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EX-32.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex32z2.htm
EX-23.2 - CONSENT - DS HEALTHCARE GROUP, INC.dskx_ex23z2.htm
EX-31.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex31z2.htm
EX-23.1 - CONSENT - DS HEALTHCARE GROUP, INC.dskx_ex23z1.htm
EX-31.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.dskx_ex31z1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


———————

FORM 10-K

———————


þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended: December 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.

(Exact name of registrant as specified 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, FL 33139

(Address of Principal Executive Office) (Zip Code)


(888) 404-7770

(Registrant’s telephone number, including area code)


N/A

(Former name or former address, if changed since last report)

———————

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

 

Name of each exchange on which registered

 

 

 

Securities registered pursuant to Section 12(g) of the Act:


Common Stock

 

(Title of Class)

 

———————

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes  þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes  þ No

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. þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  þ No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨  

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 þ

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter ($0.369 per share).  $12,025,432.14 on June 30, 2011.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of April 2, 2012 there were 105,029,613 shares outstanding.

 

 




TABLE OF CONTENTS

PAGE

 

Item 1.

Business.

1


Item 1A.

Risk Factors.

8


Item 1B.

Unresolved Staff Comments.

8


Item 2.

Properties.

8


Item 3.

Legal Proceedings.

8


Item 4.

Mine Safety Disclosures.

9


Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities.

10


Item 6.

Selected Financial Data.

10


Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation.

11


Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

24


Item 8.

Financial Statements and Supplementary Data.

24


Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

24


Item 9A.

Controls and Procedures

25


Item 9B.

Other Information.

26


Item 10.

Directors, Executive Officers and Corporate Governance.

27


Item 11.

Executive Compensation.

29


Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters.

31


Item 13.

Certain Relationships and Related Transactions, and Director Independence.

32


Item 14.

Principal Accounting Fees and Services.

32


Item 15.

Exhibits, Financial Statement Schedules.

33


SIGNATURES

35

 





PART I

Item 1.

Business.

Overview

Divine Skin, Inc. is a Florida corporation organized on January 26, 2007. Divine Skin, Inc. and its subsidiaries (collectively, the “Company” or “Divine Skin”) develop products for skin care and personal care needs.  The Company has grown steadily since inception with a network of specialty retailers across North America and distributors throughout Europe, Asia and South America. Divine Skin currently researches and develops (formulates) its own products. We currently offer the following lines of products:

·

skin care

·

personal care

·

hair care

Our current principal products are discussed below. We formulate, market and sell these products through specialty retailers, spas, salons and other distributors. Our products are produced through various third party manufacturers on an order by order basis.

Our corporate headquarters are located at 1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139. Our phone number is (888) 404-7770. We own and operate several websites, including divineskin.com, polarisresearchlab.com, sigmaskin.com, polarisresearch.co.uk and www.dslaboratories.com. Information contained on our website is not part of this report.

History

Through its predecessors, including Divine Skin, Inc., (a New York company) and DS Laboratories, Inc. (a New York corporation) the Company has been developing and marketing skin care and personal care products for over ten years. In January 2007 the operations of Divine Skin, Inc. (a New York company), were terminated and its assets were distributed to its shareholders. Those assets and certain liabilities were used to capitalize Divine Skin, Inc. (a Florida corporation). The companies had common shareholders. The Company currently conducts business under the “Divine Skin” trade name and also under the “DS Laboratories” trade name. DS Laboratories, Inc. (a New York corporation) was closed in December 2006 and recapitalized as a Florida corporation in January 2007. Divine Skin, Inc. (a Florida corporation) has operated out of South Florida since its inception in 2007. Our founders also owned DS Laboratories, Inc. (a Florida company), which was formed in January 2007 to secure the DS Laboratories trade name and was essentially idle through 2007 and 2008. In January 2009 all of the issued and outstanding shares of DS Laboratories, Inc. (a Florida company) were transferred to the Company for nominal consideration.

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 by our Vice President’s father. 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. We currently distribute hair growth products, facial moisturizers and anti-aging facial cleansers through Sigma. In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company. Polaris was founded for marketing purposes, to distribute Polaris branded versions of the Company’s products to physicians and to foreign distributors. We currently distribute hair care products through Polaris. These products are primarily distributed through physicians.

During fourth quarter 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. During third quarter 2010 the Company engaged in establishing a joint venture distribution company with its exclusive Brazilian distributor. The purpose of the joint venture was to capitalize on its exclusive distribution rights in Brazil. The Company 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 during second quarter 2012. During the third quarter of 2011, due to the costs involved, the Company entered into an agreement with its joint venture partner whereby the joint venture partner agreed to provide all required financing in exchange for 100% ownership of the joint venture. The Company retains its distribution rights.



1



Strategy

Divine Skin intends to capitalize on several opportunities to increase its market share, revenues, and profitability. The Company currently has a distribution network of retail outlets in the United States as well as internationally.  We intend to increase revenues and profitability by launching more products and to increase marketing activities for these products. Each new product launch is broken down into several phases:

1.

Research and Development. We are a performance driven brand and consumers expect a very high level of effectiveness from Divine Skin. In addition, in the retail environment where our products are sold regular shoppers who contribute to the organic growth and proliferation of the brand are turned away if the products do not deliver something truly special. Therefore all new products must be given careful attention, development, and research. The product launch phase is itself broken down into several phases of packaging development, formulation development, research, compatibility and stability testing, and a few other internal protocols.

2.

Awareness. Based on experience, we believe a product cannot achieve its sales potential unless it is launched along with a strong awareness and sampling campaign. An example of this would be to work with our retail partners and mail a newsletter to each customer that they have on their mailing list and include sachet samples of the product.

3.

Support. When products are rolled out onto retail shelves, in-store training and education is of paramount importance. The difference between simply placing products on shelves versus visiting the stores and providing intensive education, training, and incentives can make a material difference in sales volume.

4.

Advertising. We believe the Company can benefit greatly from increased advertising. Our greatest distribution expansion challenge is supporting new accounts rather than opening them. Furthermore, there is a material cost for hiring, training and compensating local representatives. Therefore, we believe the best way to drive strong sales through the majority of our accounts is to increase nationwide advertising which would simultaneously increase brand awareness and educate clients in local markets to successfully drive sales through remaining doors that are not serviced.

Products

Our current product lines include the following:  

Skin Care

Trioxil®

Trioxil (bisazulene gel) is an acne cream. It contains Ichthyol Pale among other ingredients, which has been shown to reduce skin blemishes under an independent study conducted on 101 test persons who were treated with a formulation containing 1% of ICHTHYOL® PALE. The study was conducted by ICHTHYOL-Gesellschaft in Germany in 2004.

Hydroviton®

Hydroviton is a skin cleanser, developed for oily and acne prone skin. It contains liposome encapsulated azelaic acid (trade name: Azelosome) which in an independent study conducted by BASF Corporation in 2004 showed a 46% suppression of 5α-reductase, a hormone that causes oily skin.

Keramene®

Keramene is formulated to suppress hair growth and softens remaining hair strands. Keramene combines plant hormones, natural palmatine and nondihydroguaiaretic acid. Keramene performs via two complementary pathways: 1) inducing follicles into the catagen state so they stop growing hairs, and 2) suppressing kerafinocyte proliferation so remaining hairs grow slower. Keramene contains Telocapil, among other ingredients, which has been shown by an independent study performed by Provital Group in 2003 to reduce hair growth.



2



Viterol.A®

Viterol.A is an anti-aging aid that contains viatrozene, a compound that is formulated to reduce wrinkles and expression lines and improve over-all skin health. One of the active ingredients of Viterol.A is Acetyl Octapeptide-3. In an independent study performed by Lipotec Group in Spain in 2005, skin topography analysis was performed to measure the effectiveness of applying Acetyl Octapeptide-3 twice a day. Silicon imprints were obtained from around the eyes of 17 women volunteers pre-test and after the 28 day treatment. The reduction value of wrinkle depth was 63%.

Oligo®

Oligo.DX is a cream that is designed to improve the appearance of cellulite from women’s thighs, hips and buttocks. We believe Oligo.DX improves the appearance of cellulite. It contains a liposomal complex of caffeine and escin among other ingredients which were tested in a study by an independent group in Spain in 2002. The global action of this complex as an effective anticellulite was evaluated in an in vivo study performed on 20 females with cellulite imperfections, aged between 18 and 70. The product was applied daily for 60 days on specific body areas and the following parameters were identified: 1.) Buttock circumference - 15% of patients showed a decrease of 2.0 to 3.0 cm while 60% showed a decrease of 0.5 to 1.0 cm; 2.) Thigh circumference - 85% of patients presented a decrease of 0.5 to 1.0 cm; 3.) Body fat mass - 50% of patients showed a significant decrease of 0.6 to 1.4 kg.

Hair Care

Spectral.DNC-L®

Indicated for men with advanced androgenic alopecia – male pattern baldness of 4 or greater on the Norwood scale – Spectral.DNC-L is designed to regrow hair via multiple pathways. We believe this formula helps retain and regrow hair. One of the principal active ingredients in Spectral DNC-L is Procyanidin B-2 complex. In an independent study published in the British Journal of Dermatology in 2002, Procyanidin B-2 was shown to shorten the hair resting phase and prolong the hair growth phase, therefore increasing hair growth results.

Spectral.RS®

Spectral.RS works by addressing multiple causes that lead to thinning hair such as perifollicular fibrosis and internal factors such as stress, hormonal disturbances, lack of vitamins and mineral salts, and the use of certain medications. Perifollicular fibrosis is a condition that accompanies all hair loss whereby the collagen around the hair root becomes rigid and tightens, pushing a root to the surface and causing premature hair loss. One of the active ingredients in Spectral.RS is Adenosine. This ingredient was shown to be effective in an independent clinical study conducted by Shiseido Laboratories in 2005 to induce hair growth.

Revita®

Revita is a hair growth shampoo. Revita is a combination of materials specially designed to maintain scalp vitality and act on follicle dysfunctions. This formulation is developed completely without the use of Sodium Lauryl Sulfate and Sodium Laureth Sulfate, commonly used low cost detergents in shampoos and cleansers that are linked to skin irritation, drying, and hair loss due to follicle attack. It contains a high concentration of caffeine, among other ingredients. Under independent studies conducted at the University of Jena in Germany in 2000 using hair samples from the scalps of young men entering into the first stages of hormone-related hair loss, the caffeine treatment increased average hair growth by approximately 46% and the life cycle of the hair was extended by 37%, when compared to the control study.

Nia Hydrating Shampoo

Nia Hydrating Shampoo was developed in response to requests within our distributor network that are seeing strong demand for hydrating shampoos and conditioners.

Nia Conditioner

Nia Conditioner is designed to complement Nia Hydrating Shampoo.



3



NR-08

NR-08 is a hair loss spray containing minoxidil and other ingredients. This product is currently only available for sale outside the United States.

Personal Care

Nirena®

Nirena is an intimate feminine care cleanser developed without cheap detergents, harsh chemicals, and low pH tolerances, which are found in other commercially available products. The principle active ingredient in Nirena is Brazilian Peppertree extract. In clinical studies, extract of the Brazilian Peppertree displays antimicrobial properties. A 1974 independent study used the herb effectively to treat 100 patients with chronic cervicitis and vaginitis.

Beauty Care

Revita.EPS

Revita.EPS is a product based on advanced bio-peptides that are designed to grow and increase the length and girth of eyelash hair. The bio-peptides include SymPeptide 226EL, which under independent studies conducted by Symrise Corporation in 2007 have shown a 25% increase in eyelash length after 2 weeks of use. Rather than packaging the product in the form of an eye lash curler, Revite.EPS is packaged in disposable individual use packets that we believe will provide better hygiene and reduce the risk of eye infection. This product was launched in 2010.

Product Studies

The studies referenced above were conducted by independent third parties. Such third parties did not create the products that were subject of the studies. The studies are widely and publicly available, the majority of which can be found on the Internet. As the studies are publicly available, the Company did not obtain the consent of the third parties to reference such third parties in this report.

While the majority of the active ingredients in our current products have undergone independent third party clinical trials, including the studies referenced above, to establish benefit claims and efficacy, certain ingredients contained in our products and our future products may require clinical trials to establish our benefit claims or their safety and efficacy. Such trials can require a significant amount of resources and there is no assurance that such trials will be favorable to the claims we make for our products, or that the cumulative authority established by such trials will be sufficient to support our claims. Moreover, both the findings and methodology of all clinical trials are subject to challenge by scientific bodies. If the findings of clinical trials are challenged or found to be insufficient to support our claims, additional trials may be required, or products may require re-formation, in order for us to continue to market current products or before future products can be marketed. Furthermore, there are limited studies, if any, on our product ingredients combined in our product formulations. Accordingly, there can be no assurance that our products even when used as directed will have the effects intended. In the event we are unable to substantiate benefit claims or efficacy, or in the event that historical clinical trials are refuted, market acceptance for our products may decrease or not develop, which would have a detrimental effect on our business.

Marketing and Advertising

We have in-house graphic design and public relations departments to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers.

Manufacturing and Supplies

Historically the Company relies on third party subcontractors and suppliers to provide product raw materials, components and to formulate and package finished good. Third parties also provide order fulfillment, warehousing and distribution services. Commencing in the first quarter of 2009, we made two significant changes to our production methodology. First, we began to formulate (research and develop) certain of our products ourselves in an effort to improve product quality and reduce costs. Second, triggered by our sales projections, we began to purchase product in larger production batches thereby increasing production efficiency for our outsourced suppliers, which reduced our costs. Warehousing and fulfillment activities remain outsourced.



4



The Company uses contracted third parties to manufacture its products and to provide raw materials. The third party manufactures are responsible for receipt and storage of raw material, production and packaging and labeling finished goods. At present, the Company is dependent upon manufacturers for the production (manufacturing) of all of its products. To the extent the manufacturer should discontinue the relationship with the Company; the Company’s sales could be adversely impacted. The Company believes at the present time it will be able to obtain the quantity of products and supplies it will need to meet orders.

