DS Healthcare (DSKX) 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

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ü	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the quarterly period ended:June 30, 2010
or
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
	ACT OF 1934
For the transition period from: _____________ to _____________

Commission File Number: 000-53680

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DIVINE SKIN, INC.

(Name of Small Business Issuer in Its Charter)

———————

Florida	20-8380461
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

1680 Meridian Avenue, Suite 301, Miami Beach, Florida 33139

(Address of Principal Executive Office) (Zip Code)

(888) 404-7770

(Issuer’s Telephone Number, Including Area Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

———————

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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.			ü	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 during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).				Yes		No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer		Accelerated filer
Non-accelerated filer	(Do not check if a smaller	Smaller reporting company			ü
	reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
				Yes	ü	No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 92,857.001 shares of common stock outstanding as ofJune 30, 2010.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

DIVINE SKIN, INC. (DBA DS LABORATORIES)

CONSOLIDATED BALANCE SHEETS

	June 30, 2010			December 31, 2009
ASSETS
Current Assets
Cash	$	142,775		$	259,449
Accounts receivable		798,420			689,484
Inventory		1,126,423			718,108
Prepaid expenses and other current assets		7,896			8,054
Total Current Assets		2,075,514			1,675,095
Furniture and Equipment, net		32,538			30,038
Other Assets		709,833			739,290
TOTAL ASSETS	$	2,817,885		$	2,444,423
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	572,712		$	1,061,422
Other current liabilities		31,072			13,394
TOTAL LIABILITIES		603,784			1,074,816
COMMITMENTS AND CONTINGENCIES
Shareholder's Equity
Preferred stock, $0.001 par value, 30 million shares authorized:
10 million shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		10,000			10,000
Common stock, $0.001 par value, 300 million shares authorized:
92,857,001 and 89,986,001 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		92,857			89,986
Additional paid-in-capital		2,242,852			1,660,841
Accumulated deficit		(131,608	)		(391,220	)
Total Shareholders' Equity		2,214,101			1,369,607
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,817,885		$	2,444,423

See accompanying notes to consolidated financial statements

2

DIVINE SKIN, INC. (DBA DS LABORATORIES)

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue:
Product sales	$	1,334,518		$	769,430		$	2,412,464		$	1,749,205
Service revenue		—			2,425			—			2,600
Less returns and allowances		(34,321	)		(40,211	)		(117,195	)		(55,509	)
Net revenue		1,300,197			726,7940			2,295,270			1,696,295
Cost of Goods Sold		330,791			205,225			663,769			384,070
Gross Profit		969,406			521,5694			1,631,500			1,312,225
Operating Costs and Expenses:
Selling and marketing		183,134			275,407			417,676			426,833
General and administrative		555,259			436,516			1,003,286			776,503
Total operating costs and expenses		738,394			711,922			1,420,962			1,203,336
Other Income (Expense)
Interest income		—			17			—			72
Interest expense		—			(1,432	)		—			(1,241	)
Other income		1,409			(24,038	)		49,073			(18,029	)
Total other income (expense)		1,409			(25,453	)		49,073			(19,197	)
Income Before Taxes		232,422			(215,807	)		259,612			89,692
Income Tax Provison		0			(53,606	)		—			34,307
Net Income	$	232,422		$	(160,201)		$	259,612		$	55,385
Basic Earnings per Share:
Weighted average shares		91,808,979			90,767,548			91,341,145			90,060,680
Earnings per share	$	0.003		$	(0.00	)	$	0.003		$	0.001
Diluted Earnings per Share:
Weighted average shares		92,845,756			90,844,303			92,377,922			90,137,435
Earnings per share	$	0.003		$	(0.00	)	$	0.003		$	0.001

See accompanying notes to consolidated financial statements

3

DIVINE SKIN, INC. (DBA DS LABORATORIES)

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND THE YEAR ENDED DECEMBER 31, 2009

										APIC			Stock Subscription			Accumulated Deficit			Total Shareholders’ Equity
	Preferred Stock			Common Stock
	Shares	Amount		Shares			Amount
December 31, 2008	—	$	—		10,000		$	10		$	566,368		$	149,222		$	(430,693	)	$	284,907
Capitalization of undistributed Subchapter S losses	—		—		—			—			(430,693	)		—			430,693			—
Stock dividend	—		—		99,990,000			99,990			(99,990	)		—			—			—
Share exchange for preferred stock	10,000,000		10,000		(10,000,000	)		(10,000	)		—			—			—			—
Subscriptions to purchase common stock	—		—		—			—			—			220,600			—			220,600
Less: Issuance costs	—		—		—			—			—			(66,180	)		—			(66,180	)
Shares Issued:
Sold to foreign investors under PPM					4,087,548			4,088			1,209,686			(433,774	)					780,000
Less: Issuance costs	—		—		—			—			(364,132)			130,132			—			(234,000	)
To foreign investors to adjust PPM pricing					767,548			768			(768)									—
For services					74,000			74			18,426									18,500
As gifts					13,000			13			(13)									—
Sold to investors					28,000			28			6,972									7,000
Distribution agreement					3,000,000			3,000			747,000									750,000
Shares cancelled:
Repurchased and cancelled					(5,000,000	)		(5,000	)		5,000						(75,000	)		(75,000	)
Surrended for gifts					(13,000	)		(13	)		13									—
Surrended by principals					(2,969,095	)		(2,969	)		2,969									—
Surrended by others					(2,000	)		(2	)		2									—
Net income and comprehensive income 2009 Net (Loss)	—		—		—			—			—			—			(316,220	)		(316,220	)
December 31, 2009	10,000,000		10,000		89,986,001			89,986			1,660,841			—			(391,220	)		1,369,607
Shares Issued:																				—
Sold to private investors					2,846,000			2,846			457,154									460,000
Less: Issuance costs											(138,000)									(138,000	)
For services					25,000			25			4,475									4,500
Warrants:
Vested for trading symbol services											64,000									64,000
Issued for financial consulting services											194,382									194,382
Net income and comprehensive income 2010 Net Income																	259,612			259,612
June 30, 2010 (Unaudited)	10,000,000	$	10,000		92,857,001		$	92,857		$	2,242,852		$	—		$	(131,608	)	$	2,214,101

