DS HEALTHCARE GROUP, INC. - FORM 10-Q

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

(MARK ONE)

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

For the quarterly period ended September 30, 2016

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 November 9, 2016.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheets


	September 30,			December 31,
	2016			2015
				(Audited)
ASSETS

Current Assets
Cash	$	894,109		$	4,517,604
Accounts receivable, net		1,320,708			1,557,560
Inventories, net		3,141,580			3,733,213
Prepaid expenses and other current assets		146,422			255,980
Total Current Assets		5,502,819			10,064,357

Furniture and Equipment, net		100,508			99,539
Intangible assets, net		359,467			483,765
Other assets		163,419			67,765

TOTAL ASSETS	$	6,126,213		$	10,715,426


LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,701,904		$	1,235,152
Accrued expenses		1,008,628			1,400,552
Note payable		28,235			97,042
Other current liabilities		822,889			574,475
Total Current Liabilities		3,561,656			3,307,221

Long Term Debt, net of current portion		168,546			115,050

TOTAL LIABILITIES		3,730,202			3,422,271

COMMITMENTS AND CONTINGENCIES

Shareholders' Equity
		—			—
Common stock, $0.001 par value, 300 million shares authorized: 22,556,765 shares issued and outstanding at September 30, 2016 and December 31, 2015		22,557			22,557
Additional paid-in-capital		28,332,784			28,308,784
Accumulated deficit		(26,139,885	)		(20,978,751	)
Accumulated comprehensive income		180,555			(59,435	)

Total Shareholders' Equity		2,396,011			7,293,155

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	6,126,213		$	10,715,426

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 Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
				(As restated)						(As restated)

Net Revenue	$	2,675,495		$	3,119,530		$	9,845,547		$	9,122,049

Cost of Goods Sold		539,165			1,110,989			5,305,283			3,664,147

Gross Profit		2,136,330			2,008,541			4,540,164			5,457,902

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		161,497			652,819			737,788			1,180,427
Marketing and promotion		398,349			365,924			1,325,921			758,446
Other selling and marketing expenses		682,534			404,758			1,595,905			1,179,172
		1,242,380			1,423,501			3,659,614			3,118,045
General and administrative
Salary and personnel costs		979,718			682,347			2,234,475			1,705,971
Professional fees and consulting costs		723,159			318,725			2,914,748			1,042,226
Other general and administrative expenses		249,694			370,239			788,144			1,081,872
		1,952,571			1,371,311			5,937,367			3,830,069

Total operating costs and expenses		3,194,951			2,794,812			9,596,981			6,948,114

Operating Loss		(1,058,621	)		(786,271	)		(5,056,817	)		(1,490,212	)

Other Income (Expense)
Interest expense		(9,478	)		(42,280	)		(59,679	)		(83,092	)
Impairment of intangible asset								—			(337,500
Other		41,435			9,115			(44,638	)		118,720

Total other (expense) income		31,957			(33,165	)		(104,317	)		(301,872	)

Loss Before Income Taxes		(1,026,664	)		(819,436	)		(5,161,134	)		(1,792,084	)

Income Tax (Benefit) Expense		—			—			—			—

Net Loss Attributable to Common Shareholders	$	(1,026,664	)	$	(819,436	)	$	(5,161,134	)	$	(1,792,084	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		22,556,765			17,944,353			22,556,765			17,101,253
Loss per share	$	(0.05	)	$	(0.05	)	$	(0.23	)	$	(0.10	)

Other Comprehensive Income:
Foreign currency translation adjustment		(38,125	)		(38,398	)		239,990			(38,398	)
Comprehensive loss	$	(1,064,789	)	$	(857,834	)	$	(4,921,144	)	$	(1,830,482	)

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 Nine Months Ended
	September 30,
	2016			2015
				(As restated)
Cash Flows from Operating Activities:
Net Loss	$	(5,161,134	)	$	(1,792,084	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		213,022			156,181
Impairment of intangible asset		—			337,500
Provision of bad debts		—			120,254
(Provision for obsolete inventory		—			9,970
Amortization of stock subscription related to stock issued for prepaid services		—			147,167
Amortization of stock-based compensation related to issued warrants		—			102,225
Stock issued for services		24,000			367,589
Non-cash interest expense		—			13,609
Changes in operating assets and liabilities:
Accounts receivable, net		236,852			(254,548	)
Inventories, net		591,633			(204,102	)
Prepaid expenses and other current assets		109,558			12,662
Other assets		—			(12,819	)
Accounts payable		466,752			(269,329	)
Accrued expenses		(391,924	)		240,779
Other current liabilities		248,414			(23,437	)
Net cash used in operating activities		(3,662,827	)		(1,048,383	)

