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EX-31.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex31z1.htm
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EX-32.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex32z2.htm
EX-31.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex31z2.htm


 

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 June 30, 2014

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 16,088,268 shares of common stock outstanding as of August 6, 2014.

 

 




 


PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS


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

 Condensed Consolidated Balance Sheets


 

 

June 30,

 

 

December 31,

 

 

 

2014

 

 

2013

 

 

 

(Unaudited)

 

 

 

 

ASSETS

  

                       

  

  

                       

  

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

 

$

773,055

 

 

$

2,872,946

 

Accounts receivable, net

 

 

2,097,171

 

 

 

2,229,329

 

Inventories

 

 

3,524,537

 

 

 

2,702,579

 

Prepaid expenses and other current assets

 

 

413,963

 

 

 

289,885

 

Total Current Assets

 

 

6,808,726

 

 

 

8,094,739

 

 

 

 

 

 

 

 

 

 

Furniture and Equipment, net

 

 

205,665

 

 

 

206,958

 

Intangible Assets, net

 

 

1,249,870

 

 

 

1,346,389

 

Other Assets

 

 

163,164

 

 

 

66,506

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

8,427,425

 

 

$

9,714,592

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,603,722

 

 

$

2,230,723

 

Accrued expenses

 

 

848,185

 

 

 

945,949

 

Credit facility

 

 

228,887

 

 

 

582,383

 

Other current liabilities

 

 

863,418

 

 

 

286,282

 

Total Current Liabilities

 

 

3,544,212

 

 

 

4,045,337

 

 

 

 

 

 

 

 

 

 

Long Term Debt, net of current portion

 

 

30,795

 

 

 

36,425

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

3,575,007

 

 

 

4,081,762

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 30 million shares authorized: 0 shares issued and outstanding at June 30, 2014 and December 31, 2013

 

 

 

 

 

 

Common stock, $0.001 par value, 300 million shares authorized: 16,088,268 and 15,843,005 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

16,088

 

 

 

15,843

 

Additional paid-in-capital

 

 

14,691,155

 

 

 

14,163,595

 

Stock subscription

 

 

(2,500

)

 

 

(194,500

)

Accumulated deficit

 

 

(9,786,540

)

 

 

(8,307,420

)

Accumulated comprehensive income

 

 

(27,355

)

 

 

(12,462

)

Total Shareholders' Equity

 

 

4,890,848

 

 

 

5,665,056

 

Non-Controlling Interest

 

 

(38,430

)

 

 

(32,226

)

 

 

 

 

 

 

 

 

 

Total Shareholders' Equity

 

 

4,852,418

 

 

 

5,632,830

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

8,427,425

 

 

$

9,714,592

 




See accompanying notes to condensed consolidated financial statements

1



 


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

 Condensed Consolidated Statements of Operations

 (Unaudited)


 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

  

                       

  

  

                       

  

  

                       

  

  

                       

  

Net Revenue

 

$

3,744,434

 

 

$

3,431,154

 

 

$

6,429,397

 

 

$

7,392,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

1,802,898

 

 

 

1,830,068

 

 

 

3,005,416

 

 

 

4,017,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

1,941,536

 

 

 

1,601,086

 

 

 

3,423,981

 

 

 

3,375,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions and consulting

 

 

479,778

 

 

 

225,272

 

 

 

840,337

 

 

 

485,040

 

Other selling and marketing expenses

 

 

714,460

 

 

 

669,094

 

 

 

1,323,923

 

 

 

1,166,324

 

 

 

 

1,194,238

 

 

 

894,366

 

 

 

2,164,260

 

 

 

1,651,364

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salary and personnel costs

 

 

557,058

 

 

 

472,945

 

 

 

1,141,741

 

 

 

958,676

 

Professional fees and consulting costs

 

 

472,549

 

 

 

371,543

 

 

 

1,057,774

 

 

 

738,385

 

Other general and administrative expenses

 

 

308,929

 

 

 

525,070

 

 

 

472,965

 

 

 

1,181,173

 

 

 

 

1,338,536

 

 

 

1,369,558

 

 

 

2,672,480

 

 

 

2,878,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

 

2,532,774

 

 

 

2,263,924

 

 

 

4,836,740

 

 

 

4,529,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(591,238

)

 

 

(662,838

)

 

 

(1,412,759

)

 

 

(1,153,829

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (Expense) Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(22,443

)

 

 

(41,817

)

 

 

(49,988

)

 

 

(61,562

)

Other

 

 

10,036

 

 

 

(55,954

)

 

 

8,950

 

 

 

661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other (expense) income

 

 

(12,407

)

 

 

(97,771

)

 

 

(41,038

)

 

 

(60,901

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss Before Income Taxes

 

 

(603,645

)

 

 

(760,609

)

 

 

(1,453,797

)

 

 

(1,214,730

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

 

31,527

 

 

 

2,893

 

 

 

31,527

 

 

 

10,888

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(635,172

)

 

 

(763,502

)

 

 

(1,485,324

)

 

 

(1,225,618

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

(1,833

)

 

 

(6,439

)

 

 

(6,204

)

 

 

(10,562

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Common Shareholders

 

$

(633,339

)

 

$

(757,063

)

 

$

(1,479,120

)

 

