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EX-31.1 - CERTRIFICATION - DS HEALTHCARE GROUP, INC.dvskn_ex31z1.htm
EX-31.2 - CERTRIFICATION - DS HEALTHCARE GROUP, INC.dvskn_ex31z2.htm
EX-32.1 - CERTRIFICATION - DS HEALTHCARE GROUP, INC.dvskn_ex32z1.htm
EX-32.2 - CERTRIFICATION - DS HEALTHCARE GROUP, INC.dvskn_ex32z2.htm




 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

P

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

 

 ACT OF 1934

For the quarterly period ended: March 31, 2011

or

 

 

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

 

 ACT OF 1934

For the transition period from: _____________ to _____________

———————

DIVINE SKIN, INC.

(Name of Small Business Issuer in Its Charter

———————

Florida

000-53680

20-8380461

(State or Other Jurisdiction

(Commission

(I.R.S. Employer

of Incorporation or Organization)

File Number)

Identification No.)

1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139

(Address of Principal Executive Offices) (Zip Code)

(888) 404-7770

(Issuer’s Telephone Number, Including Area Code)

N/A

(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
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

P

 Yes

 

 No

 

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this

chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and

post such files).

 

 Yes

 

 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.

 

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

P

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the

 

Exchange Act).

 

 Yes

P

 No

 

 

There were 98,766,208 shares of common stock outstanding as of May 17, 2011.

 

 









DIVINE SKIN, INC.

INDEX

Page

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

1

Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited)
and December 31, 2010

1

Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 2011 and 2010

2

Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2011 and 2010

3

Condensed Consolidated Statements of Stockholders Equity (unaudited)
for the period from January 31, 2010 to March 31, 2011

4

Notes to Unaudited Condensed Consolidated Financial Statements

5

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

22

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

26

ITEM 4.

CONTROLS AND PROCEDURES

27


PART II – OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS

28

ITEM 1A.

RISK FACTORS

28

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

28

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

28

ITEM 4.

(REMOVED)

28

ITEM 5.

OTHER INFORMATION

28

ITEM 6.

EXHIBITS

28

SIGNATURES

30




i





PART I – FINANCIAL INFORMATION


ITEM 1.

FINANCIAL STATEMENTS

DIVINE SKIN, INC. (dba DS LABORATORIES) AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

March 31

2011

 

December 31,

2010

 

 

 

 

 

ASSETS

     

(Unaudited)

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash

 

$

133,109

 

$

146,405

 

Accounts receivable, net

 

 

1,484,052

 

 

737,954

 

Inventory

 

 

1,118,743

 

 

1,181,680

 

Prepaid expenses and other current assets

 

 

57,548

 

 

110,601

 

 

 

 

 

 

 

 

 

Total Current Assets

 

 

2,793,451

 

 

2,176,640

 

 

 

 

 

 

 

 

 

Furniture and Equipment, net

 

 

28,405

 

 

18,861

 

Intangible Assets, net

 

 

705,766

 

 

730,916

 

Other Assets

 

 

17,403

 

 

17,443

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,545,026

 

$

2,943,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

494,871

 

$

604,311

 

Other current liabilities

 

 

7,504

 

 

21,162

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

502,375

 

 

625,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder's Equity

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 30 million shares authorized:
10 million shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively

 

 

10,000

 

 

10,000

 

Common stock, $0.001 par value, 300 million shares authorized:
98,296,208 and 94,961,001 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively

 

 

98,296

 

 

94,961

 

Additional paid-in-capital

 

 

3,647,248

 

 

2,824,459

 

Stock subscription

 

 

19,000

 

 

(70,000

)

Accumulated deficit

 

 

(716,861

)

 

(528,293

)

 

 

 

 

 

 

 

 

Total Shareholders' Equity

 

 

3,057,683

 

 

2,331,127

 

Non-Controlling Interest

 

 

(15,032

)

 

(12,740

)

 

 

 

 

 

 

 

 

Total Equity

 

 

3,042,651

 

 

2,318,387

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

3,545,026

 

$

2,943,860

 



See accompanying notes to unaudited condensed consolidated financial statements


1





DIVINE SKIN, INC. (dba DS LABORATORIES) AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three Months Ended

March 31,

 

 

 

2011

 

2010

 

Revenue:

     

 

                    

     

 

                    

 

Product sales

 

$

2,349,457

 

$

1,077,947

 

Less returns and allowances

 

 

(99,039

)

 

(82,874

)

 

 

 

 

 

 

 

 

Net revenue

 

 

2,250,418

 

 

995,073

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

1,080,742

 

 

332,979

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

1,169,676

 

 

662,094

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

Selling and marketing

 

 

581,600

 

 

234,542

 

General and administrative

 

 

779,969

 

 

449,634

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

 

1,361,570

 

 

684,176

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(191,894

)

 

(22,082

)

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Other

 

 

1,034

 

 

49,272

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

1,034

 

 

49,272

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

 

(190,860

)

 

27,190

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

2,292

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Shareholders of Divine Skin, Inc.

 

$

(188,568

)

$

27,190

 

 

 

 

 

 

 

 

 

Basic Earnings per Share:

 

 

 

 

 

 

 

Weighted average shares

 

 

96,272,300

 

 

89,986,001

 

Earnings per share

 

$

(0.002

)

$

0.000

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share:

 

 

 

 

 

 

 

Weighted average shares

 

 

96,272,300

 

 

92,582,711

 

Earnings per share

 

$

(0.002

)

$

0.000

 




See accompanying notes to unaudited condensed consolidated financial statements


2





DIVINE SKIN, INC. (DBA DS LABORATORIES) AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Three Months Ended

March 31,

 

 

 

2011

 

2010

 

Cash Flows from Operating Activities:

     

 

 

     

 

 

 

Net (Loss) Income

 

$

(190,860

)

$

27,190

 

Adjustments to reconcile net (loss) income to net
cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,480

 

 

21,544

 

Bad debts

 

 

11,205

 

 

30,292

 

Stock issued for services

 

 

33,180

 

 

4,500

 

Warrants issued for capital raise

 

 

134,244

 

 

18,904

 

Warrants vested for services

 

 

48,000

 

 

16,000

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(757,303

)

 

67,677

 

Inventory

 

 

62,937

 

 

(251,517

)

Prepaid expenses and other current assets

 

 

53,053

 

 

159

 

Accounts payable and accrued expenses

 

 

(109,438

)

 

(135,087

)

Other current liabilities

 

 

(13,658

)

 

11,918

 

Net cash used in operating activities

 

 

(701,161

)

 

(188,419

)

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchase of furniture and equipment

 

 

(11,875

)

 

 

Security deposits

 

 

40

 

 

(8,043

)

Net cash used in investing activities

 

 

(11,835

)

 

(8,043

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from sale of stock subscription to investors

 

 

110,000

 

 

 

Less Issuance costs

 

 

(21,000

)

 

 

Proceeds from sale of stock to others

 

 

821,000

 

 

200,000

 

Less issuance costs

 

 

(210,300

)

 

(60,000

)

Net cash provided by financing activities

 

 

699,700

 

 

140,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash

 

 

(13,296

)

 

(56,462

)

Cash, Beginning of Period

 

 

146,405

 

 

259,449

 

 

 

 

 

 

 

 

 

Cash, End of Period

 

$

133,109

 

$

202,987

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

 

Cash paid for taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

Investing and Financing

 

 

 

 

 

 

 

Non-Cash Transactions:

 

 

 

 

 

 

 

Warrants for financial consulting services

 

$

 