Cash Flows from Investing Activities:
Purchase of furniture and equipment		(7,573	)		(2,555	)
Purchase of injection molds		(95,654	)		—
Net cash used in investing activities		(103,227	)		(2,555	)

Cash Flows from Financing Activities:
Proceeds from loans and notes		53,496			450,000
Repayment of loans and notes		(68,807	)		(9,028	)
Proceeds from sale of common stock		—			720,000
Proceeds from exercise of warrants		—			25,500
Net cash (used in) provided by financing activities		(15,311	)		1,186,472

Effect of exchange rate changes on cash		157,870			111,200

Increase (Decrease) in Cash		(3,623,495	)		246,734
Cash, Beginning of Period		4,517,604			1,128,556

Cash, End of Period	$	894,109		$	1,375,290

Supplemental Information:
Cash paid for interest	$	938		$	83,092

Supplemental Non-cash Investing and Financing Activities
Stock issued to settle debt	$	—		$	—
Conversion of note and accrued interest to common stock	$	—		$	387,100
Warrants issued in connection with notes	$	—		$	26,049
Sale of common stock pending proceeds, recorded as stock subscription	$	—		$	1,496,500
Common stock issued for prepaid services	$	—		$	2,595,500
Warrants issued for stock-based compensation	$	—		$	2,746,200
Common stock issued to settle accrued expenses	$	—		$	422,700

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
	2015-QTR	Three months ended September 30, 2015
	2015-YTD	Nine months ended September 30, 2015
	2016-QTR	Three months ended September 30, 2016
	2016-YTD	Nine months ended September 30, 2016
	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 every day and to advance drug development to capitalize on both short term and long term projects.

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies we use for quarterly financial reporting are the same as those disclosed in Note 2 of the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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 its form 10-Q as required.

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 Company continued to 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 nine months ended September 30, 2016 and 2015, 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.

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 nine months ended September 30, 2015 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 October 7, 2016. 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 September 30, 2016 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, 2016.

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.

Cash

The Company maintains its cash in financial institutions located in the United States and Mexico. At times, the Company’s cash and cash equivalent balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not experienced any losses in such accounts.

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

(Unaudited)

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

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 September 30, 2016 and December 31, 2015, the allowance for uncollectable accounts, including reserves for product returns and advertising credits, was $665,976 and $663,151, respectively.

Inventories

Inventory is reported at the lower of cost or market on the first-in, first-out 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 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 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 totaled $52,059 and $33,407 for 2016 QTR and 2015 QTR, respectively, and $116,110 and $108,731 for 2016-YTD and 2015-YTD, respectively.

Earnings Per Share

The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) attributable to shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company. Weighted average securities which are not included in the calculation of diluted earnings per common share because their impact is anti-dilutive were 444,213 and 286,526 as of September 30, 2016 and 2015, respectively.

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

(Unaudited)

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

Debt Discounts

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

NOTE 3. – LIQUIDITY and GOING CONCERN

The Company has sustained operational losses since its inception. At September 30, 2016, the Company had an accumulated deficit of $26,139,885 compared to $20,978,751 at December 31, 2015. While the Company has commenced taking action to achieve profitability in the future, 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 September 30, 2016, the Company had $894,109 in cash. While the Company has historically financed its operations and growth primarily through the successful issuance and sale of shares of its 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 $489,543 in net revenue for 2016-YTD.

So far, in 2015, the Company launched a range of new products. Although the Company cannot predict its success with these products or projects, all are currently under development and production and in various stages of DS completion. The Company has commenced implementing, and will continue to implement, various measures to address its 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.
·	Adherence to an operational budget for 2015-2017 that sets changes in its processes to focus on profitability. The Company is also implementing a feedback process with improved interdepartmental communication.
·	Continue 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. The Company has commenced implementing, and will continue to implement, various measures to address our financial condition.

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

(Unaudited)

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS

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

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business entities and all nonpublic business entities upon issuance. The Company has not yet determined the effect of the adoption of this standard on the Company’s consolidated financial position and results of operations.

In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which addresses certain aspects of recognition, measurement, presentation and disclosure of financial statements. This guidance will be effective in the first quarter of fiscal year 2019 and early adoption is not permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement – Period Adjustments. This ASU simplifies the accounting for adjustments made to provisional amounts recognized in a business combination; the amendments eliminate the requirement to retrospectively account for those adjustments. This ASU will require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. It also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts calculated as if the accounting had been completed at the acquisition date. This ASU is effective for the annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. This ASU simplifies the guidance on the subsequent measurement of inventory by requiring inventory within the scope of this update to be measured at the lower of cost or net realizable value rather than the lower of cost or market. This ASU is effective for the annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating whether the adoption of this new guidance will have a significant impact on our consolidated financial statements and disclosures.