$

(1,215,056

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

16,085,112

 

 

 

12,209,433

 

 

 

16,007,199

 

 

 

12,137,997

 

Loss per share

 

$

(0.04

)

 

$

(0.06

)

 

$

(0.09

)

 

$

(0.10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(40,439

)

 

 

 

 

 

(14,893

)

 

 

 

Comprehensive loss

 

$

(673,778

)

 

$

(757,063

)

 

$

(1,494,013

)

 

$

(1,215,056

)




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 Six Months Ended
June 30,

 

 

 

2014

 

 

2013

 

Cash Flows from Operating Activities:

  

                       

  

  

                       

  

Net Loss

 

$

(1,485,324

)

 

$

(1,225,618

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

144,909

 

 

 

185,567

 

Loss on disposal of fixed assets

 

 

2,468

 

 

 

 

(Recovery) provision for bad debts

 

 

(142,585

)

 

 

142,567

 

(Recovery) provision for obsolete inventory

 

 

(168,917

)

 

 

(38,870

)

Stock issued for services

 

 

31,520

 

 

 

279,424

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

274,742

 

 

 

(207,042

)

Inventories

 

 

(653,041

)

 

 

353,554

 

Prepaid expenses and other current assets

 

 

232,648

 

 

 

(158,976

)

Accounts payable

 

 

(627,001

)

 

 

262,809

 

Accrued expenses

 

 

(44,862

)

 

 

(330,003

)

Other current liabilities

 

 

577,137

 

 

 

130,426

 

Net cash used in operating activities

 

 

(1,858,306

)

 

 

(606,162

)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of furniture and equipment

 

 

(50,359

)

 

 

(33,978

)

Purchase of injection molds

 

 

 

 

 

(35,139

)

Proceeds from disposal of fixed asset

 

 

 

 

 

20,039

 

Advances / repayments related parties

 

 

 

 

 

(8,027

)

Security deposits

 

 

 

 

 

4,801

 

Net cash used in investing activities

 

 

(50,359

)

 

 

(52,304

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Net (repayments) proceeds of credit facility

 

 

(353,496

)

 

 

401,384

 

Proceeds of shareholders' loans

 

 

 

 

 

310,000

 

Repayment of loans and notes

 

 

(5,630

)

 

 

(9,609

)

Proceeds from sale of common stock

 

 

192,000

 

 

 

 

Less issuance cost

 

 

(10,000

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(177,126

)

 

 

701,775

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(14,100

)

 

 

5,587

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash

 

 

(2,099,891

)

 

 

48,896

 

Cash, Beginning of Period

 

 

2,872,946

 

 

 

412,488

 

 

 

 

 

 

 

 

 

 

Cash, End of Period

 

$

773,055

 

 

$

461,384

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

49,988

 

 

$

61,562

 

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

Condensed Consolidated Statements of Changes in Equity

For the Period From January 1, 2014 to June 30, 2014


 

 

 

 

 

 

 

 

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, 2014

 

 

 

 

$

 

 

 

15,843,005

 

 

$

15,843

 

 

$

14,163,595

 

 

$

(194,500

)

 

$

(8,307,420

)

 

$

(12,462

)

 

$

5,665,056

 

 

$

(32,226

)

 

$

5,632,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold to private investors

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

5

 

 

 

4,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

 

 

 

 

5,000

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private investment in public equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

192,000

 

 

 

 

 

 

 

 

 

 

 

192,000

 

 

 

 

 

 

 

192,000

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,000

)

 

 

 

 

 

 

(10,000

)

For services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

 

 

 

 

48,000

 

 

 

48

 

 

 

106,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

106,560

 

 

 

 

 

 

 

106,560

 

Settlement of claim

 

 

 

 

 

 

 

 

 

 

20,513

 

 

 

20

 

 

 

39,980

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,000

 

 

 

 

 

 

 

40,000

 

Distributor award

 

 

 

 

 

 

 

 

 

 

8,000

 

 

 

8

 

 

 

19,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,520

 

 

 

 

 

 

 

19,520

 

Consulting

 

 

 

 

 

 

 

 

 

 

160,000

 

 

 

160

 

 

 

358,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

358,400

 

 

 

 

 

 

 

358,400

 

Board of Directors

 

 

 

 

 

 

 

 

 

 

3,750

 

 

 

4

 

 

 

8,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,325

 

 

 

 

 

 

 

8,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,893

)

 

 

(14,893

)

 

 

 

 

 

 

(14,893

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014 Net Loss (6 months)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,479,120

)

 

 

 

 

 

 

(1,479,120

)

 

 

(6,204

)

 

 

(1,485,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014 (Unaudited)

 

 

 

 

$

 

 

 

16,088,268

 

 

$

16,088

 

 

$

14,691,155

 

 

$

(2,500

)

 

$

(9,786,540

)

 

$

(27,355

)

 

$

4,890,848

 

 

$

(38,430

)

 

$

4,852,418

 





See accompanying notes to condensed consolidated financial statements

4



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

 

2013-QTR

Three months ended June 30, 2013

 

2013-YTD

2014-QTR

2014-YTD

Six months ended June 30, 2013

Three months ended June 30, 2014

Six months ended June 30, 2014

  

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. Management believes the Company is currently a leading innovator of (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 are 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.




