6 years. We have evaluated the asset and determined that no impairment was considered necessary. $3,695 and $6,400 has been amortized during 13-QTR and 12-QTR, respectively.



13



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 7. – INTANGIBLE ASSETS (Continued)


Nutra Origin brand license – We completed our negotiations to secure an exclusive license to use the Nutra Origin brand from our supplier. We have been distributing the Nutra Origin brand products for nearly a year and although the brand currently represents a relatively modest portion of our sales, we intend for this brand to expand our health and personal care product offerings into the nutraceutical market. Our CEO’s father is a part owner and was COO of the company that owns the Nutra Origin brand. He is now our Nutra Origin product manager. Our agreement requires us to pay $7,500 per month for an exclusive 10 year license to use the Nutra Origin brand, plus $50,000 in DSKX common shares. The agreement contains certain performance clauses for both parties, which permit cancellation by us after 3 years and permit cancellation by the seller if we fail to maintain stipulated minimum sales.

DS Mexico Customer list – In connection with the acquisition of our Mexican distributor, which is discussed more fully in Note 20, we acquired the customer list which was recorded at its fair value as determined by management utilizing the services of an independent appraiser. The asset is being amortized over its estimated useful life of 9 years. Accordingly, the Company recognized $44,348 of amortization expense in 13-QTR. The change in the gross value of the DS Mexico customer list is the result of foreign currency translation adjustment at March 31, 2013. The Company will assess the asset for impairment annually. At March 31, 2013 no impairment was considered necessary.

Goodwill – Also in connection with the acquisition of our Mexican distributor, which is discussed more fully in Note 20, we acquired goodwill which represents the excess of the fair value of consideration given over the fair value of the assets acquired. Its fair value as determined by an independent appraiser. The asset is not being amortized, however the Company will access the asset for impairment annually. The change in the gross value of the goodwill is the result of foreign currency translation adjustment at March 31, 2013.  At March 31, 2013 no impairment was considered necessary.

The following table represents the amortized cost of the various assets over the next years.

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

Beyond

 

 

Total

 

Asset:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brazil distribution rights

 

$

56,250

 

 

$

75,000

 

 

$

75,000

 

 

$

75,000

 

 

$

206,250

 

 

$

487,500

 

Pure Guild brand rights

 

 

11,085

 

 

 

14,780

 

 

 

14,780

 

 

 

14,780

 

 

 

22,176

 

 

 

77,601

 

Nutra Origin brand license

 

 

34,705

 

 

 

46,273

 

 

 

44,803

 

 

 

 

 

 

 

 

 

125,781

 

Mexican Customer list

 

 

76,252

 

 

 

101,670

 

 

 

101,670

 

 

 

101,670

 

 

 

539,264

 

 

 

920,526

 

 

 

$

178,292

 

 

$

237,723

 

 

$

236,253

 

 

$

191,450

 

 

$

767,690

 

 

$

1,611,408

 




14



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 8. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Significant components of accounts payable and accrued expenses at March 31, 2013 and December 31, 2012 consist primarily of:

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

 

Trade payables

 

$

2,324,417

 

$

2,327,540

 

 

 

 

 

 

 

 

 

Accrued expenses:

 

 

 

 

 

 

 

Advertising and marketing

 

 

48,264

 

 

60,264

 

Commissions

 

 

139,396

 

 

362,346

 

Facilities

 

 

73,426

 

 

38,023

 

Fees / interest

 

 

20,658

 

 

19,012

 

Insurance

 

 

10,129

 

 

 

Investor relations

 

 

 

 

44,000

 

Production materials

 

 

11,000

 

 

 

Other

 

 

 

 

61,807

 

Personnel

 

 

25,833

 

 

109,930

 

Professional fees

 

 

33,630

 

 

9,500

 

Public relations

 

 

22,500

 

 

 

Refunds and returns

 

 

65,000

 

 

 

 

 

$

449,836

 

$

704,882

 


Trade payables – Consist of liabilities arising in the normal course of business, evidenced by invoices and are generally incurred in connection with the acquisition of materials, inventory or outside services. The Company has fueled its expansion in part by securing significant support from its vendors and suppliers.

Accrued expenses – Represents commitments made for goods or services provided during 13-QTR where the activity does not normally generate an invoice that can be recorded as a trade payable such as accrued commissions or where invoices were received subsequent to the end of the reporting period but the goods or services were provided prior to the end of the reporting period.


NOTE 9. – OTHER CURRENT LIABILITIES

Significant components of other current liabilities at March 31, 2013 and December 31, 2012 consist primarily of:

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

 

Customer deposits

 

$

245,300

 

$

22,689

 

Credit cards

 

 

84,570

 

 

117,006

 

Taxes payable

 

 

12,023

 

 

78,989

 

Current portion of long term debt

 

 

8,723

 

 

8,723

 

Other

 

 

25,534

 

 

 

 

 

$

376,150

 

$

227,407

 


Customer deposits – Customer deposit represent monies advanced to us on orders for future shipments.



15



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 10. – SHAREHOLDER LOANS


Shareholder loans - On December 10, 2012 we received an unsecured loan for $314,000 from one of our consultants who is also a shareholder. This loan is non-interest bearing and matures on December 11, 2013. During the first quarter of 2013, we received an additional $240,000 from the same consultant/shareholder under the same terms as the initial advance. The total advanced outstanding at March 31, 2013 was $554,000.


We also received a loan from Daniel Khesin, our Chief Executive Officer for $39,000. This loan is an unsecured, non-interest bearing and matures on December 25, 2013. Two installment payments totaling $3,900 have been made during 13-QTR. The net advanced outstanding at March 31, 2013 was $35,100.

On January 20, 2013, we received an unsecured loan for $70,000 from Gamma Investors, also a shareholder and affiliate of our Brazilian distributor. The loan bears interest at 3% per month and matures on May 20, 2013. The loan calls for monthly installment payments along with interest. The net advanced outstanding at March 31, 2013 was $70,000.