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

(Unaudited)

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

The FASB has issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to continue as a Going Concern. This ASU requires management to assess every reporting period whether there is substantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments define that substantial doubt exists when relevant conditions and events, considered in aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued or available to be issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should disclose: (1) principal conditions or events that raised substantial doubt; and (2) management’s evaluation of the significance of those events. Further, management should also consider whether its plans that are intended to mitigate those conditions or events will alleviate the substantial doubt. If so, management should disclose information that enables users to understand those plans that alleviated the substantial doubt. The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. For all other entities (nonpublic entities), the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. A nonpublic entity may elect to apply this guidance earlier, however, only as prescribed in this ASU. The Company has not yet determined the effect of the adoption of this standard and its impact on the Company's 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 10-Q filings during the nine months ending September 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 nine months ended September 30, 2015, are reflected in the tables below:

Condensed Consolidated Balance Sheets:


	Previously Reported			Adjustment			Restated 2015
ASSETS

Current Assets
Cash	$	1,375,290		$	—		$	1,375,290
Accounts receivable, net		3,173,576			(1,360,870	)		1,812,706
Inventories, net		4,043,598			13,066			4,056,664
Prepaid expenses and other current assets		266,052			—			266,052
Total Current Assets		8,858,516			(1,347,804	)		7,510,712

Furniture and equipment, net		150,551			(36,913	)		113,638
Intangible assets, net		1,024,748			(300,000	)		724,748
Other assets		101,066			(26,000	)		75,066

TOTAL ASSETS	$	10,134,881		$	(1,710,717	)	$	8,424,164

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,171,798		$	45,631		$	1,217,429
Accrued expenses		722,603			75,488			798,091
Note payable		437,560			—			437,560
Other current liabilities		863,385			—			863,385
Total Current Liabilities		3,195,346			121,119			3,316,465

Long Term Debt, net of current portion		15,969			—			15,969

TOTAL LIABILITIES		3,211,315			121,119			3,332,434

COMITMENTS AND CONTINGENCIES

Shareholders' Equity
Common stock, $0.001 par value, 300 million shares authorized: 19,178,985shares issued and outstanding at September 30, 2015		19,179			—			19,179
Additional paid-in-capital		21,063,355			(83,475	)		20,979,880
Stock subscription		(3,947,333	)		—			(3,947,333	)
Accumulated deficit		(10,279,667	)		(1,748,361	)		(12,028,028	)
Accumulated comprehensive income		106,462			—			106,462
Total Shareholders' Equity		6,961,996			(1,831,836	)		5,130,160
Non-Controlling Interest		(38,430	)		—			(38,430	)
Total Shareholders' Equity		6,923,566			(1,831,836	)		5,091,730

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	10,134,881		$	(1,710,717	)	$	8,424,164

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	$	3,637,629		$	(518,099	)	$	3,119,530

Cost of Good sold		1,216,386			(105,397	)		1,110,989

Gross Profit		2,421,243			(412,702	)		2,008,541

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		736,294			(83,475	)		652,819
Marketing and promotion		365,924			—			365,924
Other selling and marketing expenses		461,402			(56,644	)		404,758
		1,563,620			(140,119	)		1,423,501

General and administrative
Salary and personnel costs		682,347			—			682,347
Professional fees and consulting costs		324,725			(6,000	)		318,725
Other general and administrative expenses		388,988			(18,749	)		370,239
		1,396,060			(24,749	)		1,371,311

Total operating costs and expenses		2,959,680			(164,868	)		2,794,812

Operating Loss		(538,437	)		(247,834	)		(786,271	)

Other Income (Expense)
Interest expense		(42,280	)		—			(42,280	)
Other		9,115			—			9,115

Total other (expense)		(33,165	)		—			(33,165	)

Net Loss		(571,602	)		(247,834	)		(819,436	)


Net Loss Attributable to Non-Controlling Interest		—			—			—

Net Loss Attributable to Common Shareholders	$	(571,602	)	$	(247,834	)	$	(819,436	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		17,944,353			—			17,944,353
Net Loss per share	$	(0.03	)	$	(0.01	)	$	(0.05	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(38,398	)	$	—		$	(38,398	)
Comprehensive loss	$	(610,000	)	$	(247,834	)	$	(857,834	)

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

(Unaudited)

NOTE 5. – RESTATEMENT OF FINANCIAL STATEMENTS (Continued)


	Nine Months Ended
	Previously Reported			Adjustment			Restated 2015
Net Revenue	$	10,101,097		$	(979,048	)	$	9,122,049

