DS HEALTHCARE GROUP, INC. - FORM 10-Q/A

Attached files

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EX-32.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex32z2.htm
EX-32.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex32z1.htm
EX-31.2 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex31z2.htm
EX-31.1 - CERTIFICATION - DS HEALTHCARE GROUP, INC.	dskx_ex31z1.htm

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

FORM 10-Q/A

(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 22,556,765 shares of common stock outstanding as of October 14, 2016.

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)			(As restated)
ASSETS

Current Assets
Cash	$	979,111		$	1,128,556
Accounts receivable, net		1,952,839			1,678,411
Inventories, net		3,965,930			3,862,532
Prepaid expenses and other current assets		357,472			278,714
Total Current Assets		7,255,352			6,948,213

Furniture and Equipment, net		131,844			169,495
Intangible Assets, net		730,925			1,101,373
Other Assets		76,706			62,247

TOTAL ASSETS	$	8,194,827		$	8,281,328


LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,434,962		$	1,486,758
Accrued expenses		738,098			1,017,112
Obligation to issue common stock		350,000			—
Credit facility		250,000			—
Note Payable		—			350,000
Other current liabilities		886,516			886,822
Total Current Liabilities		3,659,576			3,740,692

Long Term Debt, net of current portion		19,023			24,997

TOTAL LIABILITIES		3,678,599			3,765,689

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		(11,208,593	)		(10,235,944	)
Accumulated comprehensive income		144,860			(63,384	)
Total Shareholders' Equity		4,554,658			4,554,069
Non-Controlling Interest		(38,430	)		(38,430	)

Total Shareholders' Equity		4,516,228			4,515,639

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,194,827		$	8,281,328

See accompanying notes to condensed consolidated financial statements

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
	(As restated)			(As restated)			(As restated)			(As restated)

Net Revenue	$	3,304,509		$	3,744,434		$	6,002,519		$	6,429,397

Cost of Goods Sold		1,338,943			1,827,361			2,553,159			3,218,908

Gross Profit		1,965,566			1,917,073			3,449,360			3,210,489

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		394,378			646,147			774,414			1,018,496
		904,266			1,236,568			1,694,544			2,206,590
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			723,501			1,064,444
Other general and administrative expenses		271,301			428,929			711,633			592,965
		1,128,575			1,458,536			2,458,758			2,799,150

Total operating costs and expenses		2,032,841			2,695,104			4,153,302			5,005,740

Operating Loss		(67,275	)		(778,031	)		(703,942	)		(1,795,251	)

Other Income (Expense)
Interest expense		(24,957	)		(22,443	)		(40,812	)		(49,988	)
Impairment of intangible asset		---			—			(337,500	)		—
Other		(10,870	)		10,036			109,605			8,950

Total other income (expense)		(35,827	)		(12,407	)		(268,707	)		(41,038	)

Loss Before Income Taxes		(103,102	)		(790,438	)		(972,649	)		1,836,289	)

Income Tax Expense		—			31,527			—			31,527

Net Loss		(103,102	)		(821,965	)		(972,649	)		(1,867,816	)

Net Loss Attributable to Non-Controlling Interest		—			(1,833	)		—			(6,204	)


Net Loss Attributable to Common Shareholders	$	(103,102	)	$	(820,132	)	$	(972,649	)	$	(1,861,612	)

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	$	(0.01	)	$	(0.05	)	$	(0.06	)	$	(0.12	)

Other Comprehensive Income:
Foreign currency translation adjustment		(12,390	)		(40,439	)		208,244			(14,893	)
Comprehensive loss	$	(115,492	)	$	(860,571	)	$	(764,405	)	$	(1,876,505	)

See accompanying notes to condensed consolidated financial statements

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
	(As restated)			(As restated)

Cash Flows from Operating Activities:
Net Loss	$	(972,649	)	$	(1,867,816	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		83,354			144,909
Loss on disposal of fixed assets		337,500			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, net		(267,772)			274,742
Inventories, net		(87,488)			(498,621	)
Prepaid expenses and other current assets		249,242			232,648
Other assets		—			26,000
Accounts payable		(51,796)			(424,929	)
Accrued expenses		(198,780	)		(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

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., Polymer Research, 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.

On March 30, 2016, during the preparation of the Company’s 10-K, the company identified that certain transactions recorded in the company’s 10-K report for it consolidated financial statements for the years ended December 31, 2014 and the results of each quarterly 10-Q filings for the period ending September 30, 2015 became subject to an internal investigation. The internal investigation resulted in the company’s inability to timely file it’s for 10-Q as required.

The Company continued its review these transactions with its newly appointed independent accountants, the results of which have now been corrected and reflected in the restated unaudited consolidated financial statements for the three and six months ended June 30, 2015 and 2014, respectively. The corrective actions identified errors related to sales and customer returns and allowances, amounts with respect to the recognition of revenues and customer accounts receivable, and the recording of certain stock transactions.

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

(Unaudited)

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

The Audit Committee of the Board of Directors consulted with management and analyzed the adjustments with the intent to correct the 2014 and 2015 10-Q filings to reflect these errors. However, because of the above mentioned errors, the Audit Committee has directed the Company to conduct a thorough review of the financial records for calendar years ended 2014 and 2015 along with its independent accountants and believes the restated financial statements for the three and six months ended March 31, 2015 and 2014, respectively, included herein to be fairly presented.

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.

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

(Unaudited)

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

Inventories

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

Revenue Recognition

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


·	persuasive evidence of a sales arrangement exists,
·	shipping terms are FOB shipping point,
·	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.

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

(Unaudited)

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.

