Quarterly report [Sections 13 or 15(d)]

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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, 2015

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. 001-35763

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, Deerfield 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 17,113,058 shares of common stock outstanding as of May 19, 2015.





PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS


DS Healthcare Group, Inc. (dba DS Laboratories) and Subsidiaries

Condensed Consolidated Balance Sheets


March 31,

December 31,

2015

2014

(Unaudited)

ASSETS

Current Assets

Cash

$

652,093

$

1,128,556

Accounts receivable, net

2,043,176

1,809,178

Inventories, net

4,142,457

3,984,528

Prepaid expenses and other current assets

277,884

278,714

Total Current Assets

7,115,610

7,200,976

Furniture and Equipment, net

187,707

206,406

Intangible Assets, net

1,088,511

1,101,373

Other Assets

100,497

88,247

TOTAL ASSETS

$

8,492,325

$

8,597,002

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Accounts payable

$

996,084

$

1,229,863

Accrued expenses

904,495

967,112

Note payable

350,000

350,000

Other current liabilities

625,510

886,822

Total Current Liabilities

2,876,089

3,433,797

Long Term Debt, net of current portion

22,032

24,997

TOTAL LIABILITIES

2,898,121

3,458,794

COMMITMENTS AND CONTINGENCIES

Shareholders' Equity

Preferred stock, $0.001 par value, 30,000,000 shares authorized: 0 shares issued and outstanding at March 31, 2015 and December 31, 2014

—

—

Common stock, $0.001 par value, 300,000,000 shares authorized: 16,328,058 and 16,202,268 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

16,328

16,202

Additional paid-in-capital

14,940,069

14,839,695

Stock subscription

217,500

(2,500

)

Accumulated deficit

(9,698,513

)

(9,613,375

)

Accumulated comprehensive income

157,250

(63,384

)

Total Shareholders' Equity

5,632,634

5,176,638

Non-Controlling Interest

(38,430

)

(38,430

)

Total Shareholders' Equity

5,594,204

5,138,208

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

8,492,325

$

8,597,002




See accompanying notes to condensed consolidated financial statements

1




DS Healthcare Group, Inc. (dba DS Laboratories) and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)


For the Three Months Ended

March 31,

2015

2014

Net Revenue

$

2,803,920

$

2,684,964

Cost of Goods Sold

1,138,760

1,202,518

Gross Profit

1,665,160

1,482,446

Operating Costs and Expenses:

Selling and marketing

Commissions and consulting

169,372

360,559

Other selling and marketing expenses

607,406

609,463

776,778

970,022

General and administrative

Salary and personnel costs

512,451

584,683

Professional fees and consulting costs

376,411

585,226

Other general and administrative expenses

189,278

164,035

1,078,140

1,333,944

Total operating costs and expenses

1,854,918

2,303,966

Operating Loss

(189,758

)

(821,520

)

Other Income (Expense)

Interest expense

(15,855

)

(27,545

)

Other

120,475

(1,088

)

Total other income (expense)

104,620

(28,633

)

Net Loss

(85,138

)

(850,153

)

Net Loss Attributable to Non-Controlling Interest

—

(4,371

)

Net Loss Attributable to Common Shareholders

$

(85,138

)

$

(845,782

)

Basic and Diluted Earnings per Share:

Weighted average shares outstanding

16,256,461

15,967,533

Net Loss per share

$

(0.01

)

$

(0.05

)

Other Comprehensive Loss:

Foreign currency translation adjustment

$

(14,893

)

$

25,546

Comprehensive loss

$

(100,031

)

$

(820,236

)





See accompanying notes to condensed consolidated financial statements

2




DS Healthcare Group, Inc. (dba DS Laboratories) and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


For the Three Months Ended
March 31,

2015

2014

Cash Flows from Operating Activities:

Net Loss

$

(85,138

)

$

(850,153

)