We purchase all of our raw materials from several third party suppliers and manufacturers pursuant to purchase orders without any long-term agreements. We do not rely on any principal suppliers or manufacturers. In the event that a current manufacturer is unable to meet our supply or manufacturing requirements at some time in the future, we may suffer short-term interruptions of delivery of certain products while we establish an alternative source. While we believe alternative sources are in most cases readily available and we have also established working relationships with several third party suppliers and manufacturers, none of these agreements are long-term. We also rely on third party carriers for product shipments, including shipments to and from our distribution facilities. We are therefore subject to the risks, including employee strikes and inclement weather, associated with our carriers’ ability to provide delivery services to meet our fulfillment and shipping needs. Failure to deliver products to our customers in a timely and accurate matter would harm our reputation, our business and results of operations.

Relationships with Retailers

The Company sells a variety of products that fall into the category of skin care, hair care or personal care. While all of our offerings are health care based, each product category targets a slightly different consumer and approaches its target group in a different manner. Due to the common theme, some of the markets will overlap, thereby qualifying the same customer for more than one major product. Our products are sold through retail and wholesale groups. The Company has sold its products to approximately 250 retailers and wholesale groups. The Company does not currently sell directly to the end user. The Company has established relationships with specialty retailers, spas, salons and distributors, the majority of which are on a purchase order basis, without long term commitments. The Company continues to search for retailers and distributors both nationally and abroad for all of our products. Within the U.S. market, the Company sells its products directly to specialty retailers, spas and salons, including, but not limited to GNC, Vitamin Shoppe, Planet Beauty, Target.com and Drugstore.com.

Distribution Agreements

The Company has entered into several distribution agreements and distribution arrangements outside of the United States. The Company believes that there is a need for such arrangements as identifying partners in overseas markets enables the Company to outsource logistical matters and such third parties also provide customer support and have a greater knowledge of local markets and customs.

The Company has entered into an Exclusive Distribution Agreement with Cellway International, Inc. (“Cellway”). Under an agreement dated November 25, 2008, the Company has granted Cellway the exclusive distribution rights for its current products throughout Japan. The term of the agreement is for a period of ten years unless earlier terminated by the Company or Cellway. Cellway may terminate this agreement at any time after December 31, 2009 by providing the Company with not less than 30 days advance written notice. In addition, the Company may terminate the agreement if Cellway fails to comply with minimum sales quotas of 25,000 product units per year. For the year ended December 31, 2011 and December 31, 2010, revenues from the Company’s relationship with Cellway were in excess of 10% per year.

The Company has entered into an Exclusive Distribution Agreement with WR Group, Inc. (“WR Group”). Pursuant to the Exclusive Distribution Agreement dated March 1, 2009, the Company has granted WR Group the exclusive rights to distribute its current products within the European Union. The term of the agreement is for a period of ten years unless earlier terminated by WR Group with not less than 30 days written notice to the Company. In addition, the Company may terminate the agreement if WR Group fails to comply with minimum sales quotas of 25,000 product units per year.  For the years ended December 31, 2011 and December 31, 2010, revenues from the Company’s relationship with WR Group were in excess of 10% per year.



5



During the third quarter of 2009, we entered into a private label and distribution agreement with WR Group to develop a private label brand of premium products and associated packaging materials based on our current product lines under the “Pure Guild” brand.  We own a 50% interest in the Pure Guild brand and the perpetual exclusive rights to manufacture the Pure Guild products.  In exchange for these rights we provided $106,666 of product at our retail cost to WR Group, representing approximately 70% of the initial stocking order.

The Company has also entered into exclusive distribution agreements in Brazil, Mexico, Russia, Saudi Arabia and Egypt.

The exclusive distribution agreement for Mexico is entered into with MD Laboratories S.A. under a one year agreement dated September 2007. The parties have orally agreed to extend the agreement. MD Laboratories may terminate the agreement for any reason upon thirty day advance written notice.

The exclusive distribution agreement throughout Russia is with OOO Omega, a Russian company, and is effective until October 31, 2012. Under the agreement Omega is required to make certain minimum quarterly purchases. The agreement may be terminated by Omega without cause and by the Company in case of default by Omega for failure to meet minimum purchase requirements.

The exclusive distribution agreements for Saudi Arabia and Egypt are with Top Care Trading Co. and the agreement is effective through March 2013. Top Care Trading is subject to minimum annual purchase requirements. The agreement may be terminated by Top Care upon thirty days advance written notice or by the Company if Top Care fails to meet minimum purchase requirements.

The exclusive distribution agreement, as amended for Brazil is entered into with Gamma Investors under a ten year agreement dated September 1, 2009, as amended. Gamma Investors may terminate the agreement with 30 days notice. The agreement is also subject to minimum purchase requirements. As additional compensation for marketing and consulting services provided under the agreement by Gamma Investors, the Company issued Gamma Investors 3,000,000 shares of restricted common stock. During third quarter 2010 the Company engaged in establishing a joint venture distribution company with its exclusive Brazilian distributor. The purpose of the joint venture was to capitalize on its exclusive distribution rights in Brazil. The Company 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 during second quarter 2012. During the third quarter of 2011, due to the costs involved, the Company entered into an agreement with its joint venture partner whereby the joint venture partner agreed to provide all required financing in exchange for 100% ownership of the joint venture. The Company retains its distribution rights.

The Company has also entered into non-exclusive distribution arrangements in Turkey, Canada, Lebanon, Hong Kong and Bangladesh.

Research and Development

We perform our research and development (formulation) at our executive offices, primarily through the services of our chief executive officer and a chemist. During 2011 and 2010 the Company expensed $152,726 and $127,048, respectively, to research and development. None of these costs were borne directly by our customers.

Proprietary Rights

The Company’s products are created in-house. The Company does not license any products from third parties. The Company regards the protection of trademarks and other proprietary rights that it may own material to its future success and competitive position. The Company relies upon the combination of laws and contractual restrictions such as confidentiality agreements to establish and protect its proprietary rights. Laws and contractual restrictions, however, may not be sufficient to prevent misappropriation of proprietary rights or to deter others from independently formulating products that are substantially equivalent or superior to the Company’s products. The Company has no patent protection on any of its products.

The Company has obtained the following U.S. trademarks: DS Laboratories, Aminexil, Revita, Spectral.DNC and Oligo.DX.



6



The Company currently has no license agreements, franchises, concessions, royalty agreements or other intellectual property.

Regulation

The United States Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act regulate the purity and packaging of health and beauty aid products and fragrances in cosmetic products. Similar statutes are in effect in various states and foreign jurisdictions. Health and beauty aids are also subject to the jurisdiction of the Federal Trade Commission (FTC) with respect to matters such as advertising content and other trade practices. We believe our products are defined as cosmeceuticals. Within the skin care industry, cosmeceuticals are not clearly regulated. In general products within this category walk a gray line between cosmetics and OTC drugs, often making drug-like claims. It is possible that an agency like the FDA may request that we make certain changes to our label claims and/or remove certain ingredients from our products. We have contracted a law firm that specializes in dealing with these regulatory matters and they have advised us that our regulatory risk is low at this time. However, it should be noted that any very drastic change to our label claims could adversely affect our business. For instance, if we were forced to change “Revita Hair Growth Stimulating Shampoo” to “Revita Shampoo” it could have a negative effect on our marketing of the product, causing a significant drop in sales volume for this product. The failure of our Company or our manufacturers to comply with applicable government regulations could result in product recalls that could adversely affect our relationships with our customers.

Our products are subject to various regulatory risks both domestically and abroad. It is possible that the FDA and health agencies in other countries may take action and demand that we remove certain products from the market, remove certain ingredients, or change certain wording on our packaging that could make the products less desirable to our customers. In addition, it is possible that the FDA and other health agencies may determine that some of the products that we market as cosmetics are actually drugs (either OTC or prescription) and may demand that we apply for either an NDA (New Drug Application) or ANDA (Abbreviated New Drug Application) which could result in the removal of those products from the market and delay the sale of these products. We currently believe that our products are not subject to any specific material regulations. Furthermore, we require our international distributors to satisfy regulatory compliance matters within the particular region that such distributor is selling our products. We believe the risk of regulatory action at this time is low; however this can change at any time depending on the current FDA administration and its posture on topical skin care and hair care products. The extent that potentially adverse government regulations which might arise from future legislation or administrative action cannot be predicted. Furthermore, in the event any of our products required FDA approval we can not predict or estimate the timing or cost for us to obtain FDA approval for such product.

Competition

The skin care and personal care industries are highly competitive. Many of the Company’s competitors are large, well known companies that have considerably greater financial, sales, marketing, research and development and technical resources in the company. Additionally, these competitors have formulary capabilities that may allow them to formulate new and improved products that may compete with product lines that the Company develops and markets. In addition, competitors may elect to devote substantial resources to marketing their products to similar outlets and may choose to develop advertising, educational and information programs like this formulated by the Company to support their marketing efforts. The Company’s business, financial condition and results of operations could be materially and adversely affected by any one or more of such developments.

Our products, in general, compete against similar products distributed by national skin care and personal care companies, including, but not limited to, Cooper Peptide, Syk Haircare and Asian Skincare Ideas. The Company’s competitive position is based on the foundation of developing niche products with active ingredients that may not be found in generic products. The Company’s competitive strategy is based on management’s attempt to continually focus on the application of new technologies and efficiencies rather than fashions or trends.

Employees

At December 31, 2011, we had 31 fulltime employees, including 3 in product research and development, 19 in operations and customer services, and 2 in administrative and finance positions. In addition, we have 10 part-time employee. None of our employees are represented by a labor union, nor governed by any collective bargaining agreements. We consider relations with our labor force as satisfactory.



7



Item 1A.

Risk Factors.

Not applicable to smaller reporting companies. However, our principal risk factors are described under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

The Company leases its current executive offices and research laboratory in Miami Beach, Florida under a lease agreement dated December 14, 2007 and amended in July 2009. Under the lease agreement as amended, the lease term was through December 31, 2009 and the monthly cost for this space was approximately $6,500. The lease agreement was originally for a term of five years. Pursuant to the amendment, the landlord agreed to terminate the lease on December 31, 2009 in consideration for a payment of approximately $39,000. The lease, as amended, is guaranteed by our executive officers.  We currently occupy this space on a month-to-month basis at a cost of approximately $5,700 per month.  We intend to negotiate a new lease for our current offices or seek alternative space in Miami.  

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 rentals of $3,437 in monthly rent in the first year with an increasing scale for years two through five.  The lease matures in March 2015 and provides for a five 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 rentals of $1,600 in monthly rent in the first year with a small increase in the second year.  The lease matures on December 31, 2012 and provides for a two year renewal option.

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

In October 2011, the Company entered into a lease for 13,137 square feet of warehouse and production space in Pompano Beach, Florida.  The lease provides for monthly rent of $6,350 and matures in 12 months.

We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs. None of these facilities are critical to our operations because suitable alternatives are available in substantially all of the locations where we conduct business. We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire or lease additional facilities and/or dispose of existing facilities.

Item 3.

Legal Proceedings.

The Company has received several threatened litigations from various suppliers and service providers typically over non-payment for goods or services. The 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 is vigorously challenging these claims on the grounds of the substandard materials or services provided. However, we established an accrual for certain media, materials and freight supplier claims of $143,051 and $111,777 at December 31, 2011 and December 31, 2010, respectively.

On June 13, 2011, the Company filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an investor relations and consulting agreement entered into on or about October 15, 2010 whereby the Company paid a third party approximately $20,000 and 230,000 shares of restricted common stock in consideration of investor relations and consulting services. The Company has demanded return of the 230,000 shares of restricted stock and recovery of costs and other damages.  The third party has filed a counter claim for breach of the agreement. The Company intends to vigorously defend this claim.



8



During 2011, the Company also filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an agreement entered into on or about May 18, 2010 whereby the Company paid a third party approximately $500 and 200,000 shares of restricted common stock in consideration of consulting services. The Company has demanded return of the 200,000 shares of restricted stock and recovery of costs and other damages. The claim was dismissed for lack of jurisdiction and the Company re-filed the action in the Supreme Court, New York County, New York on or about January 11, 1012 seeking rescission of said agreement of May 18, 2010, and the return of $500 and 200,000 shares of restricted common stock..

We have been notified by our insurance carrier, Hartford, that a worker at the Velocity production facility has filed a claim regarding a cut to her finger received while allegedly packaging eye droppers for one of our products. We do not believe this claim has merit and do not expect to incur any material costs not covered by our insurance, associated with this claim.

It is impossible for us to predict with any certainty the outcome of pending disputes, and unless otherwise stated below, we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations.

Item 4.

Mine Safety Disclosures.

None.



9



PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is quoted on the OTC Bulletin Board under the symbol DSKX. Quotation commenced during the quarter ended March 31, 2010. The range of closing prices for our common stock, as reported on the OTC Bulletin Board during each quarter since March 31, 2010 was as follows. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of March 30, 2012, the closing sale price of our common stock as reported on the OTC Bulletin Board was $0.24.

 

 

Calendar Year 2010

 

 

 

High Bid

Low Bid

 

 

First Quarter

$  -0-

$  -0-

 

 

Second Quarter

$0.35

$0.30

 

 

Third Quarter

$0.33

$0.15

 

 

Fourth Quarter

$0.38

$0.30

 

 

 

 

 

 

 

Calendar Year 2011

 

 

 

High Bid

Low Bid

 

 

First Quarter

$0.74

$0.37

 

 

Second Quarter

$0.45

$0.36

 

 

Third Quarter

$0.43

$0.31

 

 

Fourth Quarter

$0.38

$0.33

 


Holders

As of December 31, 2011, there were approximately 325 security holders of record  of our common stock.

Dividend Policy

We have not paid any cash dividends on our common stock and do not plan to pay any such dividends in the foreseeable future. We currently intend to use all available funds to develop our business. We can give no assurances that we will ever have excess funds available to pay dividends.