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. – RESTATEMENT OF FINANCIAL STATEMENTS

On September 28, 2016, during the preparation of the Company’s 10-K for the year ended December 31, 2015, the company identified certain transactions recorded in the company’s 10-K report for it consolidated financial statements for the years ended December 31, 2014 and the results of each quarterly 10-Q filings for the periods ending March 31, 2015, June 30, 2015 and September 30, 2015, and determined these transactions did not reflect the proper matching of revenues and costs. The impact of these transactions on the Company’s financial statements for the year ended December 31, 2014, have been considered and have been disclosed and reported in the notes to the Company’s financial statements as reported in the annual 10-K report for the year ending December 31, 2015.

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

The results of the quarterly 10-Q filings during the six months ending June 30, 2015, as previously filed, also did not reflect the proper matching of revenues and costs. The impact of this restatement on the Company’s financial statements for the three months and six months ended June 30, 2015 and 2014, are reflected in the tables below:

Condensed Consolidated Balance Sheets:


	Previously Reported			Adjustment			Restated 2015
ASSETS

Current Assets
Cash	$	979,111		$	—		$	979,111
Accounts receivable, net		2,795,608			(842,769	)		1,952,839
Inventories, net		3,955,359			10,571			3,965,930
Prepaid expenses and other current assets		357,472			—			357,472
Total Current Assets		8,087,550			(832,198	)		7,255,352

Furniture and equipment, net		168,757			(36,913	)		131,844
Intangible assets, net		1,049,675			(318,750	)		730,925
Other assets		102,706			(26,000	)		76,706

TOTAL ASSETS	$	9,408,688		$	(1,213,861	)	$	8,194,827

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,226,283		$	208,679		$	1,434,962
Accrued expenses		660,110			77,988			738,098
Obligation to issue common stock		350,000			—			350,000
Credit Facility		250,000			—			250,000
Other current liabilities		886,516			—			886,516
Total Current Liabilities		3,372,909			286,667			3,659,576

Long Term Debt, net of current portion		19,023			—			19,023

TOTAL LIABILITIES		3,391,932			286,667			3,678,599

COMITMENTS AND CONTINGENCIES

Shareholders' Equity
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			—			17,395
Additional paid-in-capital		15,901,663			—			15,901,663
Stock subscription		(300,667	)		—			(300,667	)
Accumulated deficit		(9,708,065	)		(1,500,528	)		(11,208,593	)
Accumulated comprehensive income		144,860			—			144,860
Total Shareholders' Equity		6,055,186			(1,500,528	)		4,554,658
Non-Controlling Interest		(38,430	)		—			(38,430	)
Total Shareholders' Equity		6,016,756			(1,500,528	)		4,516,228

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	9,408,688		$	(1,213,861	)	$	8,194,827

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	Previously Reported			Adjustment			Restated 2014
ASSETS

Current Assets
Cash	$	773,055		$	—		$	773,055
Accounts receivable, net		2,097,171			—			2,097,171
Inventories, net		3,524,537			(154,420	)		3,370,117
Prepaid expenses and other current assets		413,963			—			413,963
Total Current Assets		6,808,726			(154,420	)		6,654,306

Furniture and equipment, net		205,665			—			205,665
Intangible assets, net		1,249,870			—			1,249,870
Other assets		163,164			(26,000	)		137,164

TOTAL ASSETS	$	8,427,425		$	(180,420	)	$	8,247,005

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,603,722		$	202,072		$	1,805,794
Accrued expenses		848,185			—			848,185
Credit Facility		228,887			—			228,887
Other current liabilities		863,418			—			863,418
Total Current Liabilities		3,544,212			202,072			3,746,284

Long Term Debt, net of current portion		30,795			—			30,795

TOTAL LIABILITIES		3,575,007			202,072			3,777,079

COMITMENTS AND CONTINGENCIES

Shareholders' Equity
Common stock, $0.001 par value, 300 million shares authorized: 17,394,712 and 16,088,268 shares issued and outstanding at June 30, 2015 and 2014, respectively		16,088			—			16,088
Additional paid-in-capital		14,691,155			—			14,691,155
Stock subscription		(2,500	)		—			(2,500	)
Accumulated deficit		(9,786,540	)		(382,492	)		(10,169,032	)
Accumulated comprehensive income		(27,355	)		—			(27,355	)
Total Shareholders' Equity		4,890,848			(382,492	)		4,508,356
Non-Controlling Interest		(38,430	)		—			(38,430	)
Total Shareholders' Equity		4,852,418			(382,492	)		4,469,926

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,427,425		$	(180,420	)	$	8,247,005

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statements of Operations and Comprehensive Loss:


	Three Months Ended
	Previously Reported			Adjustment			Restated 2015
Net Revenue	$	3,659,548		$	(355,039	)	$	3,304,509

Cost of Good sold		1,595,181			(256,238	)		1,338,943

Gross Profit		2,064,367			(98,801	)		1,965,566

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		358,236			—			358,236
Marketing and promotion		151,652			—			151,652
Other selling and marketing expenses		380,878			13,500			394,378
		890,766			13,500			904,266

General and administrative
Salary and personnel costs		511,172			—			511,172
Professional fees and consulting costs		346,102			—			346,102
Other general and administrative expenses		290,051			(18,750	)		271,301
		1,147,325			(18,750	)		1,128,575

Total operating costs and expenses		2,038,091			(5,250	)		2,032,841

Operating Loss		26,276			(93,551	)		(67,275	)

Other Income (Expense)
Interest expense		(24,957	)		—			(24,957	)
Other		(10,870	)		—			(10,870	)

Total other income (expense)		(35,827	)		—			(35,827	)

Net Loss		(9,551	)		(93,551	)		(103,102	)


Net Loss Attributable to Non-Controlling Interest		—			—			—

Net Loss Attributable to Common Shareholders	$	(9,551	)	$	(93,551	)	$	(103,102	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		17,043,601			—			17,043,601
Net Loss per share	$	(0.00	)	$	(0.04	)	$	(0.01	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(12,390	)	$	—		$	(12,390	)
Comprehensive loss	$	(21,941	)	$	(93,551	)	$	(115,492	)