$

135,426

 




See accompanying notes to unaudited condensed consolidated financial statements


3





DIVINE SKIN, INC. (DBA DS LABORATORIES) AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE PERIOD FROM JANUARY 31, 2010 TO MARCH 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional
Paid In
Capital

 

Subscription\
Stock
Receivable

 

Accumulated
Deficit

 

Total
Shareholders
Equity

 

Non-

Controlling
Interest

 

Total
Equity

 

Preferred Stock

Common Stock

Shares

 

Amount

Shares

 

Amount

December 31, 2009

   

10,000,000

   

 

10,000

   

89,986,001

   

 

89,986

   

 

1,660,841

   

 

   

 

(391,220

)

  

1,369,607

   

 

   

 

1,369,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

Shares Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold to private
investors

 

 

 

 

 

 

4,506,000

 

 

4,506

 

 

839,994

 

 

 

 

 

 

 

 

844,500

 

 

 

 

844,500

 

Less: Issuance
costs

 

 

 

 

 

 

 

 

 

 

 

 

(249,600

)

 

 

 

 

 

 

 

(249,600

)

 

 

 

(249,600

)

For services

 

 

 

 

 

 

469,000

 

 

469

 

 

161,031

 

 

 

 

 

 

 

 

161,500

 

 

 

 

161,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares to
be returned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70,000

)

 

 

 

 

(70,000

)

 

 

 

(70,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested for trading
symbol

 

 

 

 

 

 

 

 

 

 

 

 

160,000

 

 

 

 

 

 

 

 

160,000

 

 

 

 

160,000

 

Issued for financial
Consulting
services

 

 

 

 

 

 

 

 

 

 

 

 

252,193

 

 

 

 

 

 

 

 

252,193

 

 

 

 

252,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137,073

)

 

(137,073

)

 

(12,740

)

 

(149,813

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

10,000,000

 

$

10,000

 

94,961,001

 

$

94,961

 

$

2,824,459

 

$

(70,000

)

$

(528,293

)

$

2,331,127

 

$

(12,740

)

$

2,318,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold to private
investors

 

 

 

 

 

 

3,257,207

 

 

3,257

 

 

817,743

 

 

 

 

 

 

 

 

821,000

 

 

 

 

 

821,000

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

(210,300

)

 

 

 

 

 

 

 

(210,300

)

 

 

 

 

(210,300

)

For services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

10,000

 

 

10

 

 

4,590

 

 

 

 

 

 

 

 

4,600

 

 

 

 

 

4,600

 

Employee bonus

 

 

 

 

 

 

30,000

 

 

30

 

 

11,070

 

 

 

 

 

 

 

 

11,100

 

 

 

 

 

11,100

 

Consulting – sales
and marketing

 

 

 

 

 

 

38,000

 

 

38

 

 

17,442

 

 

 

 

 

 

 

 

17,480

 

 

 

 

 

17,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriptions sold,
shares not Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold to private
investors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110,000

 

 

 

 

 

110,000

 

 

 

 

 

110,000

 

Less: Issuance
costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,000

)

 

 

 

 

(21,000

)

 

 

 

 

(21,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares
to be returned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested for trading
symbol

 

 

 

 

 

 

 

 

 

 

 

 

48,000

 

 

 

 

 

 

 

 

48,000

 

 

 

 

 

48,000

 

Issued for financial
consulting services

 

 

 

 

 

 

 

 

 

 

 

 

134,244

 

 

 

 

 

 

 

 

134,244

 

 

 

 

 

134,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(188,568

)

 

(188,568

)

 

(2,292

)

 

(190,860

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011
(Unaudited)

 

10,000,000

 

$

10,000

 

98,296,208

 

$

98,296

 

$

3,647,248

 

$

19,000

 

$

(716,861

)

$

3,057,683

 

$

(15,032

)

$

3,042,651

 





See accompanying notes to unaudited condensed consolidated financial statements


4





DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Terms and Definitions

AICPA

American Institute of Certified Public Accountants

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

FASB

Financial Accounting Standards Board

FIFO

First-in, First-out

GAAP (US)

Generally Accepted Accounting Principles as applied in the United States

PPM

Private Placement Memorandum

SEC

Securities Exchange Commission

SFAS or FAS

Statement of Financial Accounting Standards

Q110-QTR

Three months ended March 31, 2010

Q111-QTR

Three months ended March 31, 2011

VIE

Variable Interest Entity

Organization and Nature of Business

Divine Skin, Inc. (the “Company”, “Divine Skin”, “DS Laboratories”, “we”, “us” or “our”) was organized under the laws of the State of Florida in January 2007.  Through its predecessors, including Divine Skin, Inc., (a New York company) the Company has been developing and marketing skin care and personal care products for over ten years. The Company has grown steadily over the last few years with a network of top specialty retailers across North America and distributors throughout Europe, Asia and South America. Divine Skin researches and develops its own products, which management believes keeps the Company at the forefront of innovation. Management believes the Company is currently a leading innovator of “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the action of active ingredients contained in pharmaceutical and cosmeceutical products. We currently offer skin care, aging, cellulite, hair loss and personal care products.  The majority of these products are within the following product lines:  

·

Skin Care

·

Aging

·

Cellulite

·

Hair Loss

·

Personal Care

History of the Company

In January 2007, the operations of Divine Skin, Inc. (a New York company), were terminated and its assets were used to capitalize Divine Skin, Inc. (a Florida corporation).  In December 2006, DS Laboratories, Inc. (a New York Corporation), was closed and its assets were used to capitalize DS Laboratories, Inc. (a Florida corporation) formed in January 2007, which has been idle since its inception.  Divine Skin, Inc. (a Florida corporation) and DS Laboratories, Inc. (a Florida corporation) are related through common shareholders.  The primary operating entity is Divine Skin, Inc (a Florida corporation).  The Company currently conducts business under the “Divine Skin” trade name and also under the “DS Laboratories” trade name.



5



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


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

In January 2008, the Company engaged two consultants to assist it developing production operations in Brazil as a means to simplify the regulatory requirements surrounding importation of its product. Production operations in Brazil are not yet fully commercialized. All costs associated with exploring this production alternative have been expensed in accordance with the guidance offered in ASC 720-15-25.

In January 2009, the Company acquired 100% of the outstanding shares of DS Laboratories, Inc. (a Florida Corporation) for a nominal amount. DS Laboratories, Inc. (a Florida Corporation) was established in January 2007 for the purposes to holding the trade and brand name. The Company recorded no transactions since its inception in 2007.  DS Laboratories, Inc. (a Florida Corporation) was a separate entity related to us through common shareholders until the acquisition. Subsequent to the acquisition, DS Laboratories, Inc. (a Florida Corporation) operates as a wholly owned subsidiary of the Company.

In January 2009, the Company acquired 100% of the outstanding shares of Sigma Development and Holding Co., Inc. for a nominal amount. Sigma was founded as an upscale brand addition to the Company’s product portfolio. Sigma operated as a related but separate entity until the acquisition. Subsequent to the acquisition, Sigma operates as a wholly owned subsidiary of the Company.

In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company. Polaris was founded, to distribute Polaris branded versions of the Company’s products that, for marketing purposes, are sold through physicians and foreign distributors.

In Q4 2009, the Company completed an agreement covering the exclusive distribution of its product and additional future products specifically tailored for the Brazilian market.  The costs associated with procuring this agreement have been capitalized and are amortized over the life of the agreement.

