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

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended June 30, 2015

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

For the transition period from _______ to _______.

Commission File No. 001-35763

DS HEALTHCARE GROUP, INC.

(Exact name of registrant as specified in its charter)

Florida	20-8380461
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
1601 Green Road, Deerfield Beach, Florida	33064
(Address of Principal Executive Offices)	(Zip Code)
(888) 404-7770
(Issuer’s Telephone Number, Including Area Code) ___________________________________________ (Former Name, if Changed Since Last Report)

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

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

Smaller reporting company þ

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

There were 17,964,712 shares of common stock outstanding as of August 5, 2015.

 

 

---

 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

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

 Condensed Consolidated Balance Sheets

		June 30,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Current Assets
Cash		$	979,111			$	1,128,556
Accounts receivable, net			2,795,608				1,809,178
Inventories, net			3,955,359				3,984,528
Prepaid expenses and other current assets			357,472				278,714
Total Current Assets			8,087,550				7,200,976
Furniture and Equipment, net			168,757				206,406
Intangible Assets, net			1,049,675				1,101,373
Other Assets			102,706				88,247
TOTAL ASSETS		$	9,408,688			$	8,597,002
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable		$	1,226,283			$	1,229,863
Accrued expenses			660,110				967,112
Obligation to issue common stock			350,000				—
Credit facility			250,000				350,000
Other current liabilities			886,516				886,822
Total Current Liabilities			3,372,909				3,433,797
Long Term Debt, net of current portion			19,023				24,997
TOTAL LIABILITIES			3,391,932				3,458,794
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity
Preferred stock, $0.001 par value, 30 million shares authorized:
0 shares issued and outstanding at
June 30, 2015 and December 31, 2014.			—				—
Common stock, $0.001 par value, 300 million shares authorized:
17,394,712 and 16,202,268 shares issued and outstanding at
June 30, 2015 and December 31, 2014, respectively			17,395				16,202
Additional paid-in-capital			15,901,663				14,839,695
Stock subscription			(300,667	)			(2,500	)
Accumulated deficit			(9,708,065	)			(9,613,375	)
Accumulated comprehensive income			144,860				(63,384	)
Total Shareholders' Equity			6,055,186				5,176,638
Non-Controlling Interest			(38,430	)			(38,430	)
Total Shareholders' Equity			6,016,756				5,138,208
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	9,408,688			$	8,597,002

See accompanying notes to condensed consolidated financial statements

1

---

 

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

 Condensed Consolidated Statements of Operations and Comprehensive Loss

 (Unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Net Revenue		$	3,659,548			$	3,744,434			$	6,463,468			$	6,429,397
Cost of Goods Sold			1,595,181				1,802,898				2,733,941				3,005,416
Gross Profit			2,064,367				1,941,536				3,729,527				3,423,981
Operating Costs and Expenses:
Selling and marketing
Commissions and consulting			358,236				479,778				527,608				840,337
Marketing and promotion			151,652				110,643				392,522				347,757
Other selling and marketing expenses			380,878				603,817				747,414				976,166
			890,766				1,194,238				1,667,544				2,164,260
General and administrative
Salary and personnel costs			511,172				557,058				1,023,624				1,141,741
Professional fees and consulting costs			346,102				472,549				722,513				1,057,774
Other general and administrative expenses			290,051				308,929				479,329				472,965
			1,147,325				1,338,536				2,225,466				2,672,480
Total operating costs and expenses			2,038,091				2,532,774				3,893,010				4,836,740
Operating Income (Loss)			26,276				(591,238	)			(163,483	)			(1,412,759	)
Other Income (Expense)
Interest expense			(24,957	)			(22,443	)			(40,812	)			(49,988	)
Other			(10,870	)			10,036				109,605				8,950
Total other income (expense)			(35,827	)			(12,407	)			68,793				(41,038	)
Loss Before Income Taxes			(9,551	)			(603,645	)			(94,690	)			(1,453,797	)
Income Tax Expense			—				31,527				—				31,527
Net Loss			(9,551	)			(635,172	)			(94,690	)			(1,485,324	)
Net Loss Attributable to Non-Controlling Interest			—				(1,833	)			—				(6,204	)
Net Loss Attributable to Common Shareholders		$	(9,551	)		$	(633,339	)		$	(94,690	)		$	(1,479,120	)
Basic and Diluted Earnings per Share:
Weighted average shares outstanding			17,043,601				16,085,112				16,652,204				16,007,119
Loss per share		$	(0.00	)		$	(0.04	)		$	(0.01	)		$	(0.09	)
Other Comprehensive Income:
Foreign currency translation adjustment			(12,390	)			(40,439	)			208,244				(14,893	)
Comprehensive (loss) income		$	(21,941	)		$	(673,778	)		$	113,554			$	(1,494,013	)

See accompanying notes to condensed consolidated financial statements

2

---

 

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

 Condensed Consolidated Statements of Cash Flows

 (Unaudited)