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	Six Months Ended
	Previously Reported			Adjustment			Restated 2015
Net Revenue	$	6,463,468		$	(460,949	)	$	6,002,519

Cost of Good sold		2,733,941			(180,782	)		2,553,159

Gross Profit		3,729,527			(280,167	)		3,449,360

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		527,608			—			527,608
Marketing and promotion		392,522			—			392,522
Other selling and marketing expenses		747,414			27,000			774,414
		1,667,544			27,000			1,694,544

General and administrative
Salary and personnel costs		1,023,624			—			1,023,624
Professional fees and consulting costs		722,513			988			723,501
Other general and administrative expenses		479,329			232,304			711,633
		2,225,466			233,292			2,458,758

Total operating costs and expenses		3,893,010			260,292			4,153,302

Operating Loss		(163,483	)		(540,459	)		(703,942	)

Other Income (Expense)
Interest expense		(40,812	)		—			(40,812	)
Impairment of intangible asset		—			(337,500	)		(337,500	)
Other		109,605			—			109,605

Total other income (expense)		68,793			(337,500	)		(268,707	)

Net Loss		(94,690	)		(877,959	)		(972,649	)


Net Loss Attributable to Non-Controlling Interest		—			—			—

Net Loss Attributable to Common Shareholders	$	(94,690	)	$	(877,959	)	$	(972,649	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		16,652,204			—			16,652,204
Net Loss per share	$	(0.01	)	$	(0.04	)	$	(0.06	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	208,244		$	—		$	208,244
Comprehensive loss	$	113,554		$	(877,959	)	$	(764,405	)

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	Three Months Ended
	Previously Reported			Adjustment			Restated 2014
Net Revenue	$	3,744,434		$	—		$	3,744,434

Cost of Good sold		1,802,898			24,463			1,827,361

Gross Profit		1,941,536			(24,463	)		1,917,073

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		479,778			—			479,778
Marketing and promotion		110,643			—			110,643
Other selling and marketing expenses		603,817			42,330			646,147
		1,194,238			42,330			1,236,568

General and administrative
Salary and personnel costs		557,058			—			557,058
Professional fees and consulting costs		472,549			—			472,549
Other general and administrative expenses		308,929			120,000			428,929
		1,338,536			120,000			1,458,536

Total operating costs and expenses		2,532,774			162,330			2,695,104

Operating Loss		(591,238	)		(186,793	)		(778,031	)

Other Income (Expense)
Interest expense		(22,443	)		—			(22,443	)
Other		10,036			—			10,036

Total other income (expense)		(12,407	)		—			(12,407	)

Net Loss before income taxes		(603,645	)		(186,793	)		(790,438	)

Income Tax (Benefit) Expense		31,527			—			31,527

Net Loss		(635,172	)		(186,793	)		(821,965	)

Net Loss Attributable to Non-Controlling Interest		(1,833	)		—			(1,833	)

Net Loss Attributable to Common Shareholders	$	(633,339	)	$	(186,793	)	$	(820,132	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		16,085,112						16,085,112
Net Loss per share	$	(0.04	)	$	(0.01	)	$	(0.05	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(40,439	)	$	—		$	(40,439	)
Comprehensive loss	$	(673,778	)	$	(186,793	)	$	(860,571	)

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	Six Months Ended
	Previously Reported			Adjustment			Restated 2014
Net Revenue	$	6,429,397		$	—		$	6,429,397

Cost of Good sold		3,005,416			213,492			3,218,908

Gross Profit		3,423,981			(213,492	)		3,210,489

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		840,337			—			840,337
Marketing and promotion		347,757			—			347,757
Other selling and marketing expenses		976,166			42,330			1,018,496
		2,164,260			42,330			2,206,590

General and administrative
Salary and personnel costs		1,141,741			—			1,141,741
Professional fees and consulting costs		1,057,774			6,670			1,064,444
Other general and administrative expenses		472,965			120,000			592,965
		2,672,480			126,670			2,799,150

Total operating costs and expenses		4,836,740			169,000			5,005,740

Operating Loss		(1,412,759	)		(382,492	)		(1,795,251	)

Other Income (Expense)
Interest expense		(49,988	)		—			(49,988	)
Impairment of intangible asset		—			—			—
Other		8,950			—			8,950

Total other income (expense)		(41,038	)		—			(41,038	)

Net Loss before income taxes		(1,453,797	)		(382,492	)		(1,836,289	)

Income Tax (Benefit) Expense		31,527						31,527

Net Loss		(1,485,324	)		(382,492	)		(1,867,816	)

Net Loss Attributable to Non-Controlling Interest		(6,204	)		—			(6,204	)

Net Loss Attributable to Common Shareholders	$	(1,479,120	)	$	(382,492	)	$	(1,861,612	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		16,007,119			—			16,007,119
Net Loss per share	$	(0.09	)	$	(0.03	)	$	(0.12	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(14,893	)	$	—		$	(14,893	)
Comprehensive loss	$	(1,494,013	)	$	(382,492	)	$	(1,876,505	)

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statements of Cash Flows:


	For the Six Months Ended
	Previously Reported			Adjustment			Restated 2015

Cash Flows from Operating Activities:
Net loss	$	(94,690	)	$	(877,959	)	$	(972,649	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		102,104			(18,750	)		83,354
Impairment of intangible asset		—			337,500			337,500
Provision (Recovery) of bad debts		(6,656	)		—			(6,656	)
Provision for obsolete inventory		(15,910	)		—			(15,910	)
Stock issued for services		136,760			—			136,760
Changes in operating assets and liabilities:
Accounts receivable, net		(979,774	)		712,002			(267,772	)
Inventories, net		45,079			(132,567	)		(87,488	)
Prepaid expenses and other current assets		(51,425	)		300,667			249,242
Accounts payable		(3,583	)		(1	)		(51,796	)
Accrued expenses		73,900			(272,680	)		(198,780	)
Other current liabilities		(305	)		—			(305	)
Net cash used in operating activities		(794,500	)		48,212			(794,500	)

