DS HEALTHCARE GROUP, INC. - FORM 10-K

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended: December 31, 2016

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

For the transition period from: _____________ to _____________

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DS Healthcare Group, Inc.

(Exact name of registrant as specified in its charter)

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Florida	001-35763	20-8380461
(State or Other Jurisdiction	(Commission	(I.R.S. Employer
of Incorporation or Organization)	File Number)	Identification No.)

1601 Green Road

Pompano Beach, FL 33064

(Address of Principal Executive Office) (Zip Code)

(888) 404-7770

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Common Stock, Par Value $0.001


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

	(Title of Class)

———————

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes þ No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

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

As of December 31, 2016, the registrant’s most recently completed fiscal year, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the market price at which the common equity was last sold was $15,769,991.

As of March 22, 2017, the registrant had approximately 23,537,330 shares of outstanding common stock, par value $0.01 per share.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This filing of our 2016 Annual Report on Form 10-K includes forward-looking statements, including statements about our future financial and operating performance and results, business strategy, market price, brand portfolio and performance, our SEC filings, enhancing internal controls and remediating material weaknesses. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this amendment, and we make such forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Many of our forward-looking statements include discussions of trends and anticipated developments under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the periodic reports that we file with the SEC. We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “may” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. You also should carefully consider other cautionary statements elsewhere in this amendment and in other documents we file from time to time with the SEC. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this amendment. Actual results may differ materially from what we currently expect because of many risks and uncertainties, such as: the possibility that we may be required to file additional periodic reports and financial statements in connection with our restatement disclosures; our leverage, which may make it more difficult for us to respond to changes in our business, markets and industry; possible increased borrowing costs; potential difficulties raising additional capital if needed, and the potential dilutive impact of any such equity capital raising; uncertainty and expense related to litigation and regulatory proceedings; potential difficulties in signing up; customers; purchase agreements; uncertain availability and cost of and other raw materials; increasing competition and possible loss of key customers; and general economic and capital markets conditions.

As used in this Annual Report, the terms “DS Healthcare Group Inc.,” “Company,” “Registrant,” “we,” “us,” and “our” mean DS Healthcare Group Inc. and its subsidiaries unless the context indicates otherwise.

TABLE OF CONTENTS


		PAGE
	PART I

Item 1.	Business.	1
Item 1A.	Risk Factors.	7
Item 1B.	Unresolved Staff Comments.	15
Item 2.	Properties.	15
Item 3.	Legal Proceedings.	15
Item 4.	Mine Safety Disclosures.	16

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	17
Item 6.	Selected Financial Data.	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	25
Item 8.	Financial Statements and Supplementary Data.	25
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	25
Item 9A.	Controls and Procedures.	25
Item 9B.	Other Information.	29

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance.	30
Item 11.	Executive Compensation.	32
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	34
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	35
Item 14.	Principal Accounting Fees and Services.	35

	PART IV

Item 15.	Exhibits, Financial Statement Schedules.	37

SIGNATURES		38

PART I

Item 1.

Business.

Overview

DS Healthcare Group, Inc. (formerly Divine Skin, Inc.) (d/b/a DS Laboratories) is a Florida corporation organized on January 26, 2007. DS Healthcare Group, Inc. and its subsidiaries (collectively, the “Company” or “DS Healthcare”) develop proprietary technologies and products for hair care and personal care needs. Management believes the Company is currently a leading innovator of (1) “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the act ion of the active ingredients in our products, and (2) “Nanosome Technology”, which acts as a delivery vehicle, and has been designed to infuse active compounds into targeted cells for increased efficiency of our products. The Company has grown steadily since inception with a network of retailers across North America and distributors throughout Europe, Asia and South America. DS Healthcare currently researches and develops (formulates) its own products. We currently offer the following lines of products: hair care, skin care and personal care.

Our current principal products are discussed below. We formulate, market and sell these products through specialty retailers, spas, salons, pharmacies and other distributors. Our products are compounded either in our laboratory or through various third party compounders on an order–by-order basis.

Our Company

We are a global personal-care, product development and marketing company. We develop and market proprietary branded personal care products that address thinning hair conditions, skin care and other personal care needs. We currently research, develop and formulate our own products, consistent with our mission to provide products that make a meaningful difference in the lives of our customers.

We compete in the personal care markets by focusing on developing innovative technologies and products that more adequately meet the personal care needs of consumers. Our current products are primarily sold under our “DS Laboratories” brand. We also sell certain products under our “Polaris Labs” and “Sigma Skin” brands. We market and sell these products through salons, spas, department stores, specialty retailers and distributors.

We have grown steadily since our inception through sales to a variety of specialty retailers, salon chains and distributors in North America and through distributors and pharmacies for international sales. We have a growing base of domestic and international customers with several large salon chains and distributors, which collectively sell to over 10,000 salons and retail outlets throughout the world. Our current principal products, which are all sold under our DS Laboratories brand, are set forth below.


Thinning Hair	Hair Care	Skin Care	Personal Care
Revita	Dandrene	Hydroviton	Nirena
Revita LT	Continuum	Keramene	Spectral.Lash
Revita Cor		Oligio
Spectral		Trioxil

Our Key Strategies

We offer a broad range of branded, personal care products that address various personal needs applications in the hair care market, specifically technology for thinning hair. All of our products and technology are a result of internally researched and developed formulas. Our product development activities are not limited to any particular product category; rather, we take a broad approach to personal care applications and develop products that serve specific needs. The ingredients within our products implement technologies that utilize encapsulation techniques which we believe improve the effectiveness and spectrum of the active ingredients of our products. Our thinning hair technology, Nanoxidil, a proprietary compound, for example, is designed to stimulate follicles on the entire scalp. We believe Nanoxidil surpasses competing products in terms of efficacy and tolerability due to its higher level of penetration and prolonged therapeutic effect because of its relatively low molecular weight. Our research into the mechanism of thinning hair has also led us to develop applications to suppress unwanted body hair growth.

Our historical revenue growth has been primarily driven by the following three factors: 1) introduction of new and innovative products, 2) increasing distribution in new channels and territories and 3) supporting existing distribution with education, training and marketing. We believe the most rapid way to accelerate revenue growth is to aggressively support our existing customer base and concurrently expand into new markets.

We intend to continue to capitalize on several opportunities to increase our market share and revenues. We currently have a distributor network through which our products are placed in over 1,000 salon-based retail outlets in the United States and distributors in over 15 countries. We intend to increase revenues and achieve profitability by continuing to develop and market new products while aggressively supporting our distribution partners.

Sales and Marketing

We are increasingly marketing our products directly to salons, pharmacies, spas, department stores and specialty retailers in an effort to foster greater brand loyalty. However, a majority of our current sales are made to distributors. We sell our products in the U.S. and internationally, principally through both U.S. and internationally based distributors and in Mexico through our Mexican subsidiary, Divine Skin Laboratories, S.A. DE C.V.

We utilize our branded website to provide information about our Company, products and technology and are developing a viable E-Commerce business on via our website. All marketing and communications efforts feature a constant internet based strategy which we believe allows us to leverage our brand to generate sales.

Corporate Background

Our corporate headquarters are located at 1601 Green Road, Pompano Beach, Florida 33064. Our phone number is (888) 404-7770. We own and operate several websites, including dshealthgroup.com, polarisresearchlab.com, polarisresearchlabs.com and dslaboratories.com. Information contained on our websites is not part of this report. Our Company was organized under the name Divine Skin, Inc. and we changed our corporate name to DS Healthcare Group, Inc. in November 2012.

Our corporate structure is set forth below:

[dskx_10k002.gif]

Our consolidated financial statements include the operating activities of Velocity Storage and Packaging, LLC (“Velocity”), which are accounted for as Variable Interest Entity (“VIE”). Velocity performed packaging and shipping services exclusively for the Company. The Company’s variable interest relates to a financing arrangement whereby, all operational expenses, including labor costs, facility costs and other operational expenses are reimbursed by the Company at Velocity’s cost. The Company has no equity investment in Velocity and Velocity has no assets, liabilities or equity structure of its own. Accordingly, the Company determined that Velocity is a VIE and the Company is the primary beneficiary under the guidance offered in Accounting Standards Codification (“ASC”) 810-10 since Velocity does not have sufficient equity at risk for the entity to finance its own activities. ASC 810-10 requires that an enterprise consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entity's expected losses if they occur. On October 31, 2016, Velocity ceased performing service for its operation with the Company. All of Velocity’s employees were hired by the company for the purpose of performing necessary packaging and shipping services.

Products

Our business model is to develop products with unique features and benefits that are outside the scope of general products offering by larger competitors in our industry. Our products are developed (formulated) internally to fill a niche product category so that we can create new products without direct competition from larger, better capitalized market participants and achieve organic growth with minimal investment. The company has developed and optimized nanosome encapsulation technology, which is employed to entrap and deliver active ingredients in certain product more efficiently and safely in order to improve overall product performance. Our current principal products are as follows:

Hair Care

We have developed a line of shampoos and conditioners, which includes products specifically designed to treat thinning hair, dandruff and other common hair care conditions.

Revita® Shampoo and Revita.Cor Conditioner

Revita and Revita LT are high performance hair stimulating shampoos. Revita.Cor is our hair stimulating conditioner which employs nanosomal encapsulation technology. Revita uses a combination of materials specially designed to maintain scalp vitality and act on follicle dysfunctions. This formulation is developed completely without the use of harsh chemicals such as Sodium Lauryl Sulfate and Sodium Laureth Sulfate, commonly used low cost detergents in shampoos and cleansers that are linked to skin irritation, drying, and hair loss due to follicle attack. It contains a high concentration of caffeine, among other ingredients. Revita LT is formulated for customers with lighter colored hair.

Spectral

Our Spectral line of topical lotions and sprays are designed for men with advanced androgenic alopecia – male pattern baldness. Spectral.DNC, a spray formula, Spectral.DNC-L, a lotion, are designed to re-grow hair through multiple pathways. One of the active ingredients in Spectral DNC and DNC-L is Procyanidin B-2 complex. We believe this formula helps retain and re-grow hair. In an independent study published in the British Journal of Dermatology in 2002, Procyanidin B-2 was shown to shorten the hair resting phase and prolong the hair growth phase, therefore increasing hair growth results. This treatment uses over 10 active compounds that trigger different processes in the scalp to generate healthy hair and contains nanosome microspheres to enhance absorption into the skin. Spectral DNC and Spectral DNC-L are only sold outside the United States. Our Spectral DNC-N, sold in the United States, is a spray formula and is the first treatment to employ Nanoxidil 5%, a powerful new non-prescription non-OTC alternative to existing formulations offering high efficacy, with no known side effects.

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

Dandrene®

Dandrene is an antidandruff shampoo formulated with highest concentration of Zinc pyrithione, an over the counter (“OTC”) drug designed to treat itchy scalp and dandruff. The product provides relief from scaling, irritation, redness and flaking associated with dandruff, psoriasis and seborrheic dermatitis.

Continuum

Human hair are prone to considerable damage due to several factors such as normal aging, exposure to certain environmental conditions such as sunlight and most significantly due to bleaching process. Anatomically, a single hair strand can be represented as a rope made up of systematically arranged cortical fibers with an additional protective cover called cuticles. Exposure to detrimental factors or bleaching process causes weakening of hair cuticles and lessening of cortical fibers that leads to undesirable surface roughness and eventually breakage. Continuum is an innovative product created by combining unique molecules, a precursor and activators, to strengthen the connections between cortical fibers in order to regain hair strength; and, to rearrange cuticles so that to ensure its maximum protective efficacy and natural shine to the hair. Continuum line includes three product – Ro.Maxx, Ro.Zen and Ro.Topia.

Skin Care

Hydroviton®

Hydroviton is a skin cleanser, developed for oily and acne prone skin. It contains liposome encapsulated azelaic acid, which has shown by independent study to suppress 5α-reductase, a hormone that causes oily skin.

Keramene®

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

Oligo®

Oligo.DX is a cream that is designed to improve the appearance of cellulite from women’s thighs, hips and buttocks. It contains a liposomal complex of caffeine and escin, among other ingredients.

Trioxil®

Trioxil is an anti-acne gel. It contains Ichthyol Pale among other ingredients, which has been shown to reduce skin blemishes under an independent study.

Personal Care

Nirena®

Nirena is an intimate feminine care cleanser developed without cheap detergents, harsh chemicals, and low pH tolerances, which are generally found in other commercially available products. The principle active ingredient in Nirena is Brazilian Peppertree extract. In clinical studies, extract of the Brazilian Peppertree displays antimicrobial properties.

Spectral.Lash

Spectral Lash is a product based on advanced bio-peptides that are designed to grow and increase the length and girth of eyelash hair. The bio-peptides include SymPeptide 226EL, which under independent studies have shown an increase in eyelash length after 2 weeks of use.

Marketing and Advertising

We have in-house graphic design and public relations departments which are supplemented by the use of third parties, to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also target specific markets by selectively marketing our products in partnership with distribution partners that we believe reach our potential customers.

As retail salons, specialty retailers and pharmacies are an important source of revenue generation, we provide these outlets with educational materials and training and other marketing support services. We believe the relationships that stylists and salespersons have with their clients create an opportunity for such persons to recommend our products to their customers as compared to customers simply choosing our products from a shelf in retail stores. In addition, since the stylist is looking at the hair line on a regular basis, we feel that the stylist may be the first to diagnose hair loss. Early detection has the highest rate of successful treatment and therefore stylists can significantly improve the quality of life for many of their clients while also generating revenues for their respective salon or store.

Compounders and Suppliers

We primarily use contracted third parties to compound our products. During 2015 and 2016, we contracted with two compounders for the compounding of our products. We engage these compounders on a per order basis, without long term contracts. The third party compounders are responsible for receipt and storage for a portion of raw material, compounding and labeling of our products. At present, we are dependent upon these compounders for the compounding of all of our products. We believe at the present time we will be able to obtain the quantity of products and supplies we will need to meet orders. We purchase all of our raw materials from several third-party suppliers pursuant to purchase orders without any long-term agreements. We do not rely on any principal suppliers, although during 2015 and 2016, we had two suppliers that each provided in excess of 10% of our materials. During 2015 and 2016, we have purchased raw materials from over 30 suppliers. In the event that a current supplier or compounder is unable to meet our supply or compounder requirements at some time in the future, we may suffer short-term interruptions of delivery of certain products while we establish an alternative source. While we believe alternative sources are in most cases readily available and we have established working relationships with several third party suppliers and compounders, none of these agreements are long-term. We also rely on third party carriers for product shipments, including shipments to and from our distribution facilities. We are therefore subject to the risks, including employee strikes and inclement weather, associated with our carriers’ ability to provide delivery services to meet our fulfillment and shipping needs. Failure to deliver products to our customers in a timely and accurate matter would harm our reputation, our business and results of operations.

We package and assemble our products internally.

Sales Channels

We currently sell our products to approximately 250 salons, retailers, distributors and wholesale groups. We have begun retailing our products directly to the consumer on our company website. We have established relationships with specialty retailers, spas, salons, pharmacies and distributors, the majority of which are on a purchase order basis, without long term commitments. We continue to explore relationships with retailers and distributors both nationally and abroad for all of our products.

Distribution Agreements

As of December 31, 2016, we are a party to 10 distribution agreements covering approximately 30 countries throughout the world and 9 distributors covering all markets within the United States. The agreements may generally be terminated by the distributor without cause upon 30 days’ notice or by us in the event the distributor fails to meet certain purchase requirements. We believe that there is a need for such arrangements as identifying partners in overseas markets enables us to outsource logistical matters and such third parties also provide customer support and have a greater knowledge of local markets and customs. During 2016, one individual customer accounted for more than 10% of our revenues.

Research and Development

We perform our research and development (formulation development) at our executive offices and in-house laboratories. During 2015 and 2016, we expensed $154,308 and $178,034, respectively, to research and development. Currently, the Company has several new projects and products in the pipeline, and they are as follows:

Continuum line extension with 4 more products focusing on hair anti-aging, protective and repairing effects;

Dandrene line extension with 2 more OTC products for improved management and control of dandruff;

Trioxil line enancements with two new products for acne control;

Several new projects for contract product development and manufacturing (private label).