5



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

(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 4, 2014. In the opinion of management, all adjustments (consisting only of a normal recurring nature) which are necessary to provide a fair presentation of financial position as of June 30, 2014 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, 2014.


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.


Cash


The Company maintains its cash in financial institutions located in the United States. At times, the Company’s cash and cash equivalent balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not experienced any losses in such accounts.


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 June 30, 2014 and December 31, 2013, the allowance for uncollectable accounts was $162,729 and $305,314, respectively, $210,000 and $210,000 respectively for defectives and product returns and $60,000 at both dates for advertising credits.




6



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

(unaudited)



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


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.


Furniture and Equipment


Furniture and equipment are recorded at cost and depreciation is provided using the double declining balance depreciation method in the United States and the straight line depreciation method in Mexico over the estimated useful lives of the assets, which range from 5 to 7 years. The Company recorded $48,263 and $49,631 in depreciation expense during 2014-YTD and 2013-YTD, respectively. Accumulated depreciation was $287,236 and $238,051 at June 30, 2014 and December 31, 2013, 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.


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 $59,410 and $47,707 for 2014-QTR and 2013-QTR, respectively and $106,816 and $76,699 for 2014-YTD and 2013-YTD, respectively.


Share-Based Payment


The Company measures compensation cost for all employee stock-based awards at their fair values on the date of grant. Stock-based awards issued to non-employees are measured at their fair values on the date of grant, and are re-measured at each reporting period through their vesting dates. When a non-employee becomes an employee and continues to vest in the award, the fair value of the individual’s award is re-measured on the date that he becomes an employee, and then is not subsequently re-measured at future reporting dates. The fair value of stock based awards is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method for stock options and restricted stock. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards.



7



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

(unaudited)



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


Subsequent Events


Management has evaluated subsequent events or transactions occurring through the date the financial statements were issued. Management concluded that no additional subsequent events required disclosure in these condensed consolidated financial statements except as disclosed.


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.

 

Earnings Per Share


Basic earnings per share is computed by dividing net loss attributable to 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. Warrants to purchase 253,893 shares of common stock and options 32,633 shares of common stock were excluded from the earnings per share calculation because they would be anti-dilutive.


NOTE 3. – LIQUIDITY


We have sustained operational losses since our inception. At June 30, 2014, we had an accumulated deficit of $9,786,540. 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, success of new and existing products and increase in overall revenue. These conditions raise substantial doubt about the entity’s ability to continue as a going concern.


As of June 30, 2014, we had $773,055 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 for the Company.  Some of these initiatives include: establishing an online store scheduled to become fully operational in the third quarter of 2014 and establishing a hair treatment clinic.  We have also begun shipping ingredients for a private label product to a Fortune 500 healthcare company and have taken steps to increase our domestic and international presence. Although we cannot predict our success with these products and or projects, all are currently under way 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 2014 that sets changes in our processes to focus on profitability in 2014.  We are also implementing a feedback process with improved interdepartmental communication.




8



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

(unaudited)



NOTE 3. – LIQUIDITY (Continued)


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


The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier 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.


The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The Company has not yet determined the effect of the adoption of this standard and its impact on the Company's condensed consolidated financial position and results of operations.


In March 2013, FASB issued ASU 2013-05, “Foreign Currency Matters: Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” an amendment which allows an entity to release cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This is effective for fiscal years and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or related disclosures.


In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,”. The amendments in this update require that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under a few limited circumstances. The amendments in this update do not require new recurring disclosures. This new guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s condensed consolidated financial statements.




9



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

(unaudited)



NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)


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.


NOTE 5. – INVENTORIES


Significant components of inventory at June 30, 2014 and December 31, 2013 consist primarily of:


 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Bulk product and raw materials

 

$

2,578,272

 

 

$

1,930,848

 

Work in process

 

 

133,588

 

 

 

192,319

 

Merchandise inventory

 

 

893,338

 

 

 

965,127

 

Inventory in transit

 

 

300,142

 

 

 

164,005

 

Less: Allowance

 

 

(380,803

)

 

 

(549,720

)

 

 

$

3,524,537

 

 

$

2,702,579

 

 

Management evaluated the inventory at June 30, 2014 and December 31, 2013 and reserved $380,803 and $549,720, respectively, as an allowance for slow moving and obsolete inventory. The allowance applies primarily to bulk product and raw materials where the chemical components have expired and the bottles, pumps and packaging materials are no longer being used in current production due to packaging changes or were in excess of quantities needed based on current production consumption. Generally, merchandise inventory does not require a reserve.


NOTE 6. – INTANGIBLE ASSETS


Significant components of intangible assets at June 30, 2014 and December 31, 2013 consist of:


 

 

2014

 

 

2013

 

Distribution rights in Brazil

 

$

750,000

 

 

$

750,000

 

Less: Accumulated amortization

 

 

(356,250

)

 

 

(318,750

)

Net distribution rights

 

 

393,750

 

 

 

431,250

 

 

 

 

 

 

 

 

 

  

Pure Guild brand rights

 

 

159,086

 

 

 

159,086

 

Less: Accumulated amortization

 

 

(99,960

)

 

 

(92,570

)

Net brand right

 

 

59,126

 

 

 

66,516

 

 

 

 

 

 

 

 

 

 

DS Mexico Customer list

 

 

932,000

 

 

 

932,000

 

Less: Accumulated amortization

 

 

(169,450

)

 

 

(119,662

)

Net customer list

 

 

762,550

 

 

 

812,338

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

34,444

 

 

 

36,285

 

 

 

$

1,249,870

 

 

$

1,346,389

 


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, former joint venture partner and current shareholder, is currently commercializing its product lines and products for the Brazilian market, which was introduced in the 4th quarter of 2012. Such rights are being amortized over 10 years. $18,750 was amortized during both the three months ending June 30, 2014 and 2013, respectively.  $37,500 was amortized during both the six months ending June 30, 2014 and 2013, respectively.