Cash Flows from Operating Activities:
Proceeds from furniture and equipment		(457	)		—			(457	)
Proceeds from disposal of assets		(212	)		—			(212	)
Purchases of injection molds		(18,459	)		—			(18,459	)
Net cash used in investing activities		(19,128	)		—			(19,128	)

Cash Flows from Financing Activities:
Proceeds from credit facility		250,000						250,000
Proceeds from loans and notes		(5,974	)		—			(5,974	)
Proceeds from stock subscriptions		220,000			—			220,000
Net cash provided by financing activities		464,026			—			464,026

Effect of exchange rate changes on cash		200,157			—			200,157

Decrease in cash		(149,445	)		—			(149,445	)
Cash, Beginning of Period		1,128,556			—			1,128,556

Cash, End of Period	$	979,111		$	—		$	979,111

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	For the Six Months Ended
	Previously Reported			Adjustment			Restated 2014

Cash Flows from Operating Activities:
Net loss	$	(1,485,324	)	$	(382,492	)	$	(1,867,816	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		144,909			—			144,909
Loss on disposal of fixed asset		2,468			—			2,468
Recovery of bad debts		(142,585	)		—			(142,585	)
Recovery for obsolete inventory		(168,917	)		—			(168,917	)
Stock issued for services		31,520			—			31,520
Changes in operating assets and liabilities:
Accounts receivable, net		274,742			—			274,742
Inventories, net		(653,041	)		154,420			(498,621	)
Prepaid expenses and other current assets		232,648			—			232,648
Other assets		—			26,000			26,000
Accounts payable		(627,001	)		202,072			(424,929	)
Accrued expenses		(44,862	)		—			(44,862	)
Other current liabilities		577,137			—			577,137
Net cash used in operating activities		(1,858,306	)		—			(1,858,306	)

Cash Flows from Operating Activities:
Purchase of furniture and equipment		(50,359	)		—			(50,359	)
Net cash used in investing activities		(50,359	)		—			(50,359	)

Cash Flows from Financing Activities:
Repayments of credit facility		(353,496	)		—			(353,496	)
Repayment of loans and notes		(5,630	)		—			(5,630	)
Proceeds from sales of common stock		192,000			—			192,000
Less issuance cost		(10,000	)		—			(10,000	)
Net cash provided by financing activities		(177,126	)		—			(177,126	)

Effect of exchange rate changes on cash		(14,100	)		—			(14,100	)

Decrease in cash		(2,099,891	)		—			(2,099,891	)
Cash, Beginning of Period		2,872,946			—			2,872,946

Cash, End of Period	$	773,055		$	—		$	773,055

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

(Unaudited)

NOTE 6. – 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		2,340,809			2,502,402
Work in process		418,265			213,832
Merchandise inventory		1,446,023			1,301,933
Less: Allowance		(371,348	)		(387,258	)
	$	3,965,930		$	3,862,532

NOTE 7. – 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 & impairment		(750,000	)		(393,750	)
Net distribution rights		—			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
	$	730,925		$	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		2019		Total
Mexican customer list	$	51,750	$	103,500	$	103,500	$	103,500	$	332,390	$	694,640
	$	51,750	$	103,500	$	103,500	$	103,500	$	332,390	$	694,640

NOTE 8. – 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
Stock awards		50,988		50,000
Personnel		81,293		108,819
Employee benefits		27,000		—
Warehouse		41,008		55,948

	$	738,098	$	1,017,112

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

(Unaudited)

NOTE 9. – 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.

NOTE 10. – 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

VAT 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 11. – 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

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

(Unaudited)

NOTE 12. – 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.

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

(Unaudited)

NOTE 12. – COMMITMENTS AND CONTINGENCIES (Continued)

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.

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 13. – 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.

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

(Unaudited)

NOTE 14. – 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.

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 15. – 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%

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

(Unaudited)

NOTE 16. – 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	$	2,221,799	$	2,629,177
International		3,780,720		3,800,220

	$	6,002,519	$	6,429,397

Furniture and Equipment, net:
North America	$	90,423	$	109,664
International		41,421		96,001

	$	131,844	$	205,665

NOTE 17. – 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, that potentially may be in violation of the Sarbanes Oxley Act of 2002 (see the Company’s annual 10-K report for the year ended December 31, 2015) of $58,732 (2015) and $2,700 (2014) and payables of $0 (2015) and $0 (2014), and paid $95,000 (2015) and $0 (2014) for outsourced COO services to the consultant who is also a shareholder and employee. In addition, the Company had the following transactions with entities controlled by the consultant:

–

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

–

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

–

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

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

(Unaudited)

NOTE 18. – SUBSEQUENT EVENTS

Management has evaluated subsequent events or transactions occurring through the date the financial statements were issued. The following items are a summary of events or transactions occurring subsequent to the balance-sheet date, but prior to the issuance of these financial statements, that have a material effect on the financial statements and therefore require adjustment or disclosure in these statements.

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.

On October 7, 2016, the company issued an 8-K to inform the investors that previously submitted filings should not be relied upon for investing decisions. The company will be filing amended 10-Q’s for the periods ending March 31, 2015, June 30, 2015 and September 30, 2015. These amended financial statements will include adjustments to the comparable financial statements for 2014. The company became aware of the need to issue amended financial reports on or about September 25, 2016 as part of the audit of its financials by its independent auditor, BF Borges CPA PC. The total impact of the adjustments for the nine months ending September 30, 2015 amount to an increased net loss of $1,125,792. The primary adjustments are between periods within 2015 and the company deemed that the adjustments required the filing of adjusted quarterly financial reports.