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

Depreciation and amortization

32,307

69,898

Loss on disposal of fixed assets

—

2,468

Recovery of bad debts

(16,504

)

(152,875

)

Provision for obsolete inventory

1,087

25,018

Stock issued for services

100,500

91,254

Changes in operating assets and liabilities:

Accounts receivable, net

(217,494

)

775,198

Inventories, net

(159,016

)

(680,041

)

Prepaid expenses and other current assets

830

102,914

Accounts payable

(233,780

)

(570,238

)

Accrued expenses

(62,617

)

(257,994

)

Other current liabilities

(261,311

)

505,923

Net cash used in operating activities

(901,136

)

(938,628

)

Cash Flows from Investing Activities:

Purchase of furniture and equipment

526

(40,975

)

Purchase of injection molds

(14,250

)

—

Net cash used in investing activities

(13,724

)

(40,975

)

Cash Flows from Financing Activities:

Net repayments of credit facility

—

(105,326

)

Repayment of loans and notes

(2,965

)

(1,858

)

Proceeds from sale of stock subscription

220,000

—

Proceeds from sale of common stock

—

192,000

Less issuance cost

—

(10,000

)

Net cash provided by financing activities

217,035

74,816

Effect of exchange rate changes on cash

221,362

27,111

Decrease in cash

(476,463

)

(877,676

)

Cash, Beginning of Period

1,128,556

2,872,946

Cash, End of Period

$

652,093

$

1,995,270

Supplemental Information:

Cash paid for interest

$

—

$

27,545

Supplemental Noncash Investing and Financing Activities

Stock issued to satisfy accrual

$

—

5,000





See accompanying notes to condensed consolidated financial statements

3



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Terms and Definitions

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

FASB

Financial Accounting Standards Board

FIFO

First-in, First-out

US GAAP

Accounting principles generally accepted in the United States of America

SEC

Securities and Exchange Commission

2014-QTR

Three months ended March 31, 2014

2014-YTD

Year ended December 31, 2014

2015-QTR

Three months ended March 31, 2015

VIE

Variable Interest Entity

Organization and Nature of Business


DS Healthcare Group, 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. The Company utilizes two innovative technologies in its products, (1) “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the action of the active ingredients in our products, and (2) “Nanosome Technology”, which acts as a delivery vehicle, and has been designed to infuse active compounds into targeted cells for increased efficiency of our products. We currently offer products within the following broad product categories:  Hair Care, Skin Care and Personal Care.

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation and Presentation


The condensed 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 US GAAP.


The condensed consolidated financial statements include the accounts of the Company and its 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 (“DS Mexico”). Also included in the condensed consolidated financial statements are the operating activities of Velocity Storage and Packaging, LLC and Wally Group, LLC, an inactive entity, which are accounted for as VIEs. All significant intercompany balances and transactions have been eliminated in consolidation.




4



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



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


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 US GAAP 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 and related disclosures included in the Company’s Annual Report on Form 10-K, filed with the SEC on April 15, 2015. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) which are necessary to provide a fair presentation of financial position as of March 31, 2015 and the related operating results and cash flows for the interim periods presented have been made.  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, 2015.


Use of Estimates


The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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 condensed 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 intangible assets,

·

Estimates of value of equity transactions for services rendered,

·

Estimates of returned or damaged product, and

·

Estimates made in our deferred income tax calculations, for which there is a full valuation allowance.


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, 2015 and December 31, 2014, the allowance for uncollectable accounts was $251,825 and $268,329, respectively, $210,000 at both dates for defectives and product returns and $60,000 at both dates for advertising credits.


Inventories


Inventory is reported at the lower of cost or market on the 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.




5



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



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


Revenue Recognition


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.  Shipping and handling costs are included in cost of goods sold.


Research and Development


The Company currently maintains a functional laboratory employing a full time chemist, 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. Such activities are 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 $47,326 and $89,731 for 2015-QTR and 2014-QTR, respectively.