Recent Sales of Unregistered Securities

In addition to those unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission, during the period covered by this report, we have sold securities without registration under the Securities Act of 1933, as amended, in reliance upon the exemption provided under Section 4(2), as provided below.  The securities issued contain a legend restricting transfer absent registration or applicable exemption.  The security holders received current information about the Company and had the opportunity to ask questions about the Company.

During the fourth quarter of 2011 the Company issued 19,256 shares of common stock for services provided by consultants valued at $0.38 per share, which resulted in an expense of $7,408.

During October 2011 the Company issued 2,502,877 shares of its common stock pursuant to the exercise of outstanding options and warrants previously issued to a service provider. The options and warrants were exercised at $0.01 per share.

Item 6.

Selected Financial Data.

Not required for smaller reporting companies.



10



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Introductory Statements

Information included or incorporated by reference in this filing may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

This filing contains forward-looking statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. 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” below 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.

Overview

Divine Skin, Inc. is a Florida corporation organized on January 26, 2007. Divine Skin, Inc. and its subsidiaries (collectively, the “Company” or “Divine Skin”) develop, market and sell products for skin care hair care and health care needs. Through its predecessors, the Company has been developing and marketing hair care and personal care products for over ten years. In January 2007 the operations of Divine Skin, Inc. (a New York company), were terminated and its assets were distributed to its shareholders. The Company currently conducts business under the “Divine Skin” trade name and also under the “DS Laboratories” trade name. We own 100% of the outstanding common shares of DS Laboratories, Inc. (a Florida company), which was formed in January 2007 to secure the DS Laboratories trade name. All of the issued and outstanding shares of DS Laboratories were transferred to the Company for nominal consideration during January 2009.

In January 2009, the Company also acquired 100% of the outstanding shares of Sigma Development and Holding Co., Inc. for a nominal amount. Sigma was founded by our Vice President’s father. 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. We currently distribute hair growth products, facial moisturizers and anti-aging facial cleansers through Sigma. In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company. Polaris was founded for marketing purposes to distribute Polaris branded versions of the Company’s products through physicians and foreign distributors. We currently distribute hair care products through Polaris.

The Company currently maintains a network of specialty retailers across North America and distributors throughout Europe, Asia and South America. Divine Skin researches and formulates its own products. We currently offer skin care, personal care and hair care products.

We develop, market and sell these products through specialty retailers, spas, salons and other distributors. Our products are produced through various third party manufacturers on an order-by-order basis.

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



11



Consolidated 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:

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.

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.

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.



12



The Company accepts product returns and will issue a credit, refund or product exchange. Product returns and allowances during 2011 were approximately $613,000. The Company has established a product return reserve of $100,252 as of December 31, 2011.

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.

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 years ended December 31, 2010 and December 31, 2011. 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.

Year Ended December 31, 2011 (“YTD-2011”) to the Year Ended December 31, 2010 (“YTD-2010”)

Revenues, net -- Total net revenues increased $4,228,056 or 77.7%, from $5,444,805 (YTD-2010) to $9,672,861 (YTD-2011). The Company’s product revenues represent primarily sales of Revita and Spectral DNC, which collectively represent 38% of total sales and Revita Cor and Spectral DNC-L, which together account for approximately 17% of total sales.  Sales of introduction packs containing an assortment of new products accounted for 9% of total sales during 2011.

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 27% of the Company’s total revenues during 2011.

Cost of Goods Sold -- Total cost of goods sold increased $2,868,801 or 152.3%, from $1,883,160 (YTD-2010) to $4,751,961 (YTD-2011).  The increase was due to our increase in sales and changes in formula costs and production.  Had our sales mix and production cost structure remained consistent with 2010’s structure we would have expected a $1,373,991 increase related to our increase in sales. Therefore, during 2011, $1,377,971 of the increase in cost of goods sold was attributable to changes in product mix, increased material costs and increased production costs and to acquire market share.  



13



Selling and Marketing Costs -- Selling and marketing costs increased $1,229,807 or 75,6%, from $1,626,675 (YTD-2010) to $2,856,482 (YTD-2011). The increase is primarily due to the following:

Increases in:

·

$838,163 for consulting and commission costs, the majority due to increased costs of distribution representatives related to the expansion of our customer base and growing our sales,

·

$180,681 for marketing and promotion costs incurred to broaden our product offering and promote additional sales,

·

$71,858 for warehousing costs as a result of transferring a portion of our outsourced warehousing activities to “in house” facilities,

·

$56,784 for product development resulting from improving our formulas and expanding our product lines,

·

$76,150 for travel and entertainment costs incurred to expand and promote additional sales and,

·

$14,403 net, for other selling and marketing costs.

Partially offset by decreases in:

·

$8,232 for postage as a result of increased use of electronic media.

General and Administrative Costs -- General and administrative costs increased $934,318 or 44.0%, from $2,123,670 (YTD-2010) to $3,057,988 (YTD-2011). The increase is due to the following:

Increases in:

·

$264,849 for personnel costs due to increased staffing as a result of our expanding operations,

·

$85,055 for amortization and depreciation expense associated primarily with amortizing various deferred costs such as a prepaid operations consulting and the exclusive distribution rights agreement,

·

$85,218 for increased bad debts as a result of expanded sales,

·

$452,366 for professional fees for financial consultants and fees to attorneys and accountants related to costs of regulatory filings and reporting,

·

$38,428, for rent as a result of expanded facilities, and

·

$58,041 net, for various other general and administrative costs.

Partially offset by decreases in:

·

$49,639 for office expenses.

Other Income -- Other income decreased $26,209 or 67.4% from $38,887 income (YTD-2010) to $12,678 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.

Net Loss -- Net Loss increased $831,079 or 531.2% from a $149,813 Net Loss (YTD-2010) to $980,892 Loss (YTD-2011).

Liquidity and Capital Resources

We had working capital of $4,306,774 at December 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



14



subscriptions to purchase shares under a private placement which we began accepting subscriptions in early 2009, through other private sales of our common stock and through a recent Securities Purchase Agreement.

Based on our current plans for the next 12 months, we anticipate that current working capital and 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 2012. 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, 2011, the Company accepted an aggregate of $2,069,500 from 16 investors to subscribe for 8,039,281 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 $459,769 which consisted of 15% sales commission, a 5% due diligence fee and payment of expenses of up to 10% of gross proceeds. As a result, the Company netted $1,609,731 in proceeds from the subscription.

Also during the year ended December 31, 2011, the Company closed on a Securities Purchase Agreement for an aggregate of $1,730,000 from 4 investors to subscribe for 6,178,572 shares of our common stock. The SPA provides for issuance costs which amounted to $140,100 in cash and $24,674 in warrants. As a result, the Company netted $1,565,226 in proceeds.

Subsequent Events

On March 30, 2012, the Company closed on $1.5 million credit facility provided by a financial institution. The credit facility provides for asset based lending collateralized by all assets of the Company. Advances are based on 80% of qualified accounts receivable and 40% of finished goods inventory. The credit facility provides for interest and bank fees, which currently aggregate to 8% (prime plus 3% plus 1.75% asset monitoring fees and other fees) per annum and expires March 24, 2014, and may be renewed under certain conditions. The credit facility is personally guaranteed by our Chief Executive Officer and, under certain conditions, may be called upon demand. The credit facility also provides for a referral fee of 4% per annum for 3 years.

Cash Flows for the Year Ended December 31, 2011

Cash Flows from Operating Activities

Operating activities used net cash for the year ended December 31, 2011 of $2,013,053. Net cash used reflects an adjusted net loss for the year ended of approximately $183,395, as adjusted for various items which impact net income but do not impact cash during the period, such as issuance of warrants or depreciation and amortization. Net cash used also reflects $1,829,658 of cash used for net changes in working capital items, primarily from financing provided by vendors, which included:

·

$1,304,182 used by an increase in accounts receivable as a result of increased sales,

·

$993,105 used by an increase in inventory to support increased sales,

·

$417,003 provided by a increase in accounts payable and accrued expenses as a result of expanded  payment terms from suppliers, and

·

$50,626 provided by an increase in other current liabilities and assets, net.

Cash Flows used in Investing Activities

Our investing activities used $48,640 in net cash during the year ended December 31, 2011. Net cash used is composed primarily of purchases of furniture and equipment.

Cash Flows from Financing Activities

Our financing activities provided net cash of $3,199,631 for the year ended December 31, 2011. We raised this capital through the private sale of our common shares to private qualified investors and through our recent Securities Purchase Agreement.



15



Financial Position

Total Assets -- Our total assets increased $3,160,132 or 107.3% from $2,943,860 as of December 31, 2010 to $6,103,992 as of December 31, 2011 primarily as a result of a net increase in current assets of $3,228,880 the components of which are discussed further below and a net increase in furniture and equipment of $34,156.  Increases in total assets were partially offset by decreases in intangible assets and other assets of $102,905 and an increase in cash of $1,137,938.

Current Assets -- The net increase in current assets of $3,228,880 was primarily associated with a $993,105 increase in inventory levels, $1,150,499 increase in accounts receivable, a decrease in other current assets of $52,661 and a $1,137,938 increase in cash.  These net increases are primarily driven by the need to support increased sales, but are more specifically discussed as follows.

Inventory -- Inventory levels increased 84%, primarily in increased materials to support expanded production to keep pace with increasing sales.

Increased inventory on hand at December 31, 2011, represents approximately 35.3% of COGS or a 4.2 month supply based on the sell through rate achieved for the year ended December 31, 2011. Management believes that the sales achieved in 2011 will continue throughout fiscal year 2012. Management also understands that these inventory decisions result in an inventory turnover rate of 2.8 times. Management intends to maintain this turnover rate in the future and its ultimate goal is to achieve at least a 3 times inventory turnover rate, once it has satisfactorily explored alternative production methodologies and established a profitable and sustainable production cost structure. Improving our inventory turns reduces the cash required to support expanding sales.

Accounts Receivable – Accounts receivable increased $1,150,499.  The increase represents a 155.9% increase in the accounts receivable balance at December 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. The increase is also the result of a high portion of fourth quarter sales occurring in the last month of the quarter and have not had enough time to collect consistent with a normal collection cycle.

Cash -- The $1,137,938 increase in cash is explained more fully by the preceding discussion of cash flows and by referring to the consolidated statements of cash flows included in the financial statements.

Sales of Equity Securities

In 2011, the Company raised capital through two capital sources, the private sale of shares to qualified investors and a security purchase agreement discussed above.  

Table of capital funding, less selling expenses

 

 

Common

Stock

Proceeds

 

Selling

Expenses

 

Net

Proceeds

 

 

 

 

 

 

 

 

 

 

 

 

 

Private sales to qualified investors

 

$

2,069,500

 

$

459,769

 

$

1,609,731

 

Securities Purchase Agreement

 

 

1,730,000

 

 

140,100

 

 

1,589,900

 

TOTAL

 

$

3,799,500

 

$

599,869

 

$

3,199,631

 


Material Commitments

None.

Off Balance Sheet Arrangements

None.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.



16



Recent Accounting Pronouncements

Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.

Revenue Recognition:  On January 1, 2011, the Company adopted FASB ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.”   This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Fair Value Measurement: In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).  This ASU was issued to provide largely identical guidance about fair value measurement and disclosure requirements for entities that disclose the fair value of an asset, a liability, or an instrument classified in shareholders' equity in their consolidated financial statements as that provided in the International Accounting Standards Board's new IFRS 13, Fair Value Measurement. This ASU does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under GAAP. This guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that results from applying the ASU to quantify the total effect, if practicable. The Company believes the adoption of this guidance will not have a material impact on its financial statement disclosures.

Fair Value of Financial Instruments. The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

Comprehensive Income: In June 2011, the FASB issued new guidance that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total for comprehensive income. The entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements(s) where the components of net income and the components of other comprehensive income are presented. The guidance is to be applied retrospectively, for fiscal periods and interim periods within those years, beginning after December 15, 2011 and early adoption is permitted. In December 2011, the FASB issued new guidance deferring the changes in the June 2011 relating to presentation of classification adjustments. The Company’s adoption of the new guidance, other than that related to presentation of reclassification adjustments, as of January 1, 2012 is not expected to have a material impact on its consolidated financial position, results of operations and cash flows.



17



Intangibles – Goodwill and Other:  In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The amended guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.

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 consolidated financial statements.

Other ASUs not effective until after December 31, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.

Risks Related to Our Business and Industry

We had a net loss of $149,813 and $980,892for the year ended December 31, 2010 and year ended December 31, 2011, respectively, and we have historically incurred losses and may incur losses in the future that may adversely affect our financial condition

We had a net loss of $149,813 and $980,892 for the year ended December 31, 2010 and year ended December 31, 2011, respectively.  We also incurred net losses of $316,222 for the year ended December 31, 2009.  In the event we are unable to sustain increased gross margins, reduced costs and/or continue to generate sufficient additional revenues to offset our costs at levels achieved in the year ended December 31, 2012 or better, we may sustain losses in the future.

Our ability to succeed depends on our ability to grow our business and achieve profitability.

The introduction of new products and services and expansion of our distribution channels have contributed significantly to our recent results, but we must continue to develop new and innovative ways to manufacture our products and expand our distribution in order to maintain our growth and achieve profitability. Our future growth and profitability will depend upon a number of factors, including, but not limited to:

·

Our ability to manage costs;

·

The increasing level of competition in the skin care and personal care industry;

·

Our ability to continuously offer new or improved products;

·

Our ability to maintain efficient, timely and cost-effective production and delivery of our products;

·

Our ability to maintain sufficient production capacity for our products;

·

The efficiency and effectiveness of our sales and marketing efforts in building product and brand awareness;



18



·

Our ability to identify and respond successfully to emerging trends in the skin care, hair care and personal care industry;

·

The level of consumer acceptance of our products;

·

Regulatory compliance costs; and

·

General economic conditions and consumer confidence.

We may not be successful in executing our growth strategy, and even if we achieve targeted growth, we may not be able to sustain profitability. Failure to successfully execute any material part of our growth strategy would significantly impair our future growth and our ability to attract and sustain investments in our business.