NOTE 11. – DEBT FINANCING

Credit Facility - On April 6, 2012 a financial institution provided the Company with a $1.5 million credit facility with an initial draw of $580,000. The credit facility provides for asset based lending collateralized by all assets of the Company. Advances are based on 80% of qualified accounts receivable and 40% of finished goods inventory. The credit facility provides for interest and bank fees, which currently aggregate to 8% (prime plus 3% plus 1.75% asset monitoring fees and other fees) per annum and expires March 24, 2014, and may be renewed under certain conditions. The credit facility is personally guaranteed by our Chief Executive Officer and, under certain conditions, may be called upon demand. The credit facility also provides for a referral fee of 4% per annum for 3 years. The Loan Agreement contains customary representations, warranties, affirmative and negative covenants and events of default. The negative covenants include, among other things, restrictions on transferring our assets, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, and creating other liens on our assets, in each case subject to customary exceptions. As of March 31, 2013, the Company had $538,284 outstanding and $255,566 available to borrow based on its advance formulas for qualified accounts receivable and finished goods inventory.

We are currently in compliance with the covenants under the credit facility, with the following exceptions;

(1)

Under the terms of the credit facility, we are required to obtain a life insurance policy on the Company’s Chief Executive Officer. We are in the process of obtaining the life insurance policy and the requirement has been waived until May 31, 2013.

Long Term Debt – On December 10, 2012 the Company entered into a loan agreement for $53,900 to purchase certain warehouse equipment. The loan provides for monthly payments of $1,041 for 60 months at 5.95% interest. The first payment was required on February 18, 2013. No interest expense from this loan was recognized in 2012 due to its immateriality.

Principal payout over the life of the loan is as follows:

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

Total

 

Long Term Debt

 

$

8,723

 

$

10,073

 

$

10,689

 

$

11,343

 

$

12,036

 

$

1,036

 

$

53,900

 




16



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 12. – COMMITMENTS AND CONTINGENCIES


During 13-QTR and 2012, the Company operated under several material agreements as listed below:

Lease for office and production facilities –

 

·

The Company leased its corporate headquarters office space located in Miami Beach, Florida, on a month to month basis at $5,700 per month or $68,400 on an annual basis, which was terminated during the fourth quarter of 2012.

 

 

 

 

·

In October 2012, the Company entered into a lease, which added 1,525 square feet of additional space and renewed its existing lease for a total of 1,875 square feet in sales facilities located in Ashville, North Carolina. The leases provide for monthly rent of $4,725 throughout the lease term which both expire on December 31, 2015.

 

 

 

 

·

The Company leased 13,137 square feet of warehouse and production space in Pompano Beach, Florida. The lease provided for monthly rent of $6,350 and expired on October 15, 2012.

 

 

 

 

·

In fourth quarter of 2012, the Company entered into a lease for 50,000 square feet in warehouse and corporate office space located in Deerfield Beach, Florida. The lease provides for monthly rent of $20,000 in the first six months and $27,000 per month thereafter. The lease term is for 22 months.


The Company is committed to lease payments over the next five years are as follows:

 

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

Beyond

 

 

Total

 

Facility Leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deerfield Beach, Florida (Production) (HQ)

 

$

243,000

 

 

$

189,000

 

 

$

 

 

$

 

 

$

 

 

$

432,000

 

Ashville, North Carolina (Sales)

 

 

42,521

 

 

 

56,695

 

 

 

56,695

 

 

 

 

 

 

 

 

 

155,911

 

 

 

$

285,521

 

 

$

245,695

 

 

$

56,695

 

 

$

 

 

$

 

 

$

587,911

 


Pending and threatened litigation

 

·

The Company has received several pending and threatened litigations from various suppliers typically over non-payment for goods or services. Such vendor disputes are typical in the normal course of business. The Company has vigorously disputed those claims on the grounds of the substandard materials or services provided. In 2011, we received 5 supplier claims for certain advertising, human resource and consulting matters that we are disputing and filing counter claims. We settled four of these claims in 2012 and structured payouts representing our estimate of the amount due of $114,097 and $162,764 at March 31, 2013 and December 31, 2012, respectively.

·

On June 13, 2011, we filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an investor relations and consulting agreement entered into on or about October 15, 2010 whereby we paid a third party approximately $20,000 and 23,000 shares of restricted common stock in consideration of investor relations and consulting services. We have demanded return of the 23,000 shares of restricted stock and recovery of costs and other damages. The third party has filed a counter claim for breach of the agreement. We intend to vigorously defend this claim.

·

During 2011, we also filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an agreement entered into on or about May 18, 2010 whereby we paid a third party approximately $500 and 20,000 shares of restricted common stock in consideration of consulting services. We have demanded return of the 20,000 shares of restricted stock and recovery of costs and other damages. The claim was dismissed for lack of jurisdiction and we re-filed the action in the Supreme Court, New York County, New York on or about January 11, 2012, seeking rescission of said agreement and the return of $500 and 20,000 shares of restricted common stock.



17



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 12. – COMMITMENTS AND CONTINGENCIES (Continued)

·

We and our chief executive officer, individually, were named in a lawsuit brought in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida by a former employee of Evolution Model Management, Inc. claiming wrongful termination. We were named because we originally hired the employee rather than Evolution Model Management, as the latter was not yet an established entity. On December 2, 2012, we entered into a settlement agreement and release of claims whereby we agreed to pay the plaintiff an aggregate of $77,500, payable in three equal installments. The final payment was made in April 2013.

·

We and our chief executive officer, individually, were named in a lawsuit brought in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida by a former contractor claiming wrongful termination. Plaintiffs complaint alleges $85,000 in back salary, performance bonus and a 40,000 share grant. Management intends to vigorously defend the action and contends the suit is without merit as the contractor was dismissed for cause. Accordingly, management has not provided a contingency reserve for this matter.

Purchase commitments

In order to secure an adequate supply of raw materials, the Company executes purchase orders to its suppliers as evidence of its intent to purchase materials. Purchase orders outstanding at March 31, 2013 totaled $2,046,888.

Contract contingencies

Our distribution agreement with Gamma Investors provides that in the event we terminate the agreement without cause, we are required to repurchase all products held in Gamma’s inventory and pay Gamma a fee equal to the greater of the prior 12 month product purchased by Gamma or $2 million.