Proprietary Rights

Our product formulations are created in-house. We regard the protection of trademarks and other proprietary rights that we may own material to our future success and competitive position. We rely upon the combination of laws and contractual restrictions such as confidentiality agreements to establish and protect its proprietary rights. Laws and contractual restrictions, however, may not be sufficient to prevent misappropriation of proprietary rights or to deter others from independently formulating products that are substantially equivalent or superior to our products. In October 2013, we filed two patents with the United States Patent and Trademark Office (USPO) titled “Compositions and Methods for Treatment of Hair Loss” for two of our formulations. This patent is currently pending with the USPO. There can be no assurance of the outcome of the patent application. If we are unable to protect our proprietary rights, our business could be adversely affected.

We have obtained the following U.S. trademarks: DS Laboratories, Aminexil, Revita, Spectral.DNC and Oligo.DX, Trioxil, Nanoxidil and Sigma Skin.

Regulation

The United States Food, Drug and Cosmetic Act and the Fair Packaging and Labeling Act regulate the purity and packaging of health and beauty aid products and fragrances in cosmetic products. Similar statutes are in effect in various states and foreign jurisdictions. Health and beauty aids are also subject to the jurisdiction of the Federal Trade Commission (“FTC”) with respect to matters such as advertising content and other trade practices. We believe our products are defined as cosmeceuticals. Within the skin care industry, cosmeceuticals are not clearly regulated nor recognized by the U.S. Food and Drug Administration (“FDA”). In general, products like ours are treated as either cosmetics or OTC drugs, often making drug-like claims. It is possible that the FDA, which regulates the sale and marketing of our products, may request that we make certain changes to our label claims and/or remove certain ingredients from our products or take other regulatory action. We have contracted a law firm that specializes in dealing with these regulatory matters and they have advised us that our regulatory risk is low at this time. However, it should be noted that any very drastic change to our label claims could adversely affect our business. For instance, if we were forced to change “Revita Hair Stimulating Shampoo” to “Revita Shampoo” it could have a negative effect on our marketing of the product, causing a significant drop in sales volume for this product. The failure of our Company or our compounders to comply with applicable government regulations could result in product recalls that could adversely affect our relationships with our customers.

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

Competition

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

Our products, in general, compete against products distributed by national and international hair care, skin care and personal care companies, including, but not limited to, Loreal and Unilever. Our competitive position is based on the foundation of developing niche products with active ingredients that may not be found in competing products. Our competitive strategy is based on our attempt to continually focus on the application of new technologies and efficiencies rather than fashions or trends.

Employees

As of December 31, 2016, we have a total of 131 employees, of which 38 are employed in the United States and 93 are employee in Mexico.

Item 1A.

Risk Factors.

Although this is not applicable to smaller reporting companies, we are providing such information herein because investing in our common stock involves a high degree of risk. Therefore, you should carefully consider the following risk factors before deciding whether to invest in the Company. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline.

Risks Related to Our Business and Industry

We had a net loss of $6,939,358 and $10,742,806 for 2016 and 2015, respectively, and we have historically incurred losses and may incur losses in the future that may adversely affect our financial condition.

We had a net loss of $6,939,358 and $10,742,806 for 2016 and 2015, respectively. In the event we are unable to increase gross margins, reduced costs and/or generate sufficient additional revenues to offset our costs, we may continue to sustain losses in the future.

Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern.

As of December 31, 2016, our accumulated deficit was $27,918,109. Primarily as a result of our recurring losses from operations, negative cash flows and our accumulated deficit, our independent registered public accounting firm has included in its report for the year ended December 31, 2016, an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, our ability to obtain sufficient financing to support our operations.

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

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

Our ability to manage costs;

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

Our ability to continuously offer new or improved products;

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

Our ability to maintain sufficient production capacity for our products;

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

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

The level of consumer acceptance of our products;

Regulatory compliance costs; and

General economic conditions and consumer confidence.

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

The majority of our revenue is generated on the basis of purchase orders, rather than long term purchase commitments; if we lose one or more of these customers it may adversely affect our financial position and results of operations.

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

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

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

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

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

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

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

We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, may require us to:

Defend against infringement claims which are expensive and time consuming;

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

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

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

We are dependent upon suppliers for our raw materials which we purchase on a per order basis without long term contracts and our suppliers are dependent on the continued availability and pricing of raw materials, either of which could negatively affect our ability to manage costs and maintain profitable operating margins.

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

We rely on third-party suppliers and compounders to provide raw materials for our products and to compound our products, and we have no control over these suppliers and compounders and may not be able to obtain quality products on a timely basis or in sufficient quantity.

Substantially all of our products are compounded by unaffiliated compounders. We do not have any long-term contracts with our suppliers or compounding sources, and we expect to compete with other companies for raw materials, production and import capacity.

If we experience significant increased demand, or need to replace an existing compounder, there can be no assurance that additional supplies of raw materials or additional compounding capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or compounder would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new compounding or raw material sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and compounding in our methods, products and quality control standards. Any delays, interruption or increased costs in the supply of raw materials or compounding of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

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

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

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

While we have one patent pending and under review by the USPO, we currently have no patents on our products. We will continue to use the current business strategy of adding proprietary blends to each product formula. More than the name trademark, the proprietary blend formula makes formula replication challenging for any possible competitor. We believe adding proprietary blends make replication quite difficult and expensive. However, to the extent we do not have patents on our products; another company may replicate one or more of our products.

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

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

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

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

We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. The FDA or other governmental regulatory bodies could require the reformulation of certain products to meet new standards or FDA approval prior to marketing and sale of certain products. Any or all of such requirements could have a materially adverse effect on our business, financial condition, results of operations and cash flows. The cost to comply with new or changing regulations could be material. Furthermore, we cannot provide any assurances that any product would ultimately comply with new or changing regulations.

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

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

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

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

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

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

Our website and internal systems may be subject to intentional disruption that could adversely impact our reputation and future sales.

We could be a target of cyber-attacks designed to penetrate our network security or the security of our internal systems, misappropriate proprietary information and/or cause interruptions to our services or delay the delivery of our products to customers. If an actual or perceived breach of our network security occurs, it may expose us to the loss of information, litigation and possible liability. Such a security breach could also divert the efforts of our technical and management personnel. In addition, such a security breach could impair our ability to operate our business. If this happens, our reputation could be harmed, our revenues could decline and our business could suffer.

We are involved in several litigation matters that could harm our business, brand and reputation, financial condition or results of operations.

We are involved in a several lawsuits. Any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or we may decide to settle lawsuits on unfavorable terms. In addition, defending these claims is costly and can impose a significant burden on management and employees, and we may receive unfavorable preliminary or interim rulings in the course of litigation. Any such negative outcome could result in payments of monetary damages, adverse effects on the market price of our common stock or changes to our business practices, and accordingly our business, brand and reputation, financial condition, or results of operations could be materially and adversely affected.

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

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

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

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

Businesses we may acquire in the future, as well as strategic investments such as joint venture arrangements, expose us to increased risks.

As part of the Company’s growth strategy, we intend to explore acquisition opportunities, including joint venture arrangements and equity investments intended to complement or expand our business, as well as divestment of certain of our businesses or assets.

On February 8, 2017, the company entered into a Joint Venture and Financing arrangement with EverCare Prohealth Technologies LTD (“Evercare”), a private Hong Kong company, whereby EverCare would provide $2 million dollars in financing to the Company and enter into a joint venture arrangement for the development of certain new products, whereby the operational costs would be shared between the two companies.. Included in the agreement are the granting of exclusive distribution rights to EverCare for Asia, Australia and Africa. Additionally, the Company has pledged via transfer of certain intellectual property, held under its DS Laboratories subsidiary, to EverCare as security for the financing. Such pledge includes buyback provisions exercisable within 5 years of the closing date of the transaction. Additionally, the Company received 3 million shares of Evercare as part of the arrangement.

Executed and effective on December 29, 2016, the Company entered into an agreement to acquire the distribution rights of it Brazilian distributor, of which our current chief operating officer Fernando Tamez, and former Officer Abner Silva, are shareholders and listed as sellers on the agreement, to acquire 100% of the distributers shares in exchange for $47,000 in cash to satisfy certain liabilities, guaranteed employment contract for an employee valued at approximately $28,000, and the option to receive 500 units per month at no cost for 24 months. The agreement includes The Company assuming all current operating cost of the distributor during the period of time between the execution of the agreement and the alteration of the shareholder’s agreement.

Subsequent to year end, the Company paid $33,000 towards the purchase price. As of the date of this filing the Brazilian distributor has not been cooperative with The Company’s attempts to perform the required due diligence and has refused to provide and grant access to the records or required information preventing the company to properly consolidating the entity. Therefore, on March 29, 2017, the Company informed the Brazilian distributor, by way of legal letter, that they are in breach of the agreement and subsequently has rescinded the agreement dated December 29, 2016 and has demanded a return of the monies paid to date. Due to the uncertainty of the outcome of this legal action The Company deemed it necessary to accrue for the consideration pledged in the purchase agreement and immediately expense the full amount due to the uncertainty of the Company’s ability to obtain the net assets of the distributor, which was determined to be valued at approximately $250,000.

These types of transactions can pose substantial risks and liabilities associated with their operations, as well as the risk that our relationships with our partners do not succeed in the manner that we anticipate. We cannot provide any assurance that we will find attractive acquisition candidates in the future, that we will be able to acquire such candidates on economically acceptable terms or that we will be able to finance acquisitions on economically acceptable terms. If we acquire new businesses in the future, we may incur substantial additional indebtedness and other expenses or we may complete potentially dilutive issuances of equity securities, which may affect the market price of our common stock, inhibit our ability to pay dividends or otherwise restrict our operations.

If we are unable to retain our senior management and key personnel, our business and results of operations could be harmed.

Our ability to maintain our competitive position is largely dependent on the services of our senior management and key personnel. Although we have employment or severance agreements with certain of our employees, these agreements do not prevent those individuals from ceasing their employment with us at any time. If we are unable to retain existing senior management and key personnel, or to attract other qualified senior management and key personnel on terms satisfactory to us, our business could be adversely affected.

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

As of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that our internal controls over financial reporting were not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Although we have successfully completed all of our initial remediation efforts, any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or cause us to fail to meet our periodic reporting obligations. The existence of a material weakness could result in errors in our financial statements that could result in restatements of our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the trading price of our stock. Refer to “Controls and Procedures” below for further discussion.

The company is involved in a number of law suits, more particularly described in Item 3 hereof. The Company cannot predict the outcome of these proceedings nor the financial impact to the Company in the event the Company is not successful in its defense of the claims. If the Company is unsuccessful the financial effect could be material.

Throughout the year ended 2014, 2015 and 2016, Daniel Khesin, the Company's former chief executive officer and former chief financial officer, received in addition to base compensation, reimbursement and payroll advances of expenses of approximately $76,000, $40,000 and $48,000 through August 2016, respectively, which were for non-business related goods and services. For the year ended 2016, the amount above includes $27,000 for use of a leased vehicle and related car insurance which was approved by the board of directors and $10,000 owed us from Mr. Khesin for certain legal fees paid on his behalf. The Company owes Mr. Khesin $44,100 related to medical contributions incorrectly deducted from his salary from 2013 – 2015. Pursuant to his executive employment agreement, $50,000 in shares were to be payable in shares of the Company's common stock each fiscal year-end.

While Mr. Khesin believed that these payments were received as satisfaction of certain bonus or other perquisites earned by him on a monthly basis under his employment agreement, such payments, if any, required approval of our compensation committee, which approval was not received until subsequent to 2014, 2015, and 2016. 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 for 2014 and 2015. The Company’s Audit Committee has agreed with the findings for 2014 and 2015. On September 29, 2016. The Company, in accordance with Section 10A of the Securities and Exchange Act of 1934, informed the Commission in a letter also dated September 29, 2016. See "Controls and Procedures" and "Executive Compensation" below.

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

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. As of December 31, 2015, the Company accrued for the Asheville suit. In September 2016, the Company was notified it received a default judgement in the amount of $73,000. On December 19, 2016 the company settled the lawsuit for $25,000.

On April 20, 2016, DS Healthcare Group, Inc. (the “Company”) was notified by Nasdaq that because the Company has not filed its Annual Report on Form 10-K for the year ended December 31, 2015, the Company no longer qualifies for continued listing in accordance with Nasdaq Rule 5250(c)(1).

On April 12, 2016, the SEC issued a “Formal Order” directing a private non-public formal investigation to determine whether violations of the federal securities law may have been committed, directly or indirectly, by the Company, its officers, directors, employees, partners, subsidiaries and/or affiliates, and/or other persons or entities. The possible violations set forth in the Formal Order include Section 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 13(k), 14(a), and 14(f) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, 13b2-2(a), 14a3, 14a-9, and 14f-1. The relevant time period specified in the Formal Order is between January 1, 2010 and March 31, 2016. On April 15, 2016, the SEC issued a subpoena duces tecum to Mr. Khesin. On May 4, 2016, the SEC issued a subpoena duces tecum to the Company. The company is complying with all requests to the SEC and the review and production process is ongoing in nature. On or about July 27, 2016, the SEC issued a second subpoena duces tecum to the Company seeking a current copy of its QuickBooks file with a user name and password. The Company is complying with all requests to date and has no way of knowing what the outcome of the investigation will be.

Risks Related to Our Common Stock

Our common stock may be affected by limited trading volume and may fluctuate significantly.

There has been a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

We do not currently intend to pay dividends on our common stock and, consequently, an investor’s ability to achieve a return on its investment will depend on appreciation in the price of our common stock.

We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations and other factors our board of directors may deem relevant. If we do not pay dividends, a shareholder’s ability to achieve a return on its investment in the Company will depend on any future appreciation in the market price of the Company’s common stock. There is no guarantee that the Company’s common stock will appreciate in value or even maintain the price at which a shareholder initially purchased its common stock.

If shares of our common or preferred stock available for issuance or shares eligible for future sale were introduced into the market, it could dilute our current stockholders and/or hurt our stock price.

We are authorized to issue 300,000,000 shares of common stock and 30,000,000 shares of preferred stock. The exercise of outstanding options and/or warrants may cause substantial dilution to those who hold shares of common stock prior to such exercises. In addition, sales of substantial amounts of the common stock in the public market by these holders or perceptions that such sales may take place may lower the common stock's market price. We may sell our authorized, but unissued, common stock to satisfy our funding requirements. We are also authorized to issue up to 30,000,000 shares of preferred stock, without stockholder approval. Any future series or class of preferred stock may have rights that are superior to the rights of the holders of our common stock. The sale or the proposed sale of substantial amounts of our common or preferred stock may adversely affect the market price of our common stock and our stock price and our stockholders may also experience substantial dilution.

We have conflicts of interests relating to certain ownership interests held by our Chief Operating Officer with the Company

Our current Chief Operating Officer, Fernando Tamez, has a 8.7% ownership interest in a company that we were attempting to acquire which owns the distribution rights to the sell and promote our products in the country of Brazil, and a 25% interest in a fund that that owns the entity in Spain that owns the rights to sell and promote our products in the country of Spain. While Mr. Tamez is not currently active in the day to day operations of either company, we are actively pursuing these companies as potential acquisitions. Accordingly, conflicts of interest may arise as a result of his ownership interests and the ability to consummate an agreement. We currently do not have any formal agreement with Mr. Tamez with respect to Spain, however the Company as of December 29, 2016 unsuccessfully attempted to acquire company in Brazil which resulted in a loss of $250,000 resulting from a breach of contract with the seller. While the Company considers both companies as valuable for future growth of our Company, however there is no guarantee that the Company will be able to formalize agreements with both and minimize any future conflict of interests in during negotiations as a result of his interest that would be favorable to the Company.

Item 1B.

Unresolved Staff Comments.

Not applicable to smaller reporting companies.

Item 2.

Properties.