		For the Six Months Ended
		June 30,
		2015				2014
Cash Flows from Operating Activities:
Net Loss		$	(94,690	)		$	(1,485,324	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			102,104				144,909
Loss on disposal of fixed assets			—				2,468
(Recovery) for bad debts			(6,656	)			(142,585	)
(Recovery) for obsolete inventory			(15,910	)			(168,917	)
Stock issued for services			136,760				31,520
Changes in operating assets and liabilities:
Accounts receivable			(979,774	)			274,742
Inventories			45,079				(653,041	)
Prepaid expenses and other current assets			(51,425	)			232,648
Accounts payable			(3,583	)			(627,001	)
Accrued expenses			73,900				(44,862	)
Other current liabilities			(305	)			577,137
Net cash used in operating activities			(794,500	)			(1,858,306	)
Cash Flows from Investing Activities:
Purchase of furniture and equipment			(457	)			(50,359	)
Purchase of injection molds			(18,459	)			—
Proceeds from disposal of fixed asset			(212	)			—
Net cash used in investing activities			(19,128	)			(50,359	)
Cash Flows from Financing Activities:
Repayments of credit facility			—				(353,496	)
Proceeds of credit facility			250,000				—
Repayment of loans and notes			(5,974	)			(5,630	)
Proceeds from sale of stock subscription			220,000				—
Proceeds from sale of common stock			—				192,000
Less issuance cost			—				(10,000	)
Net cash provided (used) by financing activities			464,026				(177,126	)
Effect of exchange rate changes on cash			200,157				(14,100	)
Decrease in Cash			(149,445	)			(2,099,891	)
Cash, Beginning of Period			1,128,556				2,872,946
Cash, End of Period		$	979,111			$	773,055
Supplemental Information:
Cash paid for interest		$	40,812			$	49,988
Supplemental Noncash Investing and Financing Activities
Stock issued to settle debt		$	—			$	5,000
Conversion of note to common stock pending issuance		$	350,000			$	—
Common stock issued for prepaid services		$	328,000			$	—
Common stock issued to settle accrued expenses		$	380,902			$	—

See accompanying notes to condensed consolidated financial statements

3

---

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

(Unaudited)

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

 

Terms and Definitions

 

	ASC	Accounting Standards Codification
	ASU	Accounting Standards Update
	FASB	Financial Accounting Standards Board
	FIFO	First-in, First-out
	US GAAP	Accounting principles generally accepted in the United States of America
	SEC	Securities and Exchange Commission
	2014-QTR	Three months ended June 30, 2014
	2014-YTD	Six months ended June 30, 2014
	2015-QTR	Three months ended June 30, 2015
	2015-YTD	Six months ended June 30, 2015
	VIE	Variable Interest Entity

Organization and Nature of Business

DS Healthcare Group, Inc. (the “Company”, “DS Laboratories”, “DSKX”, “we”, “us” or “our”) was organized under the laws of the State of Florida in January 2007. The Company is engaged in the development and discovery of drug therapies for specialty pharmaceuticals and commercializes innovative personal care products for its consumer brand. The growing personal care products portfolio is distributed through a network of domestic and international retailers and distributors. The Company researches and develops its own products, which management believes keeps the Company at the forefront of innovation. Our goal is to immediately commercialize unique and disruptive technologies for personal care products that consumers use everyday and to advance drug development to capitalize on both short term and long term projects.

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The condensed consolidated financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting is US GAAP.

The condensed consolidated financial statements include the accounts of the Company and its operating subsidiaries DS Laboratories, Inc., Sigma Development and Holding Co., Inc., Polaris Labs, Inc., Nutra Origin, Inc. and Divine Skin Laboratories, S.A. de CV (“DS Mexico”). Also included in the condensed consolidated financial statements are the operating activities of Velocity Storage and Packaging, LLC and Wally Group, LLC, an inactive entity, which are accounted for as VIEs. All significant intercompany balances and transactions have been eliminated in consolidation.

4

---

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

(Unaudited)

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

Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. The interim condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and related disclosures included in the Company’s Annual Report on Form 10-K, filed with the SEC on April 15, 2015. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) which are necessary to provide a fair presentation of financial position as of June 30, 2015 and the related operating results and cash flows for the interim periods presented have been made.  The results of operations for the periods presented are not necessarily indicative of the results to be expected for future periods or for the year ending December 31, 2015.

Prior Period Reclassifications

Certain prior period amounts have been reclassified for comparability with the June 30, 2015 presentation. These reclassifications had no effect on previously reported net loss.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these condensed consolidated financial statements include:

·	Estimates of allowances for uncollectable accounts receivable,
·	Estimates of inventory obsolescence and overhead and labor cost allocations,
·	Estimates assuming future earning capacity of our intangible assets,
·	Estimates of value of equity transactions for services rendered,
·	Estimates of returned or damaged product, and
·	Estimates made in our deferred income tax calculations, for which there is a full valuation allowance.

Accounts Receivable

Accounts receivable are reported at their net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. The Company also provides for allowances against accounts receivables for product returns and cooperative advertising allowances. At June 30, 2015 and December 31, 2014, the allowance for uncollectable accounts was $261,824 and $268,329, respectively, $210,000 at both dates for defectives and product returns and $60,000 at both dates for advertising credits.