NOTE 13 – EQUITY

Common Stock

When shares are issued in lieu of cash for goods or services, such goods or services are valued based upon the shares issued multiplied by the closing price of the stock on the date immediately preceding.

During the first quarter of 2012, the Company issued 28,182 shares for services provided by two employees valued at $3.10 - $3.20 per share, which resulted in an expense of $89,182 in aggregate. The Company also issued 8,824 shares as an award for achieving business goals. The shares were valued at $3.40, which resulted in an allowance offsetting revenues of $30,000.

During the second quarter of 2012, the Company issued 108,764 shares for services provided by six associates valued at $2.00 - $2.80 per share, which resulted in an expense of $241,528 in aggregate. The Company also issued 38,514 shares as an award for achieving business goals at $2.60, which resulted in an allowance offsetting revenues of $100,000. In addition, a consultant exercised vested options for 40,700 common shares for $4,070.

During the third quarter of 2012, the Company issued 28,000 shares for services provided by an IR firm and a former associate valued at $2.20 - $3.20 per share, which resulted in an expense of $69,600 in aggregate. Also during the quarter, two founders converted 450,000 shares of preferred stock into 450,000 of common shares. The Company also issued 292,000 shares to existing shareholder investors at $2.50 per share or $732,000 from which $146,400 in fees were paid to the selling agent, resulting in net proceeds of $585,600 to the Company.

During the fourth quarter of 2012, the Company issued 31,367 shares to a distributor for achieving sales goals valued at $3.32 per share, which resulted in a sales allowance of $104,138 in aggregate. In connection with our license of the Nutra Origin brand, we issued 15,385 shares valued at $3.25 per share, which resulted in an increase in our brand rights intangible asset of $50,000.



18



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 13. – EQUITY (Continued)


During the first quarter of 2013, the Company issued 15,300 shares to a distributor for achieving sales goals valued at $2.50 per share, which resulted in a sales allowance of $38,250 in aggregate. We also issued 20,000 shares to an investor relations (“IR”) firm for services valued at $2.20 per share or $44,000 in total. Our directors received 5,000 shares for services valued at $3.20 per share or $16,000.

Surrender of Common Stock

During the third quarter of 2012, an IR firm surrendered 20,000 shares previously issued for services not fully earned and previously valued at $2.80 per share, which resulted in a return to equity of $56,000 in aggregate.

During the fourth quarter of 2012, an IR firm returned 5,000 shares valued at $3.36 per share, which resulted in a recovery of $16,800.

Warrants

In fourth quarter of 2011 the Company completed a closing of a private offering of 617,857 shares of the Company’s Common Stock, under a securities purchase agreement (“SPA”). The SPA provides the investors with warrants to purchase an aggregate of 154,465 shares of Common Stock. In addition, the SPA also granted warrants to purchase 49,249 shares of Common Stock as fees for assisting in the SPA closing. In addition to the foregoing, there were 50,000 warrants issued to an IR firm for services in 2010.

The following tables present the status of all warrants outstanding at March 31, 2013 and December 31, 2012, respectively

 

 

Warrants

 

Weighted-

Average

Exercise

Price

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

Aggregate

Intrinsic

Value

Year Ended December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 

 

253,893

 

 

$

0.10

 

 

 

4.22

 

 

$

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2012

 

 

253,893

 

 

$

0.10

 

 

 

3.21

 

 

$

 

Exercisable at December 31, 2012

 

 

253,893

 

 

$

0.10

 

 

 

3.21

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2013

 

 

253,893

 

 

$

0.10

 

 

 

3.21

 

 

$

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2013

 

 

253,893

 

 

$

0.10

 

 

 

2.97

 

 

$

 

Exercisable at March 31, 2013

 

 

253,893

 

 

$

0.10

 

 

 

2.97

 

 

$

 

No warrants were issued in 2013 or 2012.



19



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 13. – EQUITY (Continued)

Option

During 2009 the Company entered into a Consulting Agreement with a selling agent under which the selling agent assisted the Company in filing a registration statement on Form 10 and quotation of its shares on the Over the Counter Bulletin Board (OTCBB). The Company has issued an option to the selling agent to purchase 200,000 shares of common stock at an exercise price of $0.10 per share. At grant date, the option was valued based on the offering price of the PPM of $2.50 per share, which was $480,000. The option expires in five years. The option vests and is exercisable subject to certain lock up and leak out provisions which commence upon the effective date of the Company obtaining OTCBB listing. Leak out provisions limit exercisability of the option number to 20,000 shares per quarter. During the first quarter of 2010, the Company obtained its trading symbol and accordingly recorded an expense for consulting services of $160,000 in 2010 reflecting the structured vesting. As a result of the structured vesting, the Company recognized $128,000 in 2012 and $192,000 in 2011. At December 31, 2012 the options were fully expensed.

The following tables present the status of all options outstanding at March 31, 2013 and December 31, 2012:

 

 

Options

 

Weighted-

Average

Exercise

Price

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

Aggregate

Intrinsic

Value

Year Ended December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 

 

73,333

 

 

$

0.10

 

 

 

3.0

 

 

$

264,000

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(40,700

)

 

$

0.10

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2012

 

 

32,633

 

 

$

0.10

 

 

 

2.16

 

 

$

107,690

 

Exercisable at December 31, 2012

 

 

32,633

 

 

$

0.10

 

 

 

2.16

 

 

$

107,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2013

 

 

32,633

 

 

$

0.10

 

 

 

2.16

 

 

$

107,690

 

Issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2013

 

 

32,633

 

 

$

0.10

 

 

 

1.91

 

 

$

85,498

 

Exercisable at March 31, 2013

 

 

32,633

 

 

$

0.10

 

 

 

1.91

 

 

$

85,498

 


No options were issued in 13-QTR, 2012 or 2011.