The Company leases an executive office and warehouse space in Pompano Beach, Florida and the lease terminates on July 31, 2019. The Company’s Mexican subsidiary leases an office and warehouse space in Mexico City, Mexico. The lease was extended in May 2016, and expires in April 30, 2018.

We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs. We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire or lease additional facilities and/or dispose of existing facilities.

Item 3.

Legal Proceedings.

We are 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. As a result of this mediation and subsequent negotiations, there is an agreement with Plaintiffs in both the securities case and the derivative demands as to amount of the settlement and most of the key terms. The parties are negotiating the precise terms of the Court stipulations that will need to be filed. Agreements on the terms of inter-defendant releases are pending approval by both sides. The final settlements will also need to be approved by the Court.

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. As of December 31, 2015 and 2016, the Company has not recorded an accrual for this claim.

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 $3 million. DS Healthcare disputes the claims asserted by PhotoMedex, including that PhotoMedex is entitled to the “break-up fee” under the agreements. DS Healthcare has also asserted a counterclaims for damages against PhotoMedex for their breaches of the two agreements. An initial case management conference occurred on October 13, 2016, however no resolution was reached. A settlement conference occurred on January 31, 2017 and once again no settlement was achieved. Although both parties continue to work to reach an agreement, the court case is scheduled on or after September 15, 2017.

On December 28, 2015, the Company, our Chief Executive Officer, Daniel Khesin individually, and Abner Silva, a former consultant and employee were 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 successfully settled this matter on December 28, 2016.

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. As of December 31, 2015, the Company accrued for the Asheville suit.In September 2016, the Company was notified it received a default judgement in the amount of $73,000. On December 9, 2016, the company settled the lawsuit for $25,000.

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. 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.

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 not 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 record a contingent liability or reserve for these matters.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

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

We have made an application for our common stock to be listed on the OTC Markets. As of December 31, 2016, the closing price of our stock on the Nasdaq Capital Market was $0.67. The following table sets forth, for each quarter in 2016 and 2015, the high and low closing sales prices of our common stock as reported by the Nasdaq Capital Market. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.


Calendar Year 2016
		High	Low
	First Quarter	$0.67	$0.67
	Second Quarter	$0.67	$0.67
	Third Quarter	$0.67	$0.67
	Fourth Quarter	$0.67	$0.67

Calendar Year 2015
		High	Low
	First Quarter	$1.15	$0.65
	Second Quarter	$4.96	$0.76
	Third Quarter	$4.14	$2.15
	Fourth Quarter	$3.60	$2.30

Holders

As of December 31, 2016, there were approximately 1,499 security holders of record of our common stock.

Dividend Policy

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

Recent Sales of Securities

Sales of Unregistered Securities

Not applicable.

Sales of Registered Securities

Not Applicable.

Equity Compensation Plan Information

The following chart reflects the number of awards granted under equity compensation plans approved and not approved by shareholders and the weighted average exercise price for such plans as of December 31, 2016.


Name of Plan	Number of shares of common stock to be issued upon exercise of outstanding options (a)	Weighted-average exercise price of outstanding options (b)	Number of shares remaining available for future issuance under equity compensation plans (excluding the shares reflected in column (a)) (c)
Equity compensation plans approved by security holders	—	—	500,000


Total			500,000

In January 2009, the directors and a majority of our shareholders adopted our 2009 Equity Incentive Plan (the “Plan”). We have reserved an aggregate of 500,000 shares of common stock for issuance pursuant to options or restricted stock granted under the Plan. As of the date of this report, we have issued no shares under the Plan. The purpose of the Plan is to advance the interests of the Company and its stockholders by providing a means of attracting and retaining key employees, directors and consultants for the Company and its subsidiaries. The Plan shall be administered by the board of directors until such time as a committee shall be appointed (the “Administrator”). Options granted under the Plan may either be options qualifying as incentive stock options (“Incentive Options”) under Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or options that do not so qualify (“Non-Qualified Options”).

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

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

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

All restricted stock units (“RSUs”), warrants and options that have been granted to employees through December 31, 2015 have been granted outside of the 2009 Equity Incentive Plan. No RSUs, warrants and options have been issued to employees during 2016. See Note 11 to the Notes to Consolidated Financial Statements included in this Form 10-K for information on the Company’s RSUs, warrants and options activities.

Item 6.

Selected Financial Data.

Not required for smaller reporting companies.

Item 7.

Management’s Discussion and Analysis Of Financial Condition And Results Of Operation.

Introductory Statements

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

This filing contains forward-looking statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this registration statement, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” below for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Significant Accounting Policies

Our 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 the Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our 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 consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

Risks and Uncertainties – The Company’s business could be impacted by price pressure on its product manufacturing, acceptance of its products in the market place, new competitors, changes in federal and/or state legislation, potential acquisitions, 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 – Revenue is recognized when a product is shipped. The Company’s revenue recognition policies are in compliance with ASU No. 2014-09, “Revenue from Contracts with Customers”, which establishes core principle of the revenue recognition that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The Company recognizes revenue when all the following four criteria are met:

Identify the contract(s) with a customer,

Identify the separate performance obligations in the contract,

Determine the transaction price and

Allocate the transaction price to the separate performance obligations.

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

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

Income Taxes – The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded when it is more likely than not that some portion or all of a deferred tax asset will be realized.

Earnings per share – The Company computes basic and diluted earnings per share amounts in accordance with ASC Topic 260, “Earnings per Share”. Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.

Results of Operations

The following discussion and analysis addresses the major factors that affected our operations and financial condition reflected in our consolidated financial statements for 2016 and 2015. This discussion is intended to supplement and highlight information contained in, and should be read in conjunction with, our consolidated financial statements and related notes and the selected financial data presented elsewhere in this report.

Year Ended December 31, 2016 to the Year Ended December 31, 2015

Net Revenues –

Our total net revenue increased by $1,169,415, or 9.9%, from $11,777,760 for 2015 to $12,947,175 for 2016. The increase in net revenue was due to an increase in net revenue in the U.S. and Mexico. Net revenue in the U.S. increased by $687,061 or 8%, from $8,625,778 for 2015 to $9,312,838 for 2016. Net revenue in Mexico increased by $482,355, or 15.3% from $3,151,982 for 2015 to $ 3,634,337 for 2016. Of the increase for Mexico, $397,422 was in net revenue for Mexico and $84,933, or 17.6% was related to the strengthening of the U.S. dollar versus the Mexican Peso. The increase in total net revenues in the U.S. is primarily due to our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributors, both domestic and foreign.

Cost of Goods Sold – Our total cost of goods sold increased $1,124,353, or 21%, from $5,377,518 for 2015 to $6,501,871 for 2016. Our U.S. cost of goods sold increased by $ 950,161, or 24%, from $3,956,106 for 2015 to $4,906,266 for 2016. The increase in U.S. cost of goods sold totaling $950,161 was primarily due to an increase in net revenue of $687,061 and a charge for inventory obsolescence totaling approximately $272,000. Cost of goods sold in Mexico increased by $174,192, or 12%, from $1,421,412 for 2015 to $1,595,605 for 2016. The increase in our cost of goods sold in Mexico totaling $143,520 was primarily due to the increase in net revenue and $30,672, or 17.6%, was related to the strengthening of the U.S. dollar versus the Mexican Peso.

Gross Profit - The overall increase in cost of goods sold, as a percentage of net revenue, contributed to a decrease in our overall gross margin from 54% for 2015 to 50% for 2016. Our consolidated gross profit increased $45,062, or 1%, from $6,400,242 for 2015 to $ 6,445,304 for 2016. Of the total increase in gross profit, our gross profit in the U.S. decreased $ 263,100, or 5.6% from $4,669,672 for 2015 to $ 4,406,572 for 2016, and our gross profit in Mexico increased by $308,163, or 17.8%, from $1,730,570 for 2015 to $2,038,732 for 2016.

Selling and Marketing Costs – Selling and marketing costs decreased $4,203,892, or 47%, from $9,020,546 for 2015 to $4,816,654 for 2016. The decrease was due to the following:

$2,442,670 for commissions and consulting, primarily as a result of a decrease in personnel costs of $341,993, $311,000 in commissions, and stock compensation costs of $1,602,620 recorded in 2015,

$1,895,045 for marketing and promotion, primarily as a result of $2,118,666 in common stock issued to a distributor in Hong Kong as an incentive, offset by an increase of $295,244 in online marketing.

General and Administrative Costs – General and administrative costs increased $762,415, or 10%, from $7,601,823 for 2015 to $8,364,238 for 2016. The increase was due to the following:

$1,142,330 in professional fees for legal, outsourced accounting, and audit fees.

$151,025 in salary and personnel costs mainly due to increase in stock based compensation.

Offset by a decrease in:

the provision for bad debt of $497,853.

Other Income and Expenses – Other expense decreased $281,627 from $389,984 expense in 2015 to $108,357 expense in 2016. The decrease is a result of a charge for an impaired intangible brand right agreement of $337,500 in 2015, offset by an acquisition loss reserve associated with an attempted Brazilian acquisition of $250,000 ,and an increased other income of $169,901 and interest and other income of $ 33,226.

Liquidity and Capital Resources

We had cash and cash equivalents of $322,319 and working capital of $279,218 at December 31, 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 through the initial contribution by our founders in 2007, through sales of our common stock and by credit financing, including borrowings from third parties.

We have sustained operational losses since our inception. At December 31, 2016, we had an accumulated deficit of $27,918,109. The Company cannot predict how long it will continue to incur further losses or whether it will ever become profitable as this is dependent upon the 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.

We have commenced implementing, and will continue to implement, various measures to address our financial condition, including increasing gross profit margins and reducing operational costs and overhead. 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.

Equipment Loan – During August and December 2016, the Company’s Mexican subsidiary obtained an equipment loan for MXN 848,500 or $41,050, payable in monthly installments over 30 months and payment began in September 2016. As of December 31, 2016, the remaining outstanding amount on this equipment loan was MXN 514,657 or $24,906 and bears annual interest of 0%.

Bank Loans - On June 25, 2015, the Company’s Mexican subsidiary obtained a bank loan for MXN 2,000,000 or $127,715, payable in monthly installments over 36 months and payment began in July 2015 and bears interest of 12.28%. As of December 31, 2016, the remaining outstanding repaid.

On July 6, 2015, the Company’s Mexican subsidiary obtained another bank loan for MXN 3,150,000 or $201,151, payable in monthly installments over 36 months and payment began in August 2015. As of December 31, 2016, the remaining outstanding amount on this bank loan was MXN $1,771,802, or $85,743 and bears annual interest of 9.3%.

Cash Flows for the Year Ended December 31, 2016

Cash Flows from Operating Activities

Our operating activities used $4,245,464 in net cash for 2016 as compared to $2,509,212 in net cash used for 2015. The increase of $1,736,252, or 69% in net cash used for operating was due to a decreased net loss of $3,803,448, a decrease in non-cash items of $6,890,180, and a increase in changes in operating assets and liabilities of $1,350,478. For additional details, see the consolidated statements of cash flows in the consolidated financial statements.

Cash Flows from Investing Activities

Our investing activities used $48,582 in net cash for 2016 as compared to $7,137 in net cash used for 2015. The decrease in net cash used for investing of $41,445 was primarily due to a reduction in the purchase of furniture and equipment. For additional details, see the consolidated statements of cash flows in the consolidated financial statements.

Cash Flows from Financing Activities

Our financing activities used $88,574 in net cash for 2016 as compared to $5,746,595 in cash used for 2015. The change in cash flows from financing activities of $5,835,168 was primarily due to net proceeds from private placement of $4,514,000, proceeds from the sale of common stock of $1,020,000 and proceeds from the issuance of warrants of $25,500 in 2015. For additional details, see the consolidated statements of cash flows in the consolidated financial statements.

Financial Position

Total Assets – Our total assets decreased from $10,715,426 as of December 31, 2015, to $5,718,284 as of December 31, 2016. The decrease in our total assets of $4,997,142, or 47%, is a result of an increase in current assets, partially offset by a decrease in non-current assets.

Current Assets – Our current assets decreased from $10,064,357 as of December 31, 2015, to $4,716,296 as of December 31, 2016. The decrease in our current assets of $5,348,061, or 53%, is attributable to decreases in cash and cash equivalents, decrease in inventories, a decrease in prepaid and other current assets, offset by an increase in accounts receivable, net.

Cash and cash equivalents – Cash and cash equivalents decreased from $4,517,604 as of December 31, 2015, to $322,319 as of December 31, 2016. The decrease in cash and cash equivalents of $4,195,285 was primarily related to cash proceeds from the sale of stocks and warrants of $5,559,000 in 2015 and used in 2016. For additional details, see the consolidated statements of cash flows in the consolidated financial statements.

Inventories, net – Inventories, net decreased from $3,733,213 as of December 31, 2015, to $ 2,251,005 as of December 31, 2016. The decrease in inventories, net of $1,482,208, or 40%, is a result of a reserve for obsolescence of $272,000 and a reduction in inventory on hand as a result of an increase in demand and back orders.

Accounts Receivable, net – Accounts receivable, net increased from $1,557,560 as of December 31, 2015, to $2,028,360 as of December 31, 2016. The increase in accounts receivable, net of $470,800, or 30 %, was primarily a result of sales recorded in the last quarter of 2016 compare to the same period in 2015.

Prepaid Expenses and other current assets – Prepaid and other current assets decreased from $255,980 as of December 31, 2015, to $114,612 as of December 31, 2016. The decrease in prepaid and other current assets of $141,368 was primarily related to amortization of prepaid prepaid marketing expenses, from 2015.

Non-current Assets – Our non-current assets increased from $651,069 as of December 31, 2015, to $1,001,988 as of December 31, 2016. The increase in non-current assets of $350,919 or 54%, is attributable to an increase in furniture and equipment, net of $6,992, $488,054 related party receivable, Fernando Tamez who is our distributor in Spain, offset by $143,470 of amortization expenses associated with intangible assets.

Total Liabilities – Our total liabilities increased from $3,422,271 as of December 31, 2015, to $4,484,665 as of December 31, 2016. The increase in our total liabilities of $1,062,394, or 31%, is attributable to a decrease in current liabilities, partially offset by an increase in long-term debt, net of current portion.

Current Liabilities – Our current liabilities increased from $3,307,221 as of December 31, 2015, to $4,437,078 as of December 31, 2016. The increase in our current liabilities of $1,129,857, or 34%, is attributable to an aggregate net increase of $1,315,605 in accounts payable and other current liabilities, offset by an aggregate decrease of $185,748 in accrued expenses and short term debt. The aggregate net increase in accounts payable and other current liabilities was related, in part, to higher business volume and timing of payments.

Long term debt, net of current portion – Our long-term debt, net of current portion decreased from $115,050 as of December 31, 2015, to $47,587 as of December 31, 2016. The decrease of $67,463, or 59%, was primarily related to bank loans payments. See below “Material Commitments” for additional information.

Material Commitments

Equipment Loan – During August and December 2016, the Company’s Mexican subsidiary obtained an equipment loan for MXN $848,500 or $41,050, payable in monthly installments over 30 months and payment began in September 2016. As of December 31, 2016, the remaining outstanding amount on this equipment loan was MXN $514,657 or $24,906 and bears annual interest of 0%.

Bank Loans - On June 25, 2015, the Company’s Mexican subsidiary obtained a bank loan for MXN $2,000,000 or $127,715, payable in monthly installments over 36 months and payment began in July 2015. As of December 31, 2016, this bank loan was repaid.

On July 6, 2015, the Company’s Mexican subsidiary obtained another bank loan for MXN $3,150,000 or $201,151, payable in monthly installments over 36 months and payment began in August 2015. As of December 31, 2016, the remaining outstanding amount on this bank loan was MXN $1,771,802.13, or $85,744 and bears annual interest of 9.3%.

Off Balance Sheet Arrangements

None.

Recent 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. The adoption of this new guidance will not 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. The adoption of this new guidance will not have a significant impact on our consolidated financial statements and disclosures.

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

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. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. 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 completed a review of the requirements of ASU No. 2014-09 against our current accounting policies. This focused on accounting sales, discounts, shipping, sales taxes and incentives. As a result of our review we concluded that our current accounting policies are in line with the new standard. As our business model evolves, we will continue to review the Group’s contracts and transactions with customers to ensure compliance with IFRS 15 on adoption.