Throughout the year ended 2014 and 2015, Daniel Khesin, the Company's former chief executive officer and former chief financial officer, received in addition to base compensation, reimbursement and payroll advances of expenses of approximately $76,000 and $40,000 respectively, which were for non-business related goods and services. Pursuant to his executive employment agreement $50,000 in shares were to be payable in shares of the Company's common stock at fiscal year-end. While Mr. Khesin believed that these payments were received as satisfaction of certain bonus or other perquisites earned by him on a monthly basis under his employment agreement, such payments, if any, required approval of our compensation committee, which approval was not received until subsequent to 2014 and 2015. Section 402 of the Sarbanes Oxley Act of 2002 prohibits advances or loans to a director or executive officer of a public company. While our audit committee has concluded that the payments made to Mr. Khesin prior to board approval may be in violation of Section 402 of the Sarbanes Oxley Act of 2002, in the event it is determined any such payments were a violation of the Sarbanes Oxley Act, such violation could have a material adverse effect on our Company, including, but not limited to criminal, civil or administrative sanctions, penalties, or investigations, in addition to potential securities litigation. As a consequence of these activities, the company received notice from its independent auditor of potential illegal acts concerning payments of personal expenses by the Company. The Company’s Audit Committee has agreed with the findings. On September 29, 2016. The company, in accordance with Section 10A of the Securities and Exchange Act of 1934, informed the Commission in a letter also dated September 29, 2016. See "Controls and Procedures" and "Executive Compensation" below.

During 2013, in addition to base compensation paid to Abner Silva, a consultant deemed to be an officer by our independent auditor for accounting purposes, our company advanced approximately $11,500, to Mr. Silva. While Mr. Silva, believed that these payments were received as satisfaction of certain moneys owed to him or his affiliate companies, such payments, if any, required prior approval of our compensation committee, which approval was not received. As a consequence of these activities, the company received notice from its independent auditor of potential illegal acts concerning payments of personal expenses by the company on September 29, 2016. The company, in accordance with Section 10A of the Securities and Exchange Act of 1934, informed the Commission in a letter also dated September 29, 2016.

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

(Unaudited)

NOTE 18. – SUBSEQUENT EVENTS (Continued)

In December 2015, the Company, under former management entered into an agreement with a barter trading company to sell slow moving, finished goods in exchange for prepaid credits. During 2015 and through April 2016, the Company sold merchandise worth $956,176 and $4,566,717 to this barter trading company. However, these credits proved to have no economic value and accordingly revenue did not meet the criteria as defined in Accounting Standards Codification 605 (“ASC”). The Company has reversed the sales to this barter trading company that did not meet the revenue standards.

In January 2016, the company entered into a Stock Purchase Agreement with a private party in the amount of $1,996,500 for 605,000 shares of the company’s stock. To date, the purchase agreement has only partially settled. The Company’s has offset subscription receivable against the additional paid in capital of $1,196,500. The Board of Directors has decided to negotiate a revision to the original Stock Purchase Agreement to reach an appropriate resolution to the matter. The company has no way of knowing what the financial impact will be.

On May 2, 2016, the company received a letter from an attorney representing its former CEO, Renee Barch-Niles requesting certain payments she believes are due arising from her employment contract. This includes salary demands, equity demands and commission demands on the above barter transaction. The total claims made by Ms. Barch-Niles are $2,500,000 worth of shares of the company’s stock, $123,000 in commissions from the barter trading arrangement, and $300,000 in severance payments. The company maintains that Ms. Barch-Niles is not due any payments subsequent to her separation from the company and will take all appropriate action to defend against the claims.

On September 27, 2016, pursuant to the Company’s By-Laws, the current Board of Directors approved and ratified all shares to the former management through date of termination. It is the Company’s position that due to circumstances surrounding the terminations, no further shares or compensation are owned and will vehemently defend its position.

On April 20, 2016 the company was notified by Nasdaq that the Company did not comply with Nasdaq’s filing requirements set forth in Listing Rule 5250(c)(1) because it had not filed its Form 10-K for the period ended December 31, 2015.

On June 7, 2016 and August 19, 2016, the company was notified by Nasdaq that the Company did not comply with Nasdaq’s filing requirements set forth in Listing Rule 5250(c)(1) because it had not filed its Forms 10-Q for the periods ended March 31 and June 30, 2016, respectively.

On September 26, 2016, the company received Nasdaq’s staff determination letter, informing the company of Nasdaq’s intention to deny the company’s request for continued listing due to the delinquent reports. Separately, Nasdaq informed the company of its determination of additional basis for delisting due to public interest concerns under listing Rule 5101 raised by 1. The company’s failure to promptly initiate and conduct an independent investigation, recommended by its previous independent auditors, into concerns identified by its former board of directors, including concerns regarding revenue recognition and stock issuances, among other matters; and 2. The Company’s inability to produce minutes evidencing meetings of the Company’s board of directors for calendar year 2015 and for the first four months of calendar year 2016. Further, and also as a separate basis for delisting, Nasdaq informed the company of its belief the Company had made misleading statements and/or omitted material facts in its communications with Staff, in violation of Listing Rule 5250(a)(1). Pursuant to Nasdaq listing Rule 5800 series the Company appealed the staff’s determination to a Hearings Panel and requested an oral hearing to appeal the staff determination. In addition, the Company requested a stay of the suspension and delisting action pending the issuance of a written decision by the Hearings Panel. In the request, the company stated that the delinquent reports would be filed prior to the October 11^th due date, informed Nasdaq that an independent investigation had been initiated by the company with an expected completion date of approximately October 11^th, 2016, informed Nasdaq of its efforts to retrieve the missing minutes via a diligent search of its email archives and attempts to contact prior board members for their records, and its disagreement with the staff’s belief that any misleading statement had been made. The company received from Nasdaq, on September 26^th, 2016, a letter informing them that the requested hearing will take place on November 10^th.