Preferred Stock

As provided under Certificate of Designation for Series A Preferred Stock dated January 14, 2009, amended in September 2009, each share of Series A Preferred Stock is entitled to 0.2 votes per share and the Series A Preferred Stock votes together with the Company’s common stock, except as otherwise provided under Florida law. The preferred stock automatically converts into common stock on a ten-to-one basis in September 2013. Two of the founders converted 4,500,000 preferred shares into 450,000 common shares during 2012. The remaining 5,500,000 shares are held by the remaining founder and CEO of the Company.



20



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 14. – 2009 EQUITY INCENTIVE PLAN

Overview – The Company initiated a 2009 Equity Incentive Plan (the "Plan") to:

1.

attract and retain the best available personnel for positions of substantial responsibility,

2.

provide additional incentives to Employees, Directors and Consultants, and

3.

promote the success of the Company and the Company's Affiliates.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights, time vested and/or performance vested Restricted Stock, Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.

Subject to the Plan – The initial maximum number of shares of Common Stock that may be issued under the Plan is 500,000 shares. No more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either, authorized and unissued shares or shares held in treasury.

Eligibility – Nonstatutory Stock Options, Stock Purchase Rights, Stock Awards, Stock Appreciation Rights and Unrestricted Shares may be granted to all Service Providers. Incentive Stock Options may be granted only to Employees.

Limitations Each Option shall be designated as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, if an Employee becomes eligible in any given year to exercise Incentive Stock Options for Shares having a Fair Market Value in excess of $100,000, those Options representing the excess shall be treated as Nonstatutory Stock Options.

Term – The term of each Option shall be stated in the applicable Option Agreement or, if not stated, ten years from the date of grant. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns, directly or indirectly, stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company and any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the applicable Option Agreement.

Exercise and Vesting – Unless otherwise determined by the Administrator and provided for in the Option Agreement, each Option shall vest and become exercisable as to one-sixth (1/6) of the shares subject to the Option on the date that is nine months after the date of grant, and an additional one-sixth (1/6) of the shares subject to the Option every nine months thereafter until fully vested and exercisable.



21



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 15. – SIGNIFICANT CUSTOMERS

Our product revenues represent primarily sales of Revita, Revita Cor and Spectral DNC-N, which individually exceed 10% of total sales and collectively represent 61% of total sales. Other products, which individually exceed 5% of total sales, are Revita EPS and Spectral DNC-S, which collectively account for an additional 11% of total sales. The Company sells its products to several types of customer, which primarily include distributors and salons, two of which represent individually in excess of 10% of total sales during 13-QTR and 12-QTR. During 13-QTR our top six customers generated 45% of our sales.

Sales to 10% or greater these customers during 13-QTR and their accounts receivable at March 31, 2013 were:

Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

B

 

$ 438,526

 

11%

 

$ 347,782

 

 12%

F

 

$ 395,592

 

10%

 

$   57,735

 

  2%


Sales to 10% or greater customers during 12-QTR and their accounts receivable at March 31, 2012 were:

 

Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

B

 

$ 447,458

 

22%

 

$ 332,287

 

 20%


NOTE 16. – SIGNIFICANT VENDORS

The Company purchases its raw materials from various foreign and domestic suppliers several of which represent individually in excess of 10% of total purchases. Purchases of raw materials consist primarily of basic chemicals and packaging materials. The Company believes that it enjoys cordial relationships with all its suppliers but should the need arise; the Company believes that it could transition to alternate suppliers with minimal adverse impact. It does not have any formal long term purchase agreements with its suppliers. The Company does issue purchase orders based on its production plan, which may be modified or cancelled should its production plan change.

Purchases from significant vendors during 13-QTR and their accounts payable at March 31, 2013 were:

Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payable

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$ 316,377

 

19%

 

$ 202,852

 

9%

C

 

$ 290,967

 

18%

 

$ 173,806

 

8%

Purchases from significant venders during 12-QTR and their accounts payable at March 31, 2012 were:

Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payable

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$ 399,360

 

31%

 

$ 0

 

 0%




22



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 17. – GEOGRAPHIC REVENUE REPORTING

The Company is organized based on fundamentally one business segment although it does distribute its products on a world-wide basis. Several of its largest distributors are based in North America who in turn sell their products in Europe or Asia. We consider these customers as based in North America. However our sales to true international distributors who distribute our product outside North America have been increasing. We have also recently acquired our distributor in Mexico, the results of which are more fully discussed in Note 20.

Information about the Company’s geographic operations for both 13-QTR and 12-QTR as follows:

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net Revenue:

 

 

 

 

 

 

 

North America

 

$

3,038,796

 

$

1,606,685

 

International

 

 

1,026,569

 

 

377,297

 

 

 

$

3,965,365

 

$

1,983,982

 


Furniture and Equipment, Net:

 

 

 

 

 

 

 

North America

 

$

157,343

 

$

50,657

 

International

 

 

120,356

 

 

 

 

 

$

277,699

 

$

50,657

 


NOTE 18. – CONSOLIDATION OF VARIABLE INTEREST ENTITY

The Company holds a variable interest in Velocity Storage and Packaging LLC (“Velocity”) an entity for which the Company is the primary beneficiary. Velocity performs packaging and shipping services exclusively for the Company. The Company’s variable interest relates to a financing arrangement whereby, all operational expenses including labor costs, facility costs and other operational expenses are reimbursed by the Company at Velocity’s cost. The Company has no equity investment in Velocity and Velocity has no assets, liabilities or equity structure of its own. Accordingly, the Company determined that Velocity was a variable interest entity ("VIE") and the Company was the primary beneficiary under the guidance offered in ASC 810-10 since Velocity does not have sufficient equity at risk for the entity to finance its own activities. ASC 810-10 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur.

NOTE 19. – ACQUISITION OF MEXICAN DISTRIBUTOR

Effective November 1, 2012, the Company purchased essentially 100% of the outstanding common stock of Divine Skin Laboratories, S.A. DE C.V. (“DS Mexico”) from the sole shareholder pursuant to a Share Exchange Agreement. In accordance with Mexican law, Mexican companies must have two shareholders therefore the principal seller will retain one share of common stock of DS Mexico.