In Q1 2010, the Company filed an S-1 Selling Shareholder Registration Statement with the SEC which was declared effective by the SEC and obtained its trading symbol (DSKX) permitting the quotation of its shares of common stock on the Over the Counter Bulletin Board (OTCBB).  

In Q3 2010, the Company engaged in establishing DS Laboratories Brazil, LTDA, a joint venture distribution company with its exclusive Brazilian distributor.  The Company owns 51% of DS Laboratories Brazil, LTDA. The purpose of the joint venture is to capitalize on its exclusive distribution rights in Brazil.  The Company has completed the formulation and packaging of its initial minoxidil product and through its joint venture operation in Brazil, is obtaining the necessary permits and licenses to begin distribution and sale of its products.  The Company expects to complete the licensure process and commence sales in Q4 2011.  As of March 31, 2011, the Company has invested $26,000 in this venture.  

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

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

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of Divine Skin, Inc. and its wholly owned operating subsidiaries DS Laboratories, Inc. (a Florida Corporation), Sigma Development and Holding Co., Inc. and Polaris Labs, Inc.  Also included in the consolidated financial statements are the activities of Velocity Storage and Packing, LLC, which is accounted for as a VIE and DS Laboratories Brazil, LTDA a majority owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.



6



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


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

Condensed Consolidated Financial Statements

The condensed consolidated financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the Company’s annual financial statements, notes and accounting policies included in the Company’s Annual Report. In the opinion of management, all adjustments which are necessary to provide a fair presentation of financial position as of March 31, 2011 and the related operating results and cash flows for the interim period presented have been made. All adjustments are of a normal recurring nature.  The results of operations, for the period presented are not necessarily indicative of the results to be expected for the year ended December 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

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. Adverse changes in these areas could negatively impact the Company’s financial position, results of operations and cash flows.

Cash

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

Accounts Receivable

Accounts receivable are reported at 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. At March 31, 2011 and December 31, 2010, the provision for doubtful accounts was $15,932 and $73,759, respectively.

Inventory

Inventory is reported at the lower end 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.  



7



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


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

Furniture and Equipment

Furniture and equipment are recorded at cost and depreciation is provided using the declining balance depreciation method over the estimated useful lives of the assets, which range from 5 to 7 years. 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.

Furniture and equipment is reviewed whenever events or changes in circumstances occur that indicate possible impairment in accordance with ASC 360-10, “Accounting for Impairment or Disposal of Long-Lived Assets”.

Long-Lived Assets

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

Non-Controlling Interest

Non-controlling interest consists of the minority owned portion of the Company’s 51% owned subsidiary, DS Laboratories Brazil, LTDA and variable interest held in Velocity Storage Packaging LLC.

ASC 810-10-65 establishes new standards, effective January 1, 2009, that govern the accounting for and reporting of (1) non-controlling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Significant changes to the accounting for non-controlling interests include (a) the inclusion of non-controlling interests in the equity section of the controlling entity’s consolidated balance sheet rather than in the mezzanine section and (b) the requirement that changes in the controlling entity’s interest in the non-controlling interest, without a change in control, be recognized in the controlling entity’s equity rather than being accounted for by the purchase method, which accounting under the purchase method would have given rise to goodwill.

Additionally, the adoption of ASC 810-10-65 requires that net income, as previously reported prior to the adoption of ASC 810-10-65, be adjusted to include the net income attributable to the non-controlling interest, and that a new separate caption for net income attributable to common shareholders of the Company be presented in the consolidated statements of operations. ASC 810-10-65 also requires similar disclosure regarding comprehensive income.



8



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


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

Revenue Recognition

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

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

·

persuasive evidence of a sales arrangement exists,

·

delivery has occurred,

·

the sales price is fixed or determinable and

·

Collectability is probable.

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

The Company accepts product returns and will issue a credit, refund or product exchange. To date, product returns have occurred but are not considered material. The Company has not established a product return reserve.

Research and Development

The Company does not engage in research and development as defined in ASC Topic 730, “Accounting for Research and Development Costs.” However, the Company does incur formulation costs that include salaries, materials and consultant fees. These costs are classified as product development, selling, general and administrative expenses in the statements of operations.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Earnings per share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”.  Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.

Segment Information

ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The Company operates in one segment for management reporting purposes.



9



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


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

Fair Value of Financial Instruments

In January 2008, we adopted the provisions under FASB for Fair Value Measurements, which define fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements.  Our adoption of these provisions did not have a material impact on our consolidated financial statements.  Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date.  The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability.  Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value.  Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment.  These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.  We currently do not have any financial assets and liabilities that are recurring that would require us to disclosure them at fair value.

Reclassification

Certain reclassifications have been made to conform to prior periods’ data to the current presentation. These reclassifications had no effect on reported losses.

NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS

The FASB has codified a single source of U.S. GAAP, the Accounting Standards Codification™. Unless needed to clarify a point to readers, we will refrain from citing specific section references when discussing application of accounting principles or addressing new or pending accounting rule changes. There are no recently issued accounting standards that are expected to have a material effect on our financial condition, results of operations or cash flows.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s condensed consolidated financial statements.




10



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 4. – INVENTORY

Significant components of inventory at March 31, 2011 and December 31, 2010 consist primarily of:

 

 

2011

 

2010

 

 

     

(Unaudited)

     

 

 

 

Bulk product and raw materials

 

$

711,025

 

$

814,416

 

Work in process

 

 

 

 

 

Merchandise inventory

 

 

238,661

 

 

204,018

 

Inventory in transit

 

 

169,057

 

 

163,246

 

 

 

 

 

 

 

 

 

 

 

$

1,118,743

 

$

1,181,680

 

Bulk product and raw materials – Bulk product consists of completed product formulations that have not yet been packaged in market ready packaging. Raw materials consist of bulk quantities of the various chemical components of product formulations.

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

Merchandise inventory – Merchandise inventory consists of completed formulations in market ready packaging. Our formulations are batch controlled and subject to various government regulations which, among other things, govern the purity and safety of our product and in some cases limit the concentration of certain ingredients, which would restrict the distribution of these products to medical professionals.

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

Management evaluated the inventory at March 31, 2011 and December 31, 2010 and any obsolete inventory was excluded from our reported inventory value, accordingly no allowance for obsolescence was necessary.

NOTE 5. – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets at March 31, 2011 and December 31, 2010 consist primarily of:

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

 

Prepaid financing fees

     

$

7,985

     

$

 

Employee advances

 

 

7,896

 

 

8,083

 

Other prepaids

 

 

 

 

2,518

 

Deferred advertising – sachets                                                         

 

 

 

 

65,000

 

Operations consultant

 

 

41,667

 

 

35,000

 

 

 

 

 

 

 

 

 

 

 

$

57,548

 

$

110,601

 

Deferred advertising - sachets – During the 1st quarter of 2010, we entered into an advertising campaign with a customer which involved the inclusion of trial sachet packs of our product in a mailer.  The customer was to process the mailer and incur all the associated media and communication costs.  We were to supply the sachet packets for inclusion.  We produced and delivered the sachets to the customer however during 2010, the customer decided to delay the promotion.  Accordingly we deferred the value of the sachets pending the customer’s decision to commence the campaign.  The customer’s campaign commenced during Q1 2011.  Accordingly, we expensed the deferred advertising.   



11



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 5. – PREPAID EXPENSES AND OTHER CURRENT ASSETS (Continued)

Operations consultant – During the 2 nd and 3 rd quarters of 2010 and the 1st quarter of 2011, we have advanced funds to a consultant for providing operational guidance in connection with business project, currently under development.  Also during the 1st quarter of 2011, we entered into a one year consulting agreement with the consultant, who is the father of our CEO, establishing total payments of $100,000.  The cost will be amortized over the life of the contract.  $8,333 was amortized during 2011.