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

(Unaudited)

NOTE 18. – SUBSEQUENT EVENTS (Continued)

On March 29, 2016, DS Healthcare, Mr. Khesin, and certain former members of the Board of Directors were sued in a class action styled, Prasant Shah v. DS Healthcare Group, Inc., et. al., Case No. 16-60661, which is pending in the United States District Court for the Southern District of Florida. A later-filed class action has been consolidated. The class action arises from the Company’s March 23, 2016 and March 28, 2016 8-K filings, which stated, in pertinent part, that the audit committee had concluded that the unaudited condensed consolidated financial statements of the Company for the two fiscal quarters ended June 30, 2015 and September 30, 2015 (the “June and September 2015 Quarters”), should no longer be relied upon because of certain errors in such financial statements, and that Daniel Khesin had been terminated for cause and removed a Chairman and a member of the Board of Directors. Plaintiffs have until November 2, 2016 to file an Amended Complaint, which DS Healthcare must respond to no later than December 19, 2016. The Company also received the first of three related shareholder derivative demands on March 29, 2016. A mediation concerning the class action and the derivative demands is scheduled for October 17, 2016, in Miami, Florida.

On May 27, 2016, PhotoMedex, Inc., Radiancy, Inc., and PhotoMedex Technology, Inc. (collectively, “PhotoMedex”) filed a civil action for damages and declaratory relief against DS Healthcare in the United States District Court for the Southern District of New York. The lawsuit is styled PhotoMedex, Inc. v. DS Healthcare Group, Inc., Case No. 1:16-cv-03981. The lawsuit arises from two merger agreements: (i) an Agreement and Plan of Merger and Reorganization among DS Healthcare Group, Inc., PHMD P Acquisition Corp., PhotoMedex, Inc. and Radiancy, Inc. dated February 19, 2016; and (ii) an Agreement and Plan of Merger and Reorganization by and among DS Healthcare Group, Inc., PHMD Professional Acquisition Corp., PhotoMedex Technology, Inc. and PhotoMedex, Inc. dated February 19, 2016. PhotoMedex alleges that DS Healthcare breached both agreements by failing to meet its pre-closing obligations and not completing the transactions contemplated by the agreements. PhotoMedex seeks a declaratory judgment that their terminations of the two agreements were proper, and requests an award of damages specified by the agreements, including a “break-up fee” of USD $3 million. DS Healthcare disputes the claims asserted by PhotoMedex, including that PhotoMedex is entitled to the “break-up fee” under the agreements. DS Healthcare has also asserted a counterclaims for damages against PhotoMedex for their breaches of the two agreements. An initial case management conference is scheduled for October 13, 2016.

On December 28, 2015, Microcap Headlines, Inc. (“Microcap”), an investor awareness business located in North Babylon, New York, filed a civil action against DS Healthcare, Daniel Khesin and former DS Healthcare employee Abner Silva in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida. The lawsuit is styled Microcap Headlines Inc. v. DS Healthcare Group, Inc. et al., Case No. 2015-030046-CA-01. Plaintiff Microcap asserts claims for breach of contract, negligent misrepresentation, fraud (solely against defendant Silva), violation of the Florida Securities and Investor Protection Act, and quantum meruit, all of which arise from an October 15, 2014 contract between Microcap and DS Healthcare pursuant to which Microcap promised to provide certain investor awareness services in exchange for compensation in the form of cash and warrants to purchase DS Healthcare stock. Microcap seeks damages in an unspecified amount. DS Healthcare disputes the claims asserted by Microcap in the lawsuit. Court-ordered mediation is scheduled for November 22, 2016, and the case is scheduled for trial to commence sometime during the three-week trial period beginning on January 17, 2017.

On April 12, 2016, the SEC issued a “Formal Order” directing a private non-public formal investigation to determine whether violations of the federal securities law may have been committed, directly or indirectly, by the Company, its officers, directors, employees, partners, subsidiaries and/or affiliates, and/or other persons or entities. The possible violations set forth in the Formal Order include Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 13(k), 14(a), and 14(f) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, 13b2-2(a), 14a3, 14a-9, and 14f-1. The relevant time period specified in the Formal Order is between January 1, 2010 and the present date. On April 15, 2016, the SEC issued a subpoena duces tecum to Mr. Khesin. On May 4, 2016, the SEC issued a subpoena duces tecum to the Company. The company is complying with all requests to the SEC and the review and production process is ongoing in nature. On or about July 27, 2016, the SEC issued a second subpoena duces tecum to the Company seeking a current copy of its QuickBooks file with a user name and password. The Company has complied with the second subpoena duces tecum. The company has no way of determining what the outcome of this investigation will be and cannot predict any financial impact.

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

(Unaudited)

NOTE 18. – SUBSEQUENT EVENTS (Continued)

Significant Changes to the Board of Directors and Executive Management:

On April 2, 2016, Michael Pope, Diane Rosenfeld, Renee Barch-Niles and Carl Sweis were terminated as Directors of the company. Additionally, Renee Barch-Niles was removed as Chief Executive Officer. Daniel Khesin was appointed sole director, Chief Executive Officer and Chief Financial Officer.

Mr. Myron Lewis joined the Board of Directors on April 22, 2016.His role includes chairing the Compensation Committee. Subsequently, on September 12, 2016, Mr. Lewis was appointed executive director and tasked with supervising the company’s operations with a goal of facilitating profitability and compliance.

Mr. Yasuhiro Fujiwara joined the Board of Directors on April 22, 2016. Subsequently, on September 12, 2016, Mr. Fujiwara was appointed chairman of the Board of Directors.

Ms. Elina Yuabov joined the Board of Directors on April 22, 2016

Ms. Estella Ng joined the Board of Directors on May 6, 2016. Her role includes chairing the Audit Committee.

Mr. John Power joined the company on September 12, 2016 as Chief Financial Officer and Chief Administrative Officer.

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.