DS Mexico is in the business of selling, distributing and marketing the Company’s products throughout Mexico. The Company acquired DS Mexico in order to obtain customers and vertically integrate its operations directly in the Mexican market.

In consideration for the nearly 100% interest in DS Mexico, the Company issued 450,000 shares of the Company’s common stock valued at $2.60 per share, based on an independent third party valuation. The Company also forgave $38,415 of invoices due from DS Mexico between April 1, 2012 and September 30, 2012. Following the closing date the sole shareholder of DS Mexico shall receive up to an aggregate of an additional 150,000 shares of DSKX Common Stock (as adjusted for a stock split, recapitalization or similar transaction) as follows:

(i)

50,000 shares of DSKX Common Stock in the event that annual net revenues of DS Mexico are equal to or greater than $4,000,000 during any calendar year period;

(ii)

50,000 shares of DSKX Common Stock in the event annual net revenues of DS Mexico are equal to or greater than $5,000,000 during any calendar year period following satisfaction of (i); and



23



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 19. – ACQUISITION OF MEXICAN DISTRIBUTOR (Continued)


(iii)

50,000 shares of DSKX Common Stock in the event annual net revenues of DS Mexico are equal to or greater than $6,000,000 during any calendar year period following satisfaction of (ii).

In connection with the Share Exchange Agreement, the Company issued 600,000 shares of its stock, of which 450,000 shares have been delivered as of December 31, 2012. The remaining 150,000 shares is held in escrow by the Company to be delivered upon completion of the performance measures as stipulated by the Share Exchange Agreement.

The present value of the consideration expected to be paid as part of this agreement is $1,341,015, as calculated below:

·

450,000 shares issued and valued at $2.60 per share, for a total of $1,170,000.

·

51,000 contingent shares valued at $2.60 per share, for a total of $132,600.

·

Forgiveness of $38,415 of invoices due from DS Mexico.

The price per share and the estimated contingent shares to be issued in connection with this agreement were based upon a third party valuation.

The Company incurred approximately $5,000 in profession fees in connection with its acquisition of DS Mexico in 2012.

The following summarizes the fair value of the assets and liabilities acquired:

Cash

 

$

127,321

 

Accounts receivable

 

 

380,522

 

Inventory

 

 

159,379

 

Prepaid and other current assets

 

 

87,125

 

Property and equipment, net

 

 

126,628

 

Customer list

 

 

932,000

 

Goodwill

 

 

34,444

 

Accounts payable

 

 

(455,726

)

Other current liabilities

 

 

(50,678

)

Total net assets acquired

 

$

1,341,015

 

Aggregate purchase price

 

$

1,341,015

 

The assets acquired were recorded at preliminary estimates of fair values determined by management, based on information currently available and on current assumptions as to future operations, and were revised upon the completion of acquisition accounting and the finalization of asset valuations.



24



DS HEALTHCARE GROUP, INC (Formerly DIVINE SKIN, INC.) (d/b/a DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


NOTE 19. – ACQUISITION OF MEXICAN DISTRIBUTOR (Continued)

Dr. Tamez, the former principal shareholder of DS Mexico, has agreed to oversee the day to day operations of DS Mexico in consideration of a base salary of approximately $60,000 per year. In further consideration of his employment with DS Mexico, we and Dr. Tamez entered into a performance agreement dated December 11, 2012, whereby Dr. Tamez shall receive on each 12 month anniversary of the agreement, and each year thereafter for a period of five years, such number of shares of our common stock that shall have a cumulative value of $50,000. Furthermore, during the term of Dr. Tamez’s employment he shall be entitled, on a calendar year basis, to 30% of the net profits of DS Mexico (the “Profit Participation”). Commencing on the third calendar anniversary of the performance agreement with us, we shall have the option of terminating the Profit Participation in consideration of a $500,000 payment to Dr. Tamez. Furthermore, in the event that a “Change of Control” of us during the term of Dr. Tamez’s employment with us, Dr. Tamez shall have the right to receive a one-time payment of $500,000. A “Change of Control” of us shall be deemed to have occurred at such time as: (1) any person (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act of 1934, as amended (the “Exchange Act”), directly or indirectly, of our securities representing 80% or more of the combined voting power of our outstanding securities then having the right to vote at elections of directors; (2) any person becomes the beneficial owner, directly or indirectly of, either: (i) 50% of DS Mexico’s outstanding shares or (ii) 30% of DS Mexico´s shares, within a period of one year; (3) the board of directors of DS

Mexico, currently consisting of Daniel Khesin, Michael Strong and Fernando Tamez, is changed in its majority; or (d) 40% of the gross value of DS Mexico´s assets is transferred to an unrelated party.





25





ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Introductory Statements

This filing contains forward-looking statements, including statements regarding, among other things, our projected sales and profitability, our Company’s growth strategies, our Company’s future financing plans and our Company’s anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

Results of Operations

The following discussion and analysis addresses the major factors that affected our operations and financial condition reflected in our condensed consolidated financial statements for the three months ended March 31, 2013 and March 31, 2012. This discussion is intended to supplement and highlight information contained in, and should be read in conjunction with, our consolidated financial statements and related notes and the selected financial data presented elsewhere in this report.

Three Months Ended March 31, 2013 to the Three Months Ended March 31, 2012

Revenues, net – Total net revenues increased $1,981,383, or 100%, from $1,983,982 (2012) to $3,965,365, (2013). Our product revenues represent primarily sales of Revita, Revita Cor and Spectral DNC, which individually exceeded 10% of total sales and collectively represented 61% of total sales. Other products, which individually exceeded 5% of total sales, are Revita EPS and Spectral DNC-S, which collectively accounted for another 11% of total sales. Revenues increased primarily due to extensive marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributors, both domestic and foreign. We conduct a significant portion of business with various distributors under exclusive distribution agreements. Revenues from our top six customers accounted for approximately 44.8% of our total revenues during the three months ended March 31, 2013. In addition, effective November 1, 2012, we purchased essentially 100% of the outstanding common stock of DS Mexico, our former Mexican distributor, which resulted in an approximate $438,045 of additional revenues during the three months ended March 31, 2013. Effective October 29, 2012, we acquired the brand “Nutra Origin”. For the three months ended March 31, 2013, sales of Nutra Origin products were approximately $22,000. Furthermore, we recognized revenues of approximately $2,000,000 of product ordered during December 2012 that we were unable to fulfill prior to December 31, 2012 which were subsequently shipped during the three months ended March 31, 2013.

