DS HEALTHCARE GROUP, INC. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - DS HEALTHCARE GROUP, INC.	Financial_Report.xls
EX-31.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex31z1.htm
EX-31.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex31z2.htm
EX-32.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex32z1.htm
EX-32.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex32z2.htm

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

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended March 31, 2012

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

For the transition period from _______ to _______.

Commission File No. 000-53680

DIVINE SKIN, INC.

(Name of Small Business Issuer in Its Charter)


Florida	20-8380461
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1680 Meridian Avenue, Suite 301, Miami Beach, Florida	33139
(Address of Principal Executive Offices)	(Zip Code)

(888) 404-7770
(Issuer’s Telephone Number, Including Area Code) (Former Name, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £

Accelerated filer £

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

Smaller reporting company þ

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

There were 105,399,666 shares of common stock outstanding as of May 11, 2012.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

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

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2012			2011
	(Unaudited)
ASSETS

Current Assets
Cash	$	925,713		$	1,284,343
Accounts receivable, net		1,444,522			1,888,453
Inventory		2,773,447			2,174,784
Prepaid expenses and other current assets		44,973			57,940

Total Current Assets		5,188,655			5,405,520

Furniture and Equipment, net		61,512			53,017
Intangible Assets, net		605,166			630,316
Other Assets		44,138			15,138

TOTAL ASSETS	$	5,899,471		$	6,103,991

LIABILITIES AND EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	1,031,891		$	1,021,313
Other current liabilities		104,812			77,432

TOTAL LIABILITIES		1,136,703			1,098,745

COMMITMENTS AND CONTINGENCIES

Equity
Preferred stock, $0.001 par value, 30 million shares authorized: 10 million shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		10,000			10,000
Common stock, $0.001 par value, 300 million shares authorized: 105,399,666 and 105,029,613 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		105,400			105,030
Additional paid-in-capital		6,678,953			6,512,141
Stock subscription		(100,000	)		(100,000	)
Accumulated deficit		(1,931,585	)		(1,506,893	)

Total Shareholders' Equity		4,762,768			5,020,278
Non-Controlling Interest		—			(15,032	)

Total Equity		4,762,768			5,005,246

TOTAL LIABILITIES AND EQUITY	$	5,899,471		$	6,103,991

See accompanying notes to condensed consolidated financial statements

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2012			2011

Revenue:
Product sales	$	2,108,424		$	2,349,457
Less returns and allowances		(124,442	)		(99,039	)

Net revenue		1,983,982			2,250,418

Cost of Goods Sold		933,662			1,154,577

Gross Profit		1,050,320			1,095,841

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		299,800			259,850
Other selling and marketing expenses		463,351			277,839
		763,151			537,689
General and administrative
Salary and personnel costs		308,722			270,207
Professional fees and consulting costs		279,496			328,134
Other general and administrative expenses		127,138			151,706
		715,356			750,046

Total operating costs and expenses		1,478,507			1,287,735

Operating Loss		(428,187	)		(191,894	)

Other Income (Expense)
Interest income		591			—
Other		(12,741	)		1,034

Total other income (expense)		(12,150	)		1,034

Loss Before Taxes		(440,337	)		(190,860	)

Income Tax Benefit		—			—

Net Loss		(440,337	)		(190,860	)

Net Loss Attributable to Non-Controlling Interest		—			2,292


Net Loss Attributable to Shareholders of Divine Skin, Inc.	$	(440,337	)	$	(188,568	)

Basic and Diluted Earnings per Share:
Weighted average shares		105,130,024			96,272,300
Loss per share	$	(0.00	)	$	(0.00	)

See accompanying notes to condensed consolidated financial statements

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

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE PERIOD FROM JANUARY 1, 2011 TO MARCH 31, 2012


											Additional Paid In Capital			Subscription/ Stock Receivable			Accumulated Deficit			Total Shareholders' Equity			Non-Controlling Interest			Total Equity
	Preferred Stock				Common Stock
	Shares		Amount		Shares			Amount

December 31, 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 Securities Purchase Agreement 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 Securities Purchase Agreement												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

Shares Issued:
For services
Employee/associate compensation						281,818			282			88,900									89,182						89,182
Distributor award						88,235			88			29,912									30,000						30,000

Warrants and Option
Vested for trading symbol												48,000									48,000						48,000
Disposal of Brazil distribution joint venture																		15,645			15,6454		$	15,032			30,677

2011 Net Loss																		(440,337	)		(440,337	)		—			(440,337	)
March 30, 2012 (Unaudited)		10,000,000	$	10,000		105,399,666		$	105,400		$	6,678,953		$	(100,000	)	$	(1,931,585	)	$	4,762,768		$	—		$	4,762,768