Inventories

Inventory is reported at the lower of cost or market on the FIFO method. Our inventory is subject to expiration and obsolescence. Accordingly, quantities purchased and sell through rates are periodically monitored for potential overstocking or pending expiration as a basis for establishing the appropriate reserve for any estimated expiration or obsolescence.

5

---

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

(Unaudited)

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

Revenue Recognition

The Company recognizes revenue when all of the following four criteria are met:

·	persuasive evidence of a sales arrangement exists,
·	delivery has occurred,
·	the sales price is fixed or determinable and
·	collectability is probable.

Shipping and handling charges related to sales transactions are recorded as sales revenues when billed to customers or included in the sales price.  Shipping and handling costs are included in cost of goods sold.

Research and Development

The Company currently maintains a functional laboratory employing a full time chemist, a part time chemist/consultant and a lab technician that identify new technology, test product alternatives and improve existing formulations. In addition, our founder and CEO devotes a substantial portion of his time in identifying new technologies and formulations to develop new products and improve existing products with the newest technology available. Such activities are expensed in the year incurred. Such costs include laboratory supplies, salaries, materials and consultant fees. These costs are classified as product development, salaries, selling, general and administrative expenses in the condensed consolidated statements of operations, and amounted to $75,324 and $157,977 for 2015-YTD and 2014-YTD, respectively.

Earnings Per Share

Potentially dilutive securities are excluded from the computation of diluted net loss per share for all of the periods presented in the accompanying condensed consolidated statements of operations because the reported net loss in each of these periods results in their inclusion being antidilutive. Antidilutive securities, which consist of stock options and warrants that are not included in the diluted net loss per share calculation, consisted of an aggregate of 316,526 shares as of June 30, 2015 and 2014.

Debt Discounts

The Company records, as a discount to notes, the relative fair value of warrants issued in connection with the issuances and the intrinsic value of any conversion options based on the differences between the fair value of the underlying common stock at the commitment date of the note and the effective conversion price embedded in the note.  Debt discounts under these arrangements are amortized to interest expense using the interest method over the earlier of the term of the related debt or its earliest redemption date.

NOTE 3. – LIQUIDITY and GOING CONCERN

We have sustained operational losses since our inception, however commencing in Q3 2014 we began to take steps to achieve profitability in the future.  Such steps included increasing gross profit through price increases in Q2 2014 and through formula changes to reduce cost without reducing efficacy. We also decreased overall G&A expenses by implementing cost controls over the last two quarters. At June 30, 2015, we had an accumulated deficit of $9,708,065 compared to $9,613,375 at December 31, 2014. The Company cannot predict how long it will continue to incur further losses or whether it will ever achieve profitability as this is dependent upon the continued reduction of certain operating expenses, success of new and existing products and increase in overall revenue among other things. These conditions raise substantial doubt about the entity’s ability to continue as a going concern.

6

---

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

(Unaudited)

NOTE 3. – LIQUIDITY and GOING CONCERN (Continued)

As of June 30, 2015, we had $979,111 in cash. While we have historically financed our operations and growth primarily through the successful issuance and sale of shares of our common stock, a line of credit and the issuance of promissory notes, the Company has started several new revenue initiatives creating additional revenue streams.  Some of these initiatives include: establishing an online store (Shop.DSLaboratories.com) which became operational in the third quarter of 2014, generating $213,885 2015-YTD in net revenue.

The Company also established a hair treatment clinic which opened in late November 2014 which has not yet generated appreciable sales. In the first quarter 2015, we have launched a range of new products. Although we cannot predict our success with these products or projects, all are currently under development and production and in various stages of completion. We have commenced implementing, and will continue to implement, various measures to address our financial condition, including but not limited to:

·	Continuing to seek debt and equity financing. However, there can be no assurances that the Company will be able to raise additional capital on favorable terms, or at all.
·	We completed an operational budget for 2015 that sets changes in our processes to focus on profitability.  We are also implementing a feedback process with improved interdepartmental communication.

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates continuation of the Company as a going concern.  The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and carrying amount or classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. We have commenced implementing, and will continue to implement, various measures to address our financial condition.

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS

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

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

NOTE 5. – INVENTORIES

Significant components of inventory at June 30, 2015 and December 31, 2014 consist primarily of:

		2015				2014
Inventory in transit		$	132,181			$	231,623
Bulk product and raw materials			2,319,667				2,502,402
Work in process			418,265				213,832
Merchandise inventory			1,456,594				1,423,929
Less: Allowance			(371,348	)			(387,258	)
		$	3,955,359			$	3,984,528

7

---

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

(Unaudited)

NOTE 6. – INTANGIBLE ASSETS

Significant components of intangible assets at June 30, 2015 and December 31, 2014 consist of:

		2015				2014
Distribution rights in Brazil		$	750,000			$	750,000
Less: Accumulated amortization			(431,250	)			(393,750	)
Net distribution rights			318,750				356,250
Mexican customer list			932,000				932,000
Less: Accumulated amortization			(237,360	)			(223,162	)
Net customer list			694,640				708,838
Goodwill			36,285				36,285
		$	1,049,675			$	1,101,373

The following table represents the amortized cost of the various assets over the remaining years; the weighted average remaining period is 5.94 years.