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.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 8.

Financial Statements and Supplementary Data.

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

Item 9.

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

None.

Item 9A.

Controls and Procedures.

Evaluation of Disclosure 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, in a manner to allow timely decisions regarding required disclosures.

About the preparation of this Form 10–K, our management, including the CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016, As described in our Form 10-K for December 31, 2015, management had 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 December 31, 2015, our disclosure controls and procedures were not effective. However, commencing with the third quarter of 2016, management commenced a plan to remediate the material weaknesses previously identified and has concluded that, as of December 31, 2016, our disclosure controls and procedures are effective.

Plans for Remediation of Material Weaknesses

During 2016 managements remediation procedures began in two areas of our operations. First, the company restructured the financial reporting process to improve the review function by restructuring the responsibilities of both the accounting staff and the participation of the company’s non-accounting personnel. This was done by:

formalizing the Company by department and holding departments fiscally responsible within their respective areas of responsibility with oversight from the Finance depart;

creating clarity surrounding the appropriate individuals with the authority to approve and commit Company’s resources within the executive management levels of the Company;

incorporating each department in the annual 2017 budget process;

management review of monthly sales and financial results, on a consolidated basis, which is reviewed with the Chief Financial Officer and board of directors;

providing direct operational insight into reported financial information in an effort to improve both its relevance and its accuracy by having department head meetings, visiting our subsidiary in Mexico, forecasting sales, reviewing customer profitability and margin contribution, and insuring the Company complies with its revenue and expense recognition policy;

and having the Finance department provide additional training in best practices in accounting procedures and GAAP to non-accounting personnel to improve fiscal responsibility, operations and the accuracy of reported financial information.

other reviews conducted periodically by the Chief Financial Officer and members of the board.

The addition of the financial review process should reduce the risk of reporting errors in the preparation and delivery of financial results.

While management continues to implement and test the financial controls to insure its remediation process continues to improve, management has not started:

to restructure the chart of accounts which will improve clarity and reduce the risk of inaccurate or misposting errors and provide clearer, more informative titles and reduces redundancy;

formalizing its policies and procedures in writing and to improve the integration of its financial consolidation and reporting system into non-accounting departments;

and implement appropriate information technology controls.

We expect that work on these plans to continue into 2017, as financial resources permit. Where appropriate, the Company is receiving advice and assistance from third-party experts as it implements and refines its remediation plan.

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant’s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:


·	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
·	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and
·	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant’s assets that could have a material effect on the financial statements.

Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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. In addition, because of changes in conditions, the effectiveness of internal control may vary over time.

As of December 31, 2016, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) (COSO) and identified material weaknesses. In conducting this evaluation, management took into account the information identified and conclusions reached by the non-management directors in the review as of December 31, 2015. In addition, management identified and disclosed those specific material weaknesses in our internal controls that persisted into the first and second quarter of 2016 in our annual 10-K report for the same year end.

As of December 31, 2016, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) (COSO) and identified material weaknesses. In conducting this evaluation, management took into account the information identified and conclusions reached by the non-management directors in the review as of December 31, 2016. A “material weakness” is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statement will not be presented or detected by our employees.

The specific material weaknesses that management identified in our internal controls as of December 31, 2015 that persisted through August 2016 are as follows:

We did not have adequate staffing resources to 1) prepare account reconciliations, financial statements; fluctuation analysis and relevant analytics on a timely basis, and 2) provide appropriate review and supervision for all necessary areas. Additionally, our general staff do not have the necessary training to perform appropriate analytical and/or review procedures.

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

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

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

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

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

We did not have effective controls over our executive management’s decisions to book certain barter credits as revenue as defined in Accounting Standards Codification 605 (“ASC”). As result the Company has reversed certain of its sales to customers that did not meet the standards.

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

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

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

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

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

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

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

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

The specific material weaknesses that management identified in our internal controls in our 10-K as of December 31, 2015 that have been remediated during the second half of 2016 are as follows:


	·	The Company hired a Controller on October 31, 2016 with technical accounting and SEC experience to manage treasury functions, accounts credit & collections, accounts payable, and order entry departments. The Controller is responsible for preparing standalone financials in accordance with United States generally accepted accounting principles quarterly, and monthly by April 1, 2017. In addition the Company hired two additional accounting interns to assist in the month end close, account reconciliations and various projects
	·	All credit card expenditures require support and submission of an expense report for reimbursement. All expense reports are approved by each department head and by the Controller prior to reimbursement. Undocumented expenditures are not processed.
	·	All sales require a valid customer purchase order and price adjustments to the Company’s pricing are approved by the Finance Department to insure adherence to the Company’s revenue recognition policy. All exceptions are reviewed by the Finance Department.
	·	Issuance of any of the company’s common stock based payments or awards to anyone requires board approval, without exception, and published in the board minutes.
	·	Management’s corporate policy adopted by the board during 2016 requires any product sales contract in excess of $1,000,000 be vetted and approved by the board. In addition, during the second quarter of 2016, the Finance Department began to monitor sales orders for compliance with sales terms on purchase orders and to insure compliance with the company’s revenue recognition policy.
	·	During the second quarter of 2016, the Finance department began to monitor and approve all requests for the issuance of a customer credit to insure validity to the claim and maintain compliance with the company’s revenue recognition policy.
	·	During the third quarter of 2016, the Finance Department requires new customers to complete a background check for credit worthiness prior to processing any order into sales, except for advance payment where we may ship prior to the completion of the background check.
	·	During 2016, the board adopted a policy that discourages advances, expenses and other illegal activities.

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. On October 31, 2016 the Company hired a controller to be responsible for the timely and accurate preparation of our financial statements in conformity to U.S. GAAP. The Contoller joins our Chief Financial Officer, who also has the requisite expertise in U.S. GAAP, to help remediate the material weaknesses in our internal control over financial reporting and prevent future errors in our financial statements which could lead to a restatement of those financial statements.

Furthermore, in an effort to remediate certain of the weaknesses above we have also added three independent directors to our board of directors who have formed an audit committee including the appointment of a financial expert. The committee is charged with, and has been, developing financial policies and controls, reviewing and providing oversight to our financial reporting processes, financial statements and public filings. Our ability to remediate the material weaknesses in our internal control over financial reporting will be dependent upon the development and implementation of these changes, which will require both the hiring of additional accounting personnel and the investment in enhanced systems, policies and procedures.

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.

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 December 31, 2016, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information.

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

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


Name	Age	Position	Director Since
Daniel Khesin (1)	37	Director and Chief Executive Officer	2007
Estella Ng	59	Director	2016
Yasuhiro Fugiwara	49	Director	2016
Elina Yubov	28	Director	2016
Myron Lewis	84	Director	2016

(1)

Daniel Khesin was replaced by Yasuhiro Fujiwara, as Chairman of the Board of Directors on September 21, 2016.

Daniel Khesin has served as our President and Chairman of the board of directors since January 2007, our inception. Also, since our inception, Mr. Khesin also served as our Chief Executive Officer until October 2015 and as our Chief Financial Officer until January 2016. Prior to January 207, Mr. Khesin was Chief Executive Officer of DK Design Group, Inc., a professional audio company, where he managed investments, engaged in the incubation of new technology and developed a distribution network from January 2004 to 2005. Previously, Mr. Khesin was Vice President of Operations of Free Razor, LLC, a continuity program for personal care products from 2003 to 2004. Mr. Khesin attended Hunter College. Mr. Khesin brings to the Board his extensive knowledge of the Company’s product and its business since he was a founder of the Company.

John Power, aged 49, was appointed as Chief Financial Officer and Chief Administrative Officer of the Company on September 12, 2016. Mr. Power will have supervision of all Financial and Administrative aspects of the Company including capital management, banking relationship, regulatory relationships, professional service provider relationships, MIS, Compliance, and Labor Relations. Mr. Power has a B.S. in Finance from Manhattan College, an M.B.A. From Dowling College, and is an Assistant Professor in the MBA program at Mercy College.

Dr. Fernando Tamez, aged 34, has served as our President of Divine Skin Laboratories, S.A. D.E. C.V. (“DS Mexico”) since 2009, our Mexican subsidiary acquired in November 2012 and has acted as our interim Chief Operating Officer since November 1, 2016. Dr. Tamez oversees domestic and international operations encompassing production, distribution, marketing, sales and research & development. Dr. Tamez graduated from Universidad La Salle Facultad Mexicana de Medicina (La Salle University Mexico, School of Medicine) in 2006 with a medical degree and graduated from Universidad Iberoamericana in 2009 with a degree in business administration.

Yasuhiro Fujiwara, is founder and CEO of Asiapia Ltd. (formerly Asia Principal Investment and Advisory Ltd.). from May 2015 through the present. He was head of equities Asia ex-Japan and Head of Equity Derivatives Trading Asia Pacific, Nomura Int’l (HK), Asia ex-Japan executive committee member. Mr. Fujiwara served as Co-Head of Global Markets & Head of Equities Asia Pacific, Bank of America Merrill Lynch December 2007 –January 2012 (in Hong Kong), Board of Director of Merrill Lynch Japan Securities Co., Ltd. During the late 1990’s, Mr. Fujiwara was head of equities trading at UBS Tokyo and in the early 1990s; he was an equities derivatives trader in Tokyo and Hong Kong. Overall, Mr. Fujiwara has 25 years of investment banking and capital markets industry experience in Asia Pacific equities, fixed income, currency and commodities in global financial institutions. Mr. Fujiwara focused on corporate governance and control in his senior management experiences and has served on various executive committees, corporate board of director positions in multiple global organizations. He received his BA in Law from Waseda University in Tokyo Japan in March 1990. On September 21, 2016, Mr. Fujiwara replaced Mr. Khesin as Chairman of the Board of Directors.

Estella Ng: Ms. Ng is currently the Deputy Chairman, Chief Strategy Officer and Chief Financial Officer of Tse Sui Luen Jewellery (International) Limited, which is listed on the Hong Kong Stock Exchange, and is responsible for Group Finance and other administrative functions as well as defining corporate strategies. From January 2008 to April 2014 she served as Chief Financial Officer of Country Garden Holdings Limited, which is also listed on the Hong Kong Stock Exchange.

From September 2005 to November 2007, she was an executive director of Hang Lung Properties Limited (“Hang Lung”). Prior to her joining in Hang Lung in 2003, she was employed by the Hong Kong Stock Exchange in a number of senior positions, most recently as senior vice president of the Listing Division. Prior to that, Ms. Ng was an auditor with Deloitte Touche Tohmatsu. Ms. Ng holds a Master of Business Administration degree from the Hong Kong University of Science and Technology. She is an associate of The Institute of Chartered Accountants in England and Wales, The Institute of Chartered Secretaries and Administrators, a fellow of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants and a member of the American Institute of Certified Public Accountants. She has also contributed her time to various public service appointments, including being a co-opted member of the audit committee of the Hospital Authority until November 2013.

Ms. Ng is an independent non-executive director of China Power New Energy Development Company Limited and Tianjin Development Holdings Limited, both companies whose shares are listed on the Hong Kong Stock Exchange. She also served as an independent director of China Mobile Games and Entertainment Group Limited, a company whose shares are listed by way of American Depositary Shares on the Nasdaq Global Market in the United States, from September 2012 through August 2015.

Myron Lewis, was co-founder and CEO of MU-Vision, Inc, Mr. Lewis was responsible for setting the overall direction and product strategy of the Company which was involved in the development of systems able to identify nuclear bombs and shielded radioactive materials in cargo carriers. He was president of KeyGen Corp. where he directed the operation of its Automatic Synchronized Key Generator ™ for generating keys to be used with encrypting applications. He served as the Vice President of GOOD NEWS! Public Relations as a director of its High Tech and Industrial Division. He was Director of Product Development for a company in the industrial group of White Consolidated Industries (now A.B. Electrolux). Overall, Mr. Lewis has over fifty years of experience in many areas of applied science: Computer Science and Software; Computer Systems and Security; Network and Satellite Communications; Electronics; Machine Tools and Automation; Materials Fabrication; Fiber Optics; Process Control Instrumentation; Laboratory Astrophysics; Plasma Physics; Nuclear Physics; and Aerodynamics. Mr. Lewis has over 40 years of experience as Manager/Vice President/President/Founder/CEO of various companies in Technology, Marketing, Communications/Public Relations, Applied Research, Defense (US Government) and Manufacturing. Mr. Lewis earned a B.S. in Physics from Carnegie Mellon University in 1954 and received his M.S. in Physics from Suffolk University in 1970.

Elina Yuabov, Esq., is currently with TD Securities (USA) LLC as Vice President, Global Counterparty Credit-Global Counterparty Management since August 2013. Prior to August 2013, Ms. Yuabov was legal consultant with BNP Paribas, Dodd-Frank Title VII Derivatives Regulation where she was served as ISDA Dodd-Frank Protocol Team Leader, responsible for the management of the daily tasks of eleven secondees and served as a liaison between the banks and the Team. Ms. Yuabov is a 2007 graduate of Italian language and culture from Universita per Stranieri Di Perugia, Italy. She earned her B.A. in History in 2009 from City University of New York and her law degree from St. John’s University School of Law in 2012.

Committees of the Board of Directors

We have three committees of the Board of Directors - a compensation committee, an audit committee, and a nominating and corporate governance committee.

The audit committee reviews the professional services provided by our independent auditors, the independence of our auditors from our management, our annual financial statements and our system of internal accounting controls. The chairman of the audit committee is Ms. Ng, and its members are Mr. Fujiwara, Mr. Lewis, Ms. Yuabov. Ms. Ng has been designated as our “audit committee financial expert” within the meaning of Item 407(d) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who: (1) understands generally accepted accounting principles and financial statements: (2) is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves; (3) has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements; (4) understands internal controls over financial reporting; and (5) understands audit committee functions.

The compensation committee was formed to review executive, director and employee compensation policies and procedures. The nominating and corporate governance committee was formed: (1) to assist the board by identifying individuals qualified to become board members, and to recommend for selection by the board the director nominees to stand for election for the next annual meeting of our shareholders; (2) to recommend to the board director nominees for each committee of the board; (3) to oversee the evaluation of the board and management, and (4) to develop and recommend to the board a set of corporate governance guidelines and enhancements to the Code of Business Conduct and Ethics. The nominating and corporate governance committee chairman is Mr. Lewis and its members are Ms. Ng, Mr. Fujiwara and Ms. Yuabov.

Most exchanges require director nominees to be either selected, or recommended for the board of directors’ selection, either by a majority of our independent directors or our nominating and corporate governance committee. The nominating and corporate governance committee is responsible for selecting those individuals to recommend to the entire board of directors for election to the board. The committee will consider candidates for directors proposed by security holders. The nominating and corporate governance committee has no formal procedures for submitting candidates and, until otherwise determined, accepts written submissions that include the name, address and telephone number of the proposed nominee, along with a brief statement of the candidate’s qualifications to serve as a director. If the proposed nominee is not the security holder submitting the name of the candidate, a letter from the candidate agreeing to the submission of his or her name for consideration should be provided at the time of submission. If the committee believes it to be appropriate, committee members may meet with the proposed nominee before making a final determination whether to recommend the individual as a nominee to the entire board of directors to stand for election to the board.

The nominating and corporate governance committee intends to identify director nominees through a combination of referrals, including by management, existing board members and security holders, and direct solicitations, where warranted. Once a candidate has been identified the nominating and corporate governance committee reviews the individual’s experience and background, and may discuss the proposed nominee with the source of the recommendation.

Among the factors that the committee will consider when evaluating proposed nominees are their knowledge and experience in business matters, finance, capital markets and mergers and acquisitions. The committee may request references and additional information from the candidate prior to reaching a conclusion. The committee is under no obligation to formally respond to recommendations, although as a matter of practice, every effort is made to do so.

Currently four of our directors are “independent,” as defined under the OTC Markets Listing Rules.

Item 11.

Executive Compensation.