10



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

(unaudited)



NOTE 6. – INTANGIBLE ASSETS (Continued)


Pure Guild brand rights – During the 3rd quarter of 2009, we entered into an agreement with 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. $3,695 has been amortized during both the three months ending June 30, 2014 and 2013, respectively.  $7,390 has been amortized during both the six months ending June 30, 2014 and 2013, respectively.


DS Mexico Customer list – In connection with the acquisition of our Mexican distributor, in November 2012, we acquired the customer list which was recorded at its fair value as determined by an independent appraiser. The asset is being amortized over its estimated useful life of 9 years. Accordingly, the Company recognized $25,418 and $7,707 of amortization expense in the three months ended June 30, 2014 and 2013, respectively.  $49,788 and $52,055 of amortization expense in the six months ended June 30, 2014 and 2013, respectively.


Goodwill – Also in connection with the acquisition of our Mexican distributor, DS Mexico, we acquired goodwill which represents the excess of the fair value of consideration given over the fair value of the assets acquired. The asset is not being amortized; however the Company will access the asset for impairment annually. At June 30, 2014, no impairment was considered necessary.


The following table represents the amortized cost of the various assets over the remaining years, the weighted average remaining period is 6.52 years.


 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

Beyond

 

 

Total

 

Asset:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brazil distribution rights

 

$

37,500

 

 

$

75,000

 

 

$

75,000

 

 

$

75,000

 

 

$

131,250

 

 

$

393,750

 

Pure Guild brand rights

 

 

7,390

 

 

 

14,780

 

 

 

14,780

 

 

 

14,780

 

 

 

7,396

 

 

 

59,126

 

Mexican Customer list

 

 

51,750

 

 

 

103,500

 

 

 

103,500

 

 

 

103,500

 

 

 

400,300

 

 

 

762,550

 

 

 

$

96,640

 

 

$

193,280

 

 

$

193,280

 

 

$

193,280

 

 

$

538,946

 

 

$

1,215,426

 




11



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

(unaudited)



NOTE 7. – ACCRUED EXPENSES


Accrued expenses at June 30, 2014 and December 31, 2013 consist of:


 

 

2014

 

2013

 

Accrued expenses:

 

 

 

 

 

 

 

Advertising and marketing

 

$

 

$

12,264

 

Commissions

 

 

179,520

 

 

261,151

 

Deferred commissions

 

 

86,658

 

 

 

Director services

 

 

11,250

 

 

18,750

 

Facilities

 

 

1,791

 

 

12,535

 

Fees / interest

 

 

 

 

21,003

 

Freight

 

 

53,757

 

 

 

Investor relations

 

 

---

 

 

157,200

 

Legal

 

 

20,000

 

 

 

Production materials

 

 

81,671

 

 

144,543

 

Personnel

 

 

17,000

 

 

70,000

 

Warehouse

 

 

15,148

 

 

 

Obligation to issue shares for financial consulting services

 

 

381,390

 

 

248,503

 

 

 

$

848,185

 

$

945,949

 


NOTE 8. – OTHER CURRENT LIABILITIES


Other current liabilities at June 30, 2014 and December 31, 2013 consist of:


 

 

2014

 

2013

 

Customer deposits

 

$

92,952

 

$

29,959

 

Credit cards

 

 

273,201

 

 

47,597

 

VAT Taxes payable

 

 

149,497

 

 

142,848

 

Current portion of long term debt

 

 

11,094

 

 

10,770

 

Insurance premium financing

 

 

 

 

4,770

 

Vendor financing

 

 

252,046

 

 

50,338

 

Other current liabilities

 

 

84,628

 

 

 

 

 

$

863,418

 

$

286,282

 


NOTE 9. – DEBT FINANCING


Credit Facility - The Company is party to a credit facility which provides for asset based lending collateralized by all assets of the Company. Advances are based on 70% of qualified accounts receivable and 40% of eligible finished goods inventory. The credit facility as amended, 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 which has been renewed with a reduced $200,000 credit facility and expires August 15, 2014. The credit facility is personally guaranteed by our Chief Executive Officer and, under certain conditions, may be called upon demand. As of June 30, 2014 and December 31, 2013, the Company had $228,887 and $582,383 outstanding, respectively.  As of June 30, 2014, the Company had $0 available to borrow.


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. Payments began on February 18, 2013.