Cost of Goods Sold – Total cost of goods sold increased $1,257,019 or 135%, from $933,662 (2012) to $2,190,681 (2013). Approximately $932,728 of the increase was related to the increase in sales. We also provided certain discounts to customers as an incentive to increase purchases of new products or establish new accounts and along with changes in product mix, lost efficiencies and increased production costs which accounted for the remaining $324,291 of the increase.

Selling and Marketing Costs – Selling and marketing costs decreased $6,153 or 1% from $763,151 (2012) to $756,998 (2013). The decrease was due to the following:

Increases of:

·

$66,156 for marketing and promotion costs, primarily to drive the increase in sales, and

·

$43,787 for travel and entertainment costs incurred to expand and promote sales.

The forgoing increases partially offset the following decreases of:

·

$40,031 for consulting and commissions, which primarily relates to additional incentives to promote increased sales,



26





·

$55,413 in freight and shipping costs, which was partially a result of efficiencies achieved from increased average sales,

·

$14,416 for product development as a result of a reduction in staff, and

·

$6,236 for other sales and marketing costs.

General and Administrative Costs General and administrative costs increased $793,319 or 110%, from $715,356 (2012) to $1,508,675 (2013). The increase is due to the following:

Increases of:

·

$87,346 for professional fees for consultants, and to a lesser extent attorneys and accountants related to costs of investor relations, regulatory filings and reporting,

·

$177,008 for personnel costs due to increased staffing as a result of our expanding sales and operations groups, including our newly acquired Mexican distributor,

·

$32,711 for insurance as a result of increased costs of coverage due to our increased operations and sales along with new policies, such as director and officer insurance which was not in place in the prior period,

·

$247,603 for bad debt as a result of increased sales and relaxed credit terms to expand sales,

·

$20,750 for bank and wire charges supporting increased international venders and customers and general sales increases,

·

$59,046 in licenses and permits and a result of required licenses for international distribution and for NASDAQ listing fees,

·

$78,161 in depreciation and amortization of increased intangible assets and assets added through our newly acquired Mexican distributor, and

·

$90,694 for various other general and administrative costs.

Other Income Other income increased $49,020 or 403% from $12,150 expense (2012) to $36,870 income (2013). The increase was a result of the recovery of previously expensed activity.

Net Loss – As a result of operational matters discussed above, net loss increased $21,778 or 5% from a $440,337 net loss (2012) to $462,115 net loss (2013).

Liquidity and Capital Resources

We had cash and cash equivalents of $196,513 and working capital of $1,947,514 at March 31, 2013. Our operating and capital requirements in connection with supporting our expanding operations and introducing new products have been and will continue to be significant to us. Since inception, our losses from operations along with the increased costs and working capital required to grow our business were satisfied through the initial contribution by our founders in 2007, through private sales of our common stock and credit financing.

Despite our losses during 2012 and the first quarter of 2013, we believe that by minimizing certain sales and marketing expenses and administrative expenses, we can minimize the cash needed to support our current operations. Our largest consumption of cash is the working capital to support expanding sales.  In the event we do not receive funding, we will need to suspend our continued expansion. The sale of additional equity or debt securities, if convertible, will result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and may also result in covenants that would restrict our operations. Based on our current plans for the next 12 months, we require approximately $2,000,000 to expand our product line, reach additional domestic and foreign markets and broadened distribution channels.

On April 6, 2012, we closed on a $1.5 million credit facility provided by a financial institution. The credit facility provides for asset based lending collateralized by all of our assets. Advances are based on 80% of qualified accounts receivable and 40% of finished goods inventory. The credit facility provides for interest and bank fees, which currently aggregate to 8% (prime plus 3% plus 1.75% asset monitoring fees and other fees) per annum and expires March 24, 2014, and may be renewed under certain conditions. The credit facility is personally guaranteed



27





by our Chief Executive Officer and, under certain conditions, may be called upon demand or in the event of default. Default events include, but are not limited to, failure to pay any amount due under the agreement, failure to perform any material term or covenant, any bankruptcy, any federal or state tax lien filed against our company, occurrence of any court order that restrains part of our business. The loan agreement also provides for certain covenants which requires us to maintain a life insurance policy on our chief executive officer for the benefit of the financial institution and precludes us from the following, except in the ordinary course of our business: making distributions to shareholders, assigning, exchanging or disposing of collateral, permit or create any liens upon any collateral, pay any dividends, make any loans or advances, including to officers and employees, assume, guaranty, endorse or become directly or contingently liable, issue evidence of any indebtedness, any transactions with affiliates at less than favorable terms compared to market, the sale, transfer or dispose of substantially all of our assets or any operating subsidiary, entering into any transaction which results in a change of control of our company. We have been in compliance with the covenants under the credit facility except that we have not obtained any life insurance policy for our chief executive officer, did not provide the bank with our 2012 tax return within 90 days of year end, and during the fourth quarter of 2012, certain invoices submitted for financing were improperly supported. The bank is aware of these matters and has provided us with applicable waivers or extension until May 31, 2013.

The credit facility also provides for a referral fee of 4% per annum for three years. At March 31, 2013, we have drawn down $538,284 under the credit facility. We had $255,566 available to borrow on the advance formulas for qualified accounts receivable and finished goods inventory at March 31, 2013. We are discussing with our credit lender the possible inclusion of international accounts receivable in our borrowing base in order to increase our availability under our line, as our sales to end users outside the U.S. have increased substantially over the past 24 months.