See accompanying notes to consolidated financial statements

4

DIVINE SKIN, INC. (DBA DS LABORATORIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2010			2009
Cash Flows from Operating Activities:
Net Income	$	259,612		$	55,385
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		43,515			3,918
Allowance for doubtful accounts		30,292			—
Stock issued for services		4,500			—
Warrants issued for capital raise		18,904			—
Warrants vested for services		64,000			—
Changes in operating assets and liabilities:
Accounts receivable		(139,228	)		(94,597	)
Inventory		(408,316	)		(248,965	)
Prepaid expenses and other current assets		159			1,517
Accounts payable and accrued expenses		(313,231	)		88,452
Other current liabilities		17,677			73,111
Net cash (used in) operating activities		(422,116	)		(121,181	)
Cash Flows from Investing Activities:
Purchase of furniture and equipment		(8,514	)		(4,082	)
Recovery (issuance) of advances		—			29,587
Security deposits		(8,043	)		—
Net cash (used in) provided by investing activities		(16,557	)		25,505
Cash Flows from Financing Activities:
Proceeds from sale of stock subscription to investors		—			170,600
Less Issuance costs		—			(51,180	)
Proceeds from sale of stock to others		460,000			—
Less Issuance costs		(138,000	)
Net cash provided by financing activities		322,000			119,420
(Decrease) Increase in cash		(116,673	)		23,744
Cash, Beginning of Period		259,449			141,918
Cash, End of Period	$	142,775		$	165,663
Supplemental Information:
Cash paid for interest	$	—		$	42
Cash paid for taxes	$	—		$	—

See accompanying notes to consolidated financial statements

5

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Terms and Definitions

AICPA	American Institute of Certified Public Accountants
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
FASB	Financial Accounting Standards Board
FIFO	First-in, First-out
GAAP (US)	Generally Accepted Accounting Principles as applied in the United States
PPM	Private Placement Memorandum
SEC	Securities Exchange Commission
SFAS or FAS	Statement of Financial Accounting Standards
Q209-QTR	Three months ended June 30, 2009
Q210-QTR	Three months ended June 30, 2010
Q209-YTD	Six months ended June 30, 2009
Q210-YTD	Six months ended June 30, 2010

Organization and Nature of Business

Divine Skin, Inc. (the “Company”, “Divine Skin”, “DS Laboratories”, “we”, “us” or “our”) is a Florida company organized under the laws of the State of Florida in January 2007. Through its predecessors, including Divine Skin, Inc., (a New York company) the Company has been developing and marketing skin care and personal care products for over ten years. The Company has grown steadily over the last few years with a network of top specialty retailers across North America and distributors throughout Europe, Asia and South America. Divine Skin researches and develops its own products, which management believes keeps the Company at the forefront of innovation. Management believes the Company is currently a leading innovator of “Liposome Technology”, which acts as a carrier agent, and has been designed to enhance the action of active ingredients contained in pharmaceutical an d cosmeceutical products. We currently offer skin care, aging, cellulite, hair loss and personal care products. The majority of these products are within the following product lines:

·

Skin Care

·

Aging

·

Cellulite

·

Hair Loss

·

Personal Care

History of the Company

In January 2007 the operations of Divine Skin, Inc. (a New York company), were terminated and its assets were distributed to its shareholders. Those assets and certain liabilities were used to capitalize Divine Skin, Inc. (a Florida corporation). The companies had common shareholders. The Company currently conducts business under the “Divine Skin” trade name and also under the “DS Laboratories” trade name.

Our shareholders also own DS Laboratories, Inc. (a Florida company), which was formed in January 2007 to secure the DS Laboratories trade name and was essentially idle through 2007 and 2008. We operated under the “DS Laboratories” trade name through the informal consent of the shareholders of DS Laboratories, Inc., who are also our shareholders. Because DS Laboratories, Inc. is a legally registered entity, we have not filed a fictitious name notification. DS Laboratories, Inc. (a New York Corporation) was closed in December 2006 and recapitalized as a Florida corporation in January 2007. Divine Skin, Inc. (a Florida corporation) has operated out of South Florida since its inception in 2007.

6

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

In January 2008 the Company engaged two consultants to assist it developing production operations in Brazil as a means to simplify the regulatory requirements surrounding importation of its product. Production operations in Brazil are not yet fully commercialized. All costs associated with exploring this production alternative have been expensed.

In January 2009, the Company acquired 100% of the outstanding shares of DS Laboratories, Inc. (a Florida Corporation) for a nominal amount. DS Laboratories, Inc. (a Florida Corporation) was established in January 2007 for the purposes to holding the trade and brand name. The Company recorded no transactions during the fiscal years 2007 and 2008. DS Laboratories, Inc. (a Florida Corporation) was a related but separate entity until the acquisition. Subsequent to the acquisition, DS Laboratories, Inc. (a Florida Corporation) operates as a wholly owned subsidiary of the Company.

In January 2009, the Company acquired 100% of the outstanding shares of Sigma Development and Holding Co., Inc. for a nominal amount. Sigma was founded as an upscale brand addition to the Company’s product portfolio. Sigma operated as a related but separate entity until the acquisition. Subsequent to the acquisition, Sigma operates as a wholly owned subsidiary of the Company.