Earnings Per Share


Potentially dilutive securities are excluded from the computation of diluted net loss per share for all of the periods presented in the accompanying condensed consolidated statements of operations because the reported net loss in each of these periods results in their inclusion being antidilutive. Antidilutive securities, which consist of stock options and warrants that are not included in the diluted net loss per share calculation, consisted of an aggregate of 286,526 shares as of March 31, 2015 and 2014.




6



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 3. – LIQUIDITY and GOING CONCERN


We have sustained operational losses since our inception. At March 31, 2015, we had an accumulated deficit of $9,698,513. The Company cannot predict how long it will continue to incur further losses or whether it will ever become profitable as this is dependent upon the reduction of certain operating expenses, success of new and existing products and increase in overall revenue among other things. These conditions raise substantial doubt about the entity’s ability to continue as a going concern.


As of March 31, 2015, we had $652,093 in cash. While we have historically financed our operations and growth primarily through the successful issuance and sale of shares of our common stock, a line of credit and the issuance of promissory notes, the Company has started several new revenue initiatives creating additional revenue streams.  Some of these initiatives include: establishing an online store ( Shop.DSLaboratories.com ) which became operational in the third quarter of 2014, generating $131,107 2014-YTD and $85,636 2015-QTR in net revenue, respectively. The company also established a hair treatment clinic which opened in late November 2014 which has not yet generated appreciable sales. In the first quarter 2015, we have launched a range of new products. Although we cannot predict our success with these products or projects, all are currently under development and production and in various stages of completion. We have commenced implementing, and will continue to implement, various measures to address our financial condition, including but not limited to:


·

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.

·

We completed an operational budget for 2015 that sets changes in our processes to focus on profitability.  We are also implementing a feedback process with improved interdepartmental communication.


Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates continuation of the Company as a going concern.  The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and carrying amount or 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.


NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS


Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our condensed consolidated financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.


In April 2015, the FASB issued ASU No. 2015-03(ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs . This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial position and results of operations.


NOTE 5. – INVENTORIES


Significant components of inventory at March 31, 2015 and December 31, 2014 consist primarily of:


2015

2014

Bulk product and raw materials

$

2,416,001

$

2,502,402

Work in process

274,790

213,832

Merchandise inventory

1,693,639

1,423,929

Inventory in transit

146,372

231,623

Less: Allowance

(388,345

)

(387,258

)

$

4,142,457

$

3,984,528



7



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 6. – INTANGIBLE ASSETS


Significant components of intangible assets at March 31, 2015 and December 31, 2014 consist of:


2015

2014

Distribution rights in Brazil

$

750,000

$

750,000

Less: Accumulated amortization

(412,500

)

(393,750

)

Net distribution rights

337,500

356,250

DS Mexico customer list

932,000

932,000

Less: Accumulated amortization

(217,274

)

(223,162

)

Net customer list

714,726

708,838

Goodwill

36,285

36,285

$

1,088,511

$

1,101,373


The following table represents the amortized cost of the various assets over the remaining years; the weighted average remaining period is 6.13 years.


2015

2016

2017

2018

Beyond

Total

Asset:

Brazil distribution rights

$

56,250

$

75,000

$

75,000

$

75,000

$

56,250

$

337,500

Mexican Customer list

77,625

103,500

103,500

103,500

326,601

714,726

$

133,875

$

178,500

$

178,500

$

178,500

$

382,851

$

1,052,226


NOTE 7. – ACCRUED EXPENSES


Accrued expenses at March 31, 2015 and December 31, 2014 consist of:


2015

2014

Advertising and marketing

$

—

$

35,000

Commissions

315,729

367,063

Director services

1,510

15,000

Facilities

16,480

10,300

Fees / interest

10,500

7,000

Investor relations

301,652

265,024

Production materials

109,320

102,958

Personnel

121,321

108,819

Warehouse

27,983

55,948

$

904,495

$

967,112


Investor relations – The reported amount is related to various agreements, dating back to August 2013, to perform investor relations services.  The services are payable in shares of our common stock, valued based on the day the services were deemed completed and the right to receive shares were earned.  The obligation at March 31, 2015 and December 31, 2014 could have been settled in cash or with the issuance of 357,154 shares of our common stock, at the Company’s discretion.