Cost of Good sold		3,950,327			(286,180	)		3,664,147

Gross Profit		6,150,770			(692,868	)		5,457,902

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		1,263,902			(83,475	)		1,180,427
Marketing and promotion		758,446			—			758,446
Other selling and marketing expenses		1,208,816			(29,644	)		1,179,172
		3,231,164			(113,119	)		3,118,045

General and administrative
Salary and personnel costs		1,705,971			—			1,705,971
Professional fees and consulting costs		1,047,238			(5,012	)		1,042,226
Other general and administrative expenses		868,317			213,555			1,081,872
		3,621,526			208,543			3,830,069

Total operating costs and expenses		6,852,690			95,424			6,948,114

Operating Loss		(701,920	)		(788,292	)		(1,490,212	)

Other Income (Expense)
Interest expense		(83,092	)		—			(83,092	)
Impairment of intangible asset		—			(337,500	)		(337,500	)
Other		118,720			—			118,720

Total other income (expense)		35,628			(337,500	)		(301,872	)

Net Loss		(666,292	)		(1,125,792	)		(1,792,084	)


Net Loss Attributable to Non-Controlling Interest		—			—			—

Net Loss Attributable to Common Shareholders	$	(666,292	)	$	(1,125,792	)	$	(1,792,084	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		17,101,253			—			17,101,253
Net Loss per share	$	(0.04	)	$	(0.06	)	$	(0.10	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(38,398	)	$	—		$	(38,398	)
Comprehensive loss	$	(704,690	)	$	(1,125,792	)	$	(1,830,482	)

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 Nine Months Ended
	Previously Reported			Adjustment			Restated 2015

Cash Flows from Operating Activities:
Net loss	$	(666,292	)	$	(1,125,792	)	$	(1,792,084	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		193,681			(37,500	)		156,181
Impairment of intangible asset		—			337,500			337,500
Provision (Recovery) of bad debts		120,254			—			120,254
Provision for obsolete inventory		9,970			—			9,970
Amortization of stock subscription related to stock issued for prepaid services		147,167			—			147,167
Amortization of stock based compensation related to issued warrants		102,225			—			102,225
Stock issued for services		451,064			(83,475	)		367,589
Non-cash interest expense		13,609			—			13,609
Changes in operating assets and liabilities:
Accounts receivable, net		(1,484,652	)		1,230,104			(254,548	)
Inventories, net		(69,040	)		(135,062	)		(204,102	)
Prepaid expenses and other current assets		12,662			—			12,662
Other assets		(12,819	)		—			(12,819	)
Accounts payable		(58,065	)		(211,264	)		(269,329	)
Accrued expenses		215,290			25,489			240,779
Other current liabilities		(23,437	)		—			(23,437	)
Net cash used in operating activities		(1,048,383	)		—			(1,048,383	)

Cash Flows from Operating Activities:
Purchases of furniture and equipment		(2,555	)		—			(2,555	)
Net cash used in investing activities		(2,555	)		—			(2,555	)

Cash Flows from Financing Activities:
Proceeds from credit facility		450,000			—			450,000
Payments of loans and notes		(9,028	)		—			(9,028	)
Proceeds from stock subscriptions		720,000			—			720,000
Proceeds from exercise of warrants		25,500			—			25,500
Net cash provided by financing activities		1,186,472			—			1,186,472

Effect of exchange rate changes on cash		111,200			—			111,200

Decrease in cash		246,734			—			246,734
Cash, Beginning of Period		1,128,556			—			1,128,556

Cash, End of Period	$	1,375,290		$	—		$	1,375,290

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

(Unaudited)

NOTE 6. – INVENTORIES

Significant components of inventory at September 30, 2016 and December 31, 2015 consist primarily of:


	2016			2015

Bulk product and raw materials	$	2,223,941		$	2,320,536
Work in process		179,609			376,849
Merchandise inventory		919,259			1,315,037
Inventory in transit		198,386			100,406
Total		3,521,195			4,112,828

Less: Allowance		(379,615	)		(379,615	)
	$	3,141,580		$	3,733,213

In March 2016, the Company, under former management, entered in a credit barter agreement with a third party to sell slow moving, finished goods inventory in exchange for trade credits the company may use to purchase goods and/or services in the future. For the nine months ended September 30, 2016, the trade credits acquired under the agreement totaled $4,566,717, which are not included in the profit and loss, have no expiration and can be used at any time. The cost of slow moving inventory under the arrangement totaled $505,623.