The following table summarizes the "total compensation" of our named executive officers for 2016, excluding any reimbursement of out-of-pocket travel, lodging and entertainment expenses which we may have paid, according to the rules promulgated by the SEC.

2016 Summary Compensation Table


Name/Principal Position	Year	Salary	Bonus	Stock Awards	Options	Non-Equity Incentive Plan Compensation	Change in Pension Value and Nonqualified Deferred Compensation Earnings	All Other Compensation	Total
Renee Barch-Niles, Chief Executive Officer	2015	$37,121	$26,640	$51,594⁽¹⁾	—	—	—	$33,662⁽²⁾	$149,017
Daniel Khesin,	2016	$290,000	—	—	—	—	—	$48,000	$378,000
CEO and President ⁽³⁾	2015	$250,000⁽⁴⁾	$25,030	—	—	—	—	$40,000	$315,030
John Power, CFO and CAO	2016	$200,000	—	$67,335	—	—	—	—	$267,335
Fernando Tamez, COO	2016	$200,000	—	$50,000	—	—	—	$60,000	$310,000
Fernando Tamez, COO

———————

(1)

Due to circumstances in the breach of contract and surrounding Ms. Barch-Niles’ termination, it is the Company’s determination that it should not honor the original terms of the agreement, and such has only accrued compensation until termination date.

(2)

This amount consists of $6,000 for consulting services performed by Ms. Barch-Niles in October 2015 prior to her employment with the Company, $26,796 for Ms. Barch-Nile relocation expenses and $866 for automobile allowance.

(3)

Mr. Khesin served as the Company’s Chief Executive Officer until October 2015 and again from April 2016 through date, and served as the Company’s Chief Financial Officer from 2008 through January 2016 and again from April 2016 through September 2016.

(4)

As per Mr. Khesin’s employment agreement, his base salary includes $50,000 payable in shares of common stock valued at the closing price at the end of each calendar year during the term of the agreement. However, during 2015, Mr. Khesin received cash of $50,000 in lieu of shares of the common stock.

Employment Agreements

Daniel Khesin, Chairman and President

Effective December 16, 2013, the Company entered into an executive employment agreement with Daniel Khesin, its current chief executive officer, to serve as chief executive officer, for an initial term through December 31, 2018 (the “Initial Term”) and thereafter automatically renewed for successive one year terms (each, a “Renewal Term”), unless terminated upon six months’ prior written notice (a “Non-Renewal Notice”). During the Initial Term his base salary shall be $250,000 and shall increase by 20% for any one quarterly period following a quarterly period in which the Company is profitable. Such increases do not accumulate or carry over to subsequent periods. The base salary, commencing year ending December 31, 2014 and subject to Nasdaq Rules, includes $50,000 payable in Company common stock valued at the closing price at the end of each calendar year during the term of the agreement. Furthermore, Mr. Khesin shall be entitled to receive an annual performance bonus, payable in stock and/or cash, based on achieving annual targets set by the board of directors. Under the agreement Mr. Khesin shall be entitled to receive reimbursement for all reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties. Mr. Khesin is entitled to paid vacation as determined by the board and initially four weeks per annum. He is also entitled to participate in any pension, insurance or other employment benefit plan as maintained by the Company for its executives, including programs of life and medical insurance. The Company has agreed to maintain disability insurance and directors’ and officers’ liability coverage during his employment term. In the event the Company fails to maintain a disability policy for Mr. Khesin and Mr. Khesin becomes disabled during the term of the agreement, then he shall continue to receive 25% of his base salary for a period of 10 years, or until the disability is removed.

If the Company terminates Mr. Khesin’s employment without cause the Company shall pay as severance pay to Mr. Khesin within 30 days following the termination date, a lump sum amount equal to 42 months of his annual base salary and all of his options, if any, shall automatically vest and become fully exercisable. Furthermore, upon delivery of a Non-Renewal Notice, the Company shall also pay Mr. Khesin a lump sum amount equal to 42 months of his annual base salary. During the term of the agreement and for a 6-month period following the termination of the agreement, Mr. Khesin shall be subject to a non-competition and non-solicitation restrictions, unless his employment is terminated without cause by the Company or upon change of control of the Company or following a Non-Renewal Notice.

John Power, Chief Financial Officer and Chief Administrative officer

John Power was appointed as Chief Financial Officer and Chief Administrative Officer of the Company on September 12, 2016. As Chief Financial Officer his annual base salary shall be $200,000. Furthermore, Mr. Power shall be entitled to receive an annual performance bonus, payable in stock based on achieving annual targets set by the board of directors.

Dr, Fernando Tamez, Chief Operating Officer

Dr. Fernando Tamez has served as our President of Divine Skin Laboratories, S.A. D.E. C.V. (“DS Mexico”) since 2009, our Mexican subsidiary acquired in November 2012 and has served as interim Chief Operating Officer since November 1, 2016. As interim Chief Operating Officer his annual base salary shall be $200,000. Furthermore, Mr. Tamez shall be entitled to receive an annual performance bonus, payable in stock based on achieving annual targets set by the board of directors.

Director Compensation

The following table summarizes the compensation paid by us to our directors for 2015, excluding any reimbursement of out-of-pocket travel and lodging expenses which we may have paid.

Director Compensation Table


Name	Fees Earned or Paid in Cash		Stock Awards ⁽¹⁾		Total
Yasuhiro Fugiwara	$	—	$	67,000	$	67,000
Daniel Khesin	$	—	$	67,000	$	67,000
Estella Ng	$	—	$	67,000	$	67,000
Elina Yubov	$	—	$	67,000	$	67,000
Myron Lewis	$	—	$	67,000	$	67,000

Outstanding Equity Awards At Fiscal Year-End

Item 12.

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

The following table shows the number of shares and percentage of all shares of common stock issued and outstanding as of December 31, 2016, held by any person known to us to be the beneficial owner of 5% or more of our outstanding common stock, by each executive officer and director, and by all directors and executive officers as a group. As of December 31, 2016, we had 23,537,300 shares of common stock issued and outstanding. The persons named in the table have sole voting and investment power with respect to all shares beneficially owned. Unless otherwise noted below, the address for each shareholder is 1601 Green Road, Suite 301, Pompano Beach, Florida 33064.


	Shares Beneficially Owned
Name and Address of Beneficial Owner	Number	Percentage
John Power		*
Fernando Tamez	466,515	2%
Daniel Khesin ⁽¹⁾	4,211,173	18%
Yasuhiro Fujiwara	251,000	1%
Estella Ng		*
Elina Yubov		*
Myron Lewis		*
All current officers and directors as a group (7 persons)		19%
Frigate Ventures LP and M5V Advisors Inc. private fund ⁽²⁾	1,473,643	6%

———————

* Less than 1%

⁽¹⁾

On May 14, 2015, Daniel Khesin entered into a loan agreement whereby he pledged 825,000 shares of company stock as collateral. These shares were transferred to be held as collateral by Stock Loan Solutions, LLC. Mr. Khesin received notice of loan forgiveness from the Internal Revenue Service on February 28, 2017. The company has been unsuccessful in its attempts to contact Stock Loan Solutions, LLC, either directly or through its attorneys, and cannot determine how many of the pledged shares remain in their possession or were sold in satisfaction the loan.

⁽²⁾

Based on a Schedule 13G/A, as filed with the SEC on February 5, 2016, Frigate Ventures LP (“Frigate”) owned 1,473,643 and M5V Advisors Inc. (“M5V’) serves as co-investment advisors to a private fund (the “Fund”) which purchased 1,500,000 shares of our outstanding common stock, of which they may direct the vote and disposition of such shares. As the general partner of Frigate, Admiralty Advisors LLC (“Admiralty”) may direct the vote and disposition of the shares held by the Fund. As the principal of Frigate and Admiralty, Mr. Bruce R. Winson may direct the vote and disposition of the shares held by the Fund. As directors of M5V, Mr. Adam Spears and Mr. Moez Kassam may each direct the vote and disposition of the shares held by the Fund. The principal address for Frigate, Admiralty and Mr. Winston is 5950 Berkshire Lane, Suite 210 Dallas, Texas 75225 and the M5V, Messrs. Spears and Kassam is 111 Peter Street, Suite 904 Toronto, ON M5V 2H1.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

We describe below certain transactions and series of similar transactions that have occurred since our inception to which we were a party or will be a party, including transactions in which:

the amounts involved exceeded or will exceed the lesser or $120,000 or 1% of the average of our Company’s total assets at year-end for the last two fiscal years; and

a director, executive officer or holder of more than 5% of our common stock or any member of his or her immediate family had or will have a direct or indirect material interest.

Currently 4 of our directors are “independent,” as defined under the NASDAQ Stock Market Listing Rules. It is our current policy that the disinterested members of our board of directors approve or ratify transactions involving directors, executive officers or principal stockholders or members of their immediate families or entities controlled by any of them in which they have a substantial ownership interest in which the amount involved may exceed the lesser of $120,000 or 1% of the average of our total assets at year end and that are otherwise reportable under SEC disclosure rules. Such transactions include employment of immediate family members of any director or executive officer.

In September 1, 2009, we entered into a 10-year exclusive distribution agreement for Brazil with Gamma Investors, which also provided for minimum purchases and certain consulting services, in exchange for 300,000 shares of common stock. The agreement was amended and restated in August 2011. The principal of Gamma Investors, Ezio da Fonseca, was also a former shareholder of the Company.

Item 14.

Principal Accounting Fees and Services.

The following table shows the fees paid by us to Marcum LLP, MaloneBaily (*) and BF Borgers CPA, our current independent registered public accounting firm, for 2016 and 2015.


Marcum LLP,	2016		2015
Audit Fees ⁽¹⁾	$	—	$	304,350
Audit Related Fees ⁽²⁾	$	—	$	35,450
Tax Fees	$	—	$	—
All Other Fees	$	—	$	—


BF Borgers CPA PC,	2016		2015
Audit Fees ⁽¹⁾	$	150,000	$	230,000
Audit Related Fees ⁽²⁾	$	—	$	—
Tax Fees	$	—	$	—
All Other Fees	$	—	$	—

(*) The Company engaged MaloneBaily LLP (“MaloneBaily”) as its independent registered public accounting firm on May 2, 2016. On August 10, 2016, MaloneBaily was dismissed. The Company has paid MaloneBaily $90,000 to date and was billed $250,000 for unfinished services. The Company brought up certain pre-litigation disputes against MaloneBaily and on December 8, 2016 received $100,000 as settlement for the reimbursement of the fees paid to date.


(1)	Audit fees – these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements.
(2)	Audit related fees – these fees reasonably related to the performance of the audit or review of our annual financial statements that are not reported above.
(3)	All other fees – these fees relate to agreed upon work to assist the Company’s evaluation of potential acquisitions.

Policy on Pre-Approval of Fees

Our Audit Committee reviews and approves audit and permissible non-audit services performed by our current independent registered public accounting firm, BF Borgers CPA PC as well as the fees charged for such services. In its review of non-audit service and its appointment of BF Borgers CPA PC as our independent registered public accounting firm, the Audit Committee considered whether the provision of such services is compatible with maintaining independence.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

(a)

Documents filed as part of the report.

(1)

All Financial Statements

(2)

Financial Statements Schedule

(3)

Exhibits


Exhibit No.		Description
2.1		Share Exchange Agreement Effective February 19, 2016 (1)
3.1		Daniel Khesin Employment Agreement dated December 16, 2013 (2
3.2		Amendment Agreement Effective January 3, 2014 (3)
3.3		List of subsidiaries of the Company (5)
23.1		Consent of BF Borgers, CPA, PC (Provided herewith)
31.1		Certification Pursuant to Rule 13a-14(a) (Provided herewith)
31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Provided herewith)
32.1		Certification Pursuant to Section 1350 (Provided herewith)
32.2		Certification Pursuant to Section 1350 (Provided herewith)
99.1		Code of Ethics (3)
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

———————

(1)

Incorporated by reference to Form 8-K filed February 22, 2016.

(2)

Incorporated by reference to Form 8-K filed December 17, 2013.

(3)

Incorporated by reference to Form 8-K filed December 26, 2013.

(4)

Incorporated by reference to Form 10-K Annual Report for the year ended December 31, 2012.

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: March 31, 2017	DS HEALTHCARE GROUP, INC.

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

Date: March 31, 2017

By:

/s/ John Power

John Power

Chief Financial Officer/

Principal Accounting Officer

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


Signature	Title	Date

/s/ Myron Lewis	Director	March 31, 2017
Myron Lewis

/s/ Yasuhiro Fujiwara	Director	March 31, 2017
Yasuhiro Fujiwara

/s/ Elina Yuabov	Director	March 31, 2017
Elina Yuabov


/s/ Estella Ng	Director	March 31, 2017
Estella Ng

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

INDEX TO FINANCIAL STATEMENTS


		Page

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Balance Sheets		F-3

Consolidated Statements of Operations		F-4

Consolidated Statements of Changes in Equity		F-5

Consolidated Statements of Cash Flows		F-7

Notes to Consolidated Financial Statements		F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, the Board of Directors and Shareholders of DS Healthcare Group, Inc.

We have audited the accompanying consolidated balance sheets of DS Healthcare Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DS Healthcare Group, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments with respect to the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

/s/ BF Borgers CPA PC

BF Borgers CPA PC

Lakewood, CO

March 31, 2017

F-2

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

Consolidated Balance Sheets


	As of December
	2016			2015
ASSETS

Current Assets
Cash	$	322,319		$	4,517,604
Accounts receivable, net		2,028,360			1,557,560
Inventories, net		2,251,005			3,733,213
Prepaid expenses and other current assets		114,612			255,980
Total Current Assets		4,716,296			10,064,357

Furniture and Equipment, net		106,531			99,539
Intangible Assets, net		340,295			483,765
Other Assets		555,162			67,765

TOTAL ASSETS	$	5,718,284		$	10,715,426

LIABILITIES AND STOCKHOLDER’S EQUITY

Current Liabilities
Accounts payable	$	2,413,000		$	1,235,152
Accrued expenses		1,235,914			1,400,552
Other current liabilities		712,232			574,475
Short-term portion of long-term debt		75,932			97,042
Total Current Liabilities		4,437,078			3,307,221

Long Term Debt, net of current portion		47,587			115,050

TOTAL LIABILITIES		4,484,665			3,422,271

COMITMENTS AND CONTINGENCIES

Shareholders' Equity
Preferred stock, $0.001 par value, 30,000,000 shares authorized: 0 shares issued
and outstanding at December 31, 2016 and December 31, 2015		—			—
Common stock, $0.001 par value, 300 million shares authorized: 23,537,330 and
22,556,765 shares issued and outstanding at
December 31, 2016 and 2015, respectively		23,538			22,557
Additional paid-in-capital		29,060,555			28,308,784
Accumulated deficit		(27,918,109	)		(20,978,751	)
Accumulated comprehensive income		67,635			(59,435	)
Total Shareholders' Equity		1,233,619			7,293,155


TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	5,718,284		$	10,715,426

See accompanying notes to consolidated financial statements

F-3

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

Consolidated Statements of Operations and Comprehensive Loss


	For the Year Ended
	December 31,
	2016			2015

Net Revenue	$	12,947,175		$	11,777,760
Cost of Goods sold		6,501,871			5,377,518

Gross Profit		6,445,304			6,400,242

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		1,049,052			3,491,723
Marketing and promotion		1,810,436			3,705,481
Other selling and marketing expenses		1,957,166			1,823,342
		4,816,654			9,020,546
General and administrative
Salary and personnel costs		2,741,338			2,628,313
Professional fees and consulting costs		4,511,695			3,329,365
Personal expenses paid for Daniel Khesin (See Note 10)		38,000			40,000
Other general and administrative expenses		1,073,205			1,604,146
		8,364,238			7,601,824
Total operating costs and expenses		13,180,892			16,622,370

Operating Loss		(6,735,588	)		(10,222,128	)

Other Income (Expense)
Acquisition loss		(250,000	)		—
Impairment of intangible asset		—			(337,500	)
Interest expense		(140,456	)		(117,026	)
Other		282,100			64,542
Total other income (expense)		(108,356	)		(389,984	)