8



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 8. – OTHER CURRENT LIABILITIES


Other current liabilities at March 31, 2015 and December 31, 2014 consist of:


2015

2014

Customer deposits

$

178,371

$

141,998

Credit cards

198,815

190,803

Marketing and promotional programs

102,772

227,681

VAT taxes payable

77,795

173,567

Current portion of long term debt

11,599

11,429

Loan from shareholder

10,000

—

Vendor financing

25,174

25,174

Advance from employee

—

26,360

Promotional gift cards

4,645

—

Payroll taxes payable

16,139

—

Other current liabilities

200

89,810

$

625,510

$

886,822


NOTE 9. – DEBT FINANCING


Note Payable – The Company is party to a note for $350,000 which is secured by finished goods and bears interest at 1% per month.  The note originally matured on March 28, 2015 and was extended to May 28, 2015.


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 principal and interest payments of $1,041 for 60 months at 5.95% interest. Payments began on February 18, 2013.


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


2015

2016

2017

Total

Current Portion of Long Term Debt

$

8,635

$

2,964

$

—

$

11,599

Long Term Debt

—

9,163

12,869

22,032

Total

$

8,635

$

12,127

$

12,869

$

33,631


NOTE 10. – COMMITMENTS AND CONTINGENCIES


During the three months ended March 31, 2015, the Company operated under several material agreements as listed below:


Lease for office and production facilities –


·

The Company is party to a 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.  Effective September 30, 2014 the Company has relocated this office to its Florida headquarters and as of March 31, 2015 is still in negotiations with the landlord to formalize the lease termination.

·

The Company was party to a lease for 50,000 square feet in warehouse and corporate office space located in Deerfield Beach, Florida, which expired in July 2014. On June 25, 2014, commencing August 1, 2014, the Company completed negotiations for a new lease for the same Deerfield Beach location. The terms of the new lease provide for $6.00 per square foot or $24,720 per month base rent plus $10,918 monthly in operating expenses and terminates on July 31, 2019. The lease provides for annual increases in the monthly base rent of $0.24- $0.27 per square foot.




9



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 10. – COMMITMENTS AND CONTINGENCIES (Continued)


The Company’s Mexican facility leases 246 square feet of office space and 1,230 square feet of warehouse Mexico City, Mexico, which expires in July 2015.  The leases provide for monthly rent of $1,408.


The Company accounts for its facility leases using the straight-line method and incurred $106,914 and $99,884 in total rent expense in the three months ended March 31, 2015 and 2014, respectively.


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


2015

2016

2017

2018

Beyond

Total

Facility Leases

Deerfield, FL (HQ/Production)

$

325,686

$

444,672

$

457,238

$

470,298

$

278,882

$

1,976,776

Mexico City, Mexico (Sales)

5,786

—

—

—

—

5,786

$

331,472

$

444,672

$

457,238

$

470,298

$

278,882

$

1,982,562


Pending and threatened litigation –


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 continue vigorously defend this claim.


During 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 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 had 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.  During March 2014, the matter was settled and each party released the other from all claims related to the action.  Under a settlement matter and general release, the defendant agreed to return to Company treasury 10,000 shares common stock subject to the dispute, and of the remaining 10,000 shares, the defendant agreed to a one year lock up agreement covering 60% of the shares for a period of one year from the settlement date. As of March 31, 2015, the agreed shares have not been returned to treasury.


From time to time, the Company may be involved in various claims and legal actions arising from the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.


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, 2015 totaled $496,994.


Contract contingencies


Our distribution agreement with Gamma Investors, a shareholder of the Company, 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. Transactions with Gamma have been de minimus to date.