12



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

(unaudited)



NOTE 9. – DEBT FINANCING (Continued)


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


 

 

2014

 

2015

 

2016

 

2017

 

Total

 

Current Portion of Long Term Debt

 

$

5,465

 

$

5,629

 

$

 

$

 

$

11,094

 

Long Term Debt

 

 

 

 

5,800

 

 

12,127

 

 

12,868

 

 

30,795

 

Total

 

$

5,465

 

$

11,429

 

$

12,127

 

$

12,868

 

$

41,889

 


NOTE 10. – COMMITMENTS AND CONTINGENCIES


During the six months ended June 30, 2014 and the year ended December 31, 2013, 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 June 30, 2014 the Company has relocated this office to its Florida headquarters and is 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 expires 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.


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 $3,153.


The Company accounts for its facility leases using the straight-line method and incurred $98,638 and $81,674 in total rent expense in the three months ended June 30, 2014 and 2013, respectively. The Company incurred $198,522 and $190,347 in total rent expense in the six months ended June 30, 2014 and 2013, respectively.


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


 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

Beyond

 

 

Total

 

Facility Leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deerfield, Fl (HQ/Production)

 

$

200,600

 

 

$

421,584

 

 

$

433,656

 

 

$

446,222

 

 

$

459,282

 

 

$

272,456

 

 

$

2,233,800

 

Ashville, NC (Sales)

 

 

28,347

 

 

 

56,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

85,042

 

Mexico City, Mexico (Sales)

 

 

8,678

 

 

 

5,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,464

 

 

 

$

237,625

 

 

$

484,065

 

 

$

433,656

 

 

$

446,222

 

 

$

459,282

 

 

$

272,456

 

 

$

2,333,306

 


Pending and threatened litigation –


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 in 2012 by a former contractor claiming wrongful termination. Plaintiff’s complaint alleges $85,000 in back salary, performance bonus and a 40,000 share grant. The claim was settled in April 2014 for 21,513 shares of common stock with a fair value of $40,000 on the date of the agreement. See Note 11.



13



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

(unaudited)



NOTE 10. – COMMITMENTS AND CONTINGENCIES (Continued)


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.


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 June 30, 2014 totaled $1,336,781.


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.


NOTE 11 – 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 such issuance.


Under a Securities Purchase Agreement dated December 24, 2013, as amended (the “Securities Purchase Agreement”), the Company sold 1,965,000 shares under a private placement, to a series of investors under a Securities Purchase Agreement at $1.60 per share for a total of $3,144,000. Fees were paid to a registered broker-dealer and legal counsel resulting in issuance costs of $151,051.  Under the Securities Purchase Agreement, the Company has agreed to restrict the issuance of shares of Common Stock or common stock equivalents for a period of approximately nine months from the closing date, subject to certain exceptions.  In addition, subject to certain exceptions, if during a period of twelve months from the closing date of the Securities Purchase Agreement, the Company issues additional shares of Common Stock or common stock equivalents (the “Additional Shares”) at a purchase, exercise or conversion price less than $1.60 (such price subject to adjustment for splits, recapitalizations and reorganizations), then the Company shall issue additional shares of Common Stock to the purchasers so that the effective purchase price per share paid for the Common Stock shall be the same per share purchase, exercise or conversion price of the Additional Shares; provided, however, the Additional Shares, when aggregated with all issuances under the Securities Purchase Agreement, shall not exceed 19.99% of the issued and outstanding Common Stock of the Company immediately prior to the closing date of the Securities Purchase Agreement.



14



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

(unaudited)



NOTE 11 – EQUITY (Continued)


During the first quarter of 2014, the Company issued 8,000 shares of common stock to distributors for achieving sales goals valued at $2.44 per share, which resulted in a sales allowance of $19,520. We also issued 208,000 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $2.24 average per share or $464,960 in total. We also issued 5,000 shares of common stock to an investor to settle overpayment.  We also issued an aggregate of 3,750 shares of common stock to our three directors for services rendered valued at $2.22 average per share or $8,325 in total.


During the second quarter of 2014, the Company issued 20,513 shares of common stock in settlement of a lawsuit originated by a former employee valued at $1.95 per share, which resulted in an expense of $40,000.


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 40% of net revenue. Spectral DNC-N represents 8% of net revenue and Polaris NR10 and NR08 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 2014-QTR and 2013-QTR. During 2014-YTD and 2013-YTD, our top ten customers generated 61% and 49% of our net revenue, respectively.


Sales to customers individually in excess of 10% of net revenue during 2014-YTD and their accounts receivable at June 30, 2014 were:


Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

C

 

$1,010,871

 

14%

 

$133,090

 

5%


There were no sales to customers individually in excess of 10% of net revenue during 2013-YTD.


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 2014-YTD and their accounts payable at June 30, 2014 were:


Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payable

 

Percent

 

 

 

 

 

 

 

 

 

C

 

$ 567,814

 

21%

 

$   87,101

 

5%


Purchases from significant venders during 2013-YTD and their accounts payable at June 30, 2013 were:


Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payable

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$ 454,422

 

18%

 

$ 304,804

 

12%

C

 

$ 394,002

 

16%

 

$   77,073

 

  3%




15



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

(unaudited)



NOTE 14. – 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 international distributors who distribute our product outside North America have been increasing.