The majority of our revenue is generated on the basis of purchase orders, rather than long term purchase commitments that may adversely affect our margins if we lose one or more of these customers.

While we have long-term agreements with several distributors, the majority of our customers may cancel a purchase order or defer shipments of our products at any time. Furthermore, most of our distributors can terminate their agreements with our Company on relatively short notice.  While we have maintained long-term relationships with many of our distributors and have not experienced significant cancellation or deferment of customer orders, the lack of long-term purchase commitments creates a risk that product demand may be reduced if orders are canceled or deferred. Furthermore, because of our inability to rely on enforceable purchase contracts, and our limited visibility into future customer demand, actual revenue may be different from our forecasts, which could adversely affect our margins and ability to maintain profitability

If we fail to promote and maintain our brand in the market, our businesses, operating results, financial condition, and our ability to attract customers will be materially adversely affected.

Our success depends on our ability to create and maintain brand awareness for our product offerings. This may require a significant amount of capital to allow us to market our products and establish brand recognition and customer loyalty. Many of our competitors in this market are larger than us and have substantially greater financial resources. Additionally, many of the companies offering similar products have already established their brand identity within the marketplace. We can offer no assurances that we will be successful in establishing awareness of our brand allowing us to compete in this market. The importance of brand recognition will continue to increase because low barriers of entry to the industries in which we operate may result in an increased number of direct competitors. To promote our brands, we may be required to continue to increase our financial commitment to creating and maintaining brand awareness. We may not generate a corresponding increase in revenue to justify these costs.

Our products may require clinical trials to establish benefit claims and their efficacy.

While the majority of the active ingredients in our current products have undergone independent third party clinical trials to establish benefit claims and efficacy, certain ingredients contained in our products and our future products may require clinical trials to establish our benefit claims or their safety and efficacy. Such trials can require a significant amount of resources and there is no assurance that such trials will be favorable to the claims we make for our products, or that the cumulative authority established by such trials will be sufficient to support our claims. Moreover, both the findings and methodology of all clinical trials are subject to challenge by scientific bodies. If the findings of clinical trials are challenged or found to be insufficient to support our claims, additional trials may be required, or products may require re-formation, in order for us to continue to market current products or before future products can be marketed. Furthermore, there are limited studies, if any, on our product ingredients combined in our product formulations. Accordingly, there can be no assurance that our products even when used as directed will have the effects intended. In the event we are unable to substantiate benefit claims or efficacy, or in the event that historical clinical trials are refuted, market acceptance for our products may decrease or not develop, which would have a detrimental effect on our business.



19



We may be unable to protect our intellectual property rights and may be subject to intellectual property litigation and infringement claims by third parties.

We intend to protect our unpatented trade secrets and know-how through confidentiality or license agreements with third parties, employees and consultants, and by controlling access to and distribution of our proprietary information. However, this method may not afford complete protection particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States and unauthorized parties may copy or otherwise obtain and use our products, processes or technology and there can be no assurance that others will not independently develop similar know-how and trade secrets. If third parties take actions that affect our rights or the value of our intellectual property, similar proprietary rights or reputation or we are unable to protect our intellectual property from infringement or misappropriation, other companies may be able to use our proprietary know-how to offer competitive products at lower prices and we may not be able to effectively compete against these companies.

We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, could expose us to the following risks, among others, we may be required to:

·

Defend against infringement claims which are expensive and time consuming;

·

Cease making, licensing or using products that incorporate the challenged intellectual property;

·

Re-design, re-engineer or re-brand our products or packaging; or

·

Enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.

We are dependent upon a few suppliers for a significant portion of our raw materials and our suppliers are dependent on the continued availability and pricing of raw materials, either of which could negatively affect our ability to manage costs and maintain profitable operating margins.

We currently purchase a majority of our raw material from approximately eight different suppliers with whom we have no written purchase contracts. Any supplier and any order may be terminated or rejected by any supplier at any time. Our reliance on open orders, no preference or assurances from suppliers, and our reliance on three primary suppliers, creates a risk that our supply of raw materials may be interrupted at any time. We may not be able to timely source another supplier, resulting in further delays. We have tried to minimize these risks by maintaining inventories consistent with projected needs but can make no assurances that we will be able to maintain adequate stockpiles or that we will be able to acquire and stockpile raw materials at costs that can be passed on to customers. Our failure to ensure a steady supply of raw material or any significant interruption in the supply of raw materials could have a material adverse effect on our operations and ability to timely fulfill orders that could result in lost orders and revenue.

We rely on third-party suppliers and manufacturers to provide raw materials for our products and to produce our products, and we will have limited control over these suppliers and manufacturers and may not be able to obtain quality products on a timely basis or in sufficient quantity.

Substantially all of our products will be manufactured by unaffiliated manufacturers. We may not have any long-term contracts with our suppliers or manufacturing sources, and we expect to compete with other companies for raw materials, production and import capacity.

There can be no assurance that there will not be a significant disruption in the supply of raw materials from our intended sources or, in the event of a disruption, that we would be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. In addition, we cannot be certain that our unaffiliated manufacturers will be able to fill our orders in a timely manner.

If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional supplies of raw materials or additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new



20



manufacturing or raw material sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products and quality control standards. Any delays, interruption or increased costs in the supply of raw materials or manufacture of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

In addition, there can be no assurance that our suppliers and manufacturers will continue to provide raw materials and to manufacture products that are consistent with our standards. We may receive shipments of product that fail to conform to our quality control standards. In that event, unless we are able to obtain replacement products in a timely manner, we risk the loss of revenues resulting from the inability to sell those products and related increased administrative and shipping costs. In addition, because we do not control our manufacturers, products that fail to meet our standards or other unauthorized products could end up in the marketplace without our knowledge, which could harm our reputation in the marketplace.

We rely on limited intellectual property protection as an important element of competition.

We currently have trademark registration for most of our products. We rely on common law trademark rights to protect our unregistered trademarks as well as our trade dress rights. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. We intend to register our trademarks in certain jurisdictions where our products are sold.

Currently, we have no patents on our products. We will continue to use the current business strategy of adding proprietary blends to each product formula. More than the name trademark, the proprietary blend formula makes formula replication challenging for any possible competitor. We believe adding proprietary blends make replication quite difficult and expensive. However, to the extent we do not have patents on our products; another company may replicate one or more of our products. Although we seek to ensure that we do not infringe the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us.

Like other retailers, distributors and manufacturers of skin care and personal care products, we face an inherent risk of exposure to product liability claims in the event that the use of the products that we sell results in injury.

While management believes we are currently materially compliant with regulations covering our products, we may be subjected to various product liability claims, including claims that the products we sell contain contaminants, are improperly labeled or include inadequate instructions as to use or inadequate warnings concerning side effects and interactions with other substances. In addition, we may be forced to defend lawsuits. While to date we have never been subject to any product liability claim, we cannot predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, we may not have adequate resources in the event of a successful claim against us. If our insurance protection is inadequate and our third-party vendors do not indemnify us, the successful assertion of product liability claims against us could result in potentially significant monetary damages. In addition, interactions of our products with other similar products, prescription medicines and over-the-counter drugs have not been fully explored.

We may also be exposed to claims relating to product advertising or product quality. People may purchase our products expecting certain physical results, unique to skin care and personal care products. If they do not perceive expected results to occur, certain individuals or groups of individuals may seek monetary retribution.

In the future we could be subject to additional laws or regulations by the FDA or other federal, state or foreign regulatory authorities or subject to more stringent interpretations of current laws or regulations which may adversely impact our business and operations.

We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. The FDA or other governmental regulatory bodies could require the reformulation of certain products to meet new standards or FDA approval prior to marketing and sale of certain products. Any or all of such requirements could have a materially adverse affect on our business, financial



21



condition, results of operations and cash flows.  The cost to comply with new or changing regulations could be material.  Furthermore, we can not provide any assurances that any product would ultimately comply with new or changing regulations.

Our business may be adversely affected by unfavorable publicity within the skin care or personal care market.

We believe that the skin care and personal care markets are significantly affected by national media attention. As with any retail provider, future scientific research or publicity may not be favorable to the industry or to any particular product, and may not be consistent with earlier favorable research or publicity. Because of our dependence on consumers’ perceptions, adverse publicity associated with illness or other adverse effects resulting from the use of our products or any similar products distributed by other companies and future reports of research that are perceived as less favorable or that question earlier research, could have a material adverse effect on our business, financial condition and results of operations. We are highly dependent upon consumers’ perceptions of the safety and quality of our products as well as similar products distributed by other companies. Thus, the mere publication of reports asserting that skin care or personal care products may be harmful or questioning their efficacy could have a material adverse effect on our business, financial condition and results of operations, regardless of whether such reports are scientifically supported or whether the claimed harmful effects would be present at the dosages recommended for such products.

Our success is dependent upon the successful introduction of our new products and success in expanding the demand for existing brands.

We believe the growth of our net sales is substantially dependent upon our ability to introduce our products to the public. At present, we have limited resources to spend on advertising and marketing therefore we will rely, to a large extent, on relationship with strategic partners to assist in our development of distribution channels. Our ability to meet future obligations is dependent in large measure on the success of our product sales. We expect to introduce additional products. The success of new products is dependent upon a number of factors, including our ability to formulate products that will appeal to consumers and respond to market trends in a timely manner. There can be no assurance that our efforts to formulate new products will be successful or that consumers will accept our new products. In addition, products experiencing strong popularity and rapid growth may not maintain their sales volumes over time.

We do not have long-term contracts with suppliers and manufacturers and we are dependent on the services of these third parties.

We purchase all of our products from third-party suppliers and manufacturers pursuant to purchase orders, but without any long-term agreements. In the event that a current supplier or manufacturer is unable to meet our manufacturing and delivery requirements at some time in the future, we may suffer short-term interruptions of delivery of certain products while we establish an alternative source. While we believe alternative sources are in most cases readily available and we have also established working relationships with several third-party suppliers and manufacturers, none of these agreements are long term. We also rely on third-party carriers for product shipments, including shipments to and from our distribution facilities. We are therefore subject to the risks, including employee strikes and inclement weather, associated with our carrier’s ability to provide delivery services to meet our fulfillment and shipping needs. Failure to deliver products to our customers in a timely and accurate manner would harm our reputation and our business and results of operations.

The skin care, hair care and personal care product markets are intensely competitive and the strengthening of any of our competitors could harm our business.

The skin care, hair care and personal care products industry is intensely competitive. Many competitors have greater name recognition and financial resources, which may give them a competitive advantage. Our competitors may also be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence our continuing and potential independent associates and members to buy products from competitors rather than from us. Such competition could adversely affect our business and current market share.



22



Many of our competitors have substantially greater financial, technical and human resources than we do.

Our competitors may succeed in formulating products that are more effective than those currently developed by us. Progress by other researchers in areas similar to those being explored by us may result in further competitive challenges. In addition, academic institutions, government agencies, and other public and private organizations conducting research may seek patent protection with respect to potentially competitive products. They may also establish exclusive collaborative or licensing relationships with our competitors.

In addition, large pharmaceutical companies compete with others and with us in the skin care and personal care product industry. Increased competition from such companies could have a material adverse effect on us because such companies have greater financial and other resources available to them and possess manufacturing, distribution and marketing capabilities far greater than ours.

We also face competition in both the health food store and mass market distribution channels from private label products offered by health and natural food store chains, drugstore chains, mass merchandisers and supermarket chains.

Risks Related to Our Common Stock

Because the market for our common stock is limited, persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid for them.

Our common stock trades on the Bulletin Board which is not a liquid market. There is currently only a limited public market for our common stock. We cannot assure you that an active public market for our common stock will develop or be sustained in the future. If an active market for our common stock does not develop or is not sustained, the price may continue to decline.

Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.

Due to factors beyond our control, our stock price may be volatile.

Any of the following factors could affect the market price of our common stock:

·

Our failure to increase revenue in each succeeding quarter;

·

Our failure to achieve and maintain profitability;

·

Our failure to meet our revenue and earnings guidance;

·

The loss of distribution relationships

·

The sale of a large amount of common stock by our shareholders;

·

Our announcement of a pending or completed acquisition or our failure to complete a proposed acquisition;

·

Adverse court ruling or regulatory action;

·

Our failure to meet financial analysts’ performance expectations;

·

Changes in earnings estimates and recommendations by financial analysts;

·

Changes in market valuations of similar companies;

·

Short selling activities;

·

Our announcement of a change in the direction of our business;

·

Our inability to manage our international operations;



23



·

Actual or anticipated variations in our quarterly or in our forecasted results of operations; or

·

Announcements by us, or our competitors, of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.

Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.

It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we acquire additional capital.

Shares eligible for sale or convertible into shares in the future could negatively affect our stock price and dilute shareholders

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock or the perception that these sales could occur. This might also make it more difficult for us to raise funds through the issuance of securities. As of December 31, 2011, we had 105,029,613 issued and outstanding shares of common stock of which our officers and directors held or controlled 72,440,366 shares of common stock (excluding outstanding preferred shares).

As of the date of this report, there are 10,000,000 shares of Series A preferred stock that is convertible into shares of common stock on a one to one basis. These preferred shares are held by our officers and directors and founders. Such shares vote on a 1 to 2 basis and vote with the common stock, except as otherwise required under Florida law. Shares of Series A Preferred Stock are convertible into shares of common stock on a one-to-one basis, at any time, at the discretion of the holder and automatically on September 15, 2012. In addition, at December 31, 2011, the Company has outstanding approximately 2,538,130 warrants exercisable at $0.01 per share and 2,004,450 warrants exercisable at $0.50 per share.

We have not issued options or other securities under our equity incentive plan; however, we may issue and/or register additional shares, options, or warrants in the future in connection with acquisitions, compensation or otherwise. We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of these shares for future sale will have on the market price of our common stock.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 8.

Financial Statements and Supplementary Data.

The requirements of this Item can be found beginning on page F-1 found elsewhere in the Annual Report.

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.



24



Item 9A.