Asset:			2015				2016				2017				2018				Beyond				Total
Brazil distribution rights			$	37,500			$	75,000			$	75,000			$	75,000			$	56,250			$	318,750
Mexican customer list				51,750				103,500				103,500				103,500				332,390				694,640
			$	89,250			$	178,500			$	178,500			$	178,500			$	388,640			$	1,013,390

NOTE 7. – ACCRUED EXPENSES

Accrued expenses at June 30, 2015 and December 31, 2014 consist of:

		2015				2014
Accounting		$	10,000			$	—
Advertising			—				35,000
Commission			270,644				367,063
Director Services			1,510				15,000
Facilities			22,660				10,300
Fees/Interest			33,833				7,000
Investor Relations			78,750				265,024
Materials			120,412				102,958
Personnel			81,293				108,819
Warehouse			41,008				55,948
		$	660,110			$	967,112

NOTE 8. – OBLIGATION TO ISSUE COMMON STOCK

The Company was a party to a note for $350,000 which was due on May 28, 2015.  On June 1, 2015 the parties agreed to convert the note plus accrued interest to 199,202 common shares.  Accordingly the Company has recorded an obligation to issue shares as a liability at June 30, 2015. The accrued interest is not material to the financial statements and has been omitted.  As of the date of this report, such shares have not been issued.

8

---

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

(Unaudited)

NOTE 9. – OTHER CURRENT LIABILITIES

Other current liabilities at June 30, 2015 and December 31, 2014 consist of:

		2015				2014
Customer deposits		$	189,170			$	141,998
Credit cards			331,921				190,803
Marketing and promotional programs			111,000				227,681
Taxes payable - Mexico			112,363				173,567
Current portion of long term debt			11,773				11,429
Vendor Note			25,174				25,174
Advance from Officer			4,000				26,360
Other operating liabilities			88,038				89,810
Payroll taxes			13,077				—
		$	886,516			$	886,822

NOTE 10. – DEBT FINANCING

Note Payable – The Company is party to a note for $250,000 which is secured by inventory and bears interest at 1% per month. The note originally matured on March 28, 2015 and was extended near the maturity date to July 20, 2016. In connection with issuing the note, the Company has also issued a warrant to purchase 30,000 common shares at $0.85 per share. The warrants expire in two years. The warrants had an aggregate relative fair value of $16,500. The transaction was deemed immaterial and not recorded.

Long Term Debt – On December 10, 2012, the Company entered into a loan agreement for $53,900 to purchase certain warehouse equipment. The loan provides for monthly principal and interest payments of $1,041 for 60 months at 5.95% interest. Payments began on February 18, 2013.

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

		2015			2016			2017			Total
Current Portion of Long Term Debt		$	5,799		$	5,974		$	—		$	11,773
Long Term Debt			—			6,154			12,869			19,023
		$	5,799		$	12,128		$	12,869		$	30,796

9

---

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

(Unaudited)

NOTE 11. – COMMITMENTS AND CONTINGENCIES

During the six months ended June 30, 2015, the Company operated under several material agreements as listed below:

Lease for office and production facilities –

	·	The Company is party to a lease for a total of 1,875 square feet in sales facilities located in Ashville, North Carolina. The leases provide for monthly rent of $4,725 throughout the lease term which both expires on December 31, 2015.  Effective September 30, 2014 the Company has relocated this office to its Florida headquarters and as of June 30, 2015 is still in negotiations with the landlord to formalize the lease termination.
	·	The Company was party to a lease for 50,000 square feet in warehouse and corporate office space located in Deerfield Beach, Florida, which expired in July 2014. On June 25, 2014, commencing August 1, 2014, the Company completed negotiations for a new lease for the same Deerfield Beach location. The terms of the new lease provide for $6.00 per square foot or $24,720 per month base rent plus $10,918 monthly in operating expenses and terminates on July 31, 2019. The lease provides for annual increases in the monthly base rent of $0.24- $0.27 per square foot.

The Company’s Mexican facility leases 246 square feet of office space and 1,230 square feet of warehouse Mexico City, Mexico, which expired in July 2015. The Company is negotiating a renewal lease at the same location for approximately the same terms. The lease provides for monthly rent of $1,408 and the Company continues to lease the space on a month to month basis.

The Company accounts for its facility leases using the straight-line method and incurred $213,828 and $171,720 in total rent expense of which a portion was allocated to manufacturing overhead, in the six months ended June 30, 2015 and 2014, respectively.

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

		2015				2016				2017				2018				2019				Total
Deerfield, FL (HQ/Production)		$	218,772			$	444,672			$	457,238			$	470,298			$	278,882			$	1,869,862
Mexico City, Mexico (Sales)			7,200				—				—				—				—				7,200
		$	225,972			$	444,672			$	457,238			$	470,298			$	278,882			$	1,877,062

Pending and threatened litigation –

On June 13, 2011, we filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an investor relations and consulting agreement entered into on or about October 15, 2010 whereby we paid a third party approximately $20,000 and 23,000 shares of restricted common stock in consideration of investor relations and consulting services. We have demanded return of the 23,000 shares of restricted stock and recovery of costs and other damages. The third party has filed a counter claim for breach of the agreement. We intend to continue vigorously defend this claim.