See accompanying notes to condensed consolidated financial statements

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2012			2011

Cash Flows from Operating Activities:
Net (Loss) Income	$	(440,337	)	$	(190,860	)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		47,682			27,480
Bad debt allowance (recovery)		(36,758	)		11,205
Inventory allowance		20,000			—
Stock issued for services		119,182			33,180
Warrants issued for financial services		—			134,244
Warrants issued for other services		48,000			48,000
Changes in operating assets and liabilities:
Accounts receivable		480,688			(757,303	)
Inventory		(618,662	)		62,937
Prepaid expenses and other current assets		(3,700	)		53,053
Accounts payable and accrued expenses		10,578			(109,438	)
Other current liabilities		27,379			(13,658	)
Net cash used in operating activities		(345,948	)		(701,161	)

Cash Flows from Investing Activities:
Purchase of furniture and equipment		(14,360	)		(11,875	)
Disposal of Brazil Joint Venture		4,678			—
Security deposits		(3,000	)		40
Net cash used in investing activities		(12,682	)		(11,835	)

Cash Flows from Financing Activities:
Proceeds from sale of stock subscription to investors		—			110,000
Less issuance costs		—			(21,000	)
Proceeds from sale of stock		—			821,000
Less issuance costs		—			(210,300	)
Net cash provided by financing activities		—			699,700


Decrease in cash		(358,630	)		(13,296	)
Cash, Beginning of Period		1,284,343			146,405

Cash, End of Period	$	925,713		$	133,109

Supplemental Information:
Cash paid for interest	$	—		$	—
Cash paid for taxes	$	—		$	—

See accompanying notes to condensed consolidated financial statements

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Terms and Definitions


	AICPA	American Institute of Certified Public Accountants
	ASC	Accounting Standards Codification
	ASU	Accounting Standards Update
	FASB	Financial Accounting Standards Board
	FIFO	First-in, First-out
	GAAP (US)	Generally Accepted Accounting Principles as applied in the United States
	IFRS	International Financial Reporting Standards
	PPM	Private Placement Memorandum
	SEC	Securities Exchange Commission
	SFAS or FAS	Statement of Financial Accounting Standards
	SPA	Security Purchase Agreement
	Q112-QTR	Three months ended March 31, 2012
	Q111-QTR	Three months ended March 31, 2011
	VIE	Variable Interest Entity

Organization and Nature of Business

Divine Skin, Inc. (the “Company”, “Divine Skin”, “DS Laboratories”, “we”, “us” or “our”) was organized under the laws of the State of Florida in January 2007. Through its predecessors, 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 the first quarter of 2009, the Company acquired 100% of the outstanding shares of DS Laboratories, Inc. (a Florida Corporation) and Sigma Development and Holding Co., 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.

In the fourth quarter of 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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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

In the first quarter of 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 the first quarter of 2011, the Company began distribution of nutraceutical products produced by NutraOrigin under an exclusive distribution agreement. As of March 31, 2012, the Company has not made or is required to make any investment in this venture. NutraOrigin is owned by our Chairman’s father.

In the third quarter of 2011, the Company finalized discussions with DS Laboratories Brazil, LTDA, to modify its joint venture distribution agreement. In exchange for 100% ownership in the joint venture, our Brazilian distributor has 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 the fourth quarter of 2011 the Company completed a SPA raising approximately $1.6 million, net of issuance costs.

In Q112-QTR the Company cancelled its Brazilian joint venture in exchange for release from future financial commitments to fund its share of the product licensure process in Brazil. The joint venture partner will continue to pursue the licensure of Divine Skin product in Brazil on behalf of the Company and Divine Skin will remain the license holder once the license is granted. As discussed above, the exclusive distribution agreement also remains effective with this distributor.

Also in Q112-QTR the Company organized DS Distribution as a whole owned subsidiary of Polaris Labs, Inc. DS Distribution was organized to process online orders for certain Polaris products.

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., Polaris Labs, Inc. and DS Distribution, Inc. Also included in the consolidated financial statements are the activities of Velocity Storage and Packaging, LLC, which is accounted for as a VIE. All significant intercompany balances and transactions have been eliminated in consolidation.

Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim condensed consolidated financial statements should be read in conjunction with the Company’s annual financial statements, notes and accounting policies included in the Company’s Annual Report. In the opinion of management, all adjustments which are necessary to provide a fair presentation of financial position as of March 31, 2012 and the related operating results and cash flows for the interim period presented have been made. All adjustments are of a normal recurring nature. The results of operations, for the period presented are not necessarily indicative of the results to be expected for the year ended December 31, 2012.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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

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. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include:

Estimates of allowances for uncollectable accounts receivable,

estimates of inventory obsolescence and overhead and labor cost allocations,

estimates assuming future earning capacity of our exclusive Brazilian distribution agreement and our future manufacturing agreement,

estimates of value of equity transactions for services rendered,

estimates of return or damaged product, and

estimates made in our deferred income tax calculations.

Risks and Uncertainties

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

Cash

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

Accounts Receivable

Accounts receivable are reported at net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. The Company also provides for allowances against accounts receivables for product returns and cooperative advertising allowances. At March 31, 2012 and December 31, 2011, the provision for doubtful accounts was $50,725 and $114,791 respectively. At March 31, 2012 and December 31, 2011, the Company provided $100,000 and $100,252, respectively for product returns and $40,000 and $12,400, respectively 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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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

Furniture and Equipment

Furniture and equipment are recorded at cost and depreciation is provided using the straight line depreciation method over the estimated useful lives of the assets, which range from 5 to 7 years. The Company expensed $5,866 and $2,330 in depreciation during the three months ended March 31, 2012 and 2011, respectively. Accumulated depreciation was $65,482 and $59,616 at March 31, 2012 and December 31, 2011, 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.

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.

During the third quarter of 2011, the Company finalized the disposal of its interests in DS Laboratories Brazil, LTDA.

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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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

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 at March 31, 2012 of $100,000 and at December 31, 2011 of $100,252.

Research and Development

The Company currently maintains a functional laboratory employing two full time chemists, a part time chemist/consultant and a lab technician that identify new technology, test product alternatives and improve existing formulations. In addition, our founder and CEO devotes a substantial portion of his time in identifying new technologies and formulations to develop new products and improve existing products with the newest technology available. The Company also contracts with third party laboratories on a limited basis. ASC Topic 730, “Accounting for Research and Development Costs” requires such activities be expensed in the year incurred. Such costs include laboratory supplies, salaries, materials and consultant fees. These costs are classified as product development, salaries, selling, general and administrative expenses in the statements of operations, and amounted to $43,377 and $38,006 for the three months ended March 31, 2012 and 2011, 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.

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. Warrants for 2,538,130 shares and options for 733,333 shares were excluded from the earnings per share calculation because they would be anti-dilutive.

Segment Information

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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

Fair Value of Financial Instruments

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

Fair Value Measurement: In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This ASU provides new guidance for fair value measurements intended to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The amended guidance provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRSs. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption was not permitted. The Company adopted ASU 2011-04 in this Form 10-Q for the three months ended March 31, 2012.

Comprehensive Income Presentation: In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), to require an entity 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. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The FASB has deferred the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income. Companies are required to either present amounts reclassified out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The effective date of this deferral will be consistent with the effective date of the ASU 2011-05. The implementation of ASU 2011-05 did not have a material effect on the Company’s consolidated financial statements.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 3. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

Goodwill Impairment: In September 2011, the FASB issued ASU 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). ASU 2011-08 permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity concludes it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it need not perform the two-step impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 31, 2011. Early adoption was permitted. The implementation of ASU 2011-08 did not have a material impact on the Company’s consolidated financial statements.

Offsetting Asset and Liabilities: In December 2011, the FASB issued ASU 2011-11, “Disclosures about offsetting Assets and Liabilities” (“ASU 2011-11”) requiring additional disclosure about offsetting and related arrangements. ASU 2011-11 is effective retrospectively for annual reporting periods beginning on or after January 1, 2013. The adoption of ASU 2011-11 will not have a material impact on the Company’s future financial position, results of operation, or liquidity.

Other ASUs not effective until after March 31, 2012, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

NOTE 4. – INVENTORY

Significant components of inventory at March 31, 2012 and December 31, 2011 consist primarily of:


	2012		2011
	(Unaudited)
Bulk product and raw materials	$	2,014,741	$	1,600,032
Work in process		73,745		—
Merchandise inventory		645,307		375,810
Inventory in transit		39,654		198,942

	$	2,773,447	$	2,174,784

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

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

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

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

Management evaluated the inventory at March 31, 2012 and December 31, 2011 and any obsolete inventory was excluded from our reported inventory value, accordingly only a $20,000 and $0 allowance for slow moving inventory was considered necessary at March 31, 2012 and December 31, 2011, respectively.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 5. – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets at March 31, 2012 and December 31, 2011 consist primarily of:


	2012			2011
	(Unaudited)
Advances to employees and associates	$	39,273		$	28,273
Other prepaids		5,700			13,000
Prepaid consultant services		100,000			100,000
Less amortization		(100,000	)		(83,333	)

	$	44,973		$	57,940

Advances to employees and associates – These advances are made on a short term basis to associates and employees and are repaid through periodic deductions from the payments to associates or payroll deductions from employees.