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 December 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 December 31, 2010 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 December 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. The limited resources and limited number of employees resulted in the Company issuing 2,502,877 shares of common stock to a consultant upon receipt of notice of exercise of outstanding warrants without receiving the exercise price of the warrants.

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.

This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report.

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



25



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.

Item 9B.

Other Information.

None.



26



PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

The following table sets forth certain information regarding our executive officers, key employees and directors as of the date of this report. Directors are elected annually and serve until the next annual meeting of shareholders or until their successors are elected and qualify. Officers are elected by our board of directors and their terms of office are at the discretion of our board.  

Name

 

Age

 

Position

Daniel Khesin  

 

32

 

President, Chief Executive Officer, Principal Accounting Officer and Chairman

Leonid Smirnov(1)

 

32

 

Vice President

Michael Paul Strong

 

32

 

Vice President of Sales

———————

(1)

Effective January 31, 2012, Leonid Smirnov advised the Company that he was resigning from serving as an executive officer of the Company for personal reasons.  Mr. Smirnov’s resignation was not the result of any disagreement with the Company on any matters relating to the Company’s operations, policies or practices.  Mr. Smirnov intends to remain with the Company on a consulting basis.


Daniel Khesin has served as President and CEO of the Company since its inception. Prior to that time, Mr. Khesin was CEO of DK Design Group, Inc., a professional audio company, where he managed investments, engaged in the incubation of new technology and developed a distribution network from January 2004 to 2005. Mr. Khesin was Vice President of Operations of Free Razor, LLC, a continuity program for personal care products from 2003 to 2004. Mr. Khesin attended Hunter College. Mr. Khesin was chosen as a director for his experience within the personal care industry.

Leonid Smirnov served as Vice President of the Company since its inception through January 2012. From February 2004 to October 2005 Mr. Smirnov served as Vice President with DK Design Group, Inc., where he was responsible for product development, design and marketing. Mr. Smirnov has an arts degree from Queens College.

Michael Paul Strong has served as Vice President of Sales of the Company since its inception. Prior to 2005, Mr. Strong was a language instructor in Rio de Janeiro, Brazil.

Employment Agreements

We have not entered into employment agreements with any of our officers. Salaries payable to our officers are subject to adjustment and deferral based on operations and cash flow of the Company. Each of our officers are eligible to receive and participate in all benefit, bonus, retirement, health, insurance and incentive programs provided by the Company for its employees.

Consulting Agreement

In January 2009, the Company entered into a consulting agreement with Abner Silva, a third party consultant. Under the agreement, Mr. Silva provides advisory services to the Company, including but not limited to investor relations and general business matters. The agreement was for an initial term of 12 months. In consideration for the services provided by the consultant, the Company initially issued a warrant to purchase up to 2,000,000 shares of the Company’s common stock, at $0.01 per share for a period of five years from the date of issuance, exercisable in 200,000 share increments over the 10 calendar quarters commencing on the date the Company is approved for quotation on the OTC Bulletin Board.  The agreement has been extended on a month to month basis and the Company may provide Mr. Silva with additional compensation at the discretion of the board of directors.  Mr. Silva also assisted the Company in its private placement under Regulation S and received certain fees and reimbursement of expenses in connection with the private placement.



27



Advisory Board

Effective February 1, 2011, the Company established an advisory board. The purpose of the advisory board is to provide business advice and recommendations to management of the Company. The board of directors may compensate or reimburse advisory board members for their expenses.  There are currently no active advisory board members.

On January 12, 2011, we entered into a two-year consulting agreement with Mr. Powell.  Under the agreement, as amended, Mr. Powell serves as management consultant for the Company’s product distribution.  In consideration of Mr. Powell’s services, the Company shall pay Mr. Powell a monthly fee of $8,000.  In addition, during the first year of the agreement, Mr. Powell shall be entitled to receive a 5% commission on all net invoices from revenues generated from distribution relationships developed by Mr. Powell.  During the second year of the agreement, Mr. Powell shall be entitled to receive a 2.5% commission on all net invoices from revenues generated from distribution relationships developed by Mr. Powell. The agreement was terminated in December 2011.

Board of Directors

Our Board of Directors currently consists of one director. Our Bylaws provide that our board shall consist of not less than one or more than ten individuals. The terms of directors expire at the next annual shareholders’ meeting unless their terms are staggered as permitted in our Bylaws. Each shareholder is entitled to vote the number of shares owned by him for as many persons as there are directors to be elected. Shareholders do not have a right to cumulate their votes for directors.

Director Compensation

Currently, we do not pay our directors any cash or other compensation for their services as director. In the future, we may consider appropriate forms of compensation.

Committees

To date, we have not established a compensation committee, nominating committee or an audit committee. Our board of directors review the professional services provided by our independent auditors, the independence of our auditors from our management, our annual financial statements and our system of internal accounting controls. None of the members of our board of directors are considered financial experts as defined under Regulation S-K.

Code of Ethics

Our Board has adopted a Code of Ethics that applies to all of our employees, including our Chief Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to our directors. The Code of Ethics provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations, including insider trading, corporate opportunities and whistle-blowing or the prompt reporting of illegal or unethical behavior.  A copy of the Code of Ethics is posted on our website (www.divineskin.com).  A request for a copy can be made in writing to Divine Skin, Inc., 1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139, Attention: Mr. Daniel Khesin.  

Shareholder Communications

Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Divine Skin, Inc., 1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139, Attention: Mr. Daniel Khesin., or by facsimile (888) 404-7770.  Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.



28



Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and the other equity securities. Officers, directors and 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.  Based solely on a review of the copies of the forms furnished to us, and written representations from reporting persons that no Form 5s were required, we believe that all filing requirements were complied with during 2011.

Item 11.

Executive Compensation.

The following information is related to the compensation paid, distributed or accrued by us to our Chief Executive Officer (principal executive officer) serving at the end of the last fiscal year and the two other most highly compensated executive officers whose total compensation exceeded $100,000 in 2011 or 2010.  We refer to these persons as the Named Executive Officers.

2011 Summary Compensation Table

Name/Principal

Position

 

Year

 

Salary
($)

 

 

Bonus
($)

 

 

Stock
Awards

 

 

Options
($)

 

 

Non-Equity
Incentive Plan
Compensation
($)

 

 

Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings

 

 

All Other
Compen-
sation
($)

 

Total
($)

 

Daniel Khesin

 

2011

 

$

203,393

 

 

 

 

 

 

 

 

 

 

 

 

 

$

203,383

 

 

2010

 

$

164,975

 

 

 

 

 

 

 

 

 

 

 

 

 

$

164,975

 

Leonid Smirnov(1)

 

2011

 

$

127,081

 

 

 

 

 

 

 

 

 

 

 

 

 

$

127,081

 

 

2010

 

$

102,000

 

 

 

 

 

 

 

 

 

 

 

 

 

$

102,000

 

Michael Paul Strong

 

2011

 

$

226,089

 

 

 

 

 

 

 

 

 

 

 

 

 

$

226,089

 

 

 

2010

 

$

166,314

 

 

 

 

 

 

 

 

 

 

 

 

 

$

166,314

 

———————

(1)

Resigned effective January 31, 2012.

Employment Agreements

We have not entered into employment agreements with, nor have we authorized any payments upon termination or change-in-control to any of our executive officers or key employees.

2011 Option Grants To Executive Officers

None.

Director Compensation

No annual compensation was paid to our directors during 2011 or 2010.

Outstanding Equity Awards At Fiscal Year-End

None.



29



Equity Compensation Plan Information

The following chart reflects the number of awards granted under equity compensation plans approved and not approved by shareholders and the weighted average exercise price for such plans as of December 31, 2011.

Name Of Plan

 

Number of shares

of common stock to

be issued upon exercise

of outstanding
options

(a)

 

Weighted-average

exercise price of

outstanding
options

(b)

 

Number of shares remaining
available for future issuance
under equity compensation
plans (excluding the shares reflected in column (a))

(c)

 

Equity compensation plans approved by
security holders

     

     

     

5,000,000

 

 

 

 

 

 

 

 

 

Equity compensation plans not approved
by security holders

 

 

 

 

Total

 

 

 

 

 

5,000,000

 


In January 2009, the directors and a majority of our shareholders adopted our 2009 Equity Incentive Plan (the “Plan”). We have reserved an aggregate of 5,000,000 shares of common stock for issuance pursuant to options or restricted stock granted under the Plan. As of the date of this Registration Statement, we have issued no options or restricted stock under the Plan. The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means of attracting and retaining key employees, directors and consultants for the Company and its subsidiaries. The Plan shall be administered by the board of directors until such time as a committee shall be appointed (the “Administrator”). Options granted under the Plan may either be options qualifying as incentive stock options (“Incentive Options”) under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or options that do not so qualify (“Non-Qualified Options”).

The price per share issuable upon exercise of an option shall be determined by the Administrator at the time of the grant and shall (i) in the case of an ISO, not be less than the fair market value of the shares on the date of grant; (ii) in the case of an ISO granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary, be at least 110% of the fair market value of the shares on the date of grant; or (iii) in the case of an NQSO, shall be no less than ninety percent (90%) of the fair market value per share on the date of grant. For the purposes of the Plan, the “fair market value” of the shares shall mean (i) if shares are traded on an exchange or over-the-counter market, the mean between the high and low sales prices of shares on such exchange or over-the-counter market on which such shares are traded on that date, or if such exchange or over-the-counter market is closed or if no shares have traded on such date, on the last preceding date on which such shares have traded or (ii) if shares are not traded on an exchange or over-the-counter market, then the fair market value of the shares shall be the value determined in good faith by the Administrator, in its sole discretion.

The per share purchase price of shares subject to options granted under the Plan may be adjusted in the event of certain changes in our capitalization, but any such adjustment shall not change the total purchase price payable upon the exercise in full of options granted under the Plan. Officers, directors and key employees of and consultants to us and our subsidiaries will be eligible to receive Non-Qualified Options under the Plan. Only our officers, directors and employees who are employed by us or by any of our subsidiaries thereof are eligible to receive Incentive Options.

The term of each option and the manner in which it may be exercised is determined by the Administrator, provided that no option may be exercisable more than ten years after the date of its grant and, in the case of an Incentive Option granted to an eligible employee owning more than 10% of our common stock, no more than five years after the date of the grant.

We have not issued any options, warrants or other equity or non-equity based incentives nor has any equity award/compensation has been awarded to, earned by, or paid to any of our executive officers, directors or key employees; therefore, we have omitted an Outstanding Equity Awards at Fiscal Year End Table as permitted under Regulation S-K. Further, as a “smaller reporting company” we are providing the scaled disclosures as permitted by Regulation S-K and therefore, have omitted a Grants of Plan Based Award Table, Options Exercised and Stock Vested Table, Pension Benefits Table and Nonqualified Deferred Compensation Table.



30



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table shows the number of shares and percentage of all shares of common stock issued and outstanding as of March 26, 2012, held by any person known to the Company to be the beneficial owner of 5% or more of the Company’s outstanding common stock, by each executive officer and director, and by all directors and executive officers as a group. As of March 26, 2012, we had 105,029,613 shares of common stock issued and outstanding.  The persons named in the table have sole voting and investment power with respect to all shares beneficially owned. Unless otherwise noted below, the address for each shareholder is 1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139.  

Name and Address of Beneficial Owner

 

Amount and Nature of
Beneficial Ownership

 

%
of Class

Daniel Khesin

   

49,194,475(1)

   

44.4%

Michael Paul Strong

 

21,048,066(2)

 

19.6%

Leonid Smirnov

 

12,197,825(3)

 

11.4%

Phoenix Investment Fund, Inc.

 

10,500,000(4)

 

  9.9%

All current officers and directors as a group
(2 persons)

 

70,242,523(1)(2)

 

62.1%

———————

(1)

Includes 5,500,000 shares of Series A Preferred Stock. Holders of the preferred stock shall be entitled to two votes for each share of preferred stock held and vote together with holders of common stock, except as otherwise required under Florida law. The preferred shares are convertible into shares of common stock on a one-to-one basis at the discretion of the holder of the preferred stock.

(2)

Includes 2,500,000 shares of Series A Preferred Stock. Holders of the preferred stock shall be entitled to two votes for each share of preferred stock held and vote together with holders of common stock, except as otherwise required under Florida law. The preferred shares are convertible into shares of common stock on a one-to-one basis at the discretion of the holder of the preferred stock.

(3)

Includes 2,000,000 shares of Series A Preferred Stock. Holders of the preferred stock shall be entitled to two votes for each share of preferred stock held and vote together with holders of common stock, except as otherwise required under Florida law. The preferred shares are convertible into shares of common stock on a one-to-one basis at the discretion of the holder of the preferred stock.

(4)

Investment and voting control held by Ezio da Fonseca. Address is Estrada das Canoas 320, Sao Conrado, Rio de Janeiro, Brasil.



31



Item 13.

Certain Relationships and Related Transactions, and Director Independence.

We have entered into an exclusive ten-year distribution agreement with Gamma Investors which provides Gamma Investors with the exclusive distribution rights throughout Brazil. In addition, we established a joint venture company with Gamma Investors and its affiliates, principally for the formulation and distribution of minoxidil based products throughout Brazil. During the third quarter of 2011 we transferred our interest in the joint venture to Gamma in consideration of Gamma agreeing to provide all required financing to complete the product. We have retained our distribution rights.. The principal of Gamma Investors is Ezio da Fonseca. Mr. Fonseca also holds investment and voting control of Phoenix Investment Fund, Inc. At December 31, 2010 and as of the date of the filing of this report, Phoenix Investment Fund, Inc. was a beneficial owner of in excess of 5% of our common stock.

During the three months ended March 31, 2011, the Company began distribution of nutraceutical products produced by NutraOrigin under an exclusive distribution agreement. NutraOrigin is owned by Alex Khesin, our Chairman’s father. The distribution agreement grants distribution rights to the Company to originate sales of NutraOrigin products in the United States, in exchange for 30% of net sales arranged by the Company. During the nine months ended September 30, 2011, the Company has sold approximately $40,000 in product from which it earned $12,000. There were no appreciable sales in 2010. Neither party has nor is obligated to invest in the other party or in this venture. In addition to the foregoing, in February 2011, the Company has also entered into a consulting agreement with Alex Khesin to provide general expertise in marketing and promoting nutraceutical products. The consulting agreement provided for a prepaid fee of $100,000, which is being earned ratably over the term of the agreement, which is one year. As of June 30, 2011, the final advance payment of $10,000 was due and ultimately paid on July 20, 2011.