In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company. Polaris was founded, to distribute Polaris branded versions of the Company’s products that, for marketing purposes, are sold through physicians and foreign distributors.

In Q4 2009, the Company completed an agreement covering the exclusive distribution of its product and additional future products specifically tailored for the Brazilian market. The costs associated with procuring this agreement have been capitalized and are amortized over the life of the agreement.

In Q1 2010, the Company filed an S-1 Selling Shareholder Registration Statement with the SEC which was declared effective by the SEC and obtained its trading symbol (DSKX) permitting the quotation of its shares of common stock on the Over the Counter Bulletin Board (OTCBB).

NOTE 2. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting conforms to accounting principles generally accepted in the United States of America.

Principles of Consolidation and Presentation

The consolidated financial statements include the accounts of Divine Skin, Inc. and its wholly owned operating subsidiaries DS Laboratories, Inc. (a Florida Corporation), Sigma Development and Holding Co., Inc. and Polaris Labs, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made in the 2009 results to conform to the presentation used in 2010.

Interim Financial Statements

The interim financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The interim financial statements should be read in conjunction with the Company’s annual financial statements, notes and accounting policies included in the Company’s Annual Report. In the opinion of management, all adjustments which are necessary to provide a fair presentation of financial position as of June 30, 2010 and the related operating results and cash flows for the interim period presented have been made. All adjustments are of a normal recurring nature. The results of operations, for the period presented are not necessarily indicative of the resu lts to be expected for the year ended December 31, 2010.

7

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

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. 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 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. At June 30, 2010 and December 31, 2009 the provision for doubtful accounts was $37,944 and $25,000, respectively.

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.

Furniture and Equipment

Furniture and equipment are recorded at cost and depreciation is provided using the 200% declining balance method over the estimated useful lives of the assets, which range from 5 to 7 years.Expenditures for repairs and maintenance of equipment are charged to expense as incurred. Major replacements and betterments are capitalized and depreciated over the remaining useful lives of the assets.

Furniture and equipment is reviewed whenever events or changes in circumstances occur that indicate possible impairment in accordance with ASC Topic 360,“Accounting for Impairment or Disposal of Long-Lived Assets”.

Revenue Recognition

Revenue is recognized when a product is shipped. The Company manages the collection process for transactions processed on its website, but it outsources its fulfillment (delivery) process to third parties.

The Company’s revenue recognition policies are in compliance with ASC Topic 605, “Revenue Recognition”, which establishes criteria that must be satisfied before revenue is realized or realizable and earned. The Company recognizes revenue when all of the following four criteria are met:

·

persuasive evidence of a sales arrangement exists,

·

delivery has occurred,

·

the sales price is fixed or determinable and

·

Collectability is probable.

Shipping and handling charges related to sales transactions are recorded as sales revenues when billed to customers or included in the sales price in accordance with ASC Topic 605, “Accounting for Shipping and Handling Fees and Costs”. Shipping and handling costs are included in cost of revenue.

8

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

The Company accepts product returns and will issue a credit, refund or product exchange. To date, product returns have occurred but are not considered material. The Company has not established a product return reserve.

Research and Development

The Company does not engage in research and development as defined in ASC Topic 730, “Accounting for Research and Development Costs.” However, the Company does incur formulation costs that include salaries, materials and consultant fees. These costs are classified as product development, selling, general and administrative expenses in the statements of operations.

Income Taxes

In January 2007, the Company elected to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379), wherein all earnings and losses of the Company are passed through to its shareholders and become taxable income or loss to them as individuals.

In January 2009, when the Company accepted the subscription for common shares from a foreign investor, the Company no longer qualified for its Subchapter S election.

The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Earnings per share

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

Segment Information

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

NOTE 3. – RECENT ACCOUNTING UPDATES

Recent accounting pronouncements that the Company has adopted or that will be required to adopt in the future are summarized below.

Fair Value Measurements: In January 2010, the FASB issued ASU 2010-06,“Fair Value Measurements”which is intended to improve disclosures about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels, the reasons for the transfers and to present information about purchases, sales, issuances and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). The Company has applied the new disclosure requirements as of January 1, 2010, except for the disclosures about purchases, sales, issu ances and settlements in the Level 3 reconciliation, which will be effective for interim and annual periods beginning after December 15, 2010. The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.

9

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. – RECENT ACCOUNTING UPDATES (CONTINUED)

Subsequent Events: In February 2010, the FASB issued ASU 2010-09,“Subsequent Events” which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated financial statements.

Derivatives and hedging: In March 2010, the FASB issued ASU 2010-11,“Derivatives and Hedging” (Topic 815). ASU 2010-11 update provides amendments to subtopic 815-15, Derivatives and hedging. The amendments clarify about the scope exception in paragraph 815-10-15-11 and section 815-15-25 as applicable to the embedded credit derivatives. The ASU is effective on the first day of the first fiscal quarter beginning after June 15, 2010. Therefore, for a calendar-year-end entity, the ASU becomes effective on July 1, 2010. Early application is permitted at the beginning of the first fiscal quarter beginning after March 5, 2010. The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.

Income Taxes: In April 2010, the FASB issued ASU 2010-12,“Income Taxes” (Topic 740). ASU 2010-12 amends FASB Accounting Standard Codification subtopic 740-10 Income Taxes to include paragraph 740-10-S99-4. On March 30, 2010 The President signed the Health Care & Education Affordable Care Act reconciliation bill that amends its previous Act signed on March 23, 2010. FASB Codification topic 740, Income Taxes, requires the measurement of current and deferred tax liabilities and assets to be based on provisions of enacted tax law. The effects of future changes in tax laws are not anticipated.” Therefore, the different enactment dates of the Act and reconciliation measure may affect registrants with a period-end that falls between March 23, 2010 (enactment date of the Act), and March 30, 2010 (enactment date of the reconciliation measure). However, the announcement states that the SEC woul d not object if such registrants were to account for the enactment of both the Act and the reconciliation measure in a period ending on or after March 23, 2010, but notes that the SEC staff “does not believe that it would be appropriate for registrants to analogize to this view in any other fact patterns.” The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.