Subsequently, the existing board of directors, along with the audit committee, have reviewed this credit barter agreement and, in accordance with the criteria as defined in Accounting Standards Codification 605 (“ASC”), have determined that these credits have no economic value, and accordingly, revenue should not have been recognized. Therefore, management has fully reserved these credits which have been removed from sales in the condensed consolidated statement of operations and comprehensive loss totaling $4,566,717 for the nine months ended September 30, 2016.

NOTE 7. – INTANGIBLE ASSETS

Significant components of intangible assets at September 30, 2016 and December 31, 2015 consist of:


	2016			2015
Distribution rights in Brazil	$	750,000		$	750,000
Less: Accumulated amortization & impairment		(750,000	)		(750,000	)
Net distribution rights		—			—

Pure Guild brand rights	$	159,086		$	159,086
Less: Accumulated amortization		(159,086	)		(159,086	)
Net brand rights		—			—

DS Mexico customer list	$	628,795		$	704,087
Less: Accumulated amortization		(294,060	)		(247,734	)
Net customer list		334,735			456,353

Goodwill		24,732			27,412
	$	359,467		$	483,765

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

(Unaudited)

NOTE 7. – INTANGIBLE ASSETS (Continued)

The following table represents the amortized cost of the various assets over the remaining years; the weighted average remaining period is 5.83 years.


	2016		2017		2018		2019		Beyond		Total
Asset:
Mexican Customer list	$	78,232	$	78,232	$	78,232	$	78,232	$	143,425	$	456,353
	$	78,232	$	78,232	$	78,232	$	78,232	$	143,425	$	456,353

Goodwill – In connection with the acquisition of our Mexican distributor, DS Mexico, we acquired goodwill which represents the excess of the fair value of consideration given over the fair value of the assets acquired. The $2,680 change in the goodwill from December 31, 2015 to $24,732 at September 30, 2016 represents foreign currency translation of the MXN functional currency subsidiary goodwill. The asset is not being amortized; however, the Company will assess the asset for impairment annually again on December 30, 2016.

NOTE 8. – COMMITMENTS AND CONTINGENCIES

Pending and threatened litigation –

The Company is a party to or otherwise involved in legal proceedings arising in the normal and ordinary course of business. As of the date of this report, except as otherwise disclosed below, we are not aware of any other proceeding, threatened or pending, against us which, if determined adversely, would have a material effect on our business, results of operations, cash flows or financial position.

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 was scheduled for October 17, 2016, in Miami, Florida. This meeting resulted in ongoing settlement discussions.

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

(Unaudited)

NOTE 8. – COMMITMENTS AND CONTINGENCIES (Continued)

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 was scheduled for October 13, 2016. The result of this meeting was that both parties submitting to mediation. The company has no way of knowing whether the mediation process will be successful.

The company has a meeting scheduled before the Nasdaq Hearing Panel on November 10, 2016 as part of its appeal to remain a Nasdaq listed company. The Company has no way to predict the final determination of the Panel, but expects to issue a public announcement immediately upon learning of the determination.

On December 28, 2015, the Company, our chief executive officer, Daniel Khesin individually, and Abner Silva, a former consultant and employee was named in a lawsuit brought in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida by a former investor relations contractor claiming monetary damages and allegations of using material or false misrepresentations. The Plaintiff’s complaint alleges owed compensation in stock and cash. Management intends to vigorously defend the action and contends the suit is primarily without merit as the contractor was dismissed in writing. Accordingly, management has provided a contingency reserve this matter.

The Company accounts for its facility leases using the straight-line method and incurred $535,012 and $489,643 in total rent expense for 2015 and 2014, respectively. In 2015, the Company was served a suit in connection to its Asheville, NC (“Asheville”) abandoned office lease. The suit calls for payments of $73,000. On September 21, 2016, the Company was notified it has received default judgement in the amount of $73,000. The Company plans of appealing the default judgment. As of December 31, 2015, the Company had sufficiently accrued for the Asheville suit.

The Company has received several pre-litigation demand letters from various former employees, including but not limited to a demand for alleged past wages, shares and commissions on various sales which do not qualify as revenue under GAAP guidance from former Chief Executive Officer, Renee Barch- Niles. While we cannot determine the outcome of these disputes, the Company intends to vehemently defend its position to the fullest extent possible. Accordingly, the Company has not reserved for these disputes.

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

During 2011, the Company filed an action in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida for the rescission of an agreement entered into on or about May 18, 2010 whereby the Company paid a third party approximately $500 and 20,000 shares of restricted common stock in consideration of consulting services. The Company has 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 the Company 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 September 30, 2016, the agreed shares have not been returned to the Company.