The Company currently has no independent directors.

Item 14.

Principal Accounting Fees and Services.

Currently, our Board reviews and approves audit and permissible non-audit services performed by its independent registered public accounting firm of Cherry, Bekaert & Holland, LLP (“CBH”) and RBSM LLP (“RBSM”), as well as the fees charged for such services. In its review of non-audit service and its appointment of CBH the Company’s independent registered public accounting firm, the Board considered whether the provision of such services is compatible with maintaining independence. All of the services provided and fees charged by CBH and RBSM were approved by the Board, acting as our Audit Committee.  The following table shows the fees for the years ended December 31, 2011 and 2010.

 

 

CBH

 

RBSM

 

 

2011

 

2010

Audit Fees (1)

 

$

48,500

 

$

25,000

Audit Related Fees (2)

   

$

4,975

 

$

0

Tax Fees

 

$

0

 

$

0

All Other Fees

 

$

0

 

$

0

———————

(1)

Audit fees – these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements.

(2)

Audit related fees – these fees relate to the review of our most recent Registration Statement on Form S-1, as amended.



32



PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a) Documents filed as part of the report.

(1) All Financial Statements

(2) Financial Statements Schedule

(3) 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)

4.1

 

Form of Warrant dated October 4, 2011(6)

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)

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)

10.9

 

Securities Purchase Agreement dated October 4, 2011(6)

10.10

 

Registration Rights Agreement dated October 4, 2011(6)

16.1

 

Letter from former Auditor(5)

16.2

 

Letter from former Auditor(7)

21.1

 

List of subsidiaries of the Company (1)

23.1

 

Consent to Incorporate by reference Audit Report (Provided herewith)

23.2

 

Consent to Incorporate by reference Audit Report (Provided herewith)

31.1

 

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

31.2

 

Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Provided herewith)

32.1

 

Certification Pursuant to Section 1350 (Provided herewith)

32.2

 

Certification Pursuant to Section 1350 (Provided herewith)

99.1

 

Code of Ethics(4)

101.INS

*

XBRL Instance Document 

101.SCH

*

XBRL Taxonomy Extension Schema Document

101.CAL

*

XBRL Taxonomy Calculation Linkbase Document

101.DEF

*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

*

XBRL Taxonomy Extension Presentation Linkbase Document

———————

* These exhibits are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we incorporate them by reference.



33



(1)

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

(2)

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

(3)

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

(5)

Incorporated by reference to Form 8-K filed February 25, 2011.

(6)

Incorporated by reference to Form 8-K filed October 11, 2011.

(7)

Incorporated by reference to Amendment No. 1 to form 8-K filed July 11, 2011.



34



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 4, 2012

     

Divine Skin, Inc.

 

 

 

 

By:

/s/ Daniel Khesin

 

 

Daniel Khesin

 

 

Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

 

Title

 

Date

 

 

 

 

 

/s/ Daniel Khesin

 

Director

 

April 4, 2012

Daniel Khesin

 

 

 

 






35



[dskx_10k002.gif]


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and
Shareholders of Divine Skin, Inc. (d/b/a DS Laboratories)

We have audited the accompanying consolidated balance sheet of Divine Skin, Inc. (d/b/a DS Laboratories) as of December 31, 2011, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended. Divine Skin, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Divine Skin, Inc. (d/b/a DS Laboratories) as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Cherry, Bekaert & Holland, L.L.P.

Fort Lauderdale, Florida
April 4, 2012





F-1




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of

Divine Skin, Inc. (d/b/a DS Laboratories)


We have audited the accompanying consolidated balance sheet of Divine Skin, Inc. (d/b/a DS Laboratories) and Subsidiaries as of December 31, 2010 and the related consolidated statements of operations, changes in equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have nor were we engaged to perform, an audit of its Internal Control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

 

 

 





/s/ RBSM LLP


New York, New York

April 15, 2011





F-2



Divine Skin, Inc. (dba DS Laboratories) and Subsidiaries

Consolidated Balance Sheets

 

 

 

December 31,

 

 

December 31,

 

 

 

2011

 

 

2010

 

ASSETS

 

 

 

 

 

 

 

    

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash

 

$

1,284,343

 

 

$

146,405

 

Accounts receivable, net

 

 

1,888,453

 

 

 

737,954

 

Inventory

 

 

2,174,784

 

 

 

1,181,680

 

Prepaid expenses and other current assets

 

 

57,940

 

 

 

110,601

 

 

 

 

 

 

 

 

 

 

Total Current Assets

 

 

5,405,520

 

 

 

2,176,640

 

 

 

 

 

 

 

 

 

 

Furniture and Equipment, net

 

 

53,017

 

 

 

18,861

 

Intangible Assets, net

 

 

630,317

 

 

 

730,916

 

Other Assets

 

 

15,138

 

 

 

17,443

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

6,103,992

 

 

$

2,943,860

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,021,313

 

 

$

604,311

 

Other current liabilities

 

 

77,433

 

 

 

21,162

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

1,098,746

 

 

 

625,473

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

10,000

 

 

 

10,000

 

Common stock, $0.001 par value, 300 million shares authorized: 105,029,613 and 94,961,001 shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively

 

 

105,030

 

 

 

94,961

 

Additional paid-in-capital

 

 

6,512,141

 

 

 

2,824,459

 

Stock subscription

 

 

(100,000

)

 

 

(70,000

)

Accumulated deficit

 

 

(1,506,893

)

 

 

(528,293

)

 

 

 

 

 

 

 

 

 

Total Shareholders' Equity

 

 

5,020,278

 

 

 

2,331,127

 

Non-Controlling Interest

 

 

(15,032

)

 

 

(12,740

)

 

 

 

 

 

 

 

 

 

Total Equity

 

 

5,005,246

 

 

 

2,318,387

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

6,103,992

 

 

$

2,943,860

 


See accompanying notes to consolidated financial statements




F-3



Divine Skin, Inc. (dba DS Laboratories) and Subsidiaries

Consolidated Statements of Operations

For the Years Ended December 31, 2011 and 2010

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

2011

 

 

2010

 

 

 

 

 

 

 

    

 

                        

   

 

                        

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

 

 

 

 

 

 

 

 

$

10,368,735

 

 

$

5,401,957

 

Consulting and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

91,750

 

Less returns and allowances

 

 

 

 

 

 

 

 

 

 

(695,874

)

 

 

(48,902

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

 

 

 

 

 

 

 

 

 

9,672,861

 

 

 

5,444,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

 

 

 

 

 

 

 

 

4,751,961

 

 

 

1,883,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

4,920,900

 

 

 

3,561,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

 

 

 

 

 

2,856,482

 

 

 

1,626,675

 

General and administrative

 

 

 

 

 

 

 

 

 

 

3,057,988

 

 

 

2,123,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

 

 

 

 

 

 

 

 

 

5,914,470

 

 

 

3,750,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income (Loss)

 

 

 

 

 

 

 

 

 

 

(993,570

)

 

 

(188,700

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

 

454

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

12,224

 

 

 

38,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

 

 

 

 

 

 

 

 

12,678

 

 

 

38,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

 

 

 

 

 

 

 

 

(980,892

)

 

 

(149,813

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Non-Controlling Interest

 

 

 

 

 

 

 

 

 

 

2,292

 

 

 

12,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss Attributable to Shareholders of Divine Skin, Inc.

 

 

 

 

 

 

 

 

 

$

(978,600

)

 

$

(137,073

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

 

 

 

 

 

 

 

 

100,611,200

 

 

$

92,668,273

 

Earnings per share

 

 

 

 

 

 

 

 

 

$

(0.01

)

 

 

(0.00

)

 

See accompanying notes to consolidated financial statements




F-4



Divine Skin, Inc. (dba DS Laboratories) and Subsidiaries

Consolidated Statements of Changes in Equity

For the Years Ended December 31, 2011 and 2010


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Subscription/

 

 

 

 

 

Total

 

 

Non-

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid In

 

 

Stock

 

 

Accumulated

 

 

Shareholders'

 

 

Controling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Receivable

 

 

Deficit

 

 

Equity

 

 

Interest

 

 

Equity

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

 

 

 

 

444,000

 

 

 

444

 

 

 

156,556

 

 

 

 

 

 

 

 

 

 

 

157,000

 

 

 

 

 

 

157,000

 

Employee/associate compensation

 

 

 

 

 

 

 

 

 

 

25,000

 

 

 

25

 

 

 

4,475

 

 

 

 

 

 

 

 

 

 

 

4,500

 

 

 

 

 

 

4,500

 

Consulting - sales and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

8,039,281

 

 

 

8,039

 

 

 

2,061,461

 

 

 

 

 

 

 

 

 

 

 

2,069,500

 

 

 

 

 

 

 

2,069,500

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(459,769

)

 

 

 

 

 

 

 

 

 

 

(459,769

)

 

 

 

 

 

 

(459,769

)

For services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investor relations

 

 

 

 

 

 

 

 

 

 

85,000

 

 

 

85

 

 

 

34,515

 

 

 

(30,000

)

 

 

 

 

 

 

4,600

 

 

 

 

 

 

 

4,600

 

Employee/associate compensation

 

 

 

 

 

 

 

 

 

 

180,046

 

 

 

180

 

 

 

69,916

 

 

 

 

 

 

 

 

 

 

 

70,096

 

 

 

 

 

 

 

70,096

 

Consulting

 

 

 

 

 

 

 

 

 

 

100,641

 

 

 

101

 

 

 

42,050

 

 

 

 

 

 

 

 

 

 

 

42,151

 

 

 

 

 

 

 

42,151

 

Sold to SPA investors

 

 

 

 

 

 

 

 

 

 

6,178,572

 

 

 

6,179

 

 

 

1,723,821

 

 

 

 

 

 

 

 

 

 

 

1,730,000

 

 

 

 

 

 

 

1,730,000

 

Less: Issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(164,774

)

 

 

 

 

 

 

 

 

 

 

(164,774

)

 

 

 

 

 

 

(164,774

)

Shares Cancelled / Surrendered:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surrendered by founders

 

 

 

 

 

 

 

 

 

 

(7,017,805

)

 

 

(7,018

)

 

 

7,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants and Options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested for trading symbol

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

192,000

 

 

 

 

 

 

 

 

 

 

 

192,000

 

 

 

 

 

 

 

192,000

 

Issued for financial consulting services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134,244

 

 

 

 

 

 

 

 

 

 

 

134,244

 

 

 

 

 

 

 

134,244

 

Exercised

 

 

 

 

 

 

 

 

 

 

2,502,877

 

 

 

2,503

 

 

 

22,526

 

 

 

 

 

 

 

 

 

 

 

25,029

 

 

 

 

 

 

 

25,029

 

Issued for Placement Agent fees on SPA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,674

 

 

 

 

 

 

 

 

 

 

 

24,674

 

 

 

 

 

 

 

24,674

 

2011 Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(978,600

)

 

 

(978,600

)

 

 

(2,292

)

 

 

(980,892

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011

 

 

10,000,000

 

 

$

10,000

 

 

 

105,029,613

 

 

$

105,030

 

 

$

6,512,141

 

 

$

(100,000

)

 

$

(1,506,893

)

 

$

5,020,278

 

 

$

(15,032

)

 

$

5,005,246

 


See accompanying notes to consolidated financial statements




F-5



Divine Skin, Inc. (dba DS Laboratories) and Subsidiaries

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2011 and 2010

 

 

 

Year Ended

 

 

 

December 31,

 

 

 

2011

 

 

2010

 

 

    

                        

   

 

                        

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net Loss

 

$

(980,892

)

 

$

(149,813

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

200,722

 

 

 

118,178

 

Bad debts

 

 

41,032

 

 

 

28,546

 

Product return and advertising reserve

 

 

112,652

 

 

 

--

 

Stock issued for services

 

 

116,847

 

 

 

21,500

 

Warrants issued for financial services

 

 

134,244

 

 

 

133,600

 

Warrants vested for services

 

 

192,000

 

 

 

162,071

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,304,182

)

 

 

(77,015

)

Inventory

 

 

(993,105

)

 

 

(463,572

)

Prepaid expenses and other current assets

 

 

(5,644

 

 

(32,549

)

Accounts payable and accrued expenses

 

 

417,003

 

 

 

(340,589

)

Other current liabilities

 

 

56,270

 

 

 

7,768

 

Net cash used in operating activities

 

 

(2,013,053

)

 

 

(591,875

)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Purchase of furniture and equipment

 

 

(50,945

)

 

 

 

Purchase brand identity and supplier exclusive agreement

 

 

 

 

 

(106,666

)

Security deposits

 

 

2,305

 

 

 

(9,403

)

Net cash used in investing activities

 

 

(48,640

)

 

 

(116,069

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from sale of stock to others

 

 

2,069,500

 

 

 

844,500

 

Less Issuance costs

 

 

(459,769

)

 

 

(249,600

)

Proceeds from sale of stock under SPA

 

 

1,730,000

 

 

 

 

Less Issuance costs

 

 

(140,100

)

 

 

 

Net cash provided by financing activities

 

 

3,199,631

 

 

 

594,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in cash

 

 

1,137,938

 

 

 

(113,044

)

Cash, Beginning of Year

 

 

146,405

 

 

 

259,449

 

 

 

 

 

 

 

 

 

 

Cash, End of Year

 

$

1,284,343

 

 

$

146,405

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

 

Cash paid for taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Non-cash Items:

 

 

 

 

 

 

 

 

Issuance cost paid in warrants

 

$

24,670

 

 

$

 


See accompanying notes to consolidated financial statements




F-6



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS


Terms and Definitions


  

AICPA

American Institute of Certified Public Accountants

  

ASC

Accounting Standards Codification

  

ASU

Accounting Standards Update

  

FASB

Financial Accounting Standards Board

  

FIFO

First-in, First-out

  

GAAP (US)

Generally Accepted Accounting Principles as applied in the United States

  

IFRS

International Financial Reporting Standards

  

PPM

Private Placement Memorandum

  

SEC

Securities Exchange Commission

  

SFAS or FAS

Statement of Financial Accounting Standards

  

SPA

Security Purchase Agreement

  

Q411-QTR

Three months ended December 31, 2011

  

Q410-QTR

Three months ended December 31, 2010

  

Q411-YTD

Year ended December 31, 2011

  

Q410-YTD

Year ended December 31, 2010

  

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, the Company has been developing and marketing skin care and personal care products for over fifteen years. The Company has grown steadily over the last few years with a network of top specialty retailers and distributors throughout North America, Europe, Asia and South America. 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

  

·

Hair Loss and Hair Care

  

·

Health 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) were related through common shareholders.