Stock Compensation: In April 2010, the FASB issued ASU 2010-13,“Stock Compensation” (Topic 718). ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the b eginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.

Other ASUs not effective until after June 30, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.

10

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. – INVENTORY

Significant components of inventory at June 30, 2010 and December 31, 2009 consist primarily of:

	2010		2009
Bulk product and raw materials	$	650,168	$	267,267
Work in process		41,450
Merchandise inventory		229,641		310,970
Inventory in transit		205,164		139,871
	$	1,126,423		718,108

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

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

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

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

Management evaluated the inventory at June 30, 2010 and December 31, 2009 and any obsolete inventory was excluded from our reported inventory value, accordingly no allowance for obsolescence was necessary.

NOTE 5. – OTHER ASSETS

Significant components of other assets at June 30, 2010 and December 31, 2009 consist primarily of:

	2010			2009
Distribution rights	$	750,000		$	750,000
Less amortization of distribution rights		(56,250	)		(18,750	)
Net distribution rights		693,750			731,250
Security deposits		16,043			8,000
Other deposits		40			40
	$	709,833		$	739,290

Distribution rights – The Company issued 3,000,000 shares of common stock in exchange for a 10 year exclusive distribution agreement in Brazil. The transaction is valued at the private placement price of $0.25 per share. The Company is currently developing a generic Minoxodil product along with appropriate packaging for the Brazilian market, which is planned for introduction in the quarter ended September 30, 2010.

The Company will amortize its distribution rights over the next 10 year as follows:

	2010		2011		2012		2013		Beyond		Total
Distribution Rights:
Brazil (exclusive)	$	37,500	$	75,000	$	75,000	$	75,000	$	431,250	$	712,500
	$	37,500	$	75,000	$	75,000	$	75,000	$	431,250	$	712,500

Security deposits – Security deposits represent funds advanced for our office and production facilities.

11

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Significant components of accounts payable and accrued expenses at June 30, 2010 and December 31, 2009 consist primarily of:

	2010		2009
Trade payables	$	225,389	$	394,358
Advances to vendors		914		24,345
Accrued expenses and claims:
Advertising and marketing		260,948		364,566
Production materials		24,038		38,460
Freight		25,367		24,349
Human resources		24,349		12,684
Professional fees		—		—
Warrant expense		—		116,522
Credits due to customers		11,708		2,421
Other		—		83,717
	$	572,712	$	1,061,422

Warrant expense – As discussed more fully in Note 8, the Company has issued warrants to a selling agent to purchase one share of Common Stock of the Company for every ten Shares sold under the Regulation S offerings. The Company has accrued the intrinsic value of the warrants granted. To date no warrants have been exercised.

Accrued expenses and claims – As discussed more fully in Note 7, the Company has responded to several claims from suppliers, primarily advertisers and media suppliers, alleging unpaid balances on services or materials provided. The Company has responded in many cases that the services or materials did not fully comply with required specifications or supplier commitments. In all cases, the Company has shifted its purchasing to more compatible suppliers. The Company has accrued the estimated settlement value of the claim based on an evaluation of the individual circumstances of each matter.

NOTE 7. – COMMITMENTS AND CONTINGENCIES

During Q210-YTD and 2009, the Company operated under several material agreements as listed below:

Lease for office facilities –

·

The Company leases its corporate headquarters office space located in Miami Beach, Florida. Monthly lease payments are $6,500 per month or $78,000 on an annual basis. The Company is currently in negotiation with its current landlord to extend the lease. Pending completion of the negotiation, the Company leases its Miami Beach facilities on a month to month basis at existing rates.

·

In March 2009, the Company leased a 3,500 square foot facility in Pompano Beach, Florida as its production facility to assemble small production runs of its products.  The lease provides for monthly rent of $2,600 and terminates in March 2011. The Company is currently in negotiations to terminate the lease.

·

In March of 2010, the Company entered into a lease for 7,500 square feet in new production facilities in Deerfield Beach, Florida. The new facility replaced its Pompano Beach production facilities and began operations in April 2010. The lease provides for monthly rentals of $3,437 in monthly rent in the first year with and increasing scale for years 2 – 5. The lease matures in 5 years and provides for a 5 year renewal option.

12

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. – COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

	2010		2011		2012		2013		Beyond		Total
Facility Leases:
Miami Beach (Office)	$	—	$	—	$	—	$	—	$	—	$	—
Pompano Beach (Production)		16,748		13,957		—		—		—		30,705
Deerfield Beach (Production)		20,625		42,213		43,901		45,657		47,483		199,879
	$	37,373	$	56,170	$	43,901	$	45,657	$	47,483	$	230,584

Pending and threatened litigation –

·

Divine Skin, Inc. has received several threatened litigations from various suppliers typically over non-payment for goods or services. The threatened litigations are generally directed at DS Laboratories, Inc. being one of the operating trade names of Divine Skin. Such vendor disputes are typical in the normal course of business. Divine Skin is vigorously challenging these claims on the grounds of the substandard materials or services provided. However, we established an accrual for certain media, materials and freight supplier claims of $334,701 and $440,059 at June 30, 2010 and December 31, 2009, respectively.

The Company has been working to resolve these claims and has negotiated settlements with several suppliers resulting in the reduction of the supplier claim recorded and repayment through a structured payout. As discussed above, accruals have been provided, when the facts of each claim, warrants it.