During 2011, we filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an agreement entered into on or about May 18, 2010 whereby we paid a third party approximately $500 and 20,000 shares of restricted common stock in consideration of consulting services. We had demanded return of the 20,000 shares of restricted stock and recovery of costs and other damages. The claim was dismissed for lack of jurisdiction and we re-filed the action in the Supreme Court, New York County, New York on or about January 11, 2012, seeking rescission of said agreement and the return of $500 and 20,000 shares of restricted common stock.  During March 2014, the matter was settled and each party released the other from all claims related to the action.  Under a settlement matter and general release, the defendant agreed to return to Company treasury 10,000 shares common stock subject to the dispute, and of the remaining 10,000 shares, the defendant agreed to a one year lock up agreement covering 60% of the shares for a period of one year from the settlement date. As of June 30, 2015, the agreed shares have not been returned to treasury.

10

---

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

(Unaudited)

NOTE 11. – COMMITMENTS AND CONTINGENCIES (Continued)

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

Purchase commitments

In order to secure an adequate supply of raw materials, the Company executes purchase orders to its suppliers as evidence of its intent to purchase materials. Purchase orders outstanding at June 30, 2015 totaled $469,539.

Contract contingencies

Our distribution agreement with Gamma Investors, a shareholder of the Company, provides that in the event we terminate the agreement without cause, we are required to repurchase all products held in Gamma’s inventory and pay Gamma a fee equal to the greater of the prior 12 month product purchased by Gamma or $2 million. Transactions with Gamma have been de minimus to date.

NOTE 12. – EQUITY

Common Stock

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

During the second quarter of 2015, the Company issued 15,500 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $28,060.  We also issued an aggregate of 412,154 shares of common stock to five employees for services rendered, at an aggregate value of $380,902 which were accrued and expensed in prior periods and 5,000 shares of common stock valued at $8,200 to a director or services rendered. We also issued 440,000 shares of common stock to an investor in satisfaction of a subscription to purchase the shares, cancelled $2,500 subscription and returned 6,000 shares to treasury and cancelled.  We issued 200,000 forfeitable shares of common stock to a consultant valued at $328,000 for services to be rendered ratably over the upcoming year, which have been charged to equity and will be accreted to expense as the services are performed.

NOTE 13. – SIGNIFICANT CUSTOMERS

Our product revenues represent primarily sales of Revita and Revita Cor which individually exceed 10% of total sales and collectively represent 39% of net revenue. Spectral DNC-N represents 9% of net revenue and Polaris NR09 represents 6%of net revenue. The Company sells its products to several types of customer, which primarily include distributors and salons, several of which represent individually in excess of 10% of total net revenue during 2015-YTD and 2014-YTD. During 2015-YTD and 2014-YTD, our top ten customers generated 47% and 42% of our net revenue, respectively.

There were no sales to customers individually in excess of 10% of net revenue during 2015-YTD.

11

---

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

(Unaudited)

NOTE 13. – SIGNIFICANT CUSTOMERS (Continued)

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

Customer		Sales Amount		Percent		Accounts Receivable		Percent
C		$1,010,871		14%		$133,090		5%

NOTE 14. – 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 from significant vendors during 2015-YTD and their accounts payable at June 30, 2015 were:

Vendor		Purchase Amount		Percent		Accounts Payable		Percent
C		$387,903		21%		$  83,522		7%
D		$234,051		13%		$137,735		11%

Purchases from significant vendors during 2014-YTD and their accounts payable at June 30, 2014 were:

Vendor		Purchase Amount		Percent		Accounts Payable		Percent
C		$567,814		21%		$87,101		5%

NOTE 15. – GEOGRAPHIC REVENUE REPORTING

The Company is organized based on one business segment although it does distribute its products on a world-wide basis. Several of its largest distributors are based in North America who in turn sells their products in Europe or Asia. We consider these customers as based in North America. However our sales to international distributors who distribute our product outside North America have been consistent.

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

		2015				2014
Net Revenue:
North America		$	2,682,748			$	2,629,177
International			3,780,720				3,800,220
		$	6,463,468			$	6,429,397
Furniture and Equipment, Net:
North America		$	127,336			$	109,664
International			41,421				96,001
		$	168,757			$	205,665

12

---

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

(Unaudited)

NOTE 16. – RELATED PARTY TRANSACTIONS

For the six months ended June 30, 2015 and 2014, the Company was a party to the following related party transactions not disclosed elsewhere in these financial statements:

·

the Company expensed $51,617 (2015) and $51,617 (2014) as compensation to the father of our Chief Executive Officer for consulting on various projects,

·

the Company expensed $27,036 (2015) and $0 (2014) as compensation to the sister of our Chief Executive Officer as a brand manager for various customers,

·

the Company had receivables from a consultant of $58,732 (2015) and $2,700 (2014) and payables of $0 (2015) and $0 (2014). In addition, the Company enters into transactions with the consultant who is also a shareholder and performs outsourced COO services are as follows:

o

The Company expensed $95,000 (2015) and $0 (2014) for outsourced COO services.

o

The Company expensed $42,475 (2015) and $16,500 (2014) for  materials needed for the assembly and manufacture of products for export,

o

The Company expensed $43,700 (2015) and $142,814 (2014) in cash and stock for IR related expenses and services.

o

The Company received $64,003 (2015) and $61,302 (2014) for finished product purchased and resold.