In Q1 2009, the Company acquired 100% of the outstanding shares of DS Laboratories, Inc. (a Florida Corporation) and Sigma Development and Holding Co., both for a nominal amount. DS Laboratories has been idle since its inception in 2007. Sigma was founded as an upscale brand addition to the Company’s product portfolio. In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company, to distribute Polaris branded versions of the Company’s products that, for marketing purposes, are sold through physicians and foreign distributors. The primary operating entity is Divine Skin, Inc (a Florida corporation). The Company currently conducts business under the “Divine Skin” and “DS Laboratories” trade names.




F-7



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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


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 Q1 2011, the Company began distribution of nutraceutical products produced by NutraOrigin under an exclusive distribution agreement. As of December 31, 2011, the Company has not made or is required to make any investment in this venture. NutraOrigin is owned by our Chairman’s father.


In Q3 2011, the Company finalized discussions with DS Laboratories Brazil, LTDA, to modify its joint venture distribution agreement. In exchange for 100% ownership in the joint venture, our Brazilian distributor has committed to fully fund the product development and licensing of our products in Brazil. The Company retains its exclusivity for Brazilian distribution and expects to complete the licensure process and commence sales in Q2 2012. As of December 31, 2011, the Company has invested $26,000 in this venture.


In Q4 2011 the Company completed a SPA raising approximately $1.6 million, net of issuance costs.


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. All significant intercompany balances and transactions have been eliminated in consolidation.


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. The Company is also has been experiencing significant growth which puts serious strains on its cash requirements. If the Company is unsuccessful in securing adequate liquidity, its plans may be curtailed. Adverse changes in these areas could negatively impact the Company’s financial position, results of operations and cash flows.




F-8



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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


Cash


Cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. Substantially all of the Company’s cash deposits are held in one commercial banking institution.


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 December 31, 2011 and 2010, the provision for doubtful accounts was $114,791 and $73,759, respectively.  In addition, in 2011, the Company provided $100,252 for product returns and $12,400 for advertising credits.


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.


Furniture and Equipment


Furniture and equipment are recorded at cost and depreciation is provided using the straight line depreciation method over the estimated useful lives of the assets, which range from 5 to 7 years. The Company expensed $16,788 and $11,178 in depreciation during the year ended December 31, 2011 and 2010, respectively. Accumulated depreciation was $59 616 and $42,828 at December 31, 2011 and 2010, respectively. Expenditures for repairs and maintenance of equipment are charged to expense as incurred. Major replacements and betterments are capitalized and depreciated over the remaining useful lives of the assets.


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 during the time it was owned, and the variable interest held in Velocity Storage Packaging LLC.




F-9



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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


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.


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 significant. The Company has established a product return reserve of $100,252.


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, which amounted to $152,726 and $95,942 for the year ended December 31, 2011 and 2010, respectively.


Income Taxes


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




F-10



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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


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. Certain options and warrants are not included in the earnings per share calculation as their effect would be anti-dilutive. Warrants for 2,538,130 shares and options for 1,233,333 shares were excluded from the earnings per share calculation.


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.


Fair Value of Financial Instruments


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


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


Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.


Revenue Recognition: On January 1, 2011, the Company adopted FASB ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force.” This ASU amended the criteria for when to evaluate individual delivered items in a multiple deliverable arrangement and how to allocate consideration received. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.




F-11



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)


Fair Value Measurement: In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This ASU was issued to provide largely identical guidance about fair value measurement and disclosure requirements for entities that disclose the fair value of an asset, a liability, or an instrument classified in shareholders' equity in their consolidated financial statements as that provided in the International Accounting Standards Board's new IFRS 13, Fair Value Measurement. This ASU does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under GAAP. This guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that results from applying the ASU to quantify the total effect, if practicable. The Company believes the adoption of this guidance will not have a material impact on its financial statement disclosures.


Fair Value of Financial Instruments. The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:


Level 1 – Quoted prices in active markets for identical assets or liabilities.


Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.


Comprehensive Income: In June 2011, the FASB issued new guidance that gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total for comprehensive income. The entity is also required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements(s) where the components of net income and the components of other comprehensive income are presented. The guidance is to be applied retrospectively, for fiscal periods and interim periods within those years, beginning after December 15, 2011 and early adoption is permitted. In December 2011, the FASB issued new guidance deferring the changes in the June 2011 relating to presentation of classification adjustments. The Company’s adoption of the new guidance, other than that related to presentation of reclassification adjustments, as of January 1, 2012 is not expected to have a material impact on its consolidated financial position, results of operations and cash flows.


Intangibles – Goodwill and Other: In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. The amended guidance will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.


Other ASUs not effective until after December 31, 2011, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.



F-12



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4. – INVENTORY


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


  

 

2011

 

 

2010

 

Bulk product and raw materials

 

$

1,600,032

 

 

$

814,416

 

Merchandise inventory

 

 

375,810

 

 

 

204,018

 

Inventory in transit

 

 

198,942

 

 

 

163,246

 

  

 

$

2,174,784

 

 

$

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.


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 December 31, 2011 and 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 December 31, 2011 and 2010 consist primarily of:


  

 

2011

 

 

2010

 

Deferred advertising costs

 

$

--

 

 

$

65,000

 

Prepaid consulting services

 

 

100,000

 

 

 

35,000

 

Less: amortization

 

 

(83,333

)

 

 

--

 

Employee advances

 

 

28,273

 

 

 

8,083

 

Other prepaid

 

 

13,000

 

 

 

2,518

 

  

 

$

57,940

 

 

$

110,601

 


Deferred advertising costs – 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 commencing the campaign. The customer’s campaign commenced during Q1 2011, and accordingly, we expensed the deferred advertising.




F-13



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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


Prepaid consulting services – During the 2 nd and 3 rd quarters of 2010, we advanced funds to a consultant, who is our CEO’s father, to provide operational guidance in connection with our health care product line, which was launched in 2011. The agreement has been fully advanced and is being amortized over its term. $83,333 has been amortized in 2011.


NOTE 6. – INTANGIBLE ASSETS


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


 

 

2011

 

 

2010

 

Distribution rights

 

$

750,000

 

 

$

750,000

 

Less amortization of distribution rights

 

 

(168,750

)

 

 

(93,750

)

Net distribution rights

 

 

581,250

 

 

 

656,250

 

 

 

 

 

 

 

 

 

 

Pure Guild brand rights and supplier agreement

 

 

106,667

 

 

 

106,666

 

Less amortization of brand rights and supplier agreement

 

 

(57,600

)

 

 

(32,000

)

Net brand rights and supplier agreement

 

 

49,067

 

 

 

74,666

 

 

 

$

630,317

 

 

$

730,916

 


Distribution rights – During 2009, the Company issued 3,000,000 shares of common stock to a Brazilian distributor 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 2nd quarter of 2012. $75,000 was amortized during 2011. During, the 3 rd quarter of 2011, due to the costs involved, the Company entered into agreement with its joint venture partner, whereby the joint venture partner agreed to provide all required financing in exchange for 100% ownership of the joint venture. The Company retains its distribution rights.


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 $106,667 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. $25,600 was amortized during 2011.


The Company will continue to amortize its brand and distribution rights over the remaining life of the agreements as follows:


 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

Beyond

 

 

Total

 

Distribution Rights:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brazil (exclusive)

 

$

75,000

 

 

$

75,000

 

 

$

75,000

 

 

$

75,000

 

 

$

281,250

 

 

$

581,250

 

Pure Guild

 

 

21,333

 

 

 

21,333

 

 

 

6,401

 

 

 

--

 

 

 

--

 

 

 

49,067

 

  

 

$

96,333

 

 

$

96,333

 

 

$

81,401

 

 

$

75,000

 

 

$

281,250

 

 

$

630,317

 




F-14



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES


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


 

 

2011

 

 

2010

 

Trade payables

  

$

779,946

  

  

$

354,796

  

Accrued expenses and claims:

  

  

  

  

  

  

  

  

Advertising and marketing claim

  

  

115,136

  

  

  

175,136

  

Production materials claim

  

  

--

  

  

  

24,038

  

Freight claim

  

  

--

  

  

  

4.500

  

Accrued bank fees

  

  

6,207

  

  

  

--

  

Accrued production labor

  

  

28,709

  

  

  

--

  

Accrued consulting services

  

  

34,415

  

  

  

--

  

Sales commission

  

  

35,000

  

  

  

--

  

Human resources claim

  

  

12,500

  

  

  

25,367

  

Credits due to customers

  

  

--

  

  

  

20,474

  

Deferred rent

  

  

9,401

  

  

  

--

  

  

  

$

1,021,313

  

  

$

604,311

  


Trade payables – Consist of liabilities arising in the normal course of business, evidenced by invoices and are generally incurred in connection with the acquisition of materials, inventory or outside services.


Accrued expenses and claims – 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.

  

·

In March 2010, the Company entered into a lease for 7,500 square feet in 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. The Company relocated to larger facilities in October 2011 and is currently in negotiation to terminate the lease.




F-15



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)


  

·

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.

  

·

In October 2011, the Company entered into a lease for 13,137 square feet of warehouse and production space in Pompano Beach, FL. The lease provides for monthly rent of $6,350 and matures in 12 months.


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


  

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

Beyond

 

 

Total

 

Facility Leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami Beach, FL (HQ)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Pompano Beach, FL (Production)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deerfield Beach, FL (Production)

 

 

43,901

 

 

 

45,657

 

 

 

47,483

 

 

 

20,107

 

 

 

 

 

 

157,148

 

Pompano Beach, FL (Production)

 

 

60,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,579

 

Ashville, NC (Sales)

 

 

19,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,800

 

  

 

$

124,280

 

 

$

45,657

 

 

$

47,483

 

 

$

20,107

 

 

$

 

 

$

237,527

 


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. Such vendor disputes are typical in the normal course of business. Divine Skin had vigorously disputed those claims on the grounds of the substandard materials or services provided. All claims received in 2010 and prior periods have been resolved primarily through negotiated settlements resulting in a reduction of the claim and repayment through a structured payout. In 2011, we received 2 additional supplier claims for certain packaging materials that we are disputing and filing counter claims. We established an accrual for these claims and the structured payouts representing our estimate of the amount due of $143,052 and $229,042 at December 31, 2011 and 2010, respectively.

  

·

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.

  

·

On June 13, 2011, the Company filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an investor relations and consulting agreement entered into on or about October 15, 2010 whereby the Company paid a third party approximately $20,000 and 230,000 shares of restricted common stock in consideration of investor relations and consulting services. The Company has demanded return of the 230,000 shares of restricted stock and recovery of costs and other damages. The third party has counterclaimed and the matters are currently pending. The Company is vigorously defending the counter claim.

  

·

On June 13, 2011, the Company filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an agreement entered into on or about May 18, 2010 whereby the Company paid a third party approximately $500 and 200,000 shares of restricted common stock in consideration of consulting services. The Company has demanded return of the 200,000 shares of restricted stock and recovery of costs and other damages. These shares were recorded as an unpaid subscription pending meeting certain performance criteria stipulated in the agreement. In November 2011, our claim was dismissed for lack of jurisdiction. The Company has refiled its claim in New York.




F-16



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9. – EQUITY


Common Stock Sold Privately


During the first quarter of 2010, the Company began selling its common stock to qualified investors, at a purchase price between $0.15-$0.25 per share. 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:


Period

 

 

Common

Shares

 

 

Price

 

 

Gross

Proceeds

 

 

Issuance

Costs

 

 

Net

Proceeds

 

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

 

 

 

 

 

4,506,000

 

 

$

0.19

 

 

$

844,500

 

 

$

(249,600

)

 

$

594,900

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2011

 

 

 

3,257,207

 

 

$

0.25

 

 

 

821,000

 

 

 

(223,651

)

 

 

597,349

 

Q2 2011

 

 

 

3,530,830

 

 

$

0.26

 

 

 

916,250

 

 

 

(179,974

)

 

 

736,276

 

Q3 2011

 

 

 

1,251,244

 

 

$

0.27

 

 

 

332,250

 

 

 

(56,144

)

 

 

276,106

 

Q4 2011

 

 

 

--

 

 

$

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

 

 

8,039,281

 

 

$

0.26

 

 

$

2,069,500

 

 

$

(459,769

)

 

$

1,609,731

 

 

 

 

 

12,545,281

 

 

$

0.23

 

 

$

2,914,000

 

 

$

(709,369

)

 

$

2,204,631

 


Common Stock Sold Under Securities Purchase Agreement (SPA)


On October 4, 2011 (the “Closing Date”), the Company and certain accredited investors entered into a SPA and completed a closing of a private offering of 6,178,572 shares of the Company’s Common Stock, par value $0.0001 per share and warrants to purchase up to an aggregate of 1,554,645 shares of Common Stock, for aggregate gross proceeds of $1,730,000. The warrants are exercisable for five years from issuance at $0.50 per share and may be exercisable on a cashless basis in certain instances if the underlying shares are not registered under a registration statement. The number of shares of Common Stock to be received upon the exercise of the warrants and the exercise price of the Warrants are subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the Closing Date.