10



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 11 – EQUITY


Common Stock


During the first quarter of 2015, the Company issued 32,500 shares of common stock to distributors for achieving sales goals valued at $27,000. We also issued 57,000 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $43,500 in total. We also issued an aggregate of 36,290 shares of common stock to three employees for services rendered, at a value of $30,000 in total. We also received $220,000 from an investor for a subscription to purchase 440,000 shares, which was accepted on April 1, 2015. (See Note 16)


NOTE 12. – SIGNIFICANT CUSTOMERS


Our product revenues represent primarily sales of Revita and Revita Cor which individually exceed 10% of total sales and collectively represent 46% of net revenue. Spectral DNC-N represents 10% of net revenue and Spectral DNC-s V1 and DNC-5% each represent 6% of net revenue. The Company sells its products to several types of customer, which primarily include distributors and salons, several of which represent individually in excess of 10% of total net revenue during 2015-QTR and 2014-QTR. During 2015-QTR and 2014-QTR, our top ten customers generated 72% and 45% of our net revenue, respectively.


Sales to customers individually in excess of 10% of net revenue during 2015-QTR and their accounts receivable at March 31, 2015 were:


Customer

Sales

Amount

Percent

Accounts

Receivable

Percent

H

$304,949

13%

$366,835

14%

F

$261,086

11%

$207,631

8%


Sales to customers individually in excess of 10% of net revenue during 2014-QTR and their accounts receivable at March 31, 2014 were:


Customer

Sales

Amount

Percent

Accounts

Receivable

Percent

H

$378,310

13%

$249,413

12%


NOTE 13. – 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 2015-QTR and their accounts payable at March 31, 2015 were:


Vendor

Purchase

Amount

Percent

Accounts

Payable

Percent

A

$191,713

22%

$29,419

4%

C

$171,149

20%

$56,824

8%


Purchases from significant vendors during 2014-QTR and their accounts payable at March 31, 2014 were:


Vendor

Purchase

Amount

Percent

Accounts

Payable

Percent

C

$325,731

28%

$98,029

6%




11



DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 14. – GEOGRAPHIC REVENUE REPORTING


The Company is organized based on 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 international distributors who distribute our product outside North America have been consistent.


Information about the Company’s geographic operations for both 2015-QTR and 2014-QTR as follows:


2015

2014

Net Revenue:

North America

$

1,204,010

$

1,033,997

International

1,599,910

1,650,967

$

2,803,920

$

2,684,964


Furniture and Equipment, Net:

North America

$

138,561

$

119,530

International

49,146

103,128

$

187,707

$

222,658


NOTE 15. – RELATED PARTY TRANSACTIONS


For the three months ended March 31, 2015 and 2014, the Company was a party to the following related party transactions not disclosed elsewhere in these financial statements:


·

the Company paid $25,808 (2015) and $25,808 (2014) as compensation to the father of our Chief Executive Officer for consulting on various projects,

·

the Company had receivables from a consultant of $40,625 (2015) and $11,170 (2014) and payables of $2,730 (2015) and $11,571 (2014). In addition, the Company paid the consultant who is a shareholder and performs outsourced COO services and was reimbursed the following:

o

$47,500 (2015) and $0 (2014) for outsourced COO services.

o

$8,839 (2015) and $6,875 (2014) for the purchase of materials needed for the assembly and manufacture of products for export,

o

$20,000 (2015) and $0 (2014) in cash and stock for IR related expenses and services.


NOTE 16. – SUBSEQUENT EVENTS


Management has evaluated subsequent events or transactions occurring through the date the financial statements were issued.


On April 1, 2015, we accepted a subscription to purchase 440,000 shares for cash proceeds of $220,000, which was received and deposited in 2015 QTR.