Net Loss		(6,843,944	)		(10,612,112	)

Income tax provision		95,414			130,694
Net Loss Attributable to Common Shareholders	$	(6,939,358	)	$	(10,742,806	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		22,597,693			17,825,166
Net Loss per share	$	(0.31	)	$	(0.60	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	194,648		$	3,949
Comprehensive loss	$	(7,134,006	)	$	(10,738,857	)

See accompanying notes to consolidated financial statements

F-4

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

Consolidated Statements of Changes in Equity

For the Period From January 1, 2015 to December 31, 2016


									Additional															Non-
	Preferred Stock				Common Stock				Paid In			Stock			Accumulated			Comprehensive			Shareholders'			Controling			Total
	Shares		Amount		Shares		Amount		Capital			Receivable			Deficit			Income			Equity			Interest			Equity

January 1, 2015						16,202,268	$	16,202	$	14,839,694		$	(2,500	)	$	(10,235,944	)	$	(63,384	)	$	4,554,068		$	(38,430	)	$	4,515,638

Shares Issued:
Sold to private investors						1,045,000		1,045		1,016,455			2,500			—			—			1,020,000			—			1,020,000
Private investment in public equity						2,000,000		2,000		4,998,000			—			—			—			5,000,000			—		$	5,000,000
Less: Issuance costs						—		—		(486,000	)		—			—			—			(486,000	)		—			(486,000	)
For services
Investor relations						1,111,905		1,112		2,232,350			—			—			—			2,233,462						2,233,462
Distributors						832,500		833		2,296,167			—			—			—			2,297,000			—			2,297,000
Consulting						925,800		926		2,353,639			—			—			—			2,354,565			—			2,354,565
Employee/Board of Directors fees						185,984		186		440,911			—			—			—			441,097			—			441,097
Share-Based Payment Awards						—		—		—			—			—			—			—			—			—
Amortization of share-based payment awards						—		—		179,172			—			—			—			179,172			—			179,172
Issuance of common stock related to share-based payment awards						32,106		32		(32	)		—			—			—			—			—			—
Conversion into common shares:
Debt converted						191,202		191		386,909			—			—			—			387,100			—			387,100
Warrants activities:
Warrants issued						—		—		26,049			—			—			—			26,049			—			26,049
Warrants exercised						30,000		30		25,470			—			—			—			25,500			—			25,500
Other Comprehensive Income						—		—		—			—			—			3,949			3,949			—			3,949
Net Loss						—		—		—			—			(10,742,807	)		—			(10,742,807	)					(10,742,807	)
Write-off of Non-Controlling Interest Receivable						—		—		—			—			—			—			—			38,430			38,430

December 31, 2015		—	$	—		22,556,765	$	22,557	$	28,308,784		$	—		$	(20,978,751	)	$	(59,435	)	$	7,293,155		$	—		$	7,293,155

See accompanying notes to consolidated financial statements

F-5

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

Consolidated Statements of Changes in Equity (Continued)

For the Period From January 1, 2015 to December 31, 2016


									Additional													Non-
	Preferred Stock				Common Stock				Paid In		Stock		Accumulated			Comprehensive			Shareholders'			Controling		Total
	Shares		Amount		Shares		Amount		Capital		Receivable		Deficit			Income			Equity			Interest		Equity

December 31, 2015		—	$	—		22,556,765	$	22,557	$	28,308,784	$	—	$	(20,978,751	)	$	(59,435	)	$	7,293,155		$	—	$	7,293,155

Shares Issued:
For services
Consulting						237,973		238		174,512		—								174,750					174,750
Employee/Board of Directors fees						742,592		743		577,259										578,002					578,002
Other Comprehensive Income																	127,070			127,070					127,070
Net Loss														(6,939,358	)					(6,939,358	)				(6,939,358	)


December 31, 2016		—	$	—		23,537,330	$	23,538	$	29,060,555	$	—	$	(27,918,109	)	$	67,635		$	1,233,619		$	—	$	1,233,619

See accompanying notes to consolidated financial statements

F-6

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

Consolidated Statements of Cash Flows


	For the Year Ended
	December 31,
	2016			2015

Cash Flows from Operating Activities:
Net loss	$	(6,939,358	)	$	(10,742,806	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		124,795			202,344
Acquisition loss		250,000			—
Impairment of intangible assets		—			337,500
Settlement of minority interest		—			38,430
Provision of bad debts		62,774			401,522
Recovery of obsolete inventory		460,026			(7,717	)
Stock issued for services		752,751			7,531,347
Non-cash interest expenses		—			37,100
Changes in operating assets and liabilities:
Accounts receivable, net		(533,574	)		(226,242	)
Inventories, net		1,022,182			137,036
Prepaid expenses and other current assets		141,368			22,734
Other assets		(487,395	)		(5,518	)
Accounts payable		1,177,848			(251,606	)
Accrued expenses		(414,638	)		329,011
Other current liabilities		137,757			(312,347	)
Net cash used in operating activities		(4,245,464	)		(2,509,212	)

Cash Flows from Investing Activities:
Purchase of furniture and equipment		(48,582	)		(7,137	)
Net cash used in investing activities		(48,582	)		(7,137	)

Cash Flows from Financing Activities:
Proceeds from loans and notes		—			187,095
Repayment of loans and notes		(88,574	)		—
Proceeds from sale of common stock		—			1,020,000
Proceeds from private placement		—			5,000,000
Less issuance cost		—			(486,000	)
Proceeds from exercise of warrants		—			25,500
Net cash (used in) provided by financing activities		(88,574	)		5,746,595

Effect of exchange rate changes on cash		187,335			158,802

(Decrease) Increase in cash		(4,195,285	)		3,389,048
Cash, Beginning of Period		4,517,604			1,128,556

Cash, End of Period	$	322,319		$	4,517,604

Supplemental Information:
Cash paid for interest	$	14,164		$	52,547

Supplemental Noncash Investing and Financing Activities
Conversion of note and accrued interest to common stock	$	—		$	387,100

See accompanying notes to consolidated financial statements

F-7

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Organization and Nature of Business

DS Healthcare Group, Inc. (d/b/a DS Laboratories) (the “Company”, “DS Laboratories”,” DSKX”, “we”, “us” or “our”) was organized under the laws of the State of Florida in January 2007. Through its predecessors, the Company has been developing and marketing hair care, skin care and personal care products for over fifteen years through a network of top specialty retailers and distributors throughout North America, Europe, Asia and South America. The Company researches and develops its own products, which management believes keeps the Company at the forefront of innovation. Management believes the Company is currently a leading innovator of (1) “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the action of the active ingredients in our products, and (2) “Nanosome Technology”, which acts as a delivery vehicle, and has been designed to infuse active compounds into targeted cells for increased efficiency of our products. We currently offer products within the following broad product categories: Hair Care, Skin Care and Personal Care.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

The 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 conforms to Accounting principles generally accepted in the United States of America (“US GAAP”).

The 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 Inc., and Divine Skin Laboratories, S.A. de CV (“DS Mexico”). Also included in the consolidated financial statements are the operating activities of Velocity Storage and Packaging, LLC (“Velocity”), which were accounted for as Variable Interest Entity (“VIE”) through October 31, 2016. All significant intercompany balances and transactions have been eliminated in consolidation. As of November 1, 2016, Velocity employees have been hired directly by DS Healthcare and the VIE is no longer used.

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

Prior Period Reclassifications

Prior period financial statement amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on previously reported net loss.

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 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.

F-8

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

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

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 December 31, 2016 and 2015, the allowance for uncollectable accounts, including reserves for product returns and advertising credits, was $725,929 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. At December 31, 2016 and 2015, the reserve for inventory obsolescence was $651,641 and $379,615, respectively.

Furniture and Equipment

Furniture and equipment are recorded at cost and depreciation is provided using the double declining balance depreciation method in the United States and the straight-line depreciation method in Mexico over the estimated useful lives of the assets, which range from 5 to 7 years. The difference between the methods was deemed de minimums to the consolidated financial statements. The Company recorded $52,258 and $71,208 in depreciation expense for 2016 and 2015, respectively. Accumulated depreciation was $273,916 and $340,200 at December 31, 2016 and 2015, respectively. Expenditures for repairs and maintenance of equipment are charged to expense as incurred. Major replacements and betterments are capitalized and depreciated over the remaining useful lives of the assets.

F-9

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Long-Lived Assets

Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. Assets disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

Intangible Assets

Intangible assets acquired individually, with a group of other assets, or in a business combination, are recorded at fair value. The Company’s identifiable intangible assets consist of customer relationships acquired as part of the Merger. The fair value of intangible assets acquired was determined based on a discounted cash flow analysis. Identifiable intangible assets are being amortized over the period of estimated benefit using the straight-line method, which approximates the customer attrition rate, reflecting the pattern of economic benefits associated with these assets, and have estimated useful lives between 6 and 10 years.

Goodwill

The Company records goodwill when the purchase price of an acquisition exceeds the fair value of the net tangible and intangible assets as of the date of acquisition. The Company performs an annual review of goodwill for indicators of impairment. When it is determined that goodwill may be impaired, the Company performs an impairment assessment of the acquired reporting unit and impairment tests using a fair value approach.

Non-Controlling Interest

Non-controlling interest consists of the minority owned portion of Nutra Origin, Inc. During the fourth quarter of 2012, the Company completed its license of the Nutra Origin brand and established a new subsidiary to operate the brand. As part of the license agreement, the licensor was granted a 7% non-controlling interest in the newly formed subsidiary. In 2013, due to poor sales of the product line, the Company defaulted on its license agreement and fully impaired related brand rights of $89,705. During 2014, the performance of the product line diminished and we reported additional operational losses of $88,630, the non-controlling portion of which is $6,204. As of December 31, 2014, the Company recorded a non-controlling interest receivable of $38,430. Since the brand operations have already ceased and the company does not believe that it will be able to collect the non-controlling interest receivable of $38,430, the company wrote-off such amount in 2015.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with ASU No. 2014-09, “Revenue from Contracts with Customers”, which establishes core principle of the revenue recognition that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those good or services. The Company recognizes revenue when all of the following four criteria are met:


·	Identify the contract(s) with a customer,
·	Identify the separate performance obligations in the contract,
·	Determine the transaction price, and
·	Allocate the transaction price to the separate performance obligations.

F-10

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, Mr. Khesin devotes a 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 consolidated statements of operations, and amounted to $178,034 and $154,308 for 2016 and 2015, respectively.

Share-Based Payment

The Company measures compensation cost for all employee stock-based awards at their fair values on the date of grant. Stock-based awards issued to non-employees are measured at their fair values on the date of grant, and are re-measured at each reporting period through their vesting dates. When a non-employee becomes an employee and continues to vest in the award, the fair value of the individual’s award is re-measured on the date that he becomes an employee, and then is not subsequently re-measured at future reporting dates. The fair value of stock based awards is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method for stock options and restricted stock. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock-based awards.

Income Taxes

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Management believes that significant uncertainty exists with respect to future realization of the deferred tax asset and has therefore recorded a full valuation allowance for 2016 and 2015. Income tax expense during the year ended December 31, 2016 and 2015 was for our Mexican subsidiary. No provision was made for U.S. or foreign taxes on undistributed earnings of DS Mexico, as such earnings are considered to be permanently reinvested. It is not practicable to determine the amount of additional tax, if any, that may be payable on the undistributed foreign earnings.

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 -0- and 444,213 for 2016 and 2015, respectively.

Segment Information

ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. Management has determined that the Company operates in one business segment, which is the commercialization and development of personal care products.

F-11

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value of Financial Instruments

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

Functional Currency

The U.S. dollar is the functional currency of our consolidated entities operating in the United States. The functional currency for our consolidated Mexican subsidiary is the Mexican peso. We translate their financial statements into U.S. dollars as follows:


·	Assets and liabilities are translated at the exchange rate in effect as of the financial statement date.
·	Income statement accounts are translated using the weighted average exchange rate for the period.

We include translation adjustments from currency exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of shareholders’ equity. There are currently no transactions of a long-term investment nature, nor any gains or losses from non-U.S. currency transactions.

NOTE 3 – LIQUIDITY AND GOING CONCERN

As of December 31, 2016, we had $322,319 in cash and cash equivalents. While we have historically financed operations and growth primarily through the successful issuance and sale of shares of our common stock and the issuance of promissory notes, the Company has started several new revenue initiatives creating additional products and cost cutting measures, we cannot predict our success with these products or projects, since all are currently under way and in various stages of completion.

We have commenced implementing, and will continue to implement, various measures to address our financial condition, including but not limited to:


·	Continuing to seek debt and equity financing. However, there can be no assurances that the Company will be able to raise additional capital on favorable terms, or at all.

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

F-12

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – INVENTORIES

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


	2016			2015

Bulk product and raw materials	$	1,739,309		$	2,320,536
Work in process		196,451			376,849
Merchandise inventory		815,103			1,315,037
Inventory in transit		151,784			100,406
Total		2,902,647			4,112,828

Less: Allowance		(651,642	)		(379,615	)
	$	2,251,005		$	3,733,213

We evaluated the inventory at December 31, 2016 and 2015 and reserved $651,642 and $379,615, respectively, as an allowance for slow moving and obsolete inventory. The allowance applies primarily to bulk product and raw materials where the chemical components have expired and the bottles, pumps and packaging materials are no longer being used in current production due to packaging changes or were in excess of quantities needed based on current production consumption. Generally, merchandise inventory does not require a reserve due to its rapid turnover.

NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets at December 31, 2016 and 2015 consist primarily of:


	2016		2015
Prepaid insurance	$	65,752	$	86,152
Prepaid value added tax		14,823		62,217
Prepaid marketing		—		107,611
Pending VAT and other current assets		34,037		—
	$	114,612	$	255,980

Prepaid vendor trade credits – Represents trade credits received from a third-party vendor that the Company may use to purchase goods and/or services in future periods.

Prepaid marketing – Represents payments made to a vendor for marketing related services that will be received in future periods.

Prepaid VAT – Represents payments made by our Mexican subsidiary to tax authorities for the value-added tax imposed on commercial transactions.

NOTE 6 – INTANGIBLE ASSETS

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


	2016			2015

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

DS Mexico customer list	$	590,821		$	704,087
Less: Accumulated amortization		(273,528	)		(247,734	)
Net customer list		317,293			456,353

Goodwill		23,002			27,412
	$	340,295		$	483,765

F-13

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – INTANGIBLE ASSETS (Continued)

Brazilian distribution rights –The Company signed a 10-year exclusive distribution agreement in Brazil. The transaction was valued at $2.50 per share. The Company, through its exclusive distributor, former joint venture partner and current shareholder, is currently commercializing its product lines and products for the Brazilian market, which was introduced in the 4th quarter of 2012. Such rights are being amortized over 10 years. We recorded $0 and $18,750 of amortization for 2016 and 2015, respectively. During 2015, the remaining unamortized distribution rights were fully impaired due to delayed sales attributable to the Brazilian distributor rights, resulting in an impairment charge of $337,500 in the accompanying statement of operations.

DS Mexico customer list – In connection with the acquisition of our Mexican distributor, in November 2012, we acquired the customer list which was recorded at its fair value as determined by an independent appraiser. The asset is being amortized over its estimated useful life of 9 years. We recorded amortization of $72,537 and $85,309 of amortization expense for 2016 and 2015, respectively. The remaining unamortized amount as of December 31, 2016 of $317,293 will be amortized as follows: $72,537 for 2017, 2018, 2019 and 2020, and $27,145 for thereafter.

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 change in goodwill from $27,412 at December 31, 2015 to $23,002 at December 31, 2016 represents foreign currency translation of the MXN functional currency subsidiary goodwill. The asset is not being amortized; however, the Company will access the asset for impairment annually. At December 31, 2016, no impairment was considered necessary.