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 $16,667 was amortized and expensed in Q112-QTR, completing the contract, which is now expired. $8,333 was expensed in Q111-QTR.

NOTE 6. – INTANGIBLE ASSETS

Significant components of intangible assets at March 31, 2012 and December 31, 2011 consist primarily of:


	2012			2011
	(Unaudited)
Distribution rights in Brazil	$	750,000		$	750,000
Less: Accumulated amortization		(187,500	)		(168,750	)
Net distribution rights		562,500			581,250


Pure Guild brand rights and supplier agreement		106,666			106,666
Less: Accumulated amortization		(64,000	)		(57,600	)
Net brand rights and supplier agreement		42,666			49,066

	$	605,166		$	630,316

Brazilian 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, through 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. $18,750 and $75,000 was amortized during Q112-QTR and 2011, respectively. During, the 3rd 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 $106,666 of product representing approximately 70% the initial stocking order. The value of these rights is being amortized over 5 years the basic term of the agreement. $6,400 and $25,600 was amortized during Q112-QTR and 2011, respectively.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 6. – INTANGIBLE ASSETS (Continued)

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)	$	56,250	$	75,000	$	75,000	$	75,000	$	281,250	$	562,500
Pure Guild		14,933		21,333		6,400		—		—		42,666
	$	71,183	$	96,333	$	81,400	$	75,000	$	281,250	$	605,166

NOTE 7. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Significant components of accounts payable and accrued expenses at March 31, 2012 and December 31, 2011 consist primarily of:


	2011		2010
	(Unaudited)
Trade payables	$	777,406	$	779,945

Accrued expenses:
Advertising and marketing		135,136		115,136
Human resources		50,000		12,500
Labor accrual		—		28,709
Consulting services accrual		26,932		34,415
Bank fee accrual		—		6,207
Deferred Rent		9,401		9,401
Sales commission		33,016		35,000
	$	1,031,891	$	1,021,313

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 Q112-QTR and 2011, the Company operated under several material agreements as listed below:

Lease for office and production 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 2010, the Company entered into a lease for 7,500 square feet in production facilities in Deerfield Beach, Florida and began operations in April 2010. The lease provided 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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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		2014		Beyond		Total

Facility Leases:
Miami Beach, Fl (HQ)	$	—	$	—	$	—	$	—	$	—	$	—
Deerfield Beach, Fl (Production)		33,176		45,657		47,483		20,107		—		146,423
Pompano, Fl (Production)		40,386										40,386
Ashville, NC (Sales)		14,850										14,850

	$	88,412	$	45,657	$	47,483	$	20,107	$	—	$	201,659

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 $111,136 and $143,052 at March 31, 2012 and December 31, 2011, respectively.

In Q1 2012, Divine Skin Inc. lost a lawsuit brought by a former employee of Evolution Model Management, Inc., an entity also related to Divine Skin, Inc. through common ownership resulting in a $51,400 verdict against the Company, Evolution Model Management and Daniel Khesin, individually. Divine Skin was named because it originally hired the employee rather than Evolution Model Management as the latter was not yet an established entity. Our management intends to appeal the verdict. We have established a reserve of $50,000, pending the outcome of the appeal.

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 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 On February 23, 2012 the New York Supreme Court issued a temporary restraining order against the transfer of said shares pending further proceedings. As of March 31, 2012 the injunction against the transfer of the 200,000 shares by the defendant remains in effect. The litigation is pending.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 8. – COMMITMENTS AND CONTINGENCIES (Continued)

Purchase commitments –

In order to secure an adequate supply of raw materials, the Company executes purchase orders to its suppliers as evidence of its intent to purchase materials. Purchase orders outstanding at March 31, 2012 totaled $569,534.

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

There were no additional private sales in Q112-QTR.

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 registered 8,183,021 common shares effective January 26, 2012.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 9. – EQUITY (Continued)

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

There were no additional sales under the SPA in Q112-QTR.

Other Issues of Common Stock

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.

During the first quarter of 2012 the Company issued 281,818 shares for services provided by two employees valued at $0.31 - $0.32 per share, which resulted in an expense of $89,182 in aggregate. The Company also issued 88,235 shares as an award for achieving business goals. The shares were valued at $.34, which resulted in an allowance offsetting revenues of $30,000.