·

Divine Skin Inc. has been named in a lawsuit brought by a former employee of 301 Model, an entity also related to Divine Skin, Inc. through common ownership. Divine Skin was named because it originally hired the employee rather than 301 Model as the latter was not yet an established entity. Our management is vigorously defending our position that the employee was terminated after two weeks for cause and that the employee subsequently violated their non-compete agreement. Accordingly, we do not anticipate that any material assessment or settlement will result from the lawsuit.

NOTE 8. – EQUITY

Recapitalization

In January 2009, Divine Skin authorized an amendment and restatement to its articles of incorporation to provide, among other things, (a) that the authorized common stock be increased to 300,000,000 shares and (b) that up to 30,000,000 shares of “blank check” preferred stock are authorized. Immediately thereafter, the Company declared a stock dividend of 10,000 shares for one share. Subsequent to the stock dividend, there were 100,000,000 shares of common stock outstanding.

Private Placement Memorandum (PPM)

During the first quarter of 2009, the Company began selling its common stock at a purchase price of $0.50 per share, to qualified investors. The offering is being conducted on a “best efforts” basis with respect to all shares. The offering also provides that the Company shall pay the selling agents the following fees and commissions: 15% sales commission, a 5% due diligence fee and payment of expenses of up to 10% of the gross proceeds.

The PPM offering was made solely to “non U.S. Persons” within the meaning of Rule 902 of Regulation S under the Securities Act of 1933. These securities have not been registered with or approved by the SEC or any state securities commission nor has any commission or state authority passed on the accuracy or adequacy of this memorandum.

During the third quarter of 2009, the offering was retroactively re-priced to $0.25 per share and a total of 767,548 additional shares were issued, at no additional cost, to investors that had previously paid $0.50 per share, to achieve that re-pricing.

13

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. – EQUITY (CONTINUED)

The following table summarizes transactions under the private placement offering as follows:

Common Stock Sold Under PPM							&n bsp;
	Common Shares		Price		Gross Proceeds			Issuance Costs			Net Proceeds
Period
2008		426,348	$	0.50	$	213,174		$	(63,952	)	$	149,222
Q1 2009		341,200	$	0.50		170,600			(51,180	)		119,420
Q2 2009		—	$	—		—			—			—
Q3 2009		4,087,548	$	0.20		830,000			(249,000	)		581,000
Q4 2009		28,000	$	0.25		7,000			—			7,000
		4,883,096	$	0.25	$	1,220,774		$	(364,132	)	$	856,642

The Company received and accepted funded subscriptions to purchase 4,883,096 common shares, under the offering referred to above. The Company received $856,642 in net proceeds after issuance costs of $364,132. The accepted funded subscriptions are recorded as a component of the Company’s equity pending issuance of common shares. Once the common shares have been issued, the amounts previously recorded as funded subscriptions are transferred to common stock par value and additional paid in capital, accordingly.

As of March 31, 2010 the PPM expired and all share certificates for all paid subscriptions have been issued.

Warrants

The Company has issued warrants to the selling agent to purchase one share of Common Stock of the Company for every ten Shares sold under the PPM offering. The exercise price of each warrant is $0.01 per share and such warrants are exercisable for a period of five years from the date of issuance. Based on the PPM’s “repriced” sale price of $0.25 per share, the warrants are “in the money” upon issuance. For the year ended December 31, 2009 the Company accrued $116,522 for financial consulting services, based on the value of the warrants granted.

During the first quarter of 2010, the selling agent assisted in a private sale of the Company’s common stock under Regulation S. The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering. Accordingly, the Company accrued an additional expense for financial consulting services, based on the value of the warrants of $18,904.  To date, no warrants have been exercised. Effective March 31, 2010 the accrued warrant liability of $135,426 was transferred to additional paid in capital.

During Q210-QTR, the selling agent assisted in a private sale of 1,734,000 of the Company’s common stock under Regulation S. The Company agreed to grant the selling agent additional warrants under the same terms offered under the PPM offering. Accordingly, the Company accrued an additional expense for financial consulting services, based on the value of the warrants of $58,956. To date, no warrants have been exercised. Effective June 30, 2010 the warrant liability of $58,956 was transferred to additional paid in capital.

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2010		485,510	$	0.01		4.0	$	116,522
Issued		284,600	$	0.01		5.0		77,860
Exercised		—	$	—
Forfeited		—	$	—
Outstanding at June 30, 2010		770,110	$	0.01		4.5	$	194,382
Exercisable at June 30, 2010		770,110	$	0.01		4.5	$	194,382

14

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. – EQUITY (CONTINUED)

Option

The selling agent engaged by the Company has also entered into a Consulting Agreement under which he will assisted the Company in filing a registration statement on Form 10 and quotation of its shares on the Over the Counter Bulletin Board (OTCBB). The Company has issued an option to the selling agent to purchase 2,000,000 share of common stock at an exercise price of $0.01 per share. At grant date, the option was valued based on the offering price of the PPM of $0.25 per share, which was $480,000. The option expires in five years. The option vests and is exercisable subject to certain lock up and leak out provisions which commence upon the effective date of the Company obtaining OTCBB listing. Leak out provisions limit exercisability of the option number to 200,000 shares per quarter. During the first quarter of 2010, the Company obtained its trading symbol and accordingly recorded an expense for consulting services of $64,000 in Q210-Y TD reflecting the structured vesting.