NOTE 17. – SUBSEQUENT EVENTS

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

During the third quarter of 2015, the Company issued 70,000 shares to two employees for services in aggregate valued at $190,100.

During the third quarter of 2015, the Company entered into a distribution agreement whereby it has issued 500,000 shares over the next 5 years, provided it meets certain revenue minimums. The shares will be held in escrow while the milestones are not met.

13

---

ITEM 2.

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

This filing contains forward-looking statements, including statements regarding, among other things, our projected sales and profitability, our Company’s growth strategies, our Company’s future financing plans and our Company’s anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

 

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

 

Significant Accounting Policies

 

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

 

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

 

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

 

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

 

Accounts Receivable – Accounts receivable are reported at their net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible.

 

14

---

Inventory – Inventory is reported at the lower of cost or market on the first-in, first-out (FIFO) method. Our inventory is subject to expiration and obsolescence. Accordingly, quantities purchased and sell through rates are periodically monitored for potential overstocking or pending expiration as a basis for establishing the appropriate reserve for any estimated expiration or obsolescence.

 

Revenue Recognition – The Company recognizes revenue when all of the following four criteria are met:

 

	·	persuasive evidence of a sales arrangement exists,
	·	delivery has occurred,
	·	the sales price is fixed or determinable and
	·	collectability is probable.

 

Shipping and handling charges related to sales transactions are recorded as sales revenues when billed to customers or included in the sales price. Shipping and handling costs are included in cost of goods sold.

 

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

 

Results of Operations

 

Three Months Ended June 30, 2015 as Compared to the Three Months Ended June 30, 2014

 

Revenues, net – Total net revenues decreased $84,886 or 2.3%, from $3,744,434 for the three months ended June 30, 2014 to $3,659,548 for the three months ended June 30, 2015. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 39% of total sales for the period. In addition, Spectral DNC-N represents approximately 9% of total sales for each period along with Polaris NR09 and Spectral DNC-S V2 which represents 6% and 4% of net revenue, respectively.

 

Net revenue from our Mexican subsidiary decreased 5.9% in 2015-QTR compared to 2014-QTR, accounting for $914,583 (25%) and $972,202 (25.4%) of consolidated net sales for the three months ended June 30, 2015 and 2014 respectively. Net revenue from our Mexican subsidiary decreased as a result of currency instability resulting in higher consumer prices.  Sales generated from US operations had a slight decrease as well, as a result of the timing and receipt of customer orders. The issue of backorders has improved dramatically. We continue our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributor base, both domestic and foreign. Revenues from our top ten customers accounted for approximately 47% and 52% of our total revenues during the three months ended June 30, 2015 and 2014, respectively.

 

Cost of Goods Sold – Total cost of goods sold decreased $207,717 or 11.5%, from $1,802,898 (2014-QTR) to $1,595,181 (2015-QTR). We continued additional cost cutting efforts during the quarter ending June 30, 2015 that included improved sales mix, reformulations, and improved manufacturing efficiencies.

Consequently, the gross margin has improved from 50.8% (2014-QTR) to 56.4% (2015-QTR), with US operations accounting for $1,371,881 or 71% (2014-QTR) and $1,551,684 or 75% (2015-QTR) of the gross margin dollars and with DS Mexico accounting for $569,654 or 29% (2014-QTR) and $512,683 or 35% (2015-QTR) of gross margin dollars.

15

---

Selling and Marketing Costs – Selling and marketing costs decreased $303,472 or 25.4% from $1,194,238 (2014-QTR) to $890,766 (2015-QTR). The decrease was due to the following:

 

	–	Decreases of:

 

	·	$121,542 for consulting and commissions, as a result of decreased sales incentives and improved efficiencies in the sales force, and

 

	·	$197,970 for freight and shipping, as a result of concentrating shipments into fewer freight forwarders to achieve volume discounts and to reduce expedited shipments as a result of improved production planning.

	–	Partially offset by increases of:

	·	$16,040 for other sales and marketing costs, which is considered nominal.

General and Administrative Costs – General and administrative costs decreased $191,210 or 14.3%, from $1,338,536 (2014-QTR) to $1,147,325 (2015-QTR). The decrease is due to the following:

 

	–	Decreases of: · $126,447 for professional fees primarily associated with a reduced need for consultants, · $45,885 for personnel costs, as a result of reductions in redundancies and overall staff needs, · $37,799 for depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing the Pure Guild brand and other intangibles associated with our Mexico operations during 2014, and · $25,635 for bank charges as a result of improved internal policies within A/P for wire and bank analysis costs, as well as overall fees for transactions. · $17,162 for other general and administrative costs, as a result of improved overall efficiencies.

 

	–	Partially offset by increases of: · $61,718 for licenses and permits, primarily as a result of increased product registration.

Other Income and Expenses – Other expense increased $23,420 or 188.8%, from $12,407 expense (2014-QTR) to $35,827 expense (2015-QTR), which is considered nominal.