Surrender of Common Stock

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

Warrants

During 2011, the Company continued to sell shares of its common stock under the PPM originated in 2010, 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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 9. – EQUITY (Continued)

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 granted warrants to purchase 493,485 shares of Common Stock as fees for assisting in the SPA closing.

The following tables present the status of all warrants outstanding at March 31, 2012 and December 31, 2011, respectively:


	Warrants			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Year Ended December 31, 2011
Outstanding at January 1, 011		1,431,110		$	0.01		3.5	$	—
Issued		2,343,230			0.01		4.2		—
Exercised		(1,236,210	)		0.01
Forfeited		—			—
Outstanding at December 31, 2011		2,538,130		$	0.01		4.2	$	—
Exercisable at December 31, 2011		2,538,130		$	0.01		4.2	$	—
Year Ended December 31, 2011

3 Months Ended March 31, 2012
Outstanding at January 1, 2012		2,538,130		$	0.01		4.2	$	—
Issued		—			—
Exercised		—			—
Forfeited		—			—
Outstanding at March 31, 2012		2,538,130		$	0.01		4.0	$	—
Exercisable at March 31, 2012		2,538,130		$	0.01		4.0	$	—

No warrants were issued in Q112-QTR however the value of the warrants issued in 2011 were determined using the Black-Scholes-Merton option pricing model and were based on the following assumptions:


	2012	2011
Expected term	n/a	5.0 yrs
Risk free interest rate .		9%
Stock price volatility		25.0%
Dividend yield		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. As a result of the structured vesting, the Company recognized $48,000 of expense in Q112-QTR.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 9. – EQUITY (Continued)

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


	Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Year Ended December 31, 2011
Outstanding at January 1, 2011		2,000,000		$	0.01		3.2	$	720,000
Issued		—			—
Exercised		(1,266,667	)		0.01
Forfeited		—			—
Outstanding at December 31, 2011		733,333		$	0.01		3.2	$	264,000
Exercisable at December 31, 2011		200,000		$	0.01		3.2	$	72,000

3 Months Ended March 31, 2012
Outstanding at January 1, 2012		733,333		$	0.01		3.2	$	168,667
Issued		—			—
Exercised		—			—
Forfeited		—			—
Outstanding at March 31, 2012		733,333		$	0.01		2.9	$	168,667
Exercisable at March 31, 2012		400,000		$	0.01		2.9	$	92,000

No options were issued in Q112-QTR and 2011.

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. The preferred stock automatically converts into common stock on a one-for-one basis in September 2012.

NOTE 10. – INCOME TAXES

The provision for income taxes for Q112-QTR and Q111-QTR is summarized as follows:


	2012			2011
Current:	(Unaudited)			(Unaudited)
Federal	$	—		$	—
State		—			—
Deferred:
Federal		(161,291	)		(65,999	)
State		(22,738	)		(6,128	)
Increase in valuation allowance		184,029			72,127

Total provision (benefit) for income taxes	$	—		$	—

The income tax benefit for Q112-QTR and Q111-QTR was not booked due to the uncertainty of future profitable operations necessary to realize the benefit.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 10. – INCOME TAXES (Continued)

The provision for income taxes for Q112-QTR and Q111-QTR differs from the amount computed by applying the federal statutory rate to income (loss) before provision (benefit) for income taxes as follows:


	2012		2011

Expected provision(benefit) at statutory rate	(35.0	%)		(35.0	%)
State taxes	(3.6	%)		(3.3	%)
Non-deductible expenses	(3.2	%)		—
Increase in valuation allowance	41.8	%		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 March 31, 2012 and December 31, 2011 are as follows:


	2012			2011
		(Unaudited)
Deferred tax assets:
Net operating loss carry-forwards	$	683,226		$	533,599
Stock-based compensation		34,402			—
Total deferred tax assets		717,628			533,599
Valuation allowance		(717,628	)		(533,599	)
Net deferred tax assets	$	—		$	—

As of March 31, 2012 and December 31, 2011 the Company had a valuation allowance on its deferred tax assets of $717,628 and $533,599, which relates to net operating losses. The valuation allowance increased $184,029 in the Q112-QTR. The increase in Q112-QTR was attributable to accumulated net operating loss.

As of March 31, 2012 and December 31, 2011, the Company had net operating loss carry-forwards of $1,771,163 and $1,446,928, respectively. Unused net operating loss carry-forwards will expire at various dates beginning in 2029 and ending on 2031.

As of March 31, 2012 and December 31, 2011, the Company had no unrecognized tax benefit and accordingly no related accrued interest or penalties.