NOTE 7 – ACCRUED EXPENSES

Accrued expenses at December 31, 2016 and 2015 consist of:


	2016		2015
Accounting & legal fees	$	290,000	$	164,550
Acquisition loss reserve		250,000		—
Advertising and marketing		11,500		11,500
Commissions		74,483		393,442
Facilities		37,780		115,118
Fees / interest		—		22,933
Investor relations		78,750		78,750
Production materials		115,145		115,145
Stock awards		202,143		392,473
Salaries and benefits		88,100		56,602
Warehouse		5,000		48,529
Others		83,013		1,510
	$	1,235,914	$	1,400,552

NOTE 8 – OTHER CURRENT LIABILITIES

Other current liabilities at December 31, 2016 and 2015 consist of:


	2016		2015
Customer deposits	$	404,866	$	97,042
Credit cards		78,575		175,543
Marketing and promotional programs		1,836		51,626
Taxes and VAT payable		158,998		216,461
Insurance premium financing		—		15,000
Vendor financing		—		13,075
Other current liabilities		67,957		5,728
	$	712,232	$	574,475

F-14

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – DEBT

Equipment Loan – On December 10, 2012, the Company entered into a loan agreement for $53,900 to purchase certain warehouse equipment. The loan provides for monthly payment of 60 months and bears interest of 5.95%. Payments began on February 18, 2013. As of December 31, 2016, the outstanding equipment loan balance was $12,869.

During August and December 2016, the Company’s Mexican subsidiary obtained equipment loans totaling MXN $848,500 or $41,050, payable in monthly installments over 30 months with payments beginning in September 2016. As of December 31, 2016, the remaining outstanding amount on this equipment loan was MXN $514,657 or $24,906 and bears annual interest of 0%.

Promissory Notes – During the fourth quarter of 2014, the Company entered into a $350,000 promissory note with a private party. The promissory note was due on May 28, 2015. On June 1, 2015, the parties agreed to convert the note plus accrued interest to common shares and the Company issued 191,202 common shares valued at $387,100 on September 15, 2015. With the same lender, in 2015, the Company entered into a $450,000 promissory note, as amended, on September 1, 2015. The note was secured by inventory, provided interest at 1% per month and had a maturity date of December 31, 2015. The note was paid off in full on December 23, 2015, excluding accrued interest of $22,933. In connection with issuing the note, the Company also issued warrants to purchase 30,000 common shares at $0.85 per share with an expiration date of April 20, 2017 and 10,000 common shares at $2.50 per share with an expiration date of September 1, 2017. The warrants had an aggregate estimated fair value of $26,048. On September 15, 2015, the warrant for 30,000 common shares was exercised.

As of December 31, 2016, the aggregate annual maturities of our debt are as follows:


	2017			2018		2019		Total
Equipment Loans	$	23,250		$	10,676	$	3,849	$	37,775
Bank loan		52,682			33,062		—		85,744
Total Debt		75,932			43,738		3,849		123,519
Less: Short Term Debt		(75,932	)		—		—		(75,932	)
Total	$	—		$	43,738	$	3,849	$	47,587

NOTE 10 – COMMITMENTS AND CONTINGENCIES

For 2016 and 2015, the Company operated under several material agreements as listed below:

Lease for office and production facilities –

On June 25, 2014, commencing August 1, 2014, the Company entered into a lease for a 50,000 square feet in warehouse and corporate office space located in Pompano Beach, Florida. The terms of the new lease provide for $6.00 per square foot or $24,720 per month base rent plus $10,918 monthly in operating expenses and terminates on July 31, 2019. The lease provides for annual increases in the monthly base rent of $0.24- $0.27 per square foot. Our lease is also personally guaranteed by our Chief Executive Officer, Daniel Khesin.

Our Mexican subsidiary leases 246 square feet of office space and 1,230 square feet of warehouse Mexico City, Mexico, which expires on April 30, 2018. The leases provide for monthly rent of $1,408.

F-15

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES (Continued)

The Company was a party to a lease for sales facilities located in Ashville, North Carolina. The lease provided for monthly rent of $4,725 and expired on December 31, 2015. In September 2014, the Company relocated this office to its Florida location, and in 2015 was in negotiations with the landlord to settle the lease abandonment suit. The suit calls for payment of $73,000. As of December 31, 2015, the Company recorded a liability of $85,042, which represented the aggregate monthly rent from the date of abandonment to the lease expiration date for the Asheville suit. On September 21, 2016, the Company was notified it received a default judgement in the amount of $73,000. On December 19, 2016 the company settled the lawsuit for $25,000.

The Company accounts for its facility leases using the straight-line method and incurred $464,865 and $535,012 in total rent expense for 2016 and 2015, respectively.

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


	2017		2018		2019		2020		Total
Facility Leases
Deerfield, FL (HQ/Production)	$	457,238	$	470,298	$	278,882	$	—	$	1,206,418
Mexico City, Mexico (Sales)		4,614		4,614		—		—		9,228
	$	461,852	$	474,912	$	278,882	$	—	$	1,215,646

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 is scheduled for October 17, 2016, in Miami, Florida. As a result of this mediation hearing and subsequent negotiations, there is an agreement with Plaintiffs in both the securities case and the derivative demands as to amount of the settlement and most of the key terms. The parties are negotiating the precise terms of the Court stipulations that will need to be filed. Agreements on the terms of inter-defendant releases are pending approval by both sides. The final settlements will also need to be approved by the Court.

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. An initial case management conference occurred on October 13, 2016, however no resolution was reached. A settlement conference occurred on January 31, 2017 and once again no settlement was achieved. Although both parties continue to work to reach an agreement, the court case is scheduled on or after September 15, 2017.

F-16

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – 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, however no resolution was reached. A settlement conference occurred on January 31, 2017 and once again no settlement was achieved. Although both parties continue to work to reach an agreement, the court case is scheduled on or after September 15, 2017.

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 vigorously defended the action and an Order of Dismissal With Prejudice was achieved on January 5, 2017.

The Company accounts for its facility leases using the straight-line method and incurred $-0- and $53,012 in total rent expense for 2016 and 2015, respectively, for a facility located in Asheville, North Carolina (“Asheville”). In 2015, the Company was served a suit in connection to its 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 reached a settlement in the matter of this complaint in the amount of $25,000 in September 2016.

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.

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.

Purchase commitments

In order to secure an adequate supply of raw materials, the Company executes purchase orders to its suppliers as evidence of its intent to purchase materials. Purchase orders outstanding at December 31, 2016 totaled $532,057.

Contract contingencies

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

F-17

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES (Continued)

Employment Agreements

Daniel Khesin

F-18

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES (Continued)

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

John Power

Effective September 12, 2016, the Company entered into an executive employment agreement with John Power, its current chief financial officer, to serve as chief financial officer, for an initial term through September 11, 2018 (the “Initial Term”) and thereafter automatically renewed for successive one year terms (each, a “Renewal Term”), unless terminated upon six months’ prior written notice (a “Non-Renewal Notice”). During the Initial Term his base salary shall be $200,000. Furthermore, Mr. Power shall be entitled to receive an annual performance bonus, payable in stock and/or cash, based on achieving annual targets set by the board of directors. Under the agreement, Mr. Power shall be entitled to receive reimbursement for all reasonable travel, entertainment and miscellaneous expenses incurred in connection with the performance of his duties. Mr. Power is entitled to paid vacation as determined by the board and initially four weeks per annum. He is also entitled to participate in any pension, insurance or other employment benefit plan as maintained by the Company for its executives, including programs of life and medical insurance. The Company has agreed to maintain disability insurance and directors’ and officers’ liability coverage during his employment term. In the event the Company fails to maintain a disability policy for Mr. Power and Mr. Power becomes disabled during the term of the agreement, then he shall continue to receive 25% of his base salary for a period of 10 years, or until the disability is removed.

If the Company terminates Mr. Power’s employment without cause the Company shall pay as severance pay to Mr. Power within 30 days following the termination date, a lump sum amount equal to 12 months of his annual base salary and all of his options, if any, shall automatically vest and become fully exercisable. Furthermore, upon delivery of a Non-Renewal Notice, the Company shall also pay Mr. Power a lump sum amount equal to 12 months of his annual base salary. During the term of the agreement and for a 6-month period following the termination of the agreement, Mr. Power shall be subject to a non-competition and non-solicitation restrictions, unless his employment is terminated without cause by the Company or upon change of control of the Company or following a Non-Renewal Notice.

Dr. Fernando Tamez

Dr. Tamez has agreed to oversee the day to day operations of DS Mexico in consideration of a base salary of approximately $60,000 per year. In further consideration of his employment with DS Mexico, we and Dr. Tamez entered into a performance agreement dated December 11, 2012, whereby Dr. Tamez shall receive on each 12-month anniversary of the agreement, and each year thereafter for a period of five years, such number of shares of our common stock that shall have a cumulative value of $50,000. Furthermore, during the term of Dr. Tamez’s employment he shall be entitled, on a calendar year basis, to 30% of the net profits of DS Mexico (the “Profit Participation”). Commencing on the third calendar anniversary of the performance agreement with us, we shall have the option of terminating the Profit Participation in consideration of a $500,000 payment to Dr. Tamez. Furthermore, in the event that a “Change of Control” of us during the term of Dr. Tamez’s employment with us, Dr. Tamez shall have the right to receive a one-time payment of $500,000. A “Change of Control” of us shall be deemed to have occurred at such time as: (1) any person (as such term is used in Section 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act of 1934, as amended (the “Exchange Act”), directly or indirectly, of our securities representing 80% or more of the combined voting power of our outstanding securities then having the right to vote at elections of directors; (2) any person becomes the beneficial owner, directly or indirectly of, either: (i) 50% of DS Mexico’s outstanding shares or (ii) 30% of DS Mexico´s shares, within a period of one year; (3) the board of directors of DS Mexico, currently consisting of Daniel Khesin and Fernando Tamez, is changed in its majority; or (d) 40% of the gross value of DS Mexico´s assets is transferred to an unrelated party. As a result the Company has recorded liability due to Mr. Tamez of approximately $102,500 relating to the profit sharing agreement. As of December 31, 2016, the balance remaining due to Mr. Tamez is approximately $73,000 and is included in other current liabilities.

F-19

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – COMMITMENTS AND CONTINGENCIES (Continued)

On March 4, 2016, the Company has received a pre-litigation dispute from a former consultant and employee for services rendered from 2009-2016. The Company is currently in settlement discussions for the return of 625,000 shares and believes it can resolve its disputes without litigation. The Company has expensed the issuances of these shares in the financials but will continue to try to obtain these shares back since they were issued without proper approval.

On August 14, 2015, the Company entered into an employment agreement with Manuel Gonzalez to serve as its Chief Commercial Officer. Under the terms of the employment agreement the Company will pay Mr. Gonzalez an annual base salary of $150,000 and shall be entitled 15,000 cashless warrants per month for 48 months, which expires 15 years from the month they are granted. In April 2016, Mr. Gonzalez was terminated. Due to circumstances surrounding the termination, it is the Company’s position that the termination was for cause which would cause Mr. González to forfeit the compensation under the employment agreement. Accordingly, the Company has not accounted for future compensation and has expensed the compensation through the date of termination. 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.

Pursuant to the employment of Ms. Barch-Niles, our former Chief Executive Officer, in October 2015, the Company granted an equity award of 450,000 restricted stock units that vest monthly over 48 months. Additionally, Ms. Barch-Niles was also granted a signing bonus of 15,924 restricted stock units that vest monthly over 12 months. Both the equity award and signing bonus are subject to a make-whole in the event that the shares are worth less than $2,500,000 and $50,000, respectively, the Company will issue additional shares to Barch-Niles to bring the value of the shares to $2,500,000 and $50,000, respectively, subject to a minimum price per share of $3.50. Ms. Barch-Niles was terminated as Chief Executive Officer as of April 14, 2016. The Company has accrued for stock based compensation through the date of termination. This amount represents the original agreement’s signing bonus and terms. Due to circumstances in the breach of contract and surrounding Ms. Barch-Niles’ termination, it is the Company’s determination that it should not honor the original terms of the agreement, and such has only accrued compensation until termination date. The Company has received a pre-litigation 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 January 5, 2016, the Company entered into an employment letter with Mr. Brockelman. Under the terms of the agreement, Mr. Brockelman will serve as the Company’s Chief Financial Officer reporting to the Company’s Chief Executive Officer. Mr. Brockelman will receive an annual base salary of $185,000 and an annual bonus at a target level of 50% of annual base salary based upon the achievement of certain bonus targets, which are to be set and agreed to by the Company’s Chief Executive Officer and Mr. Brockelman. Under the Employment Letter, the Company agreed to grant Mr. Brockelman 300,000 shares of restricted stock (the “Restricted Shares”) that vest in equal installments of 6,250 shares per month for a period of 48 months. In the event that the value of the Restricted Shares is below $1,000,000 in the twelve-month period following Mr. Brockelman’s start date, the Company will issue Mr. Brockelman additional shares such that the value of the Restricted Shares shall be equal to $1,000,000. The floor on the price per share under such make-whole provision is $3.30 per share. Further, in the event that the Company is acquired prior to the expiration of such 48-month period, any unvested Restricted Shares will become fully vested. Mr. Brockelman resigned on April 2, 2016. Accordingly, the Company has not accounted for future compensation and has expensed the compensation through the date of resignation. As a result of Mr. Brockelman’s resignation, the Company as not accounted for any options or floor-price guarantees.

On September 27, 2016, pursuant to the Company’s By-Laws, the current Board of Directors approved and ratified shares to the former management through date of termination. It is the Company’s position that due to circumstances surrounding the terminations, no further shares or compensation are owed and will vehemently defend it position. The board also determined that pursuant to the Company’s By-laws the Board of Directors will reject any share grants, attempts to grant shares or claim on shares by and from former board of director members and management. Furthermore, The Company will take all actions required to defend this position and as a result no expense for these have been taken as the Company will vehemently defend this position.

Daniel Khesin, CEO, was also promised some additional shares during fiscal year 2015 that were never issued or accounted for that he also agreed to rescind as these were never formally reviewed or approved by the Compensation Committee. As these were never issued and never properly approved and are now agreed to be rescinded no accrual or expense or liability results from these.

F-20

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – EQUITY

Common Stock

When shares are issued in lieu of cash for goods or services, such goods or services are valued based upon the shares issued multiplied by the prevailing closing price of the stock on the date of such issuance.

In 2016, we issued an aggregate of 980,565 shares of common stock at an average value of $0.67 per share, or $657,039 in aggregate, for services that the Company received from investor relation firms, employees/board of director fees, and consulting services. Included in the shares of common stock and related aggregate value issued for services, there was 125,000 shares of common stock issued to an investor relations firm in satisfaction of an obligation recognized in 2015 for services rendered at a value of $83,750.

In 2015 we issued an aggregate of 3,088,295 shares of common stock at an average value of $2.42 per share, or $7,502,208 in aggregate, for services that the Company received from investor relation firms, employee/board of director fees, distributors and consulting services. Included in the shares of common stock and related aggregate value issued for services, there was i) 1,111,905 shares of common stock issued to IR firms for $1,905,462 and ii) 832,500 shares of common stock issued to distributors for $2,270,000.

200,000 shares of common stock issued to one Investor Relations “IR” firm in the second quarter of 2015, the Company had recorded the value of the 200,000 shares of common stock at an expense of $328,000 as IR expense in 2015.

800,000 shares of common stock were issued to one distributor in third quarter of 2015. The Company recorded an expense of $2,269,200, and recorded the value of the 800,000 shares of common stock as distributor marketing and promotion expense in 2015.

In 2015, we issued 1,111,784 shares to various employees and consultants for certain milestones and for services rendered to the Company. Accordingly, we expensed $2,973,691 related to the issuance.

In a private investment in public equity offering during 2015, the Company issued 2,000,000 shares of common stock at $2.50 per share and warrants to purchase 1,500,000 common shares at an exercise price of $2.85. The gross proceeds of the private investment in public equity offering was $5,000,000 and the Company incurred issuance costs of $486,000, which has been netted against the gross proceeds received and recorded in additional paid in capital in the accompanying consolidated balance sheets. The Company has fair valued the warrant issued and it amounted to approximately $ 1,848,000.