 

16

---

Six Months Ended June 30, 2015 as Compared to the Six Months Ended June 30, 2014

 

Revenues, net – Total net revenues increased $34,071 or 0.5%, from $6,429,397 for the six months ended June 30, 2014 to $6,463,466 for the six months ended June 30, 2015. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 39% of total sales for the period. In addition, Spectral DNC-N represents approximately 9% of total sales for each period along with Polaris NR09 and Spectral DNC-S V2 which represents 6% and 4% of net revenue, respectively.

 

Net revenue from our Mexican subsidiary decreased 1.6% in 2015-YTD compared to 2014-YTD, accounting for $1,578,766 (24%) and $1,604,178 (24%) of consolidated net sales for the six months ended June 30, 2015 and 2014 respectively. Net revenue from our Mexican subsidiary decreased as a result of currency instability resulting in higher consumer prices.  Sales generated from US operations had a slight decrease as well, as a result of the timing and receipt of customer orders. The issue of backorders has improved dramatically. We continue our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributor base, both domestic and foreign. Revenues from our top ten customers accounted for approximately 48% and 47% of our total revenues during the six months ended June 30, 2015 and 2014, respectively.

 

Cost of Goods Sold – Total cost of goods sold decreased $271,475 or 9%, from $3,005,416 (2014-YTD) to $2,733,941 (2015-YTD). We continued additional cost cutting efforts during the period ending June 30, 2015 that included improved sales mix, reformulations, and improved manufacturing efficiencies.

Consequently, the gross margin has improved from 50.6% (2014-YTD) to 57.7% (2015-YTD), with US operations accounting for $2,492,426 or 72.8% (2014-YTD) and $2,832,630 or 75.9% (2015-YTD) of the gross margin dollars and with DS Mexico accounting for $931,555 or 27.2% (2014-YTD) and $896,897 or 24.1% (2015-YTD) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs decreased $496,716 or 23% from $2,164,260 (2014-YTD) to $1,667,544 (2015-YTD). The decrease was due to the following:

 

	–	Decreases of:

 

	·	$312,729 for consulting and commissions, as a result of decreased sales incentives and improved efficiencies in the sales force, and

 

	·	$191,389 for freight and shipping, as a result of concentrating shipments into fewer freight forwarders to achieve volume discounts and to reduce expedited shipments as a result of improved production planning.

	–	Partially offset by increases of:

	·	$7,402 for other sales and marketing costs, which is considered nominal.

17

---

General and Administrative Costs – General and administrative costs decreased $447,014 or 16.7%, from $2,672,480 (2014-YTD) to $2,225,466 (2015-YTD). The decrease is due to the following:

 

	–	Decreases of: · $335,261 for professional fees primarily associated with a reduced need for consultants · $118,117 for personnel costs, as a result of reductions in redundancies and overall staff needs, · $61,101 for depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing the Pure Guild brand and other intangibles associated with our Mexico operations during 2014, and · $48,998 for bank charges as a result of improved internal policies within A/P for wire and bank analysis costs, as well as overall fees for transactions. · $5,160 for other general and administrative costs, as a result of improved overall efficiencies which is considered nominal.

 

	–	Partially offset by increases of: · $121,623 for bad debt, as a result of reversal of a one- time charge during 2014-QTR.

Other Income and Expenses – Other income and expense increased $109,831 or 267.6%, from $41,038 expense (2014-YTD) to $68,793 income (2015-YTD). The increase is due to invoicing a one-time fee of $120,000 for terminating our existing agreement with a major consumer products company so that a new agreement could be structured.  The Company realized no revenue other than revenue from the terminated agreement.

 

Liquidity and Capital Resources

 

We had cash of $979,111 and working capital of $4,714,641 at June 30, 2015. Our operating and capital requirements in connection with supporting our expanding operations and introducing new products have been and will continue to be significant to us. Since inception, our losses from operations and working capital required to grow our business were satisfied primarily through the private sales of our common stock and by credit financing.

 

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

 

We have commenced implementing, and will continue to implement, various measures to address our financial condition, including methods to increase gross profit margins and reducing and streamlining our operational costs and overhead. We have historically satisfied our working capital requirements through the sale of common stock, advances from related parties and third parties and through our credit facility. We are continuing to seek debt and equity financing; however, there can be no assurances that the Company will be able to raise additional capital on favorable terms, or at all.

18

---

Cash Flows for the Six Months Ended June 30, 2015

 

Cash Flows from Operating Activities

 

Operating activities used net cash for the six months ended June 30, 2015 of $794,500. Our net loss, when adjusted by various items aggregating $216,298 which impact net loss but do not impact cash during the period, such as stock issued for services or depreciation and amortization, was$121,608. In addition, changes in operating assets and liabilities necessary to support our operations used cash of $916,108 as follows:

 

	·	$979,774 used by an increase in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,
	·	$45,078 provided by a decrease in inventory component levels which is not considered significant,
	·	$3,583 used by a decrease in accounts payable which is not considered significant,
	·	$73,900 provided by an increase in accrued expenses as a result of commissions and compensation commitments, and
	·	$51,732 used by net changes in other current assets and liabilities primarily as a result of increased other assets associated with the expansion of our Mexican operations.