NOTE 6. – INTANGIBLE ASSETS

Significant components of intangible assets at March 31, 2011 and December 31, 2010 consist primarily of:

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

 

Distribution rights

     

$

750,000

     

$

750,000

 

Less: Accumulated amortization

 

 

(112,500

)

 

(93,750

)

Net distribution rights

 

 

637,500

 

 

656,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pure Guild brand rights and supplier agreement

 

 

106,666

 

 

106,666

 

Less: Accumulated amortization

 

 

(38,400

)

 

(32,000

)

Net brand rights and supplier agreement                             

 

 

68,266

 

 

74,666

 

 

 

 

 

 

 

 

 

 

 

$

705,766

 

$

730,916

 

Distribution rights – During the year ended December 31, 2009, the Company issued 3,000,000 shares of common stock in exchange for a 10 year exclusive distribution agreement in Brazil.  The transaction is valued at $0.25 per share.  The Company, though a joint venture with its exclusive distributor is currently developing a generic Minoxidil product along with appropriate packaging for the Brazilian market, which is planned for introduction in the 4th quarter of 2011. $18,750 was amortized during 2011.

The Company will amortize its brand and distribution rights over the next 10 years as follows:

 

 

2011

 

2012

 

2013

 

2014

 

Beyond

 

Total

 

Distribution Rights:

     

 

               

     

 

               

     

 

               

     

 

               

     

 

               

     

 

               

 

Brazil (exclusive)

 

$

56,250

 

$

75,000

 

$

75,000

 

$

75,000

 

$

356,250

 

$

637,500

 

Pure Guild

 

 

19,200

 

 

25,600

 

 

23,466

 

 

 

 

 

 

68,266

 

 

 

$

75,450

 

$

100,600

 

$

98,466

 

$

75,000

 

$

356,250

 

$

705,766

 

Pure Guild brand rights and supplier agreement – During the 3rd quarter of 2009, we were approached by a customer/distributor to develop a private label brand of premium products and associated packaging materials. The Pure Guild brand of products was the result.  As part of this project we obtained a 50% interest in the Pure Guild brand and the permanent exclusive rights to manufacture the Pure Guild products.  In exchange for these rights, we provided $106,666 of product representing approximately 70% the initial stocking order.  The value of these rights is being amortized over 5 years the basic term of the agreement. $6,400 was amortized during 2011.




12



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 7. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Significant components of accounts payable and accrued expenses at March 31, 2011 and December 31, 2010 consist primarily of:

 

 

2011

 

2010

 

 

     

(Unaudited)

     

 

                    

 

Trade payables

 

$

325,526

 

$

354,795

 

 

 

 

 

 

 

 

 

Accrued expenses:

 

 

 

 

 

 

 

Advertising and marketing                                                           

 

 

156,846

 

 

175,136

 

Production materials

 

 

 

 

24,038

 

Freight

 

 

 

 

4,500

 

Human resources

 

 

12,500

 

 

25,367

 

 

 

 

 

 

 

 

 

Credits due to customers

 

 

 

 

20,474

 

 

 

 

 

 

 

 

 

 

 

$

494,871

 

$

604,311

 

Accrued expenses – As discussed more fully in Note 8, the Company has responded to several claims from suppliers, primarily advertisers and media suppliers, alleging unpaid balances on services or materials provided. The Company has responded in many cases that the services or materials did not fully comply with required specifications or supplier commitments. In all cases, the Company has shifted its purchasing to more compatible suppliers. The Company has accrued the estimated settlement value of the claim based on an evaluation of the individual circumstances of each matter.  

NOTE 8. – COMMITMENTS AND CONTINGENCIES

During 2011 and 2010, the Company operated under several material agreements as listed below:

Lease for office facilities –

·

The Company leases its corporate headquarters office space located in Miami Beach, Florida.  The Company has negotiated the cancellation of its original lease entered into in December 2007, and continues to operate out of its Miami Beach facility, on a month to month basis at $5,700 per month or $68,400 on an annual basis.

·

In March 2009, the Company leased a 3,500 square foot facility in Pompano Beach, Florida as its production facility to assemble small production runs of its products.   The lease provides for monthly rent of $2,600 and expired in March 2011.  The Company is currently in negotiations to terminate the lease.

·

In March 2010, the Company entered into a lease for 7,500 square feet in new production facilities in Deerfield Beach, Florida.  The new facility replaced its Pompano Beach production facilities and began operations in April 2010.  The lease provides for monthly rent of $3,437 in the first year with and increasing scale for years 2 – 5.  The lease matures in 5 years and provides for a 5 year renewal option.

·

In December 2010, the Company entered into a lease for 570 square feet in sales facilities in Ashville, North Carolina.  The lease provides for monthly rent of $1,600 in the first year with a small increase in the second year.  The lease matures in 2 years and provides for a 2 year renewal option.



13



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 8. – COMMITMENTS AND CONTINGENCIES (Continued)

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

 

 

2011

 

2012

 

2013

 

2014

 

Beyond

 

Total

 

Facility Leases:

     

 

               

     

 

               

     

 

               

     

 

               

     

 

               

     

 

               

 

Miami Beach, FL (HQ)

 

$

 

$

 

$

 

$

 

$

 

$

 

Pompano Beach, FL (Production)

 

 

31,200

 

 

 

 

 

 

 

 

 

 

31,200

 

Deerfield Beach, FL (Production)

 

 

31,660

 

 

43,901

 

 

45,657

 

 

47,483

 

 

20,107

 

 

188,808

 

Ashville, NC (Sales)

 

 

14,400

 

 

19,800

 

 

 

 

 

 

 

 

34,200

 

 

 

$

77,260

 

$

63,701

 

$

45,657

 

$

47,483

 

$

20,107

 

$

254,208

 

Pending and threatened litigation –

·

Divine Skin, Inc. has received several pending and threatened litigations from various suppliers typically over non-payment for goods or services. The pending and threatened litigations are generally directed at DS Laboratories, Inc. being one of the operating trade names of Divine Skin. Such vendor disputes are typical in the normal course of business. Divine Skin has vigorously challenged those claims on the grounds of the substandard materials or services provided. We established an accrual for certain media, materials and freight supplier claims of $169,346 and $229,042 at March 31, 2011 and December 31, 2010, respectively.

The Company has been working to resolve these claims and has negotiated settlements with several suppliers resulting in the reduction of the supplier claim recorded and repayment through a structured payout. As discussed above, accruals have been provided, when the facts of each claim, warrants it.  

·

Divine Skin Inc. has been named in a lawsuit brought by a former employee of 301 Model, an entity also related to Divine Skin, Inc. through common ownership. Divine Skin was named because it originally hired the employee rather than 301 Model as the latter was not yet an established entity. Our management is vigorously defending our position that the employee was terminated after two weeks for cause and that the employee subsequently violated their non-compete agreement. Accordingly, we do not anticipate that any material assessment or settlement will result from the lawsuit.

NOTE 9. – EQUITY

Recapitalization

In January 2009, Divine Skin authorized an amendment and restatement to its articles of incorporation to provide, among other things, (a) that the authorized common stock be increased to 300,000,000 shares and (b) that up to 30,000,000 shares of “blank check” preferred stock are authorized. Immediately thereafter, the Company declared a stock dividend of 10,000 shares for one share. Subsequent to the stock dividend, there were 100,000,000 shares of common stock outstanding.