NOTE 11. – 2009 EQUITY INCENTIVE PLAN

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

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

provide additional incentives to Employees, Directors and Consultants, and

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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 11. – 2009 EQUITY INCENTIVE PLAN (Continued)

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 and Spectral DNC, which individually each exceeds 10% of total sales and collectively represent 36% of total sales. Spectral UHP, Revita Cor and Spectral DNC-L collectively account for another 22% of total sales. During Q112-QTR two customers generated 24% of the Company’s sales and 40% of the outstanding accounts receivable balance at March 31, 2012. These customers are distributors of the Company.

Sales to these customers during Q112-QTR and their accounts receivable at March 31, 2012 were:


Customer	Sales Amount		Percent			Accounts Receivable		Percent

A		$447,458		24%	%		$332,287		20%
C		$ 5,032		0%	%		$326,826		20%

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


Customer	Sales Amount		Percent		Accounts Receivable		Percent

A		$360,088		16%		$208,076		14%
B		$499,882		22%		$244,252		16%

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.

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 13. - SIGNIFICANT VENDORS (Continued)

Purchases from significant vendors during Q112-QTR and their accounts payable at March 31, 2012 were:


Vender	Purchase Amount	Percent	Accounts Payable	Percent

A	$399,360	31%	$ 0	0%
B	$ 65,683	5%	$100,690	17%
C	$ 95,489	7%	$ 84,989	14%

Purchases from significant venders during Q111-QTR and their accounts payable at March 31, 2011 were:


Vender	Purchase Amount	Percent	Accounts Payable	Percent

A	$177,967	20%	$ 0	0%
D	$150,834	17%	$19,761	7%
E	$ 98,797	11%	$20,704	7%

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

NOTE 15. – SUBSEQUENT EVENTS

On April 6, 2012 a financial institution provided the Company with a $1.5 million credit facility with an initial draw of $580,000. The credit facility provides for asset based lending collateralized by all assets of the Company. Advances are based on 80% of qualified accounts receivable and 40% of finished goods inventory. The credit facility provides for interest and bank fees, which currently aggregate to 8% (prime plus 3% plus 1.75% asset monitoring fees and other fees) per annum and expires March 24, 2014, and may be renewed under certain conditions. The credit facility is personally guaranteed by our Chief Executive Officer and, under certain conditions, may be called upon demand. The credit facility also provides for a referral fee of 4% per annum for 3 years.

ITEM 2.

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

Introductory Statements

This filing contains forward-looking statements, including statements regarding, among other things, (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. 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.

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 and was essentially idle since inception.

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 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, hair care products and a health care line.

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.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this registration statement, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” in our Form 10-K Annual Report for the year ended December 31, 2011, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Significant Accounting Policies

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

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

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

Accounts Receivable – Management makes critical judgments regarding the customer’s credit worthiness when assigning credit limits and the payment terms granted. We base these judgments on available third party credit information, the customer’s internal information, other suppliers experience with the customer and our own collection experience with the customer. While our collection efforts are effective in keeping our allowance for doubtfull accounts at approximately 3.1% of accounts receivable or less, changes in economic conditions, changes in formulation of our product or other factors affecting us or our customers may affect our estimates and ultimate collections.

Inventory – Management makes critical judgments to avoid expiration and obsolescence in our inventory. To manage these issues management relies on production planning based on sales projections, monitoring production lot numbers and stability testing of new chemical components along with other techniques. As a result, an appropriate reserve for any estimated expiration or obsolescence has remained low.

Intangible Asset – The Company holds an exclusive Brazilian Distribution Agreement and an exclusive Pure Guild Suppliers agreement. Management makes critical judgments in determining the long lived value of these assets, which include estimates of the ultimate future returns these assets will provide based on projections and resulting net present value of future cash flows. Management has concluded that no impairment is necessary.

Results of Operations

The following discussion and analysis addresses the major factors that affected our operations and financial condition reflected in our condensed consolidated audited financial statements for the three months ended March 31, 2012 and March 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 filing.

Three Months Ended March 31, 2012 (“Q112-QTR”) to the Three Months Ended March 31, 2011 (“Q211-QTR”)

Revenues, net -- Total net revenues decreased $266,436 or 11.8%, from $2,250,418 (Q111-QTR) to $1,983,982 (Q112-QTR). The Company’s product revenues represent primarily sales of Revita and Spectral DNC, which collectively represent 36% of total sales and Spectral UHP, Revita Cor and Spectral DNC-L, which together account for approximately 22% of total sales.