 

Cash Flows used in Investing Activities

 

Our investing activities used $19,128 in net cash during the six months ended June 30, 2015. Net cash used is primarily the result of injection mold purchases for production in the US and sales operations in Mexico, plus a small amount for furniture and fixtures.

 

Cash Flows from Financing Activities

 

Our financing activities contributed $464,026 in net cash during the six months ended June 30, 2015, primarily as a result of the $220,000 contributed for purchase of subscriptions, $250,000 from the proceeds of a credit facility less the use of $5,974 in repayment of loans and notes.

Financial Position

 

Total Assets – Our total assets increased $811,686 or 9.4% from $8,597,002 as of December 31, 2014 to $9,408,688 as of June 30, 2015, primarily as a result of the cash used to repay creditors and increase inventory components. There was a net increase in current assets of $886,574 the components of which are discussed further below. The decrease in total assets was also the result of a decrease of $51,698 in intangible assets, due to amortization, as well as a decrease in equipment, net of depreciation, of $37,649 which was partially offset by an increase of $14,459 in other assets.

 

Current Assets – The net increase in current assets of $886,574 was primarily associated with an increase in accounts receivable of $986,430 as a result of the timing of customer orders and an increase in prepaid expenses of $78,758. These net changes are primarily driven by changes discussed below:

 

Inventory – Inventory levels decreased 0.7% from December 31, 2014 to June 30, 2015, as a result of continued efforts to replenish inventory in key raw material components in anticipation of higher sales in the latter half of 2015. Inventory levels increased as a result of increased number of SKU’s in our portfolio of products. Backlog and back orders have effectively been reduced to zero and perceived sales in the later part of 2015 should use the inventory on hand.

 

Average inventory represents approximately 72.6% of COGS or over an eleven month supply based on the sell through rate achieved for the six months ended June 30, 2015, resulting in an inventory turnover rate of 1.38 times. This inventory turn rate should improve as we ramp up sales volume that can now be met with smoother production timing.

 

19

---

Accounts Receivable, net – Accounts receivable increased $986,430, primarily as a result of increased concentration of sales during the last weeks of Q2 2015. The receivables are in line with historical averages for previous quarters and these levels of sales.

 

Prepaid Expenses and other current assets – Prepaid expenses increased 28.2%, primarily as a result of an advance to an IR consultant.

 

Material Commitments

 

None.

 

Off Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements  

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

 

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

 

In connection with the preparation of this Form 10–Q, our management, including the CEO and CFO, updated its December 31, 2014 evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. As described below, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. As a result of those material weaknesses, our management has concluded that, as of June 30, 2015, our disclosure controls and procedures were not effective, as a result of certain material weaknesses.

 

The specific material weaknesses that management identified in our internal controls as of June 30, 2015 that persist are as follows:  

	·	We did not have adequate staffing resources to provide appropriate review and supervision for all necessary areas and our general staff do not have the necessary training to perform appropriate analytical or review procedures.
	·	We did not have a sufficient number of adequately trained technical accounting and external reporting personnel to support standalone external financial reporting under SEC requirements.
	·	We did not have personnel with sufficient experience with United States generally accepted accounting principles to address complex transactions.
	·	We did not obtain adequate documentation to support all credit card transactions.

 

20

---

Plans for Remediation of Material Weaknesses

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

 

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

 

Changes in Internal Control over Financial Reporting

Except as otherwise stated above, there were no changes in our internal control over financial reporting or in other factors during the quarter ended June 30, 2015, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

21

---

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.  

ITEM 1A.

RISK FACTORS

Not Applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In addition to the equity securities previously disclosed on SEC reports by the Company, during the period covered by this report the Company issued the unregistered shares of common stock as disclosed below. The shares were issued under the exemption from registration provided by Section 4(a)(2) of the Securities Act. The certificates representing the shares contain legends restricting their transferability absent registration or exemption.

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

During the second quarter of 2015, the Company issued 15,500 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $28,060.  We also issued an aggregate of 412,154 shares of common stock to five employees for services rendered, at an aggregate value of $380,902 which were accrued and expensed in prior periods and 5,000 shares of common stock valued at $8,200 to a director or services rendered. We also issued 440,000 shares of common stock to an investor in satisfaction of a subscription to purchase the shares, cancelled $2,500 subscription and returned 6,000 shares to treasury and cancelled.  We issued 200,000 forfeitable shares of common stock to a consultant valued at $328,000 for services to be rendered ratably over the upcoming year, which have been charged to equity and will be accreted to expense as the services are performed.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibit Number		Description
31.1		Certification pursuant to Rule 13a-14(a) (Provided herewith)
31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a) (provided herewith)
32.1		Certification pursuant to Section 1350 (Provided herewith)
32.2		Certification pursuant to Section 1350 (Provided herewith)
101		XBRL Interactive Data File

22

---

SIGNATURES

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

Date: August 14, 2015	DS HEALTHCARE GROUP, INC.
	By:	/s/ Daniel Khesin
		Daniel Khesin
		President, Chief Executive Officer,
		Chief Financial Officer/
		Principal Accounting Officer

23