In connection with the Company’s sale of 605,000 shares of common stock, at $3.30 per share, or $1,996,500, to an investor in the third quarter of 2015, we recorded a stock subscription receivable of $1,496,500 as of September 30, 2015. During the fourth quarter of 2015, the Company was able to receive $300,000 of the stock subscription receivable and in total $800,000 of the stock purchase agreement. Due to current market conditions, the Company has written off the subscription receivable balance in 2015.

F-21

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – EQUITY (Continued)

Warrants

The following table summarizes the status of our warrants and related transactions for each of the following years:


						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Warrants			Price		Term (in years)		Value
2015
Outstanding at January 1, 2015		253,893			4.67		1.21	$	—
Issued		1,500,000			2.50		5.00		1,874,474
Exercised		(30,000	)		0.85
Forfeited		—			—
Outstanding at December 31, 2015		1,723,893			2.85		4.53		1,874,474
Exercisable at December 31, 2015		1,723,893			2.85		4.53		1,874,474

2016

Outstanding at January 1, 2016		1,723,893			2.85		4.53		1,874,474
Issued		—			—		—		—
Exercised		—			—
Forfeited		—			—
Outstanding at December 31, 2016		1,723,893			2.85		4.53		1,874,474
Exercisable at December 31, 2016		1,723,893			2.85		4.53		1,874,474

Options

The following table summarizes the status of our options and related transactions for each of the following years:


					Weighted-
			Weighted-		Average
			Average		Remaining		Aggregate
			Exercise		Contractual		Intrinsic
	Options		Price		Term (in years)		Value
2015
Outstanding at January 1, 2015		32,633		0.10		1.16	$	20,885
Issued		—		—
Exercised		—		—
Forfeited		32,633		0.10
Outstanding at December 31, 2015		—		—		—		—
Exercisable at December 31, 2015		—		—		—		—

2016
Outstanding at January 1, 2016		—		—		—		—
Issued		—		—
Exercised		—		—
Forfeited		—		—
Outstanding at December 31, 2016		—		—		—		—
Exercisable at December 31, 2016		—		—		—		—

F-22

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – EQUITY (Continued)

Preferred Stock

As provided under Certificate of Designation for Series A Preferred Stock dated January 14, 2009, amended in September 2009, each share of Series A Preferred Stock is entitled to 0.2 votes per share and the Series A Preferred Stock votes together with the Company’s common stock, except as otherwise provided under Florida law. The Company has 30 million shares of preferred stock authorized for issuance and there were no shares issued and outstanding as of December 31, 2016 and 2015.

2009 Equity Incentive Plan

Overview – Options granted under the Company’s 2009 Equity Incentive Plan (the “Plan”) may be Incentive Stock Options or Non-Statutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights, time vested and/or performance vested Restricted Stock, Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.

Subject to the Plan – The initial maximum number of shares of Common Stock that may be issued under the Plan is 500,000 shares. No more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either, authorized and unissued shares or shares held in treasury. No shares have been issued as all restricted stock units (“RSUs”) under the 2009 Equity Incentive Plan as of December 31, 2016.

Eligibility – Non-statutory Stock Options, Stock Purchase Rights, Stock Awards, Stock Appreciation Rights and Unrestricted Shares may be granted to all Service Providers. Incentive Stock Options may be granted only to Employees.

Limitations – Each Option shall be designated as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, if an Employee becomes eligible in any given year to exercise Incentive Stock Options for Shares having a Fair Market Value in excess of $100,000, those Options representing the excess shall be treated as Nonstatutory Stock Options.

Term – The term of each Option shall be stated in the applicable Option Agreement or, if not stated, ten years from the date of grant. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted, owns, directly or indirectly, stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company and any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such shorter term as may be provided in the applicable Option Agreement.

Exercise and Vesting – Unless otherwise determined by the Administrator and provided for in the Option Agreement, each Option shall vest and become exercisable as to one-sixth (1/6) of the shares subject to the Option on the date that is nine months after the date of grant, and an additional one-sixth (1/6) of the shares subject to the Option every nine months thereafter until fully vested and exercisable.

NOTE 12 – INCOME TAXES

The provision for income taxes for 2016 and 2015 is summarized as follows:


	2016			2015
Current:
Federal	$	—		$	—
State		—			—
Non-US		95,413			130,694
		95,413			130,694
Deferred:
Federal		(2,050,156	)		(3,566,376	)
State		(210,874	)		(102,136	)
Non-US		—			3,684
Increase (Decrease) in valuation allowance		2,261,030			3,664,828
Total provision (benefit) for income taxes	$	95,413		$	130,694

F-23

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – INCOME TAXES (Continued)

The provision for income taxes for 2016 and 2015 differs from the amount computed by applying the U.S. federal statutory rate to loss before provision (benefit) for income taxes as follows:


	2016			2015

Expected provision(benefit) at statutory rate		-35.0	%		-35.0	%
State taxes		-3.5	%		-3.4	%
Non-US		-0.2	%		0.1	%
Permanent difference and other		2.8	%		1.9	%
True-up of deferred tax asset		4.3	%		0.8	%
Valuation allowance for Net Loss		33.0	%		37.0	%
Total provision (benefit) for income taxes		1.4	%		1.4	%

Deferred income taxes reflect the net tax effect of tax carry forward items and the temporary differences between the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effect of these temporary differences representing deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:


	2016			2015

Deferred tax assets:
Net operating loss carry-forwards	$	5,901,902		$	4,998,429
Stock-based compensation		1,318,501			1,340,536
Depreciation		7,015			—
Reserve and allowance		531,742			356,271
Other Accruals		445,667			249,179
Intangible Assets		79,613			108,563
Accrued Interest		4,815			4,815
Total deferred tax assets		8,289,255			7,057,793
Valuation allowance		(8,289,255	)		(7,057,793	)
Net deferred tax assets	$	—		$	—

As of December 31, 2016 and 2015, the Company had U.S. federal and state net operating loss carry-overs of $11,393,349, respectively. Unused net operating loss carry-forwards will expire at various dates beginning in 2030 and ending on 2032. In accordance with Section 382 of the Internal Revenue code, the usage of the Company's net operating loss carryforward could be limited in the event of a change in ownership.

United States and foreign components of loss before income taxes were as follows:


	2016			2015

United States	$	(6,759,591	)	$	(10,421,663	)
Foreign		(84,353	)		(190,449	)
Loss before income taxes	$	(6,843,944	)	$	(10,612,112	)

F-24

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 – INCOME TAXES (Continued)

The Company evaluated the provisions of ASC 740 related to accounting for uncertainty in income taxes recognized in the Company’s financial statements as of December 31, 2016 and 2015. Our evaluation was performed for the tax years ended December 31, 2016 and 2015. Based on management’s evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our consolidated financial statements. For 20165 and 2015, the Company had not incurred interest or penalties. The Company files income tax returns in the US federal jurisdiction and the states of Florida and North Carolina. The Company's federal and state income tax returns since 2013 are subject to examination by the Internal Revenue Service, and our state income tax returns since 2012 are subject to examination by the respective state jurisdiction. Returns are generally subject to examination for a period of three years after the returns were filed. The Company has not filed its federal and state tax returns for 2014, and any state net operating loss carry-overs will not be available to offset future taxable income, if any, until the returns are filed.

NOTE 13 – 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 2015 and 2016, the Company sold merchandise worth $956,176 and $4,566,717, respectively, to this barter trading company. However, these credits proved to have no economic value and accordingly, revenue did not meet the criteria as defined in Accounting Standards Codification 605 (“ASC”). The Company has reserved these sales to this barter trading company that did not meet the revenue standards in 2015 and 2016, respectively.

NOTE 14 – SIGNIFICANT CUSTOMERS

The Company sells its products to several types of customer, which primarily include distributors and salons. There were no sales to customers individually in excess of 10% of net revenue for 2015. Sales to customers individually in excess of 10% of net revenue for 2016 and their accounts receivable at December 31, 2016 were:


Customer	Sales Amount	Percent	Accounts Receivable	Percent

C	$2,359,483	18%	$734,804	29%

During 2016 and 2015, our top ten customers generated 46% and 49% of our net revenue, respectively.

NOTE 15 – SIGNIFICANT SUPPLIERS

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

Purchases from significant suppliers for 2016 and their accounts payable at December 31, 2016 were:


Vendor	Purchase Amount	Percent	Accounts Payable	Percent
C	$757,003	18%	$148,900	8%
D	$562,067	13%	$ 9,756	1%

Purchases from significant suppliers for 2015 and their accounts payable at December 31, 2015 were:


Vendor	Purchase Amount	Percent	Accounts Payable	Percent
C	$703,600	20%	$109,363	11%
D	$458,065	13%	$ 13,695	1%

F-25

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 – GEOGRAPHIC REVENUE REPORTING

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

Information about the Company’s geographic operations for 2015 and 2014 are as follows:


	2016		2015
Net Revenue:
North America	$	4,819,739	$	6,065,696
International		8,127,436		5,712,064
	$	12,947,175	$	11,777,760

Furniture and Equipment, Net:
North America	$	59,256	$	71,149
International		47,275		28,390
	$	106,531	$	99,539

NOTE 17 – RELATED PARTY TRANSACTIONS

For the year ended December 31, 2016 and 2015, the Company was a party to the following related party transactions not disclosed elsewhere in these financial statements:

The Company paid $103,233 and $103,233 in 2016 and 2015, respectively, as compensation to Alexander Khesin, the father of our Chief Executive Officer for consulting on various projects,

The Company paid $48,485 and $52,036 in 2016 and 2015, respectively, as compensation to Anna Khesin, the sister of our Chief Executive Officer for consulting on various consulting projects.

The Company paid $60,000 and $60,000 in 2016 and 2015, respectively, 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 which we acquired in November 2012. Dr. Tamez oversees the day-to-day operations of DS Mexico.

The Company paid $34,091 in 2016 as compensation to Dr. Fernando Tamez as Chief Operating Officer of the Company.

Mr. Tamez owns an interest with a entity in Brazil with which the Company sold product. During 2016 and 2015 the Company sold $38,585 and $-0- in 2016 and 2015, respectively, and the outstanding accounts receivable balance as of December 31, 2016 and 2015 was $9,768 and $-0-, respectively.

Mr. Tamez owns an interest with an entity in Spain with which the Company sold product. During 2016 and 2015 the Company sold $498,479 and $-0- in 2016 and 2015, respectively, and the outstanding accounts receivable balance as of December 31, 2016 and 2015 was $498,479 and $-0-, respectively. The Company has an informal agreement to purchase the Company from Mr. Tamez upon it reaching certain millstones however a formal agreement has not been completed to date.

The Company recorded a liability due to Mr. Tamez of approximately MXN $2,118,000 Mexican pesos, or $129,200, relating to his profit sharing agreement and is included in other current liabilities in the accompanying balance sheet as of December 31, 2016.

The Company had sales to Karl Sweis, a former director until April 2016, of $-0- and $390,622 in 2016 and 2015, respectively.

In 2016 and 2015, the Company paid $-0- and $170,000 in consulting fees to Whitestone Group Inc., and Greystone Group Inc., entities controlled by Abner Silva, and $20,000 in 2015 to Abner Silva individually who is a shareholder and former consultant and employee for outsourced COO services. In addition, the Company had the following transactions with entities controlled by Abner Silva:

$-0- and $88,625 in 2016 and 2015, respectively, for the purchase of materials needed for the assembly and manufacture of products for export, which was offset by,

F-26

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 – RELATED PARTY TRANSACTIONS (Continued)

sales of its products amounting to $-0- and $69,858 in for 2016 and 2015, respectively.

The Company issued 20,513 shares or $35,500 in 2015 as payment for expenses to Julieta Jackson, a former employee and sister to Abner Silva for a settlement dispute resolution in 2013. Mrs. Jackson is the proprietor and sole shareholder of Velocity Storage and Packaging Inc.

NOTE 18. ACQUISITION

Executed and effective on December 29, 2016, the Company entered into an agreement to acquire the distribution rights of it Brazilian distributor, of which current our current chief operating officer Fernando Tamez, and former Officer Abner Silva, are shareholders and listed as sellers on the agreement, to acquire 100% of the distributers shares in exchange for $47,000 in cash to satisfy certain liabilities, guaranteed employment contract for an employee valued at approximately $28,000, and the option to receive 500 units per month at no cost for 24 months. The agreement includes The Company assuming all current operating cost of the distributor during the period of time between the execution of the agreement and the alteration of the shareholder’s agreement.

NOTE 19 – 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.

In January 2016, the company entered into a Stock Purchase Agreement with a private party in the amount of $1,996,500 for 605,000 shares of the company’s stock. To date, the purchase agreement has only partially settled. The Company’s has offset subscription receivable against the additional paid in capital of $1,196,500 The Board of Directors decided to negotiate a revision to the original Stock Purchase Agreement and an agreement was reached on February 8, 2017.

F-27

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 – SUBSEQUENT EVENTS (Continued)

On May 27, 2016, PhotoMedex, Inc., Radiancy, Inc., and PhotoMedex Technology, Inc. (collectively, “PhotoMedex”) filed a civil action for damages and declaratory relief against DS Healthcare in the United States District Court for the Southern District of New York. The lawsuit is styled PhotoMedex, Inc. v. DS Healthcare Group, Inc., Case No. 1:16-cv-03981. The lawsuit arises from two merger agreements: (i) an Agreement and Plan of Merger and Reorganization among DS Healthcare Group, Inc., PHMD P Acquisition Corp., PhotoMedex, Inc. and Radiancy, Inc. dated February 19, 2016; and (ii) an Agreement and Plan of Merger and Reorganization by and among DS Healthcare Group, Inc., PHMD Professional Acquisition Corp., PhotoMedex Technology, Inc. and PhotoMedex, Inc. dated February 19, 2016. PhotoMedex alleges that DS Healthcare breached both agreements by failing to meet its pre-closing obligations and not completing the transactions contemplated by the agreements. PhotoMedex seeks a declaratory judgment that their terminations of the two agreements were proper, and requests an award of damages specified by the agreements, including a “break-up fee” of USD $3 million. DS Healthcare disputes the claims asserted by PhotoMedex, including that PhotoMedex is entitled to the “break-up fee” under the agreements. DS Healthcare has also asserted a counter-claims for damages against PhotoMedex for their breaches of the two agreements. An initial case management conference occurred on October 13, 2016, however no resolution was reached. A settlement conference occurred on January 31, 2017 and once again no settlement was achieved. Although both parties continue to work to reach an agreement, the court case is scheduled on or after September 15, 2017.

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

On February 8, 2017, the company entered into a Joint Venture and Financing arrangement with EverCare Prohealth Technologies LTD (“Evercare”), a private Hong Kong company, whereby EverCare would provide $2 million dollars in financing to the Company and enter into a joint venture arrangement for the development of certain new products, whereby the operational costs would be shared between the two companies. Included in the agreement are the granting of exclusive distribution rights to EverCare for Asia, Australia and Africa. Additionally, the Company has pledged via transfer of certain intellectual property, held under its DS Laboratories subsidiary, to EverCare as security for the financing. Such pledge includes buyback provisions exercisable within 5 years of the closing date of the transaction. Additionally, the Company received 3 million shares of Evercare as part of the arrangement.

F-28

DS HEALTHCARE GROUP, INC. (dba DS LABORATORIES) and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 – SUBSEQUENT EVENTS (Continued)

Executed and effective on December 29, 2016, the Company entered into an agreement to acquire the distribution rights of it Brazilian distributor, of which our current chief operating officer Fernando Tamez, and former Officer Abner Silva, are shareholders and listed as sellers on the agreement, to acquire 100% of the distributers shares in exchange for $47,000 in cash to satisfy certain liabilities, guaranteed employment contract for an employee valued at approximately $28,000, and the option to receive 500 units per month at no cost for 24 months. The agreement includes the Company assuming all current operating cost of the distributor during the period of time between the execution of the agreement and the alteration of the shareholder’s agreement.

F-29

DS HEALTHCARE GROUP, INC. - FORM 10-K - March 31, 2017

Attached files

DS HEALTHCARE GROUP, INC. Reports