Revenues have decreased primarily due to the timing of a recurring order from a significant distributor. The decrease was partially offset by revenues generated from the continued establishment of distribution agreements with distributors in new global target markets and a general increase in market acceptance of our products. The Company conducts a significant portion of business with WR Group under exclusive distribution agreements. Revenues from the agreements accounted for approximately 24% of the Company’s total revenues during Q112-QTR.

Cost of Goods Sold -- Total cost of goods sold decreased $220,915 or 19.1%, from $1,154,577 (Q111-QTR) to $933,662 (Q112-QTR). The decrease was primarily directly related to the decrease in sales. In addition, during Q112-QTR, approximately $84,675 of the decrease in cost of goods sold was attributable to changes in product mix, improved efficiencies and decreased production costs.

Selling and Marketing Costs -- Selling and marketing costs increased $225,462 or 41.9%, from $537,689 (Q111-QTR) to $763,151 (Q112-QTR). The increase is primarily due to the following:

–

Increases in:

$89,264 for marketing and promotion costs incurred to broaden our product offering and promote sales,

$49,448 for freight and shipping costs due to expanding our customer base, distribution representatives and changes in freight terms,

$39,950 for consulting and commission costs due to increased costs of expanding our customer base and distribution representatives,

$30,557 for travel and entertainment costs incurred to expand and promote sales

$6,858 for warehousing costs as a result of transferring a portion of our outsourced warehousing activities to “in house” facilities,

$5,408 for product development resulting from improving our formulas and expanding our product lines, and

$3,977 net, for other selling and marketing costs.

General and Administrative Costs -- General and administrative costs decreased $34,690 or 4.6%, from $750,046 (Q111-QTR) to $715,356 (Q112-QTR). The decrease is due to the following:

–

Decreases in:

$48,638 for professional fees for financial consultants, attorneys and accountants related to costs of fund raising, regulatory filings and reporting, which did not repeat in the current quarter,

$31,379 for bad debts as a result of improved collection efforts,

$15,017 for office expenses associated with supporting increased sales and operations

$7,895 for rent as a result of expanded facilities, and

$616 net, for various other general and administrative costs.

–

Partially offset by increases in:

$38,515 for personnel costs due to increased staffing as a result of our expanding sales and operations groups,

$18,470 for credit card fees as a result of our increased use of credit cards as a payment medium, and

$11,868 for amortization and depreciation expense associated primarily with amortizing various deferred costs such as a prepaid operations consulting and the exclusive distribution rights agreement.

Other Income -- Other income decreased $13,184 or 1275.4% from $1,034 income (Q111-QTR) to $12,150 expense (Q112-QTR). The decrease was primarily a result of non recurring losses resulting from settling certain claims made by vendors.

Net Income (Loss) -- As a result of the decrease in sales discussed above, Net Loss increased $249,477 or 130.7% from a $190,860 Net Loss (Q111-QTR) to $440,337 Net Loss (Q112-QTR). In addition to the reasons discussed above, the increase in net loss was primarily driven by a decrease in revenue and secondarily increased sales and marketing costs as part of our overall strategy to increase revenues by expanding our distributor base and corresponding market share.

Liquidity and Capital Resources

We had working capital of $4,051,952 at March 31, 2012. Our operating and capital requirements in connection with supporting our expanding operations and introducing new products have been and will continue to be significant to us. Since inception, our losses from operations along with the increased costs and working capital required to grow our business were satisfied through the initial contribution by our founders in 2007 and through subscriptions to purchase shares under a private placement which we began accepting subscriptions in early 2009, 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 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 there under. The private placement provides for issuance costs of 30% which amounted to $459,769. 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 to the period covered by this report, on April 6, 2012 the Company entered into a Demand Loan and Security Agreement (the “Loan Agreement”) with Mid Cap Business Credit, LLC. The Loan Agreement provides for asset based lending of up to $1,500,000 and is secured by all of the assets of the Company. Advances under a Revolving Demand Note (the “Demand Note”) are based on approximately 80% of qualified accounts receivable and 40% of finished goods inventory. The Loan Agreement 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 Demand Note is personally guaranteed by the Company’s Chief Executive Officer and, under certain conditions, may be called upon demand. The Loan Agreement also provides for a referral fee of 4% per annum for 3 years. The Loan Agreement contains customary representations, warranties, affirmative and negative covenants and events of default. The negative covenants include, among other things, restrictions on transferring our assets, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, and creating other liens on our assets, in each case subject to customary exceptions. As of the date of this report the Company has made an initial draw of $580,000.