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2010		0	$	0.01		0.0	$	0
Issued		2,000,000	$	0.01		4.5		480,000
Exercised		—	$	—
Forfeited		—	$	—
Outstanding at June 30, 2010		2,000,000	$	0.01		4.5	$	480,000
Exercisable at June 30, 2010		266,667	$	0.01		4.5	$	664,000

Common Stock

During the third quarter of 2009, the Company issued 74,000 common shares to consultants and professional advisors for services. The shares were valued at $0.25 per share, consistent with the revised offering price of the PPM. The Company also issued 13,000 shares to certain “friends and family” of the company in acknowledgement of their assistance in starting the Company. These shares were offered at no cost and the Company has not assigned any value to the transactions.

During the fourth quarter of 2009, the Company issued 3,000,000 shares for the exclusive distribution rights in Brazil. The shares were valued at $0.25 per share, consistent with the revised offering price of the PPM. In addition, the Company issued 28,000 to certain investors, which it also valued at $0.25 per share, consistent with the revised offering price of the PPM.

Also during the fourth quarter of 2009, the Company repurchased and 5,000,000 shares from a founder of the Company for $0.015 or $75,000 as part of its effort to restructure the Company’s equity ownership. As part of this restructuring effort, the founders of the Company also surrendered 2,982,095 shares at a nominal value.

During the first quarter of 2010, the Company issued 1,112,000 shares to two investors in a private sale. The shares were priced at $0.18 per share. The Company received $140,000 in net proceeds after issuance costs of $60,000.

In addition, during the first quarter of 2010 the Company issued 25,000 shares for services, which it also valued at $0.18 per share, which resulted in recording an expense of $4,500.

During the second quarter of 2010, the Company issued 1,734,000 shares to an investor in a private sale. The shares were priced at $0.15 per share. The Company received $182,000 in net proceeds after issuance costs of $78,000.

15

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. – EQUITY (CONTINUED)

Preferred Stock

During the first quarter of 2009 three shareholders of the Company (which at such time constituted all of the shareholders of the Company) exchanged an aggregate of 10,000,000 shares of common stock for 10,000,000 shares of Series A Preferred Stock. As provided under Certificate of Designation for Series A Preferred Stock dated January 14, 2009, but filed in April 2009 and amended in September 2009, each share of Series A Preferred Stock is entitled to 2 votes per share and the Series A Preferred Stock votes together with the Company’s common stock, except as otherwise provided under Florida law.

NOTE 9. – INCOME TAXES

In January 2007, the Company elected to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379), wherein all earnings and losses of the Company are passed through to its shareholders and become taxable income or loss to them as individuals.

In January 2009, when the Company accepted the subscription for common shares from a foreign investor, the Company no longer qualified for its Subchapter S election.

The provision for income taxes for the six months ended June 30, 2010 and 2009 is summarized as follows:

	2010			2009
Current:
Federal	$	—		$	31,392
State		—			2,915
Deferred:
Federal		90,864			—
State		8,437			—
Increase (Decrease) in valuation allowance		(99,301	)		—
Total provision (benefit) for income taxes	$	—		$	34,307

The provision for income taxes for the six months ended June 30, 2010 was offset by available net operating loss carry-forwards. However, management expects those available credits to be exhausted during 2010.

The provision for income taxes for the six months ended June 30, 2010 and 2009 differs from the amount computed by applying the federal statutory rate to income (loss) before provision (benefit) for income taxes as follows:

	2010		2009
Expected provision(benefit) at statutory rate		35.0%		35.0%
State taxes		3.3%		3.3%
Valuation allowance for Net Loss		-38.3%
Total provision (benefit) for income taxes		0.0%		0.0%

16

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9. – INCOME TAXES (CONTINUED)

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 June 30, 2010 and December 31, 2009 are as follows:

	2010			2009
Deferred tax assets:
Net operating loss carry-forwards	$	21,653		$	120,954
		—			—
Total deferred tax assets		21,653			120,954
Valuation allowance		(21,653	)		(120,954	)
Net deferred tax assets	$	—		$	—

As of June 30, 2010 and December 31, 2009 the Company had a valuation allowance on its deferred tax assets of $21,653 and $120,954, which relates to net operating losses. The pro forma valuation allowance decreased $99,301 in the six months ended June 30, 2010. The decrease in Q210-YTD was attributable to accumulated net operating losses being offset by net income reported in six months ended June 30, 2010.

As of June 30, 2010 and December 31, 2009, the Company had net operating loss carry-forwards of $131,608 and $316,220, respectively. Unused net operating loss carry-forwards will expire at various dates beginning 2027.

As of June 30, 2010 and 2009, the Company had no unrecognized tax benefit and accordingly no related accrued interest or penalties. The Company is not under examination by either the US Federal or State of Florida tax authorities.

NOTE 10. – 2009 EQUITY INCENTIVE PLAN

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

1.

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

2.

provide additional incentives to Employees, Directors and Consultants, and

3.

promote the success of the Company and the Company's Affiliates.

Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights, time vested and/or performance vested Restricted Stock, Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.

Subject to the Plan – The initial maximum number of shares of Common Stock that may be issued under the Plan is 5,000,000 shares. No more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either, authorized and unissued shares or shares held in treasury.

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

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

17

DIVINE SKIN, INC. (dba DS LABORATORIES)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. – 2009 EQUITY INCENTIVE PLAN (CONTINUED)

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 11. - SIGNIFICANT CUSTOMERS

The Company’s product revenues represent primarily sales of Revita, Spectral DNC and NR008, which individually each exceeds 10% of total sales and collectively represent 59.7% of total sales.  Oligo DX, and Spectral DNC-L collectively account for another 14.9% of total sales. During Q210-YTD two customers generated 39.6% of the Company’s sales and 32.8% of the outstanding accounts receivable balance at June 30, 2010. These customers are distributors of the Company.