We also satisfied our working capital requirements in 2012 and through the three months ended March 31, 2013, through advances from related parties and third parties. On December 10, 2012 we received an unsecured loan for $314,000 from one of our consultants who is also a shareholder of our company. This loan is non-interest bearing and matures on December 11, 2013. In the first quarter of 2013, we also received an additional $240,000 from the same consultant/shareholder. This loan is unsecured, non-interest bearing and matures on December 11, 2013. We also received a loan from Daniel Khesin, our chief executive officer for $39,000. This loan is an unsecured, non-interest bearing and matures on December 25, 2013.  On January 20, 2013, we received an unsecured loan for $70,000 from Gamma Investors, also a shareholder. The loan bears interest at 3% per month and matures on May 20, 2013. The loan calls for monthly installment payments along with interest.

Cash Flows for the Three Months Ended March 31, 2013

Cash Flows from Operating Activities

Operating activities used net cash for the three months ended March 31, 2013 of approximately $596,987. That amount has two primary components; net loss adjusted by non-cash items and changes in operating assets and liabilities. Our net loss, when adjusted by various items which impact net loss but do not impact cash during the period, such as issuance of warrants or stock for services and for depreciation and amortization, resulted in net cash used by operating activities of $65,990 which was offset by changes in operating assets and liabilities of $530,997 to support expanding sales as follows:

·

$444,846 used by an increase in gross accounts receivable not including the non-cash effect of net of changes in the allowance for doubtful accounts,

·

$18,099 provided by a decrease in inventory,

·

$258,169 used by a decrease in accounts payable and accrued expenses as a result of payments of certain accrued expenses such as commissions, and

·

$153,917 provided by net changes in other current assets and liabilities.

Cash Flows used in Investing Activities

Our investing activities used $55,203 in net cash during the three months ended March 31, 2013. Net cash used is primarily composed of the following:

·

$12,036 used to purchase equipment, primarily for production,



28





·

$35,139 used to purchase injection molds,

·

$8,028 used for advances to related parties.

Cash Flows from Financing Activities

Our financing activities provided $393,394 in net cash as a result of borrowings net of repayments under the asset based credit facility and additional borrowings offered by existing shareholders during the three months ended March 31, 2013. During the period we received advances from shareholders of $310,000 and made repayments totaling $3,900.  The remaining cash provided by financing activites came from net borrowings under our asset based credit facility.

Financial Position

Total Assets – Our total assets decreased $4,347 or .1% from $8,224,676 as of December 31, 2012 to $8,220,329 as of March 31, 2013, which is considered nominal. There was a net increase in current assets of $14,057, the components of which are discussed further below. The increase in total assets was also the result of an increase of $16,747 in other assets which is considered nominal; a decrease of $16,021 in furniture and equipment due to depreciation; and a decrease of $27,158 in intangible assets due to amortization.

Current Assets – The net increase in current assets of $14,057 was primarily associated with a $28,932 increase in inventory levels, $243,224 increase in net accounts receivable. The increase was partially offset by a decrease in cash of $215,975. These net changes are primarily driven by the need to support increased sales, but are more specifically discussed as follows:

Inventory – Inventory levels increased 0.8%, which is considered nominal.

Although inventory on hand at March 31, 2013 has not changed appreciably during the current quarter, it represents approximately 39% of COGS or a five month supply based on the sell through rate achieved for the three months ended March 31, 2013, as annualized resulting in an inventory turnover rate of 2.5 times. We intend to improve this turnover rate in the future and our ultimate goal is to achieve at least a 3.0 times inventory turnover rate in 2013, once we have satisfactorily explored alternative production methodologies and established a profitable and sustainable production cost structure. The below target turnover is a result of stocking chemicals and materials in anticipation of planned sales increases in 2013.

Accounts Receivable, net – Accounts receivable, net increased $243,223 primarily as a result of a $544,845 increase in gross accounts receivable which was partially offset by a $301,621 increase in the allowance for doubtful accounts. The increase in gross receipts is a result of our expanded sales.  The increase in allowance is the result of our relaxation of terms in an effort to grow “top line” revenue. We believe that our current receivables net of the provided allowances are collectable and that the allowances provided are adequate. Our standard credit terms are 30 days net. Of the $2,368,864 accounts receivable balance at March 31, 2013, approximately 56% was collected as of May 1, 2013. The lower than historical average rate of collections is due to extended credit terms offered to attract new customers. We believe that the impact of offering extended terms has been appropriately reflected in our allowance for doubtful accounts and will not adversely affect the collectability of accounts receivable, net as reported at March 31, 2013.

Prepaid Expenses – Prepaid expenses decreased 26% primarily as a result of reductions in prepaid rent, insurance and taxes.

Cash – The decrease in cash is explained more fully by the previous discussion of cash flows.

Material Commitments

None.

Off Balance Sheet Arrangements

None.



29





Recent Accounting Pronouncements

In February 2013, the FASB amended its guidance to require an entity to present the effect of certain significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. The new accounting guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The guidance is effective prospectively for fiscal years beginning after December 15, 2012.  The Company adopted these new provisions for the quarter beginning January 1, 2013. As the guidance requires additional presentation only, there was no impact to the Company’s consolidated results of operations or financial position.

There are no recently issued accounting standards that are expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risk factors contained in our most recent annual report filed on Form 10-K with the Securities and Exchange Commission before deciding whether to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to Smaller Reporting Company.

ITEM 4.

CONTROLS AND PROCEDURES

Management’s Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (3) that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



30





Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that, due to the material weaknesses described below, our internal control over financial reporting was not effective as of March 31, 2013. 

(1)

Control environment — We did not maintain an effective control environment. The control environment, which is the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its people, and is the foundation for all other components of internal control over financial reporting. Each of the following control environment material weaknesses also contributed to the material weaknesses discussed in items (2) through (3) below. Our control environment was ineffective because of the following material weaknesses:

(a) 

We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. Generally Accepted Accounting Principles (“GAAP”) commensurate with our financial reporting requirements and business environment. Our CEO and CFO, Mr. Daniel Khesin lacks experience in U.S. GAAP and financial accounting. The balance of our internal accounting staff also has limited U.S.GAAP experience.

(b) 

We did not maintain effective controls over the segregation of duties. Specifically, due to lack of personnel, effective controls were not designed and implemented to ensure the following accounting functions were properly segregated for inventory, purchasing, shipping, bank reconciliations, payroll and accounts payable. In addition, we did not have effective general controls over information technology security and user access.