On April 20, 2015, we received a secured loan for $250,000 from one of our shareholders. This loan bears interest of 1% per month and is due on April 20, 2016. This loan is secured by the Company’s accounts receivable. As part of the terms, the Company has issue 30,000 warrants with an exercise price of $0.85 per share, with an expiration date of April 20, 2017.


During the second quarter of 2015, the company issued 345,000 shares for services in aggregate valued at $1.64 or $565,800.






12





ITEM 2.

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


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.

This discussion is intended to supplement and highlight information contained in, and should be read in conjunction with, our condensed consolidated financial statements and related notes and the selected financial data presented elsewhere in this report.

Significant Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 to condensed consolidated financial statements describes the significant accounting policies used in the preparation of the condensed consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the condensed consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our condensed consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our condensed consolidated financial statements:

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.

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.



13





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.

Revenue Recognition – 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. Shipping and handling costs are included in cost of goods sold.

Research and Development – The Company incurs formulation costs that include salaries, materials and consultant fees. These costs are classified as product development, selling and general and administrative expenses in the condensed consolidated statements of operations.

Results of Operations

Three Months Ended March 31, 2015 as Compared to the Three Months Ended March 31, 2014

Revenues, net – Total net revenues increased $118,956 or 4.4%, from $2,684,964 for the three months ended March 31, 2014 to $2,803,920 for the three months ended March 31, 2015. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 46% of total sales for the period. In addition, Spectral DNC-N represents approximately 10% of total sales for each period along with Spectral DNC-S V1 and Spectral DNC 5% which represents 6% each of net revenue.

Net revenue from our Mexican subsidiary increased 5.1% in 2015-QTR compared to 2014-QTR, accounting for $664,183 (24%) and $631,975 (23.5%) of consolidated net sales for the three months ended March 31, 2015 and 2014 respectively. The increase in net revenue from our Mexican subsidiary as a result of increased marketing efforts, continues to consistently contribute to the overall increase in net revenue. Sales generated from US operations have increased as well, as a result of no longer delaying sales due to backorders. The issue of backorders has improved dramatically. We continue our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributor base, both domestic and foreign. We conduct a significant portion of business with various distributors under exclusive distribution agreements. Revenues from our top ten customers accounted for approximately 70% and 45% of our total revenues during the three months ended March 31, 2015 and March 31, 2014, respectively.

Cost of Goods Sold – Total cost of goods sold decreased $63,758 or 5.3%, from $1,202,518 (2014-QTR) to $1,138,760 (2015-QTR). We continued additional cost cutting efforts during the quarter ending March 31, 2015 that included improved sales mix, reformulations, and improved manufacturing efficiencies.


Consequently, the gross margin has improved from 55.2% (2014-QTR) to 59.4% (2015-QTR), with US operations accounting for $1,120,545 or 76% (2014-QTR) and $1,280,946 or 77% (2015-QTR) of the gross margin dollars and with DS Mexico accounting for $361,901 or 24% (2014-QTR) and $384,214 or 23% (2015-QTR) of gross margin dollars, offset by the stronger dollar compared to the Mexican peso.




14





Selling and Marketing Costs – Selling and marketing costs decreased $193,243 or 19.9% from $970,022 (2014-QTR) to $776,778 (2015-QTR). The decrease was due to the following:

–

Decreases of:

·

$191,187 for consulting and commissions, as a result of decreased sales incentives and improved efficiencies in the sales force, and

·

$51,242 for product development, as a result of completion of new product development in Q4 2014.


Partially offset by increases of:


·

$22,261 for travel and entertainment costs, as a result of increased educational and training of support staff during the quarter, and


·

$11,947 for Internet and Web Hosting costs, as a result of increased activity through the online store and technical support needed.