Sales to these customers during Q210-YTD and their accounts receivable at June 30, 2010 were:

Customer	Sales Amount		Percent		Accounts Receivable		Percent
A	$	507,882		21.1%	$	113,900		14.3%
B	$	446,877		18.5%	$	147,880		18.5%

Sales to these customers during Q209-YTD and their accounts receivable at June 30, 2009 were:

Customer	Sales Amount		Percent		Accounts Receivable		Percent
A	$	285,136		16.3%	$	1,812		.3%
B	$	423,385		24.2%	$	186,853		34.8%

NOTE 12. – SUBSEQUENT EVENTS

In accordance with the guidance offered in ASC Topic 855, formerly SFAS 165 –“Subsequent Events”, the Company has evaluated its activities from June 30, 2010 through August 13, 2010, the date the financial statements were issued, and determined that there were no reportable subsequent events.

18

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introductory Statements

Information included or incorporated by reference in this filing may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this filing generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

Overview

Divine Skin, Inc. is a Florida corporation organized on January 26, 2007. Divine Skin, Inc. and its subsidiaries (collectively, the “Company” or “Divine Skin”) develop, market and sell products for skin care and personal care needs. Through its predecessors, including Divine Skin, Inc. (a New York company), the Company has been developing and marketing skin care and personal care products for over ten years. In January 2007 the operations of Divine Skin, Inc. (a New York company), were terminated and its assets were distributed to its shareholders. Those assets and certain liabilities were used to capitalize Divine Skin, Inc. (a Florida corporation). The companies had common shareholders. The Company currently conducts business under the “Divine Skin” trade name and also under the “DS Laboratories” trade name.

Our shareholders also owned DS Laboratories, Inc. (a Florida company), which was formed in January 2007 to secure the DS Laboratories trade name and was essentially idle through 2007 and 2008. The issued and outstanding shares of DS Laboratories, Inc. (a Florida company) were transferred to the Company for nominal consideration.

In January 2009, the Company acquired 100% of the outstanding shares of Sigma Development and Holding Co., Inc. for a nominal amount. Sigma was founded by our Vice President’s father. Sigma was founded as an upscale brand addition to the Company’s product portfolio. Sigma operated as a related but separate entity until the acquisition. Subsequent to the acquisition, Sigma operates as a wholly owned subsidiary of the Company. We currently distribute hair growth products, facial moisturizers and anti-aging facial cleansers through Sigma. In March 2009, Polaris Labs, Inc. was founded as a wholly owned subsidiary of the Company. Polaris was founded for marketing purposes to distribute Polaris branded versions of the Company’s products through physicians and foreign distributors. We currently distribute hair care products through Polaris.

The Company has grown steadily since inception with a network of specialty retailers across North America and distributors throughout Europe, Asia and South America. Divine Skin researches and formulates its own products. We currently offer skin care, personal care and hair care products.

We formulate, market and sell these products through specialty retailers, spas, salons and other distributors. Our products are produced through various third party manufacturers on an order-by-order basis.

Results of Operations for the Three Months Ended June 30, 2010 (Q210-QTR), As Compared to the Three Months Ended June 30, 2009 (Q209-QTR)

Revenues - Total revenues increased $573,403 or 78.9%, to $1,300,197 (Q210-QTR) from $726,794 (Q209-QTR). The Company’s product revenues represent primarily sales of Revita, Spectral DNC and NR008, which together represent 64.1% of total sales and Oligo DX and Spectral DNC-L, which together account for another 13.9% of total sales.

19

Revenues increased as a result of continuing efforts to attract new customers, expand its distribution channels and expand the product offering. The Company conducts a significant portion of business with two distributors, Cellway International, Inc. and WR Group, Inc., which total approximately 43.9% of Q210-QTR revenues.

Cost of Goods Sold- Total cost of goods sold increased $125,566 or 61.2%, to $330,791 (Q210-QTR) from $205,225 (Q209-QTR). The increase is attributable to unexpected personnel turnover in our production, warehousing and fulfillment functions because of which, we incurred certain inefficiencies and increased costs in these functions.

Selling and Marketing Costs - Selling and marketing costs decreased $92,273 or 33.5%, to $183,134 (Q210-QTR) from $275,407 (Q209-QTR). The decrease is primarily due to the following:

–

Decreases of:

·

$77,218 for marketing and promotion costs, which we curtailed to focus on expanding our distribution channels and preparing new products for market;

·

$50,562 for warehousing expenses due to a reduction in outsourced distribution and relocation to a more functional facility;

·

$7,011 for travel and entertainment as a result of redirecting efforts to distributors; and

·

$8,691 for other selling and marketing costs, net

–

that were partially offset by increases of:

·

$41,445 for commissions and consulting expenses due increased sales force and expanded outsourced distribution; and

·

$9,764 for product development, as a result of redirecting resources to new products.

General and Administrative Costs - General and administrative costs increased $116,743 or 27.2%, to $555,259 (Q210-QTR) from $436,516 (Q209-QTR). The increase is primarily due to the following:

–

Increases of:

·

$88,245 professional fees which includes increased legal costs and accounting costs associated with SEC regulatory filings, plus outsourcing certain administrative services to supplement limited staffing resources;

·

$32,233 for personnel costs due to increased staffing and executive compensation;

$17,724 for amortization primarily related to the financial services option granted; and

·

$3,437 for other general and administrative expenses, including rent and utilities, net

–

that were partially offset by decreases of:

·

$24,896 in bad debts.

Other Income (Expense) - Other income (expense) increased $26,862 to $1,409 (Q210-QTR) from ($25,453) (Q209-QTR). The increase was primarily the result of one time expenses incurred in Q209-QTR that did not repeat in Q210-QTR.

Net Income (Loss) – As a result of the various fluctuations discussed above, Net Income (Loss) increased $394,623 or 243.3% to $232,422 net income (Q210-QTR) from $162,201 net loss (Q209-QTR).