Common Stock Sold Under Private Placement Memorandum (PPM)

The PPM offering was made solely to “non U.S. Persons” within the meaning of Rule 902 of Regulation S under the Securities Act of 1933. These securities have not been registered with or approved by the SEC or any state securities commission nor has any commission or state authority passed on the accuracy or adequacy of this memorandum.  

During the first quarter of 2009, the Company began selling its common stock at a purchase price of $0.50 per share, to qualified investors. The offering is being conducted on a “best efforts” basis with respect to all shares. The offering also provides that the Company shall pay the selling agents the following fees and commissions: 15% sales commission, a 5% due diligence fee and payment of expenses of up to 10% of the gross proceeds.



14



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 9. – EQUITY (Continued)

During the third quarter of 2009, the offering was retroactively re-priced to $0.25 per share and a total of 767,548 additional shares were issued, at no additional cost, to investors that had previously paid $0.50 per share, to achieve that re-pricing.

The following table summarizes transactions under the private placement offering as follows:

 

 

Common

Shares

 

Price

 

Gross

Proceeds

 

Issuance

Costs

 

Net

Proceeds

 

Period

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q4 2008

 

 

426,348

 

$

0.50

 

$

213,174

 

$

(63,952

)

$

149,222

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2009

 

 

341,200

 

$

0.50

 

$

170,600

 

$

(51,180

)

$

119,420

 

Q2 2009

 

 

 

$

 

$

 

$

 

$

 

Q3 2009

 

 

4,087,548

 

$

0.20

 

$

830,000

 

$

(249,000

)

$

581,000

 

Q4 2009

 

 

28,000

 

$

0.25

 

$

7,000

 

$

 

$

7,000

 

 

 

 

4,883,096

 

$

0.25

 

$

1,220,774

 

$

(364,132

)

$

856,642

 

The Company received and accepted funded subscriptions to purchase 4,883,096 common shares, under the offering referred to above. The Company received $856,642 in net proceeds after issuance costs of $364,132. The accepted funded subscriptions are recorded as a component of the Company’s equity pending issuance of common shares. Once the common shares have been issued, the amounts previously recorded as funded subscriptions are transferred to common stock par value and additional paid in capital, accordingly.

As of March 31, 2010 the PPM expired and all share certificates for all paid subscriptions have been issued.

Common Stock Sold Privately

During the first quarter of 2010, the Company began selling its common stock, at a purchase price between $0.15 - $0.25 per share, to qualified investors. The offering is being conducted on a “best efforts” basis with respect to all shares. The offering also provides that the Company shall pay the selling agents the following fees and commissions: 15% sales commission, a 5% due diligence fee and payment of expenses of up to 10% of the gross proceeds.

The following table summarizes transactions under the private offering as follows:

 

 

Common

Shares

 

Price

 

Gross

Proceeds

 

Issuance

Costs

 

Net

Proceeds

 

Period

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2010

 

 

1,112,000

 

$

0.18

 

$

200,000

 

$

(60,000

)

$

140,000

 

Q2 2010

 

 

1,734,000

 

$

0.15

 

$

260,000

 

$

(78,000

)

$

182,000

 

Q3 2010

 

 

660,000

 

$

0.20

 

$

134,500

 

$

(36,600

)

$

97,900

 

Q4 2010

 

 

1,000,000

 

$

0.25

 

$

250,000

 

$

(75,000

)

$

175,000

 

2011 (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2011

 

 

3,697,207

 

$

0.25

 

$

931,000

 

$

(231,300

)

$

699,700

 

 

 

 

8,203,207

 

$

0.22

 

$

1,775,500

 

$

(480,900

)

$

1,294,600

 

Other Issues of Common Stock

During the third quarter of 2009, the Company issued 74,000 common shares to consultants and professional advisors for services. The shares were valued at $0.25 per share, consistent with the revised offering price of the PPM. The Company also issued 13,000 shares to certain “friends and family” of the company in acknowledgement of their assistance in starting the Company. These shares were offered at no cost and the Company has not assigned any value to the transactions.



15



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 9. – EQUITY (Continued)

During the fourth quarter of 2009, the Company issued 3,000,000 shares for the exclusive distribution rights in Brazil.  The shares were valued at $0.25 per share, consistent with the revised offering price of the PPM.  In addition, the Company issued 28,000 to certain investors, which it also valued at $0.25 per share, consistent with the revised offering price of the PPM.

Also during the fourth quarter of 2009, the Company repurchased and 5,000,000 shares from a founder of the Company for $0.015 or $75,000 as part of its effort to restructure the Company’s equity ownership.  As part of this restructuring effort, the founders of the Company also surrendered 2,982,095 shares at a nominal value.

During the first quarter of 2010 the Company issued 25,000 shares for services valued at $0.18 per share, which resulted in an expense of $4,500.

During the second quarter of 2010, we entered into a consulting agreement with an investor relations group to provide certain corporate promotional material and strategic advice.  During the third quarter of 2010, 200,000 shares of common stock were advanced to the consultant for future services.  The transaction was valued at $70,000, its fair value at the date of issuance.  To date the consultant has not completed the agreed upon services.  Accordingly, we terminated the agreement and demanded the return of our stock.  Since the agreed services have not been provided, the shares are not considered fully paid for and accordingly have been recorded in Stock Receivable, a contra equity account.   

During the fourth quarter of 2010 the Company issued 244,000 shares for investor relations services valued at $0.36 per share, which resulted in an expense of $87,840.

During the first quarter of 2011 the Company issued 78,000 shares for services provided by an employee and consultants valued at $0.42 per share, which resulted in an expense of $33,180.

Warrants

The Company has issued warrants to the selling agent to purchase one share of Common Stock of the Company for every ten Shares sold under the PPM offering. The exercise price of each warrant is $0.01 per share and such warrants are exercisable for a period of five years from the date of issuance. Based on the PPM’s “repriced” sale price of $0.25 per share, the warrants are “in the money” upon issuance. For the year ended December 31, 2009 the Company issued warrants for 485,510 shares related to the PPM, which resulted in issuance costs of $116,522, based on the value of the warrants granted.

During the first quarter of 2010, the selling agent assisted in a private sale of 1,112,000 share of the Company’s common stock under Regulation S.  The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering. Accordingly, the Company issued warrants for 111,200 shares related to the private sale of shares and accrued an additional expense for financial consulting services, based on the value of the warrants of $18,904.

Also during the first quarter of 2010, the Company issued warrants to an investor relations consultant in aggregate to purchase 500,000 shares of common stock at prices ranging from $0.25 to $0.35 per share depending on the tranche.  The warrants were recorded at their fair value of $2,071, which resulted in a charge to operations.  

During the second quarter of 2010, the selling agent assisted in a private sale of 1,734,000 the Company’s common stock under Regulation S. The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering. Accordingly, the Company issued warrants for 173,400 shares related to the private sale of shares and accrued an additional expense for financial consulting services, based on the value of the warrants of $58,956.

During the third quarter of 2010, the selling agent assisted in a private sale of 660,000 the Company’s common stock under Regulation S. The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering. Accordingly, the Company issued warrants for 61,000 shares related to the private sale of shares. Warrants were not offered on the sale of 50,000 shares. The Company accrued an additional expense for financial consulting services, based on the value of the warrants of $20,740.



16



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 9. – EQUITY (Continued)

During the fourth quarter of 2010, the selling agent assisted in a private sale of 1,000,000 the Company’s common stock under Regulation S.  The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering.  Accordingly, the Company issued warrants for 100,000 shares related to the private sale of shares and accrued an additional expense for financial consulting services, based on the value of the warrants of $35,000.