(c)

We rely extensively on outside service providers. Since our inception we have relied on an outside consultant to ensure that our financial statements contain all necessary adjustments to conform to U.S. GAAP. The consultant is a U.S. certified public accountant. Until such time as we have a chief executive officer and chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements.

(d)

We experienced problems with the post-acquisition integration of DS Mexico accounting processes, personnel, systems and procedures which differed greatly from our U.S. operations. Although our Mexican accounting staff is professional and experienced in accounting requirements and procedures generally accepted in Mexico, management has determined that they require additional training and assistance in U.S. GAAP matters.

The control environment material weaknesses described above contributed to the material weaknesses related to our monitoring of internal control over financial reporting, period end financial close and reporting, as described in items (2) to (3) below.

(2)

Monitoring of internal control over financial reporting — we did not maintain effective monitoring controls to determine the adequacy of our internal control over financial reporting and related policies and procedures because of the following material weaknesses:

(a) 

Our policies and procedures with respect to the review, supervision and monitoring of our accounting operations throughout the organization were either not designed, in place or operating effectively.

(b) 

We did not maintain an effective internal control monitoring function nor did we perform a risk assessment. Specifically, there were insufficient policies and procedures to effectively communicate and determine the adequacy of our internal control over financial reporting and to monitoring the ongoing effectiveness thereof.

(c) 

We did not maintain formal cash flow forecasts, business plans, and organizational structure documents to guide the employees in critical decision-making processes.



31





(d)

We did not maintain adequate records of our shipping activities during the last week in December 2012 to assure proper invoicing and recording of products shipped during that period. We did subsequently detect the error which amounted to $2 million and adjusted our records accordingly. We notified our auditor and lender of the invoicing error and obtained a waiver for any possible breach in our reporting obligations to our lender.

Each of these material weaknesses relating to the monitoring of our internal control over financial reporting contributed to the material weaknesses described in item (3) below.

(3) 

Period end financial close and reporting — Due to a lack of adequate staffing within the finance department and adequate staffing within operational departments that provide information to the finance department, we did not establish and maintain effective controls over certain of our period-end financial close and reporting processes because we did not maintain effective controls over the recording of either recurring or non-recurring journal entries. Specifically, effective controls were not designed and implemented to ensure that journal entries were properly prepared with sufficient support or documentation or were reviewed and approved to ensure the accuracy and completeness of the journal entries recorded.

These weaknesses above resulted in: (1) an inability to timely provide financial statements in accordance with Regulation SX for DS Mexico; and (2) our failure to file timely our annual report on Form 10-K for the year ended December 31, 2012.

In an effort remediate these material weaknesses in our internal control over financial reporting, as well as the material weaknesses in our disclosure controls and procedures, we will need to:

1.

Develop and implement an effective control environment. This will involve hiring additional personal with the requisite level of accounting knowledge, experience and training in the application of GAAP which will also permit proper segregation of duties and effective general controls over information technology security and user access. These additional personnel will also assist in developing and implementing proper accounting processes, systems and procedures for DS Mexico.

2.

Develop and implement effective monitoring controls to determine the adequacy of our internal control over financial reporting. We will develop and implement policies and procedures regarding the review, supervisions and monitoring of our accounting operations and perform the necessary risk assessments, together with developing the necessary formal cash flow forecasts, business plans and organizational structure documents.

Since our inception we have relied on an outside accounting consultant to ensure that our financial statements contain all necessary adjustments to conform to U.S. GAAP. The consultant is U.S. certified public accountant. We expect to be materially dependent upon the consultant or another third party which can provide us with the same level of accounting consulting services, for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements. Furthermore, in an effort to remediate certain of the weaknesses above we have also added three independent directors to our board of directors who have formed an audit committee including the appointment of a financial expert. The committee is charged with, and has been, developing financial policies and controls, reviewing and providing oversight to our financial reporting processes, financial statements and public filings. Our ability to remediate the material weaknesses in our internal control over financial reporting will be dependent upon the development and implementation of these changes, which will require both the hiring of additional accounting personnel and the investment in enhanced systems, policies and procedures. While we expect to continue to rely upon our outside accounting consultant until such time as we are able to hire a properly qualified chief financial officer, if we are able to successfully implement these changes to our internal control over financial reporting we believe we will be able to remediate substantially all of the material weaknesses described earlier in this section. However, there are no assurances we will be able to devote the necessary capital to hire the additional personnel and institute the additional systems, policies and procedures to the level necessary. In that event, there are no assurances that the material weaknesses described earlier in this section will not result in errors in our financial statements in future periods.



32





Our management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Changes in Internal Control over Financial Reporting.

Other than the remediation efforts described above, there have been no changes in our internal control over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



33





PART II – OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not Applicable to Smaller Reporting Company.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the first quarter of 2013, the Company issued 15,300 shares to a distributor for achieving sales goals valued at $2.50 per share, which resulted in a sales allowance of $38,250 in aggregate. We also issued 20,000 shares to an IR firm for investor relations services valued at $2.20 per share or $44,000 in total. In addition, our independent directors received an aggregate of 5,000 shares for serving on the board of directors valued at $3.20 per share or $16,000.  The shares were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act.  The certificates representing the shares contain legends restricting their transferability absent registration or exemption.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit

Number

 

Description

 

 

 

31.1

 

Certification pursuant to Rule 13a-14(a) (Provided herewith)

31.2

 

Certification pursuant to Rule 13a-14(a)/15d-14(a) (provided herewith)

32.1

 

Certification pursuant to Section 1350 (Provided herewith)

32.2

 

Certification pursuant to Section 1350 (Provided herewith)

101

 

XBRL Interactive Data File




34





SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 16, 2013

DS HEALTHCARE GROUP, INC.

 

 

 

By:

/s/ Daniel Khesin

 

 

Daniel Khesin

 

 

President, Chief Executive Officer,

 

 

Chief Financial Officer/

 

 

Principal Accounting Officer




35