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

(Unaudited)

NOTE 8. – COMMITMENTS AND CONTINGENCIES (Continued)

At this time, the amount of any loss, or range of loss, cannot be reasonably estimated as the case has only been initiated and no discovery has been conducted to determine the validity of any claim or claims made by plaintiffs. Therefore, the Company has recorded reserves and contingent liabilities related to these particular legal matters. However, in the future, as the cases progress, the Company may be required to increase its contingent liability or reserve for these matters.

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

NOTE 9. – RELATED PARTY TRANSACTIONS

For the nine months ended September 30, 2016 and 2015, the Company was a party to the following related party transactions not disclosed elsewhere in these condensed consolidated financial statements:


·	the Company expensed $77,425 (2016) and $77,480 (2015) as compensation to the father of our Chairman and President for consulting on various projects,
·	the Company expensed $40,270 (2016) and $51,174 (2015) as compensation to the sister of our Chairman and President 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) for services of $0 (2016) and $54,587 (2015), and paid $0 (2016) and $134,583 (2015) 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 $0 (2016) and $42,475 (2015) for materials needed for the assembly and manufacture of products for export,
	- The Company expensed $0 (2016) and $56,208 (2015) in cash and stock for IR related expenses and services.
	- The Company recorded sales relating to finished product of $0 (2016) and $69,858 (2015).
·	The Company paid $45,000 (2016) and $45,000 (2015) as compensation to Dr. Fernando Tamez. Dr. Tamez is President of Divine Skin Laboratories, S.A. D.E. C.V. (“DS Mexico”) since 2009, our Mexican subsidiary acquired in November 2012. Dr. Tamez oversees the day-to-day operations of DS Mexico.
·	The Company recorded $122,950 (2016) and $0 (2015) as compensation to Dr. Fernando Tamez pursuant to a share exchange agreement dated October 31, 2012.

NOTE 10. – BARTER CREDITS

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 the nine months ended September 30, 2016, the Company sold merchandise totaling $6,904,817to this barter trading company. However, these credits proved to have no economic value and accordingly revenue did not meet the criteria as defined in ASC. The Company has fully reserved these credits from this barter trading company against sales, the results of which are reflected in net revenue of the company’s consolidated condensed statement of operations and comprehensive loss for the nine months ended September 30, 2016.

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

(Unaudited)

NOTE 11. – 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.

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 has filed amended 10-Q’s for the periods ending March 31, 2015, June 30, 2015 and September 30, 2015. These amended financial statements included 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 Borgers 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.

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 September 30, 2016 as Compared to the Three Months Ended September 30, 2015

Revenues, net – Total net revenues decreased $444,035 or 14.2%, from $3,119,530 for the three months ended September 30, 2015 to $2,675,495 for the three months ended September 30, 2016.

Net revenue generated from US operations decreased $334,145, or 15.7%, to $1,790,984 in 2016-QTR from $2,125,139 in 2015-QTR. The decrease is primarily a result of the timing and receipt of customer orders and an increase in back orders in 2016-QTR as compared to the 2015-QTR. 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.

Net revenue from our Mexican subsidiary decreased $109,881, or 11.1% in 2016-QTR compared to 2015-QTR, accounting for $884,510 (33%) and $994,391 (32%) of consolidated net sales for the three months ended September 30, 2016 and 2015, respectively. Net revenue from our Mexican subsidiary decreased primarily as a result of currency instability resulting in higher consumer prices.

Cost of Goods Sold – Total cost of goods sold decreased $571,823 or 51.5%, from $1,110,989 (2015-QTR) to $539,165 (2016-QTR). This decrease is primarily as a result of a reduction in costs associated with sales returns and allowances of $105,000, and the reductions in net revenue explained above.

The gross margin has increased from 64.4% (2015-QTR) to 79.8% (2016-QTR), with US operations accounting for $1,476,086 or 73% (2015-QTR) and $1,673,075 or 78% (2016-QTR) of the gross margin dollars and with DS Mexico accounting for $532,515 or 27% (2015-QTR) and $463,255 or 22% (2016-QTR) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs decreased $181,120 or 12.7% from $1,423,501 (2015-QTR) to $ 1,242,380 (2016-QTR). The decrease was due to the following:

–

Increases of:

$32,425 for Marketing and promotions, as a result of increased ad focus for brand awareness, advertising campaigns with on-line customers.

$395,464 for warehouse expenses resulting from a net reduction in overhead allocation relating to inventory reductions.

–

Partially offset by decreases of:

$491,322 for consulting and commissions, as a result of increased sales incentives,

$114,369 for freight and shipping, as a result of concentrating shipments to fewer freight forwarders so as to achieve volume discounts and reduce expedited shipments which are more expensive, and

General and Administrative Costs – General and administrative costs increased $581,260 or 42.4%, from $1,371,311 (2015-QTR) to $ 1,952,571 (2016-QTR). The increase is due to the following:

–

increases of:

$404,434 for professional fees primarily with legal fees associated with defending the class action law suit dated March 29, 2016,

$297,371 for personnel costs, because of an increase in the number of full time employees over the prior period a year ago.