During the first quarter of 2011, the selling agent assisted in a private sale of 3,051,000 the Company’s common stock under Regulation S.  The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering.  Accordingly, the Company issued warrants for 305,100 shares related to the private sale of shares and accrued an additional expense for financial consulting services, based on the value of the warrants of $134,244.

 

 

Shares

 

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term (in years)

 

 

Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2011

     

 

1,431,110

 

     

$

0.01

      

 

2.9

 

     

$

469,688

 

Issued

 

 

305,100

 

 

 

0.01

 

 

5.0

 

 

$

134,244

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2011
(Unaudited)

 

 

1,736,210

 

 

$

0.01

 

 

3.7

 

 

$

603,932

 

Exercisable at March 31, 2011
(Unaudited)

 

 

1,736,210

 

 

$

0.01

 

 

3.7

 

 

$

603,932

 

Option

The selling agent engaged by the Company has also entered into a Consulting Agreement under which he assisted the Company in filing a registration statement on Form 10 and quotation of its shares on the Over the Counter Bulletin Board (OTCBB). The Company has issued an option to the selling agent to purchase 2,000,000 share of common stock at an exercise price of $0.01 per share. At grant date, the option was valued based on the offering price of the PPM of $0.25 per share, which was $480,000. The option expires in five years. The option vests and is exercisable subject to certain lock up and leak out provisions which commence upon the effective date of the Company obtaining OTCBB listing. Leak out provisions limit exercisability of the option number to 200,000 shares per quarter.  During the first quarter of 2010, the Company obtained its trading symbol and accordingly recorded an expense for consulting services of $48,000 and $160,000 in Q111-QTR and Q110-YTD reflecting the structured vesting.

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2011

     

 

2,000,000

     

$

0.01

     

 

4.2

     

$

880,000

 

Issued

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2011
(Unaudited)

 

 

2,000,000

 

$

0.01

 

 

4.2

 

$

880,000

 

Exercisable at March 31, 2011
(Unaudited)

 

 

866,667

 

$

0.01

 

 

4.2

 

$

381,333

 




17



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 9. – EQUITY (Continued)

Preferred Stock

During the first quarter of 2009 three shareholders of the Company (which at such time constituted all of the shareholders of the Company) exchanged an aggregate of 10,000,000 shares of common stock for 10,000,000 shares of Series A Preferred Stock. As provided under Certificate of Designation for Series A Preferred Stock dated January 14, 2009, but filed in April 2009 and amended in September 2009, each share of Series A Preferred Stock is entitled to 2 votes per share and the Series A Preferred Stock votes together with the Company’s common stock, except as otherwise provided under Florida law.

NOTE 10. – INCOME TAXES

The provision for income taxes for the three months ended March 31, 2011 and 2010 is summarized as follows:

 

 

2011

 

2010

 

 

 

(Unaudited)

 

(Unaudited)

 

Current:

 

 

 

 

 

 

 

Federal

 

$

 

$

 

State

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

Federal

 

 

(65,999

)

 

9,517

 

State

 

 

(6,128

)

 

884

 

Increase (Decrease) in valuation allowance

 

 

72,127

 

 

(10,401

)

 

     

 

 

     

 

 

 

Total provision (benefit) for income taxes

 

$

 

$

 


The income tax benefit for the three months ended March 31, 2011 was not booked due to the uncertainty of future profitable operations necessary to realize the benefit.  The income tax provision for the three months ended March 31, 2010 was offset by available net operating loss carry-forwards.  However, management expects those available credits to be exhausted during 2012.

The provision for income taxes for the three months ended March 31, 2011 and 2010 differs from the amount computed by applying the federal statutory rate to income (loss) before provision (benefit) for income taxes as follows:

 

 

2011

 

2010

 

 

 

 

 

 

 

Expected provision(benefit) at statutory rate

 

 

35.0%

 

 

35.0%

 

State taxes

 

 

3.3%

 

 

3.3%

 

Valuation allowance for Net Loss

 

 

-38.3%

 

 

-38.3%

 

 

     

 

 

 

 

 

 

Total provision (benefit) for income taxes

 

 

0.0%

 

 

0.0%

 




18



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 10. – INCOME TAXES (Continued)

Deferred income taxes reflect the net tax effect of tax carry forward items and the temporary differences between the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax assets and liabilities at March 31, 2011 and 2010 are as follows:

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Deferred tax assets:

     

 

                    

     

 

                    

 

Net operating loss carry-forwards                                        

 

$

231,411

 

$

159,284

 

 

 

 

 

 

 

Total deferred tax assets

 

 

231,411

 

 

159,284

 

Valuation allowance

 

 

(231,411

)

 

(159,284

)

Net deferred tax assets

 

$

 

$

 

As of March 31, 2011 and December 31, 2010 the Company had a valuation allowance on its deferred tax assets of $231,411 and $159,284, which relates to net operating losses. The pro forma valuation allowance increased $72,127 in 2011-QTR. The increase was attributable to accumulated net operating losses in the period.

As of March 31, 2011 and December 31, 2010, the Company had net operating loss carry-forwards of $656,895 and $466,035, respectively. Unused net operating loss carry-forwards will expire at various dates beginning 2029.

As of December 31, 2010 and 2009, the Company had no unrecognized tax benefit and accordingly no related accrued interest or penalties.

NOTE 11. – 2009 EQUITY INCENTIVE PLAN

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

1.

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

2.

provide additional incentives to Employees, Directors and Consultants, and

3.

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

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

Subject to the Plan – The initial maximum number of shares of Common Stock that may be issued under the Plan is 5,000,000 shares. No more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either, authorized and unissued shares or shares held in treasury.

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

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

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



19



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 11. – 2009 EQUITY INCENTIVE PLAN (Continued)

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

NOTE 12. – SIGNIFICANT CUSTOMERS AND VENDORS

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

The Company’s product revenues represent primarily sales of Revita, Spectral DNC and NR09, which individually each exceeds 10% of total sales and collectively represent 54.7% of total sales.   NR08 and Spectral DNC-L collectively account for another 18.3% of total sales. During Q111-YTD two customers generated 42.2% of the Company’s sales and 30.5% of the outstanding accounts receivable balance at March 31, 2011.  These customers are distributors of the Company.

Sales to these customers during Q111-YTD and their accounts receivable at March 31, 2011 were:

Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

A

$

360,088

 

16.0%

$

208,076

 

14.0%

B

$

499,882

 

22.2%

$

244,252

 

16.5%

Sales to these customers during Q110-YTD and their accounts receivable at March 31, 2010 were:

Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

A

$

235,239

 

23.4%

$

179,427

 

30.3%

B

$

113,728

 

11.3%

$

0

 

0%

The Company’s purchases its raw materials from a variety of vendors.  Concentrations in these vendors represent price advantages or other advantages such timely production or delivery. Management believes it has sufficient alternative suppliers should production be disrupted for any reason from these vendors. During Q111-YTD two vendors generated 30.5% of the Company’s purchases and 6.2% of the outstanding accounts payable balance at March 31, 2011.