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 five criteria are met:


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

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 revenue decreased $439,925 or 11.7%, from $3,744,434 for the three months ended June 30, 2014 to $3,304,509 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 (28%) and $972,202 (26%) 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. 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 $488,418 or 26.7%, from $1,827,361 (2014-QTR) to $1,338,943 (2015-QTR). As in the prior quarter, we continued 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 51.2% (2014-QTR) to 59.5% (2015-QTR), with US operations accounting for $1,347,419 or 70% (2014-QTR) and $1,452,883 or 74% (2015-QTR) of the gross margin dollars and with DS Mexico accounting for $569,654 or 30% (2014-QTR) and $512,683 or 26% (2015-QTR) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs decreased $332,302 or 26.9% from $1,236,568 (2014-QTR) to $904,266 (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


	·	$236,701 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:


	·	$25,941 for other sales and marketing costs, which is considered nominal.

General and Administrative Costs – General and administrative costs decreased $329,961 or 22.6%, from $1,458,536 (2014-QTR) to $1,128,575 (2015-QTR). The decrease is due to the following:

–

Decreases of:

$126,447 for professional fees primarily associated with a reduced need for consultants,

$64,636 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.

$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.

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

Revenues, net – Total net revenues decreased $426,878 or 6.6%, from $6,429,397 for the six months ended June 30, 2014 to $6,002,519 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 (26%) 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 decrease as well, as a result of the timing and receipt of customer orders. 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 $665,749 or 9%, from $3,218,908 (2014-YTD) to $2,553,159 (2015-YTD). We continued our cost cutting efforts during the period ending June 30, 2015 that included improved sales mix, reformulations, and improved manufacturing efficiencies, but the we will need to continue them for the duration of 2015.

Consequently, the gross margin has increased from 49.9% (2014-YTD) to 57.5% (2015-YTD), with US operations accounting for $2,278,934 or 71% (2014-YTD) and $2,552,463 or 74% (2015-YTD) of the gross margin dollars and with DS Mexico accounting for $931,555 or 29% (2014-YTD) and $896,897 or 26% (2015-YTD) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs decreased $512,046 or 23% from $2,206,590 (2014-YTD) to $1,694,544 (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


	·	$230,120 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:


	·	$44,715 for marketing and promotional costs associated with the efforts of creating brand awareness and recognition for our products.

General and Administrative Costs – General and administrative costs decreased $340,392 or 12.2%from $2,799,150 (2014-YTD) to $2,458,758 (2015-YTD). The decrease is due to the following:

–

Decreases of:

$340,943 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,

$79,851 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,

$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,

$14,197 for other general and administrative costs, as a result of improved overall efficiencies which is considered nominal, and

$84,297 for licenses and permits, primarily as a result of a decrease in product registration.

–

Partially offset by increases of:

$372,678 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 $227,669 or 554.8%, from $41,038 expense (2014-YTD) to $268,707 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, which the Company realized no revenue other than revenue from the terminated agreement. This was offset by a charge foe the impairment of an intangible asset totaling $337,500.

Liquidity and Capital Resources

We had cash of $979,111 and working capital of $3,595,776 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.

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 $437,600. In addition, changes in operating assets and liabilities necessary to support our operations used cash of $356,900 as follows:


	·	$267,772 used by an increase in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,
	·	$87,488 used by an increase in inventory component levels which is not considered significant,
	·	$51,796 used by a decrease in accounts payable which is not considered significant,
	·	$198,780 used by a decrease in accrued expenses as a result of commissions and compensation commitments, and
	·	$248,936 provided 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 decreased $86,501 or 1.0% from $8,281,328 as of December 31, 2014 to $8,194,827 as of June 30, 2015, primarily as a result of the cash used to repay creditors and increase inventory components. The decrease in total assets was also the result of a decrease of $370,448 in intangible assets, due to amortization and the charge for an impaired brand rights agreement, 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. There was a net increase in current assets of $307,139 the components of which are discussed further below.

Current Assets – The net increase in current assets of $307,139 was primarily associated with an increase in accounts receivable of $274,428 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 increased 2.7% 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.

Accounts Receivable, net – Accounts receivable increased $274,428, primarily as a result of improved collection efforts with our international customers during 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 1) prepare account reconciliations, financial statements; fluctuation analysis and relevant analytics on a timely basis, and 2) provide appropriate review and supervision for all necessary areas. Additionally, our general staff do not have the necessary training to perform appropriate analytical and/or review procedures.

We did not have a sufficient number of 1) adequately trained technical accounting and external reporting personnel to support standalone external financial reporting under SEC requirements, and 2) personnel with necessary experience with United States generally accepted accounting principles to address and report fluctuation analysis and relevant analytics to senior management.

We did not have appropriate written internal control documentation of our process and procedures for all necessary areas, including documentation and testing of key internal controls.

We did not obtain adequate documentation to support all credit card transactions.

We did not obtain adequate documentation to support revenue recognition, resulting in recognition of revenue for products not shipped and appropriateness of amount being billed.

We did not have effective controls over stock based payments made to employees and non-employees, including proper accounting of awards as either equity or liability awards and timely processing and recording of stock based payment arrangements.

We did not have effective controls over issuing customer credit approvals and product credit memorandums. As a result, credits were issued by multiple individuals and without the finance department’s approval and in some cases overwritten certain credit policies and procedures.

We did not have effective controls over our revenue recognition and policies which caused certain products to be shipped to customers without prior credit checks and approvals from the finance department.

We did not have effective controls over customer pricing and as a result pricing discrepancies between wholesale and retail were established by multiple individuals without the correct policies and procedures.

We did not have effective controls over our executive management’s overrides of certain policies and procedures, as a result certain advances, expenses and other possible illegal activities may have occurred.

We did not have effective controls over stock issuances and as result shares may have been issued without the correct approval and documentation.

We did not have effective controls over incentives to the sales force and as a result customers received incentives that were not properly designed, approved or lacked proper structure.