General and Administrative Costs – General and administrative costs decreased $255,804 or 19.2%, from $1,333,944 (2014-QTR) to $1,078,140 (2015-QTR). The decrease is due to the following:

–

Decreases of:


·

$208,815 for professional fees primarily associated with a reduced need for consultants, specifically receiving common stock compensation, and


·

$72,232 for personnel costs, as a result of reductions in redundancies and overall staff needs, and


·

$23,302 for depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing the Pure Guild brand and other intangibles associated with our Mexico operations during 2014, and


·

$26,015 for licenses and permits as a result of a decreased filings of regulatory permits in the U.S. and abroad, specifically with our Mexico subsidiary.


·

$23,364 for bank charges as a result of improved internal policies within A/P for wire and bank analysis costs, as well as overall fees for transactions.


· $58,866 for other general and administrative costs, as a result of improved overall efficiencies.

Partially offset by increases of:


· $158,391 for bad debt, as a result of a one time reversal during 2014-QTR.

Other Income and Expenses – Other income and expense increased $121,563 or 111.7%, from $1,088 expense (2014-QTR) to $120,475 income (2015-QTR). The increase is due to invoicing a one-time fee of $120,000 for terminating our existing agreement with a major consumer products company so that a new agreement could be structured.  The Company realized no revenue from the terminated agreement.

Liquidity and Capital Resources

We had cash of $652,093 and working capital of $4,239,520 at March 31, 2015. 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 and working capital required to grow our business were satisfied primarily through the private sales of our common stock and by credit financing.



15





Despite our losses since inception, we believe that by increasing our sales and gross profit margins while maintaining and better optimizing our current operational structure and administrative expenses, we can minimize the cash needed to support our operations. Our largest consumption of cash is the working capital necessary to support expanding sales. The sale of additional equity or convertible debt securities 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. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

We have commenced implementing, and will continue to implement, various measures to address our financial condition, including methods to increase gross profit margins and reducing and streamlining our operational costs and overhead. We have historically satisfied our working capital requirements through the sale of common stock, advances from related parties and third parties and through our credit facility. We are 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.


Cash Flows for the Three Months Ended March 31, 2015

Cash Flows from Operating Activities

Operating activities used net cash for the three months ended March 31, 2015 of $901,136. In addition, changes in operating assets and liabilities used cash of $933,773 as follows:

·

$217,879 provided by a decrease in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,

·

$159,016 used by an increase in inventory component levels resulting from implementing a purchasing strategy to continue eliminating backorders and improve customer satisfaction,

·

$233,781 used by a decrease in accounts payable resulting from efforts to reduce outstanding vendor balances and restore normalized vendor relations,

·

$62,617 provided by an increase in accrued expenses as a result of an increase in certain accrued expenses such as commissions due, and

·

$260,480 provided by net changes in other current assets and liabilities primarily as a result of increased liabilities associated with the expansion of our Mexican operations.

Cash Flows used in Investing Activities

Our investing activities used $13,724 in net cash during the three months ended March 31, 2014. Net cash used is primarily the result of injection mold purchases for production in the US and sales operations in Mexico.

Cash Flows from Financing Activities

Our financing activities contributed $217,035 in net cash during the three months ended March 31, 2015, primarily as a result of the $220,000 contributed for purchase of subscriptions, and use of $2,965 in repayment of loans and notes.


Financial Position

Total Assets – Our total assets decreased $104,678 or 1.2% from $8,597,002 as of December 31, 2014 to $8,492,325 as of March 31, 2015, primarily as a result of the cash used to repay creditors and increase inventory components. There was a net decrease in current assets of $85,367 the components of which are discussed further below. The decrease in total assets was also the result of a decrease of $12,862 in Intangible assets, due to amortization, as well as a decrease in Equipment, net of depreciation, of $18,699 which was partially offset by an increase of $12,250 in other assets.