Purchases from these customers during Q111-YTD and their accounts payable at March 31, 2011 were:

Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

B

$

177,967

 

16.5%

$

 

—%

C

$

150,834

 

14.0%

$

19,761

 

6.2%

Sales to these customers during Q110-YTD and their accounts receivable at March 31, 2010 were:

Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

A

$

162,200

 

48.7%

$

 

—%





20



DIVINE SKIN, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011


NOTE 13. - CONSOLIDATION OF VARIABLE INTEREST ENTITY

The Company holds a variable interest in Velocity Storage and Packaging LLC (“Velocity”) an entity for which the Company is the primary beneficiary.  Velocity performs packaging and shipping services exclusively for the Company.  The Companies variable interest relates to a financing arrangement whereby, all operational expenses including labor costs, facility costs and other operational expenses are reimbursed by the company at Velocity’s cost.  The Company has no equity investment in Velocity and Velocity has no assets, liabilities or equity structure of its own.  Velocity is financially supported by the Company in the form of reimbursement for 100% of the operational costs.  Accordingly, the Company determined that Velocity was a variable interest entity ("VIE") and the Company was the primary beneficiary under the guidance offered in ASC 810-10 since Velocity does not have sufficient equity at risk for the entity to finance its own activities. ASC 810-10 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur.

NOTE 14. – SUBSEQUENT EVENTS

In accordance with the guidance offered in ASC Topic 855, formerly SFAS 165 – “Subsequent Events”, the Company has evaluated its activities from March 31, 2011 through May 20, 2011, the date the financial statements were issued, and determined that there were no reportable subsequent events.




21





ITEM 2.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this registration statement, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” in this registration statement for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Significant Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Financial Statements describes the significant accounting policies used in the preparation of the 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 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 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 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 consolidated financial statements:

Accounts Receivable -- Accounts receivable are reported at 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.

Inventory -- Inventory is reported at the lower end 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 -- Revenue is recognized when a product is shipped. The Company manages the collection process for transactions processed on its website, but it outsources its fulfillment (delivery) process to third parties.

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

·

persuasive evidence of a sales arrangement exists,

·

delivery has occurred,

·

the sales price is fixed or determinable and

·

Collectability is probable.



22





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

The Company accepts product returns and will issue a credit, refund or product exchange. To date, product returns have occurred but are not considered material. The Company has not established a product return reserve.

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

Results of Operations

The following discussion and analysis addresses the major factors that affected our operations and financial condition reflected in our consolidated audited financial statements for the three months ended March 31, 2011 and  2010. This discussion is intended to supplement and highlight information contained in, and should be read in conjunction with, our financial statements and related notes and the selected financial data presented elsewhere in this prospectus.

Three Months Ended March 31, 2011 (“YTD-2011”) to the Three Months Ended March 31, 2010 (“YTD-2010”)

Revenues, net -- Net revenues increased $1,255,345 or 126.2%, from $995,073 (YTD-2010) to $2,250,418 (YTD-2011). The Company’s product revenues represent primarily sales of Revita, NR-09 and Spectral DNC, which collectively represent 54.7% of total sales.

Revenues have increased as a result of the Company’s efforts to establish distribution agreements with distributors in several global target markets and a general increase in market acceptance of our products. The Company conducts a significant portion of business with Cellway International, Inc. and WR Group under exclusive distribution agreements. Revenues from the agreements accounted for approximately 42.2% of the Company’s total revenues during 2011.

Cost of Goods Sold -- Total cost of goods sold increased $747,763 or 224.6%, from $332,979 (YTD-2010) to $1,080,742 (YTD-2011).  The increase was due to our increase in sales and changes in formula costs and production.  Approximately $689,652 of the increase is directly related to our increase in sales. The increase in cost of goods sold was attributable to changes in product mix, changes in product formulation and increased material costs.

Selling and Marketing Costs -- Selling and marketing costs increased $347,058 or 148%, from $234,541 (YTD-2010) to $581,600 (YTD-2011). The increase is primarily due to the following:

Increases in:

·

$189,535 for consulting and commission costs due to increased costs of expanding our customer base, distribution representatives and growing our sales,

·

$72,544 for marketing and promotion costs incurred to broaden our product offering and promote additional sales,

·

$67,472 for freight and shipping costs also resulting from our expanding sales and changes in shipping methods.

·

$15,933 for travel and entertainment costs incurred to expand and promote additional sales, and

·

$11,574 net, for other selling and marketing costs.



23





Decreases in:

·

$10,000 for warehousing costs as a result of increases in operating costs, primarily payroll activities related to our “in house” facilities.

General and Administrative Costs -- General and administrative costs increased $330,335 or73.5%, from $449,635 (YTD-2010) to $779,969 (YTD-2011). The increase is due to the following:

Increases in:

·

$26,354 for personnel costs due to increased staffing as a result of our expanding sales and operations groups,

·

$14,269 for amortization and depreciation expense associated primarily with amortizing various deferred costs such as the exclusive distribution rights agreement,

·

$243,442 for professional fees paid to (i) attorneys related to various matters, including, but not limited to SEC, FDA, trademark and employment compliance matters and (ii) accountants related to costs of SEC compliance and corporate compliance and outsourced accounting services,

·

$7,989 for office expenses associated with supporting increased sales and operations,

·

$15,977 for increased rent as a result of lease increases, and

·

$22,304 net, for various other general and administrative costs.

Other Income, net – Other income, net decreased $48,238 or 98% from $49,272 income (YTD-2010) to $1,034 income (YTD-2011). The decrease was primarily a result of non reoccurring gains realized during YTD-2010 from favorably settling certain claims made by prior vendors.

Tax Provision (Benefit) – The Company has incurred losses in YTD-2010 and YTD-2011.  As a result the Company has not booked any tax benefit until such time as there is reasonable assurance that the Company will become profitable.

Net Loss – As a result of the increase allowances offered to promote new sales coupled with increased product costs discussed above, Net Loss increased $218,050 or 801.9% from a $27,190 Net Income (YTD-2010) to $190,860 Net Loss (YTD-2011).

Liquidity and Capital Resources

We had working capital of $2,291,076 at March 31, 2011. Our operating and capital requirements in connection with supporting our expanding operations and introducing new products have been and will continue to be significant to us. Since inception, our losses from operations along with the increased costs and working capital required to grow our business were satisfied through the initial contribution by our founders in 2007 and through subscriptions to purchase shares under a private placement which we began accepting subscriptions in early 2009.

Based on our current plans for the next 12 months, we anticipate that additional revenues earned from our expanded product line and broadened distribution channels will be the primary organic source of funds for future operating activities in 2011. To fund continued expansion of our product line and extend our reach to broader markets, including foreign markets, we may rely on bank borrowing, if available, and the private placement of securities.

During the year ended December 31, 2009, the Company accepted an aggregate of $1,220,774 from 23 investors to subscribe for 4,883,096 shares of our common stock under a private placement pursuant to Section 4(2) of the Securities Act and Regulation S, promulgated thereunder. The private placement provides for issuance costs of 30% which amounted to $364,132. As a result, the Company netted $856,642 in proceeds from the subscription.

During the year ended December 31, 2010, the Company accepted an aggregate of $844,500 from seven investors to subscribe for 4,506,000 shares of our common stock under private placements pursuant to Section 4(2) of the Securities Act and Regulation S, promulgated thereunder.  The private placements provided for issuance costs of 30% which amounted to $249,600.  As a result, the Company netted $594,900.



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During the first quarter ended March 31, 2011, the Company accepted an aggregate of $931,000 from ten investors to subscribe for 3,697,207 shares of our common stock under private placements pursuant to Section 4(2) of the Securities Act and Regulation S, promulgated thereunder.  The private placements provided for issuance costs of 30% which amounted to $231,300.  As a result, the Company netted $699,700.