–

Partially offset by decreases of:

$97,998 in bad debt expense resulting from improved collection efforts over the same period a year ago, including a $122,950 incentive recorded to a related party pursuant to a share exchange agreement dated October, 31, 2012.

Other Income and Expenses – Other income increased $65,122 from $33,165 expense (2015-QTR) to $31,957 income (2016-QTR). The increase is a result of foreign transaction gains arising from our Mexico subsidiary.

Nine Months Ended September 30, 2016 as Compared to the Nine Months Ended September 30, 2015

Revenues, net – Total net revenues increased $723,398 or 7.9%, from $9,122,049 for the nine months ended September 30, 2015 to $9,845,447 for the nine months ended September 30, 2016.

Net revenue generated from US operations increased $787,939, or 12.0%, to $7,336,831 in 2016-YTD from $6,548,892 in 2015-YTD. The increase is primarily a result of the increase in orders shipped, offset by an increase in back orders in 2016-YTD as compared to the 2015-YTD. We continue our marketing and sales efforts to expand our customer base into 2016, with our primary focus on expanding our distributor base, both domestic and foreign.

Net revenue from our Mexican subsidiary decreased $64,541, or 2.5% in 2016-YTD compared to 2015-YTD, accounting for $2,508,616 (25%) and $2,573,157 (28%) of consolidated net sales for the nine months ended September 30, 2016 and 2015, respectively. Net revenue from our Mexican subsidiary decreased primarily as a result of currency instability resulting in higher consumer prices.

Cost of Goods Sold – Total cost of goods sold increased $1,641,136 or 44.8%, from $3,664,147 (2015-YTD) to $5,305,283 (2016-YTD). This increase is primarily as a result of an increase in orders shipped and units sold over that of 2015-YTD. In addition, the Company expensed approximately $347,000 of obsolete inventory.

The gross margin has decreased from 59.8% (2015-YTD) to 46.1% (2016-YTD), with US operations accounting for $4,028,490 or 74% (2015-YTD) and $3,146,151or 69% (2016-YTD) of the gross margin dollars and with DS Mexico accounting for $1,429,412 or 26% (2015-YTD) and $1,394,013 or 31% (2016-YTD) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs increased $ 541,569 or 17.4% from $3,118,045 (2015-YTD) to $ 3,659,614 (2016-YTD). The increase was due to the following:

–

increases of:

$36,518 for freight and shipping, as a result of the increase in net revenue, however concentrating shipments to fewer freight forwarders so as to achieve volume discounts and reduce expedited shipments which are more expensive, and

$567,475 for Marketing and promotions, as a result of increased ad focus for brand awareness and advertising campaigns with on-line customers.

$375,810 in warehousing expenses as a result of a reduction in allocated overhead related to the decrease in inventory levels compared to the same period a year ago.

–

Partially offset by a decrease of:

$442,639 in consulting and commissions related to staff reductions and a reduction in commissions resulting from a reduction in sales periodically during 2016-YTD.

General and Administrative Costs – General and administrative costs increased $2,107,298 or 55.0%, from $3,830,069 (2015-YTD) to $ 5,937,367 (2016-YTD). The increase is due to the following:

–

increases of:

$1,872,522 for professional fees primarily with legal fees associated with defending the class action law suit dated March 29, 2016, and

$528,504 for personnel costs, as a result an increase in the number of full time employees over the prior period a year ago.

–

Partially offset by increases of:

$309,986 for bad debt, as a result of an improvement in collection efforts with our international customers in 2016-YTD.

Other Income and Expenses – Other expense decreased $139,945 from $301,872 expense (2015-YTD) to $104,317 expense (2016-YTD). The decrease is a result of a charge for an impaired intangible brand right agreement of $337,500 in 2015-YTD, offset by an increase in interest and other income of $ 197,555.

Liquidity and Capital Resources

We had cash of $894,109 and working capital of $1,941,163 at September 30, 2016. 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 Nine Months Ended September 30, 2016

Cash Flows from Operating Activities

Operating activities used net cash for the nine months ended September 30, 2016 of $3,662,827. Our net loss, when adjusted by various non-cash items aggregating $237,022 which impact net loss but do not impact cash during the period, such as stock issued for services or depreciation and amortization, resulted in a net loss of $4,924,112.