Cash Flows for the Three Months Ended March 31, 2012

Cash Flows from Operating Activities

Operating activities used net cash for the three months ended March 31, 2012 of $345,948. Net cash used reflects an adjusted net loss for the year ended of $225,473, as adjusted for various items which impact net loss but do not impact cash during the period, such as issuance of warrants or stock for services and for depreciation and amortization. Net cash used also reflects $120,475 of cash used for net changes in working capital items, primarily from financing provided by vendors, which included:

$443,930 provided by a decrease in accounts receivable as a result of collections,

$598,662 used by an increase in inventory to support increased sales,

$10,578 provided by an increase in accounts payable and accrued expenses as a result of increased credit availability from suppliers, and

$23,679 provided by a net increase in other current assets and liabilities.

Cash Flows used in Investing Activities

Our investing activities used $12,682 in net cash during the three months ended March 31, 2012. Net cash used is composed primarily of purchases of furniture and equipment.

Cash Flows from Financing Activities

We had no financing activities during Q112-QTR.

Financial Position

Total Assets -- Our total assets decreased $204,520 or 3.4% from $6,103,992 as of December 31, 2011 to $5,899,471 as of March 31, 2012 primarily as a result of a net decrease in current assets of $216,865 the components of which are discussed further below and a net increase in furniture and equipment of $8,495. The decrease in total assets were partially offset by a decrease in intangible assets as a result of amortization and an increase other assets of $29,000 as a result of return of our advance on the eliminated Brazilian joint venture and additional security deposit.

Current Assets -- The net decrease in current assets of $216,865 was primarily associated with a $598,662 increase in inventory levels, $443,930 decrease in accounts receivable, a decrease in prepaid expenses of $12,967, and a decrease in cash of $358,631. These net increases are primarily driven by the need to support increased sales, but are more specifically discussed as follows.

Inventory -- Inventory levels increased 27%, primarily in increased materials to support expanded production to keep pace with planned sales for 2012.

Increased inventory on hand at March 31, 2012, represents approximately 41% of COGS or an 8.5 month supply based on the sell through rate achieved for the three months ended March 31, 2012, as annualized. 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 1.4 times. Management intends to improve 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. The initially low turnover is a result of stocking chemicals in anticipation of planned sales increases in 2012.

Accounts Receivable – Accounts receivable decreased $443,930. The decrease represents a 24% decrease in the accounts receivable balance at March 31, 2012. The decrease is the result of increased collection efforts. Management believes that its current receivables are collectable.

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

Material Commitments

None.

Off Balance Sheet Arrangements

None.

Quantitative and Qualitative Disclosures about Market Risk

None.

Recent Accounting Pronouncements

Other ASUs not effective until after March 31, 2012, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

TEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to Smaller Reporting Company.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2012. Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2012 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the Company’s limited resources and limited number of employees.

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework. During the three months ended March 31, 2012, we have added additional staff in accounting in the area of disbursements and budgeting.

Limitations on Effectiveness of Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company and its chief executive officer, individually, were named in a lawsuit brought in the Circuit Court of the 11^th Judicial Circuit in and for Miami-Dade County, Florida by a former employee of Evolution Model Management, Inc., an entity also related to the Company through common ownership. Divine Skin was named because it originally hired the employee rather than Evolution Model Management as the latter was not yet an established entity. On April 17, 2012 the court awarded $51,400 to the plaintiff. The Company intends to appeal the verdict. We have established a reserve of $50,000, pending the outcome of the appeal.

ITEM 1A.

RISK FACTORS

Not Applicable to Smaller Reporting Company.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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 securities holders received current information about the Company and had the opportunity to ask questions about the Company.

During the first quarter of 2012 the Company issued 281,818 shares for services provided by two employees valued at $0.31 - $0.32 per share, which resulted in an expense of $89,182 in aggregate. The Company also issued 88,235 shares to a distributor as an award for achieving business goals. The shares were valued at $.34, which resulted in an allowance offsetting revenues of $30,000.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Description

3.1		Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated January 13, 2007 (1)
3.2		Amendment to Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated September 15, 2009 (2)
3.3		Bylaws of Divine Skin, Inc. (1)
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 2, 2011 (6)
16.1		Letter from former Auditor(5)
21.1		List of subsidiaries of the Company (1)
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		XBRL Interactive Data File**

———————

** Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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

SIGNATURES

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


Date: May 14, 2012	DIVINE SKIN, INC.

	By:	/s/ Daniel Khesin
		Daniel Khesin
		President, Chief Executive Officer,
		Chief Financial Officer/
		Principal Accounting Officer

Attached files

DS HEALTHCARE GROUP, INC. Reports

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