Information about the Company’s geographic operations for both 2014-YTD and 2013-YTD as follows:


 

 

2014

 

2013

 

Net Revenue:

 

 

 

 

 

 

 

North America

 

$

2,629,177

 

$

4,862,899

 

International

 

 

3,800,220

 

 

2,529,947

 

 

 

$

6,429,397

 

$

7,392,846

 


Furniture and Equipment, Net:

 

 

 

 

 

 

 

North America

 

$

109,664

 

$

126,685

 

International

 

 

96,001

 

 

131,344

 

 

 

$

205,665

 

$

258,029

 


NOTE 15. – SUBSEQUENT EVENTS


On July 15, 2014, the Company has extended its credit line until August 15, 2014. The line limit has been set to a maximum of $200,000 and under the terms of the extension the loan must repaid in full on the expiration date.








16





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.

 



17





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 June 30, 2014 as Compared to the Three Months Ended June 30, 2013

 

Revenues, net – Total net revenues increased $313,280 or 9.1%, from $3,431,154 for the three months ended June 30, 2013 to $3,744,434 for the three months ended June 30, 2014. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 40% of total sales for the period. In addition, Spectral DNC-N represents approximately 8% of total sales for each period. There were no other products, which individually exceeded 5% of total sales.

 

Net revenue from our Mexican subsidiary increased 14.4% in 2014-QTR compared to 2013-QTR, accounting for $972,202 (26.0%) and $849,469 (24.8%) of consolidated net sales for the three months ended June 30, 2014 and 2013 respectively. The increase in net revenue from our Mexican subsidiary contributed significantly to the overall increase in net revenue. The increase in overall revenue is also attributable to increased sell-through in foreign markets. Sales generated from US operations have declined due to two key factors.  First, we ended the quarter on June 30, 2014 with approximately $1 million in backorders and open orders in the system, orders which customers have agreed to pick up in the third quarter due to our timing in completing their orders, these orders have since been shipped and the issue of continuous backorders has improved dramatically. Second, our international initiative, while growing, has slowed due to unforeseen delays in obtaining licenses and clearance from various international agencies in the target countries. 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 51% and 42% of our total revenues during the three months ended June 30, 2014 and June 30, 2013, respectively.

 

Cost of Goods Sold – Total cost of goods sold decreased $27,170 or 1.5%, from $1,830,068 (2013-QTR) to $1,802,898 (2014-QTR). Our $193,700 recovery of our obsolescence reserve accounted for all of the decrease difference. We have begun additional cost cutting efforts at the end of 2014-QTR that included payroll reductions and restructuring to improve production efficiency. Negotiating improved cost from suppliers and salvaging previously wasted components. We also have been improving formulations to improve efficacy and reduced production costs. Consequently the gross margin has improved from 46.7% (2013-QTR) to 51.9% (2014-QTR), with US operations accounting for $1,082,940 or 68% (2013-QTR) and $1,371,882 or 71% (2014-QTR) of the gross margin dollars with DS Mexico accounting for $518,145 or 32% (2013-QTR) and $596,654 or 29% (2014-QTR) of gross margin dollars.




18





Selling and Marketing Costs – Selling and marketing costs increased $299,872 or 34% from $894,366 (2013-QTR) to $1,194,238 (2014-QTR). The increase was due to the following:

 

  

Increases of:

 

  

·

$221,304 for freight and shipping costs, as a result of increased sales to international and foreign customers. We have also in some cases accommodated customers that experienced delays and backorders in the first quarter of 2014, and also as a result of increased shipping of samples to potential customers to support 2014 projected sales growth,

 

  

·

$254,506 for consulting and commissions, as a result of approximately $48,538 directly related to increase sales and staffing in Mexico to support increased sales, and the balance is associated with US operations to increase staffing to support planned growth in 2014 and 2015, and


  

·

13,208 for other sales and marketing items.


  

The forgoing increases were partially offset primarily by the following decreases of:

 

  

·

$163,105 for marketing and promotion costs as a result of reduced advertising and promotion programs and certain strategy changes that reduced costs, and

 

  

·

$26,041 for travel and entertainment as a result of certain strategy changes that reduced costs.

 

General and Administrative Costs – General and administrative costs decreased $31,022 or 2%, from $1,369,558 (2013-QTR) to $1,338,536 (2014-QTR). The decrease is due to the following:

 

  

Decreases of:


·

$78,350 in depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing certain intangibles of our Mexican operations in December 2013.  In addition, the Nutra Origin intangible asset, which was part of US operations, was fully impaired in December 2013 and accordingly, further reduced quarterly amortization,


·

$68,136 for license and permits as a result of lower NASDAQ listing fees, and


·

$69,655 for other general and administrative expenses.

 

   

The forgoing decreases were partially offset by the following increases of:


·

$101,006 for professional fees in part was due stock based compensation at times in lieu of cash compensation, all other categories of professional fees, such as legal and accounting were essentially the same as the prior period, and


·

$84,113 for personnel costs of which our Mexican operations accounted for approximately $91,410 of the increase due to expansion of its operations. The remaining portion of the increase is related to a decrease in US operations cost that include management and administrative personnel.

 

Six Months Ended June 30, 2014 as Compared to the Six Months Ended June 30, 2013

 

Revenues, net – Total net revenues decreased $963,449 or 13.0%, from $7,392,846 for the six months ended June 30, 2013 to $6,429,397 for the six months ended June 30, 2014. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 40% of total sales for the period. In addition, Spectral DNC-N represents approximately 8% of total sales for each period. There were no other products, which individually exceeded 5% of total sales.