Wilmington Capital Securities, LLC acted as our placement agent in connection with the Offering. The Placement Agent received a selling commission in cash of 7 per cent of the gross proceeds ($121,100), with an additional $10,000 expense allowance. In addition, the Company issued the Placement Agent a warrant to purchase up to 449,805 shares of Common Stock.


The Company incurred other issuance costs and expenses associated with the SPA, paid in the form of cash or warrants, for an additional $33,674.


In accordance with the terms of the SPA, the Company filed a registration statement (the “Registration Statement”) covering 8,183,021 common shares of common stock (the “Registrable Shares”), which included the shares issued under the SPA and shares underlying the warrants issued under the SPA held by the investors (the “Holders”).  The Registration Statement went effective January 26, 2012.  In the event that the Registration Statement fails to remain effective (an “Event Date”) for a period of one year from the Closing Date (the “Effectiveness Period”), the



F-17



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9. – EQUITY (Continued)


Company shall pay to the Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price paid by the Holder pursuant to the SPA for the Registrable Shares (excluding Registrable Shares eligible for resale under Rule 144) held by the Holder.  In addition on each 30-day anniversary (or pro rata portion thereof) during the Effectiveness Period, the Company shall pay to the Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price paid by the Holder pursuant to the SPA for any unregistered Registrable Shares (excluding Registrable Shares eligible for resale under Rule 144) then held by the Holder.  Furthermore, the damages payable to each Holder shall be limited to the purchase price paid by the Holder pursuant to the SPA for the Registrable Shares held by the Holder on such Event Date.


The following table summarizes transactions under the SPA as follows:


Period

 

 

Common

Shares

 

 

Price

 

 

Gross

Proceeds

 

 

Issuance

Costs

 

 

Net

Proceeds

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2011

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

Q2 2011

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

Q3 2011

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

Q4 2011

 

 

 

6,178,572

 

 

$

0.28

 

 

 

1,730,000

 

 

 

(164,774

)

 

 

1,565,226

 

 

 

 

 

 

6,178,572

 

 

$

0.28

 

 

$

1,730,000

 

 

$

(164,774

)

 

$

1,565,226

 


Other Issues of Common Stock


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.


During the second quarter of 2011 the Company issued 112,641 shares for services provided by employee and consultants valued at $0.37 - $0.42 per share, which resulted in an expense of $45,661.


During the third quarter of 2011 the Company issued 155,790 shares for services provided by employee and consultants valued at $0.38 - $0.40 per share, which resulted in an expense of $60,598.


During the fourth quarter of 2011 the Company issued 19,256 shares for services provided by consultants valued at $0.38 per share, which resulted in an expense of $7,408. In addition, a consultant exercised warrants for 1,236,210 common shares and vested options for 1,266,667 common shares, totaling 2,502,877 common shares for $25,029.


Surrender of Common Stock


During the third quarter of 2011, the 3 principal founding shareholders voluntarily surrendered 7,017,805 common shares, collectively.



F-18



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9. – EQUITY (Continued)


Warrants


During 2010, the Company sold shares of its common stock under a PPM as governed by Regulation S. As discussed in the PPM offering, the selling agent has the right to receive warrants to purchase one share of Common Stock of the Company for every ten Shares sold. 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. The warrants were “in the money” upon issuance and their value was charged to financing consulting services. Accordingly, the Company issued warrants based on the private sale of common shares as follows:


Period

 

 

Common

Shares Sold

 

 

Qualified

Warrants

 

 

Per Share

Value

 

 

Warrant

Value

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2010

 

 

 

1,112,000

 

 

 

111,200

 

 

$

.17

 

 

$

18,904

 

Q2 2010

 

 

 

1,734,000

 

 

 

173,400

 

 

 

.34

 

 

 

58,956

 

Q3 2010

 

 

 

660,000

 

 

 

61,000

 

 

 

.34

 

 

 

20,740

 

Q4 2010

 

 

 

1,000,000

 

 

 

100,000

 

 

 

.35

 

 

 

35,000

 

 

 

 

 

4,506,000

 

 

 

445,600

 

 

$

.30

 

 

$

133,600

 


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 2011, the Company continued to sell shares of its common stock under the PPM as governed by Regulation S. These sales of common shares also provided a grant warrants to the selling agent under the same terms disclosed above. Accordingly, the Company issued warrants based on the private sale of common shares as follows:


Period

 

 

Common

Shares Sold

 

 

Qualified

Warrants

 

 

Per Share

Value

 

 

Warrant

Value

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2011

 

 

 

3,257,207

 

 

 

305,100

 

 

$

.44

 

 

$

134,244

 

Q2 2011

 

 

 

3,530,830

 

 

 

--

 

 

 

.36

 

 

 

--

 

Q3 2011

 

 

 

1,251,244

 

 

 

--

 

 

 

.38

 

 

 

--

 

Q4 2011

 

 

 

--

 

 

 

--

 

 

 

.35

 

 

 

--

 

 

 

 

 

8,039,281

 

 

 

305,100

 

 

$

.30

 

 

$

134,244

 


Effective for Q2 and Q3 of 2011, the selling agent waived his rights to receive warrants. Accordingly, the Company issued no warrants related to the private sale of shares and accrued no expense for financial consulting services. During Q4 of 2011, no shares were sold privately since the terms of the SPA preclude such activities.


In Q4 2011 the Company completed a closing of a private offering of 6,178,572 shares of the Company’s Common Stock, under an SPA. (see Common Stock Sold Under Securities Purchase Agreement (SPA)). The SPA provides the investors with warrants to purchase an aggregate of 1,554,645 shares of Common Stock. In addition, the SPA also grants warrants to purchase 493,485 shares of Common Stock as fees for assisting in the SPA closing.




F-19



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9. – EQUITY (Continued)


The following tables present the status of all warrants outstanding at December 31, 2010 and 2011, respectively.


 

 

Warrants

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value

 

Year Ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2010

 

 

485,510

 

 

$

0.01

 

 

 

4.0 

 

 

$

169,929

 

Issued

 

 

945,600

 

 

 

0.01

 

 

 

5.0 

 

 

 

170,960

 

Exercised

 

 

--

 

 

 

--

 

 

 

  

 

 

 

  

 

Forfeited

 

 

--

 

 

 

--

 

 

 

  

 

 

 

  

 

Outstanding at December 31, 2010

 

 

1,431,110

 

 

$

0.01

 

 

 

4.5

 

 

$

340,889

 

Exercisable at December 31, 2010

 

 

1,431,110

 

 

$

0.01

 

 

 

4.5

 

 

$

340,889

 

  

  

  

  

  

  

 

  

  

  

  

  

  

  

 

  

  

Year Ended December 31, 2011

  

  

  

  

  

 

  

  

  

  

  

  

  

 

  

  

Outstanding at January 1, 2011

 

 

1,431,110

 

 

$

0.01

 

 

 

3.5 

 

 

$

355,200

 

Issued

 

 

2,343,230

 

 

 

0.01

 

 

 

4.2 

 

 

 

109,836

 

Exercised

 

 

(1,236,210

)

 

 

--

 

 

 

  

 

 

 

  

 

Forfeited

 

 

--

 

 

 

--

 

 

 

  

 

 

 

  

 

Outstanding at December 31, 2011

 

 

2,538,130

 

 

$

0.01

 

 

 

4.2

 

 

$

20,000

 

Exercisable at December 31, 2011

 

 

2,538,130

 

 

$

0.01

 

 

 

4.2

 

 

$

20,000

 


The value of warrants issued in 2011 and 2010 were determined using the Black-Scholes-Merton option pricing model and were based on the following assumptions:


 

 

2011

 

 

2010

 

 

 

 

 

 

 

 

Expected term

 

 

5 yrs

 

 

3.9-5.0 yrs

 

Risk free interest rate

 

 

.9%

 

 

1.56%-2.07%

 

Stock price volatility

 

 

25.0%

 

 

28.5%

 

Dividend yield

 

 

0

 

 

0

 


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 $160,000 in 2010 reflecting the structured vesting.




F-20



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9. – EQUITY (Continued)


The following tables present the status of all options outstanding at December 31, 2010 and 2011, respectively.


 

 

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value

 

Year Ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2010

  

  

0

  

  

$

0.01

  

  

  

0.0

  

  

$

0

  

Issued

  

  

2,000,000

  

  

  

0.01

  

  

  

4.5

  

  

  

  

  

Exercised

  

  

--

  

  

  

--

  

  

  

  

  

  

  

  

  

Forfeited

  

  

--

  

  

  

--

  

  

  

  

  

  

  

  

  

Outstanding at December 31, 2010

  

  

2,000,000

  

  

$

0.01

  

  

  

4.5

  

  

$

700,000

  

Exercisable at December 31, 2010

  

  

666,667

  

  

$

0.01

  

  

  

4.5

  

  

$

233,333

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Year Ended December 31, 2011

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Outstanding at January 1, 2011

  

  

2,000,000

  

  

$

0.01

  

  

  

3.5

  

  

$

720,000

  

Issued

  

  

--

  

  

  

--

  

  

  

  

  

  

  

  

  

Exercised

  

  

(1,266,667

)

  

  

--

  

  

  

  

  

  

  

  

  

Forfeited

  

  

--

  

  

  

--

  

  

  

  

  

  

  

  

  

Outstanding at December 31, 2010

  

  

733,333

  

  

$

0.01

  

  

  

3.5

  

  

$

264,000

  

Exercisable at December 31, 2010

  

  

200,000

  

  

$

0.01

  

  

  

3.5

  

  

$

72,000

  


The value of the options issued in 2010 were determined using the Black-Scholes-Merton option pricing model and were based on the following assumptions:


 

 

2011

 

 

2010

 

 

 

 

 

 

 

 

Option life

 

 

--

 

 

5.0 yrs

 

Risk free interest rate

 

 

--

 

 

1.56%

 

Stock price volatility

 

 

--

 

 

28.5%

 


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.




F-21



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10. – INCOME TAXES


The provision for income taxes for the year ended December 31, 2011 and 2010 is summarized as follows:


 

 

2011

 

 

2010

 

Current:

 

 

 

 

 

 

Federal

 

$

--

 

 

$

--

 

State

 

 

--

 

 

 

--

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

(342,510

)

 

 

(47,976

)

State

 

 

(31,804

)

 

 

(4,455

)

Increase (Decrease) in valuation allowance

 

 

374,314

 

 

 

52,431

 

  

 

 

 

 

 

 

 

 

Total provision (benefit) for income taxes

 

$

--

 

 

$

--

 


The income tax benefit for the year ended December 31, 2011 and 2010 was not booked due to the uncertainty of future profitable operations necessary to realize the benefit.


The provision for income taxes for the year ended December 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%

 


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 December 31, 2011 and December 31, 2010 are as follows:


 

 

2011

 

 

2010

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carry-forwards

 

$

533,599

  

 

$

159,284

  

  

 

  

--

  

 

  

--

  

Total deferred tax assets

 

  

533,599

  

 

  

159,284

  

Valuation allowance

 

  

(533,599

)

 

  

(159,284

)

Net deferred tax assets

 

$

--

  

 

$

--

  


As of December 31, 2011 and December 31, 2010 the Company had a valuation allowance on its deferred tax assets of $533,599 and $159,284, which relates to net operating losses. The valuation allowance increased $374,315 in 2011. The increase in 2011 was attributable to accumulated net operating loss.


As of December 31, 2011 and December 31, 2010, the Company had net operating loss carry-forwards of $1,446,928 and $466,035, respectively. Unused net operating loss carry-forwards will expire at various dates beginning in 2029 and ending in 2031.


As of December 31, 2011 and 2010, the Company had no unrecognized tax benefit and accordingly no related accrued interest or penalties.



F-22



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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.


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


The Company’s product revenues represent primarily sales of Revita, Spectral DNC and NR08, which individually each exceeds 10% of total sales and collectively represent 38% of total sales. Intro packs, Revita.cor, and Spectral DNC-L collectively account for another 26% of total sales. During Q411-YTD two customers generated 29% of the Company’s sales and 13% of the outstanding accounts receivable balance at December 31, 2011. These customers are distributors of the Company.


Sales to these customers during Q411-YTD and their accounts receivable at December 31, 2011 were:


Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

B

 

$1,458,908

 

16%

 

$86,746

 

4%

A

 

$1,182,570

 

13%

 

$184,192

 

9%




F-23



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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 12. - SIGNIFICANT CUSTOMERS (Continued)


Sales to these customers during Q410-YTD and their accounts receivable at December 31, 2010 were:


Customer

 

Sales

Amount

 

Percent

 

Accounts

Receivable

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$1,051,172

 

20%

 

$182,096

 

15%

B

 

$1,182,847

 

22%

 

$159,300

 

1%


NOTE 13. - SIGNIFICANT VENDORS


The Company purchases its raw materials from various foreign and domestic suppliers several of which represent individually in excess of 10% of total purchases. Purchases of raw materials consist primarily of basic chemicals and packaging materials. The Company believes that it enjoys cordial relationships with all its suppliers but should the need arise; the Company believes that it could transition to alternate suppliers with minimal adverse impact. It does not have any formal long term purchase agreements with its suppliers. The Company does issue purchase orders based on its production plan, which may be modified or cancelled should its production plan change. The Company had $412,284 in outstanding purchase orders at December 31, 2011.


Purchases from significant vendors during Q411-YTD and their accounts payable at December 31, 2011 were:


Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payables

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$1,177,768

 

27%

 

$           0

 

0%

B

 

$   542,154

 

12%

 

$122,761

 

26%

 

 

 

 

 

 

 

 

 


Purchases from significant venders during Q410-YTD and their accounts payable at December 31, 2010 were:


Vendor

 

Purchase

Amount

 

Percent

 

Accounts

Payable

 

Percent

 

 

 

 

 

 

 

 

 

A

 

$443,528

 

27%

 

$       0

 

0%

B

 

$ 165,371

 

  10%

 

$       0

 

0%

C

 

$  276,400

 

  17%

 

$       0

 

 0%


NOTE 14. - 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.




F-24