16





Current Assets – The net decrease in current assets of $85,367 was primarily associated with a decrease in cash of $476,462, primarily to support operations. These decreases were partially offset by a $157,929 increase in inventory levels and a $233,998 increase in Accounts receivable. These net changes are primarily driven by changes in sales and other factors more specifically discussed below:

Inventory – Inventory levels increased 4.0% from December 31, 2014 to March 31, 2015, as a result of continued efforts to replenish inventory in key raw material components in anticipation of higher sales in the latter half of 2015. Inventory levels increased as a result of increased number of SKU’s in our portfolio of products. Backlog and back orders have effectively been reduced to zero and perceived sales in the later part of 2015 should use the inventory on hand.

Average inventory represents approximately 89.2% of COGS or over an eleven month supply based on the sell through rate achieved for the three months ended March 31, 2015, resulting in an inventory turnover rate of 1.37 times. This inventory turn rate should improve as we ramp up sales volume that can now be met with smoother production timing.

Accounts Receivable, net – Accounts receivable increased $233,998, primarily as a result of increased sales during Q1 2015. The receivables are in line with historical averages for previous quarters and these levels of sales.

Prepaid Expenses and other current assets – Prepaid expenses increased 13.9%, primarily as a result of advances in stock for services.

Material Commitments

None.

Off Balance Sheet Arrangements

None.

Recent Accounting Pronouncements


Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d–15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the forms and rules of the SEC and that such information is accumulated and communicated to management, including the CEO and CFO, in a manner to allow timely decisions regarding required disclosures.

In connection with the preparation of this Form 10–Q, our management, including the CEO and CFO, updated its December 31, 2014 evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March, 2015. As described below, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. As a result of those material weaknesses, our management has concluded that, as of March 31, 2015, our disclosure controls and procedures were not effective, as a result of certain material weaknesses.



17





The specific material weaknesses that management identified in our internal controls as of March 31, 2015 that persist are as follows:


·

We did not have adequate staffing resources to provide appropriate review and supervision for all necessary areas and our general staff do not have the necessary training to perform appropriate analytical or review procedures.

·

We did not have a sufficient number of adequately trained technical accounting and external reporting personnel to support standalone external financial reporting under SEC requirements.

·

We did not have personnel with sufficient experience with United States generally accepted accounting principles to address complex transactions.

·

We did not obtain adequate documentation to support all credit card transactions.

Plans for Remediation of Material Weaknesses


We have begun implementing changes to strengthen our internal controls and will continue to implement remediation plans for the identified material weaknesses and expect the work on the plan will continue throughout 2015, as financial resources permit. The Company plans to hire a full-time Chief Financial Officer. The Company continues to formalizing its policies and procedures in writing and to improve the integration of its financial consolidation and reporting system into non- accounting departments. Where appropriate, the Company is receiving advice and assistance from third-party experts as it implements and refines its remediation plan.

Additional measures may be necessary, and the measures we expect to take to improve our internal controls may not be sufficient to address the issues identified, to ensure that our internal controls are effective or to ensure that such material weakness or other material weaknesses would not result in a material misstatement of our annual or interim financial statements. In addition, other material weaknesses or significant deficiencies may be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

Changes in Internal Control over Financial Reporting


Except as otherwise stated above, there were no changes in our internal control over financial reporting or in other factors during the quarter ended March 31, 2015, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.




18





PART II – OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not Applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In addition to the equity securities previously disclosed on SEC reports by the Company, during the period covered by this report the Company issued the unregistered shares of common stock as disclosed below.  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.

During the first quarter of 2015, the Company issued 32,500 shares of common stock to distributors for achieving sales goals valued at $27,000. We also issued 57,000 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $43,500 in total. We also issued an aggregate of 36,290 shares of common stock to three employees for services rendered, at a value of $30,000 in total.


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




19





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 20, 2015

DS HEALTHCARE GROUP, INC.

By:

/s/ Daniel Khesin

Daniel Khesin

President, Chief Executive Officer,

Chief Financial Officer/

Principal Accounting Officer






20


The above information was disclosed in a filing to the SEC. To see this filing in its entirety, click here.

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Other recent filings from the company include the following:

Current report, items 5.02 and 9.01 - June 5, 2017
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