Cash Flows for the Three Months Ended March 31, 2011

Cash Flows from Operating Activities

Operating activities used net cash for the three months ended March 31, 2011 of $701,161. Net cash used reflects an adjusted net loss for the three months ended of approximately $63,249, as adjusted for various items which impact net loss but do not impact cash during the period, such as issuance of warrants or depreciation and amortization. Operating activities also used $764,410 of net cash to support net changes in working capital items, primarily from financing provided by vendors, which included:

·

$757,303 used by an increase in accounts receivable as a result of increased sales,

·

$62,937 provided by a decrease in inventory,

·

$53,053 provided by decrease in prepaid expenses,

·

$109,438 used by a decrease in accounts payable and accrued expenses as a result of reduced payment terms to suppliers and settlement of  supplier claims, and

·

$13,658 used by a nominal increase in other current liabilities.

Cash Flows used in Investing Activities

Our investing activities used $11,835 in net cash during the three months ended March 31, 2011. Net cash used is composed of purchases of equipment.

Cash Flows from Financing Activities

Our financing activities provided net cash of $699,700 for the three months ended March 31, 2011. We raised approximately $931,000 through sales of our common stock, before $231,300 in issuance costs.

Financial Position

Total Assets – Our total assets increased $601,167 or 20.4% from $2,943,858 as of December 31, 2010 to $3,545,026 as of March 31, 2011 primarily as a result of a net increase in current assets of $616,813 the components of which are discussed further below.  Net increases in current assets were supplemented by a $9,544 increase in furniture and equipment, a $25,150 decrease in intangible assets as a result of amortization and a nominal decrease in other assets.

Current Assets – The net increase in current assets of $616,813 was primarily associated with a $746,098 increase in accounts receivable, an $62,937 decrease in inventory, a decrease in prepaid expenses of $53,053 and a decrease in cash of $13,296.  These increases are primarily driven by the need to support increased sales, but are more specifically discussed as follows.

Inventory – Inventory levels decreased 5%, as a result of timing in shipments.

The inventory level on hand at March 31, 2011, represents approximately 26% of annualized COGS or a 3.2 month supply based on the sell through rate achieved for the three months ended March 31, 2011. Management believes that the sales achieved in Q1 2011 will continue throughout fiscal year 2011. Management also understands that these inventory decisions result in an inventory turnover rate of 3.8 times. Management is pleased in efforts to improve its turnover rate and has achieved its goal of at least a 3 times inventory turnover rate.  Management will continue to explore alternative production methodologies to establish a profitable and sustainable production cost structure.

As part of its decision, management has considered the potential impairment costs and storage costs associated with slow turning inventory. Before embarking on these decisions management consulted its chemist and determined that most of its materials and components had a shelf life of 3-5 years. Even its active ingredients, whose normal shelf life is a relatively short 6 months, is stabilized and extended, when mixed into finished product. Accordingly, management has concluded that no impairment reserves are required at March 31, 2011.



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Accounts Receivable – Accounts receivable increased $746,098.  The increase represents a 101% increase in the accounts receivable balance at March 31, 2011. The increase is the result of a general increase in sales and the addition of new distributors.  Management believes that its current receivables are collectable.

Prepaid Expenses and Other Assets – Prepaids decreased $53,053.  The decrease primarily represents a $65,000 of advertising costs previously deferred but expensed because the campaign started.

Cash -- The increase in cash is explained more fully by the discussion of cash flows above.

Sales of Equity Securities

In 2009, we began accepting subscriptions from the sale of shares of our common stock to non-US resident investors. The placement of common stock is currently open and is intended to meet the exemptions of Regulation S of the Securities Act. The funds received from the sale of our common stock have been used for operational purposes. We have received funded subscriptions, less selling expenses and finder’s fees, as follows:

Table of funded subscriptions, less selling expenses

 

 

Common

Stock

Proceeds

 

Selling

Expenses

 

Net

Proceeds

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

$

1,220,774

 

$

364,132

 

$

856.642

 

2010

 

 

844,500

 

 

249,600

 

 

594,900

 

2011

 

 

931,000

 

 

231,300

 

 

699,700

 

TOTAL

 

$

2,996,274

 

$

845,032

 

$

2,151,242

 


Material Commitments

None.

Off Balance Sheet Arrangements

None.

Quantitative and Qualitative Disclosures about Market Risk

None.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to Note 3 to the Unaudited Condensed Consolidated Financial Statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to Smaller Reporting Company.



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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2011.  Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company.  Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2011 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2011, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the Company’s limited resources and limited number of employees.

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals.  As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are 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

During the three months ended March 31, 2011, the Company issued 646,207 shares of common stock to 4 accredited investors in consideration of gross proceeds of $168,250 under a private placement pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Act”). The Company paid no fees or commissions. The investors had access to information concerning the Company and the opportunity to ask questions about the Company. The certificates representing the shares contain legends restricting transferability absent registration or applicable exemption.

During the three months ended March 31, 2011, the Company issued an aggregate of 3,051,000 shares of common stock to 6 foreign investors in consideration of gross proceeds of $762,750 under a private placement pursuant to Section 4(2) and Regulation S under the Act. The Company paid fees and commissions of approximately $231,300. As a result, the Company netted $531,450 in proceeds from the subscription. The certificates representing the shares contain legends restricting transferability absent registration or applicable exemption. In addition, the Company issued a warrant to purchase 305,100 shares of common stock exercisable at $0.01 per share to a consultant that assisted in the offering.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

(REMOVED)

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit
Number

 

Description

 

      

 

3.1

 

Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated January 13, 2007 (1)


 

 

3.2

 

Amendment to Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated September 15, 2009 (2)


 

 

3.3

 

Bylaws of Divine Skin, Inc. (1)


 

 

10.1

 

2009 Divine Skin, Inc. Equity Incentive Plan (1)


 

 

10.2

 

Kane Concourse Lease Agreement (1)


 

 

10.2.1

 

Kane Concourse Lease Termination Agreement (1)


 

 

10.2.2

 

Meridian Center Lease Agreement, as amended (1)






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Exhibit
Number

 

Description

10.3

 

Consulting Agreement dated January 2009 (1)


 

 

10.4

 

Form of Exclusive Distribution Agreement (1)


 

 

10.5

 

Amendment to Gamma Investors Exclusive Distribution Agreement (3)


 

 

10.6

 

Form of Regulation S Subscription Agreement (3)


 

 

10.7

 

Form of Section 4(2) Subscription Agreement (3)


 

 

10.8

 

Form of Services Agreement (3)


 

 

16.1

 

Letter from former Auditor(5)

 

 

 

21.1

 

List of subsidiaries of the Company (1)

23.1

 

Consent

23.2

 

Consent

99.1

 

 Code of Ethics(4)

———————

(1)

Incorporated by reference to the Company’s registration statement on Form 10 filed with the Securities and Exchange Commission filed May 22, 2009.

(2)

Incorporated by reference to the Company’s Form 10Q for the period ended September 30, 2009.

(3)

Incorporated by reference to the Company’s registration statement on Form S-1 with the Securities and Exchange Commission, as amended, filed December 12, 2009 (file number 333-163449).

(4)

Incorporated by reference to the Company’s Form 10-K Annual Report for the year ended December 31, 2009.

(5)

Incorporated by reference to the Company’s Form 8-K dated February 22, 2011.




29





SIGNATURES

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

Date:

May 20, 2011

DIVINE SKIN, INC.

 

 

 

By:

/s/ Daniel Khesin

 

 

Daniel Khesin

 

 

President, Chief Executive Officer,

 

 

Chief Financial Officer/

 

 

Principal Accounting Officer




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