 



19





Net revenue from our Mexican subsidiary increased 22.2% in 2014-YTD compared to 2013-YTD, accounting for $1,604,177 (25.0%) and $1,313,135 (17.8%) of consolidated net sales for the six months ended June 30, 2014 and 2013 respectively. The increase in net revenue from our Mexican subsidiary contributed significantly to reducing the overall decrease in net revenue. The increase in overall revenue is attributable to increased sell-through in foreign markets. Sales generated from US operations have declined due to two key factors.  First, we ended the quarter on June 30, 2014 with approximately $1 million in backorders and open orders in the system, orders which customers have agreed to pick up in the third quarter due to our timing in completing their orders, these orders have since been shipped and the issue of continuous backorders has improved dramatically. Second, our international initiative, while growing, has slowed due to unforeseen delays in obtaining licenses and clearance from various international agencies in the target countries. 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 51% and 42% of our total revenues during the six months ended June 30, 2014 and June 30, 2013, respectively.

 

Cost of Goods Sold – Total cost of goods sold decreased $1,011,661 or 25%, from $4,017,077 (2013-YTD) to $3,005,416 (2014-YTD). The decrease in cost of goods sold reflects $168,917 reduction in the obsolescence reserve and approximately $320,583 cost cutting initiatives were achieved in the 3 months ended March 31, 2014. Cost cutting efforts in the three months ended June 30, 2014 were negated by one time charges associated with increased production and delivery costs incurred in addressing the order backlog. The cost cutting efforts initiated in late 2014-QTR included additional payroll reductions and department restructuring to improve production efficiency. Negotiating improved cost from suppliers and salvaging previously wasted components. We also have been improving formulations to improve efficacy and reduced production costs. Consequently the gross margin has improved from 45.7% (2013- YTD) to 53.3% (2014-YTD), with US operations accounting for $2,544,336 or 75% (2013-YTD) and $2,492,426 or 73% (2014-YTD) of the gross margin dollars with DS Mexico accounting for $831,433 or 25% (2013-YTD) and $931,555 or 27% (2014-YTD) of gross margin dollars.


Selling and Marketing Costs – Selling and marketing costs increased $512,896 or 31% from $1,651,364 (2013-YTD) to $2,164,260 (2014-YTD). The increase was due to the following:

 

  

Increases of:

 

  

·

$314,974 for freight and shipping costs, as a result of increased sales to international and foreign customers. We have also in some cases accommodated customers that experienced delays and backorders in the first and second quarter of 2014, and also as a result of increased shipping of samples to potential customers to support 2014 projected sales growth,

 

 

·

$355,296 for consulting and commissions, as a result of approximately $115,416 directly related to increase sales and staffing in Mexico to support increased sales, and the balance is associated with US operations to increase staffing to support planned growth in 2014 and 2015,


 

·

$81,278 for product development, and


 

·

$4,634 for other sales and marketing items.

 

  

The forgoing increases were partially offset primarily by the following decreases of:

 

  

·

$209,351 for marketing and promotion costs as a result of reduced programs and certain strategy changes that reduced costs, and

 

  

·

$33,935 for travel and entertainment as a result of certain strategy changes that reduced costs.




20





General and Administrative Costs – General and administrative costs decreased $205,754 or 7%, from $2,878,234 (2013-YTD) to $2,672,480 (2014-YTD). The decrease is due to the following:

  

Decreases of:

 

  

·

$142,767 in depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing certain intangibles of our Mexican operations in December 2013.  In addition, the Nutra Origin intangible, which was part of US operations, was fully impaired in December 2013 and accordingly, further reduced quarterly amortization,

 

  

·

$378,562 for bad debt as a result of improved customer terms and conditions and tighter credit policies,


 

·

$98,815 for license and permits and NASDAQ listing fees, and


 

·

$88,063 for other general and administrative expenses.

 

   

The forgoing decreases were partially offset by the following increases of:

 

  

·

$319,389 for professional fees which in part was due stock based compensation at times in lieu of cash compensation, in addition we have increased our infrastructure to support our growing sales. We have also incurred an increased in our investor relations services program which was primarily stock based compensation incurred to improve market awareness, all other categories of professional fees, such as legal and accounting were essentially the same as the prior period, and

 

  

·

$183,064 for personnel costs of which our Mexican operations accounted for approximately $127,637 of the increase due to expansion of its operations. The remaining portion of the increase is related to US operations that include management and administrative personnel.


Liquidity and Capital Resources

 

We had cash of $773,055 and working capital of $3,264,514 at June 30, 2014. 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.

 

Despite our losses since inception, we believe that by increasing our sales, gross profit margins, while maintaining and better optimizing our current operational structure and administrative expenses, we can minimize the cash needed to support our current operations. Our largest consumption of cash is the working capital necessary to support expanding sales. 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. 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 increasing 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.

 



21





As discussed in Note 9, Credit Facility - The Company is party to a credit facility which provides for asset based lending collateralized by all assets of the Company. Advances are based on 70% of qualified accounts receivable and 40% of eligible finished goods inventory. The credit facility as amended, 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 which has been renewed with a reduced $200,000 credit facility and expires August 15, 2014. The credit facility is personally guaranteed by our Chief Executive Officer and, under certain conditions, may be called upon demand. As of June 30, 2014 and December 31, 2013, the Company had $228,887 and $582,383 outstanding, respectively.  As of June 30, 2014, the Company had $0 available to borrow.