We did not have effective controls over the advance of $11,500 to Abner Silva in 2013, which we have deemed an officer. As a result, these payments were received as satisfaction of certain moneys owed to him or his affiliate companies, such payments, if any, required prior approval of our compensation committee, which approval was not received. This loan may be in violation of Section 402 of the Sarbanes Oxley Act of 2002 and such violation could have a material adverse effect on our Company, including, but not limited to criminal, civil or administrative sanctions, penalties, or investigations, in addition to potential securities litigation.

We also did not effectively implement comprehensive entity level internal controls and were unable to adequately segregate duties within the accounting department due to an insufficient number of staff, and implement appropriate information technology controls.

Throughout the year ended 2014 and 2015, Daniel Khesin, the Company's former chief executive officer and former chief financial officer, received in addition to base compensation, reimbursement and payroll advances of expenses which were for non-business related goods and services. Pursuant to his executive employment agreement $50,000 in shares were to be payable in shares of the Company's common stock at fiscal year-end. While Mr. Khesin believed that these payments were received as satisfaction of certain bonus or other perquisites earned by him on a monthly basis under his employment agreement, such payments, if any, required approval of our compensation committee, which approval was not received until subsequent to 2014 and 2015. Section 402 of the Sarbanes Oxley Act of 2002 prohibits advances or loans to a director or executive officer of a public company. While our audit committee has concluded that the payments made to Mr. Khesin prior to board approval may be in violation of Section 402 of the Sarbanes Oxley Act of 2002, in the event it is determined any such payments were a violation of the Sarbanes Oxley Act, such violation could have a material adverse effect on our Company, including, but not limited to criminal, civil or administrative sanctions, penalties, or investigations, in addition to potential securities litigation. As a consequence of these activities, the company received notice from its independent auditor of potential illegal acts concerning payments of personal expenses by the Company. The Company’s Audit Committee has agreed with the findings. On September 29, 2016. The company, in accordance with Section 10A of the Securities and Exchange Act of 1934, informed the Commission in a letter also dated September 29, 2016. See "Controls and Procedures" and "Executive Compensation" below.

We consider the payment of the personal benefits prior to receiving board approval, as a failure of our internal control system. See “Risk Factors” above. To remediate this failure, we have implemented enhanced controls over credit card and cash disbursements and documentation under the supervision of our Chief Financial Officer, John Power. We have also enhanced controls over expense reporting and established stricter guidelines for transaction receipts. These enhanced controls include, but are not limited to establishing a preparation and review functions for expense reports, mandatory receipt requirement, limited access to the physical credit card and weekly reporting. We feel that these enhancements will be adequate to prevent this event from recurring in the future.

Since our inception we have relied on an outside accounting consultants to ensure that our financial statements contain all necessary adjustments to conform to U.S. GAAP. The consultants are U.S. certified public accountants. We expect to be materially dependent upon consultants or another third parties which can provide us with the same level of accounting consulting services, for the foreseeable future. Until such time as we have a chief financial officer with the requisite expertise in U.S. GAAP, there are no assurances that the material weaknesses in our internal control over financial reporting will not result in errors in our financial statements which could lead to a restatement of those financial statements. Furthermore, in an effort to remediate certain of the weaknesses above we have also added three independent directors to our board of directors who have formed an audit committee including the appointment of a financial expert. The committee is charged with, and has been, developing financial policies and controls, reviewing and providing oversight to our financial reporting processes, financial statements and public filings. Our ability to remediate the material weaknesses in our internal control over financial reporting will be dependent upon the development and implementation of these changes, which will require both the hiring of additional accounting personnel and the investment in enhanced systems, policies and procedures. While we expect to continue to rely upon our outside accounting consultants until such time as we are able to hire a properly qualified chief financial officer, if we are able to successfully implement these changes to our internal control over financial reporting we believe we will be able to remediate substantially all of the material weaknesses described earlier in this section. However, there are no assurances we will be able to devote the necessary capital to hire the additional personnel and institute the additional systems, policies and procedures to the level necessary. In that event, there are no assurances that the material weaknesses described earlier in this section will not result in errors in our financial statements in future periods.

Our management, including our chief executive officer and our 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. Due to 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 our company have been detected.

The Company is a non-accelerated filer and is not subject to Section 404(b) of the Sarbanes Oxley Act. Accordingly, this Annual Report does not contain an attestation report of our independent registered public accounting firm regarding internal control over financial reporting, since the rules for smaller reporting companies provide for this exemption.

Plans for Remediation of Material Weaknesses

We intend to implement changes to strengthen our internal controls. We are in the process of developing and/or implementing remediation plans for the identified material weaknesses and we expect that work on the plans will continue throughout 2016 and possibly into 2017, as financial resources permit. The Company is currently working on 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.

We will begin to implement remediation procedures in two areas of our operations. First we will restructure the financial reporting process to provide an improved review function by restructuring the responsibilities of both the accounting staff and the participation of the company’s non-accounting personnel. The addition of the financial review process should reduce the risk of reporting errors in the preparation and delivery of financial results.

As part of the restructuring of responsibilities, we will also have increased the scope and involvement of non-accounting personnel to provide more direct operational insight into reported financial information in an effort to improve both its relevance and its accuracy. In connection with that restructuring of responsibilities, we are providing additional training in best practices accounting procedures and GAAP to non-accounting personnel to improve the accuracy of reported financial information.

To assist both accounting and non-accounting personnel in their efforts to improve efficiency and accuracy, we will begin to restructure the chart of accounts to improve clarity and reduce the risk of inaccurate or misposting errors. The new chart of accounts will provide clearer, more informative titles and reduces redundancy.

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.

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.

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

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: October 17, 2016	DS HEALTHCARE GROUP, INC.

	By:	/s/ Daniel Khesin
		Daniel Khesin
		President/Chief Executive Officer


	By:	/s/ John Power
		John Power
		Chief Financial Officer/
		Principal Accounting Officer

DS HEALTHCARE GROUP, INC. - FORM 10-Q/A - October 18, 2016

Attached files

DS HEALTHCARE GROUP, INC. Reports