Changes in operating assets and liabilities necessary to support our operations provided cash of $1,261,285 are as follows:


	·	$236,852 used by an decrease in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,
	·	$591,633 used for decreased inventory levels which is not considered significant,
	·	$109,558 provided by a decrease prepaid expenses and other current assets which is not considered significant,
	·	$466,752 provided for increased accounts payable which is not considered significant,
	·	$391,924 provided by change in accrued expenses primarily due to the settlement of certain accrued expenses.

Cash Flows used in Investing Activities

Our investing activities used $103,227 in net cash during the nine months ended September 30, 2016, which is not considered significant.

Cash Flows from Financing Activities

Our financing activities used $15,311 in net cash from loans and notes during the nine months ended September 30, 2016 which is not considered significant.

Financial Position

Total Assets – Our total assets decreased $4,589,213 or 42.8% from $10,715,426 as of December 31, 2015 to $6,126,213 as of September 30, 2016 as a result of a net decrease in current assets of $4,561,538, and a net decrease in non-current assets of $27,675. The decrease in total assets was also the result of a decrease of $124,298 in intangible assets, due to amortization, offset by an increase in other assets of $95,654. The component of the net decrease in current assets are discussed below.

Current Assets – The net decrease in current assets of $4,561,538 was due to decreases in cash of $3,623,495, accounts receivable of $236,852, inventories, net of $591,633, and a decrease in prepaid expenses and other current assets of $109,558. For decrease in cash, see further discussion above in cash flow for the nine months ended September 30, 2016. The net changes for current assets are primarily driven by changes discussed below:

Inventory – Inventory levels decreased 15.2% from December 31, 2015 to September 30, 2016 as a result of increased sales and the continued efforts to replenish inventory in key raw material components in anticipation of sales in the fourth quarter of 2016.

Accounts Receivable, net – Accounts receivable decreased $236,852 primarily as a result of increased concentration of increased collection efforts with our international customers. The receivables are in line with historical averages for previous quarters and these levels of sales.

Prepaid Expenses and other current assets – Prepaid expenses decreased 42.8%, which is not significant.

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, 2015 evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. 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 September 30, 2016, 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 September 30, 2016 that persist, and recent efforts to resolve the identified weaknesses, 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.

The Company has hired a new CFO/CAO. The Company has also begun the process of transitioning its outsourced accounting staff to permanent employees. Furthermore, the Company has hired a controller and is looking to either reorganize its accounting staff to upgrade the resident skillset or hire another trained accounting professional.

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.

The Company has recently adopted a Corporate Compliance Manual combined with an empowered financial staff to implement and monitor appropriate controls. The company intends to develop controls against all activities as they occur.

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

Personal Credit Cards are no longer to be paid directly by the Company. Additionally, all corporate expenses are no longer to be charged on a personal credit card; rather a company check needs to be issued. For business expenses paid for by employees, an expense report detailing the expenses must be submitted for reimbursement.

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.

As part of our new internal controls, we have eliminated the ability of any executive or manager to override policy controls.

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.

All equity issuances whether purchased or awarded must now have Board of Director approval prior to their issuance.

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.

All distribution agreements and any other sales agreement with the potential for annual value of $1 million or more are now reviewed by the Board of Directors. Without this Board approval, no product can be sold to a new customer.

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.

Without exception, all new clients must have gone through a credit review prior to processing their first order.

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.

Without exception, all new clients must have gone through a credit review prior to processing their first order.

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.

Pricing standards have been established for all sales channels. Sales personnel have a certain level of flexibility within defined ranges but cannot charge any markup outside of the defined pricing bands. Exceptions can be applied only with the approval of the CFO.

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

As part of our internal controls, we have eliminated the ability of any executive or manager to override policy controls. More importantly, we have eliminated the environment where these types of activities can occur. The consequences of compliance violations are up to and including termination. Our recent corporate organizations changes create a system of checks and balances on all business activities. Additionally, our staff are empowered to raise issues without any fear of reprimand. All equity issuances whether purchased or awarded must now have Board of Director approval prior to their issuance.

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.

Abner Silva has been fired.

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.

The company has hired a new CFO. The company has also begun the process of transitioning its outsourced accounting staff to permanent employees. As part of this process, on October 31, 2016 the company hired a controller, with a CPA, to enhance its own professional accounting staff. The company is looking to either reorganize its accounting staff to upgrade the resident skillset or hire another trained accounting professional.

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 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. The company has now hired a a chief financial officer with the requisite expertise in U.S. GAAP, and has begun to address the material weaknesses in our internal control over financial reporting to ensure we will not have further 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 may also 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, we expect 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 mis-posting 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 September 30, 2016, 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

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.

ITEM 1A.

RISK FACTORS

Not Applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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: November 9, 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

Attached files

DS HEALTHCARE GROUP, INC. Reports

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