Cash Flows for the Six Months Ended June 30, 2014

 

Cash Flows from Operating Activities

 

Operating activities used net cash for the six months ended June 30, 2014 of $1,858,306. 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 stock for services or depreciation and amortization, resulted in a net loss adjusted by noncash items of $1,617,928 which in addition to changes in operating assets and liabilities which also used cash of $240,378 as follows:

 

  

·

$274,742 provided by a decrease in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,

  

·

$653,041 used by an increase in inventory component levels resulting from implementing a purchasing strategy at 130% of sales projections, in an effort to reduce or eliminate backorders and improve customer satisfaction,

  

·

$627,001 used by a decrease in accounts payable resulting from efforts to reduce outstanding vendor balances and restore normalized vendor relations,

  

·

$44,862 used by a decrease in accrued expenses as a result of reduction of certain accrued expenses such as commissions due to payments, and

  

·

$809,784 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 $50,359 in net cash during the six months ended June 30, 2014. Net cash used is entirely the result of equipment purchases for production in the US and sales operations in Mexico.

 

Cash Flows from Financing Activities

 

Our financing activities used $177,126 in net cash during the six months ended June 30, 2014, primarily as a result of the following:

 

  

·

$353,496 used by repayments net of advances under our asset based credit facility, and

  

·

$182,000 provided net of issuance cost from the second tranche our December 2013 private placement offering as a result of two investors completing their funding of pending subscriptions for the sale of common shares.

 

Financial Position

 

Total Assets – Our total assets decreased $1,287,167 or 13.2% from $9,714,592 as of December 31, 2013 to $8,427,425 as of June 30, 2014, primarily as a result of the cash used to repay creditors and increase inventory components. There was a net decrease in current assets of $1,286,013 the components of which are discussed further below. The increase in total assets was also the result of a decrease of $1,293 in furniture and equipment, net primarily due to purchases partially offset by depreciation; and a decrease of $96,519 in intangible assets due to amortization.

 



22





Current Assets – The net decrease in current assets of $1,286,013 was primarily associated with a decrease in cash of $2,099,891 primarily used to support operations along with a $132,158 decrease in accounts receivable. These decreases were partially offset by an $821,958 increase in inventory levels, and a $124,078 increase in prepaids and other current assets. These net changes are primarily driven by changes in sales and other factors more specifically discussed as follows:

 

Inventory – Inventory levels increased 30.4% from December 31, 2013 to June 30, 2014, as a result of efforts to replenish inventory in key components and in anticipation of higher sales in the later half 2014.  Operations engaged in a purchase program in Q1 2014 to purchase at 130% of sales projections in an effort to reduce order backlog or backorders.

 

Average inventory represents approximately 52% of COGS or over a six month supply based on the sell through rate achieved for the six months ended June 30, 2014, resulting in an inventory turnover rate of 1.9 times. This inventory turn rate should improve as we ramp up key components to smooth production timing. 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 Q4 2014, once we have satisfactorily explored alternative production methodologies and established a profitable and sustainable production cost structure. 

 

Accounts Receivable, net – Accounts receivable, net decreased $132,158 primarily as a result of strong collections of Q1 2014 sales along with a slowdown of the creation of new receivables resulting from slower production in Q1 2014 while inventory components were replenished, as previously discussed.

 

Prepaid Expenses and other current assets – Prepaid expenses increased 42.8%, primarily as a result of advances in stock for services.

 

Material Commitments

 

None.

 

Off Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier 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.




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The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supercedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The Company has not yet determined the effect of the adoption of this standard and its impact on the Company's condensed consolidated financial position and results of operations.

 

In March 2013, FASB issued ASU 2013-05, “Foreign Currency Matters: Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” an amendment which allows an entity to release cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This is effective for fiscal years and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or related disclosures.

 

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The amendments in this update require that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under a few limited circumstances. The amendments in this update do not require new recurring disclosures. This new guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s condensed consolidated financial statements.

 

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 Company.

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, 2013 evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. 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 June 30, 2014, our disclosure controls and procedures were still not effective, as a result of certain material weaknesses.

 



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The specific material weaknesses that management identified in our internal controls as of June 30, 2014 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 maintain a fully automated financial consolidation and reporting system and as a result, extensive manual analysis, reconciliations and adjustments were required in order to produce financial statements for external reporting purposes.

 

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 2014, as financial resources permit. The Company has hired a Controller in March 2014 and plans to hire a full-time Chief Financial Officer, both of whom who will be on-site. The Company is currently 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 June 30, 2014, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.




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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

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 second quarter of 2014, the Company issued 20,513 shares of common stock in settlement of a lawsuit originated by a former employee valued at $1.95 per share, which resulted in an expense of $40,000.

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




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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: August 14, 2014

DS HEALTHCARE GROUP, INC.

 

 

 

By:

/s/ Daniel Khesin

 

 

Daniel Khesin

 

 

President, Chief Executive Officer,

 

 

Chief Financial Officer/

 

 

Principal Accounting Officer










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