Results of Operations for the Six Months Ended June 30, 2010 (Q210-YTD) As Compared To the Six Months Ended June 30, 2009 (Q209-YTD)

20

Revenues - Total revenues increased $601,573 or 35.5%, to $2,295,270 (Q210-YTD) from $1,693,695 (Q209-YTD). The Company’s product revenues represent primarily sales of Revita, Spectral DNC and NR008, which together represent 59.7% of total sales and Oligo DX and Spectral DNC-L, which together account for another 14.9% of total sales.

Revenues have increased as a result of the Company’s efforts to expand its distribution. The Company conducts a significant portion of business with two distributors, Cellway International, Inc. and WR Group, Inc., which total approximately 39.6% of Q210-YTD revenues.

Cost of Goods Sold- Total cost of goods sold increased $279,699 or 72.8%, to $663,769 (Q210-YTD) from $384,070 (Q209-YTD). Approximately $135,618 of the increase is attributable to the increase in sales volume based on Q209-YTD gross profit percentage. The remaining $144,081 of the increase is attributable in material cost fluctuations and production inefficiencies due to staffing instability.

Selling and Marketing Costs - Selling and marketing costs decreased $9,157 or 2.1%, to $417,676 (Q210-YTD) from $426,833 (Q209-YTD). The decrease was primarily due to the following:

–

Decreases of:

·

$42,430 for warehousing expenses due to a reduction in outsourced distribution and relocation to a more functional facility;

·

$23,975 for marketing and promotion costs, which we curtailed to focus on expanding our distribution channels and preparing new products for market;

·

$16,083 for travel and entertainment as a result of redirecting efforts to distributors;

·

$18,837 for call center operations which were discontinued, and

·

$1,016 for other selling and marketing costs, net,

–

that were partially offset by increases of:

·

$93,184 for commissions and consulting expenses due to expanding the sales force and outsourced distribution.

General and Administrative Costs - General and administrative costs increased $228,783 or 29.2%, to $1,003,286 (Q210-YTD) from $776,503 (Q209-YTD). The increase is primarily due to the following:

–

Increases of:

·

$111,614 professional fees which includes increased legal costs and accounting costs associated with SEC regulatory filings, plus outsourcing certain administrative services to supplement limited staffing resources;

·

$109,600 for personnel costs due to increased staffing and compensation paid as a result of the growth of our business and becoming a public company;

·

$35,350 for amortization primarily related to the financial services option granted; and

·

$13,301 for office supplies.

–

that were partially offset by decreases of:

·

$28,045 for bad debt; and

·

$13,735 for repairs and maintenance completed during 2009.

Other Income (Expense) - Other income (expense) increased $68,270 or 355.6% to $49,073 (Q210-YTD) from ($19,198) (Q209-YTD). The increase was primarily a result of net settlements of various supplier related claims and litigations for less than the original claim, net of various other nominal expenses which individually are not significant.

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Net Income (Loss) – As a result of the various fluctuations discussed above, Net Income (Loss) increased $204,227 or 368.7% to $259,612 net income (Q210-YTD) from $55,385 net income (Q209-YTD). The increase in net income is primarily a result of expanded sales to additional customers.

Liquidity and Capital Resources

We had working capital of $1,471,730 at June 30, 2010. 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. Our losses from 2008 and 2009 operations along with the increased costs and working capital required to grow our business were satisfied through the initial contribution by our founders in 2007 and through the sale of common shares under private placements which we began in early 2009.

Based on our current plans for the next 12 months, we anticipate that additional revenues earned from our expanded product line and broadened distribution channels will be the primary organic source of funds for future operating activities in 2010. To fund continued expansion of our product line and extend our reach to broader markets, including foreign markets, we may rely on bank borrowing, if available, and the private placement of securities.

During the six months ended June 30, 2010, the Company accepted $460,000 from three foreign investors to subscribe for an aggregate of 2,846,000 shares of our common shares under a private offerings pursuant to Regulation S under the Securities Act of 1933, as amended. The offerings provided for issuance costs of 30% which amounted to $138,000 in relation to the offerings. As a result, the Company netted $322,000 in proceeds from the subscription.

Financial Position

Total Assets - Our total assets increased $373,462 or 15.3% to $2,817,885 as of June 30, 2010 from $2,444,423 as of December 31, 2009 primarily as a result of a net increase in current assets of $400,419; which was partially offset by a net decrease in furniture and equipment of $2,500, primarily associated with depreciation; and a net decrease in other assets of $29,457 primarily associated with amortizing our prepaid Brazilian distribution agreement.

Current Assets - The net increase in current assets was associated with a $408,316 increase in inventory levels and a $108,936 increase in accounts receivable, which was partially offset by a $116,673 decrease in cash.

Inventory - Inventory levels increased 59%, in part as a result of our change in production methodology to stock raw materials to support increased batch production runs from 5,000 units to 10,000 and 20,000 units in an effort to reduce production costs and to support the in-house formulation of our finished product.

The increased inventory level on hand at June 30, 2010, represents approximately 84.9% of annualized COGS or a 10 month supply based on the annualized sell through rate achieved for the six months ended June 30, 2010. Management has begun to increase its stocking levels of raw materials as a result of the addition of a significant customer who operates a chain of salons. We are anticipating increasing sales, which we expect to materialize prior to the end of 2010. Management also understands that these inventory decisions result in an inventory turnover rate of 1.2 times. Management intends to improve this turnover rate in the future and its ultimate goal remains to achieve at least a 3 times inventory turnover rate, once it has satisfactorily explored alternative production methodologies and established a profitable and sustainable production cost structure. Management has no projections as to when its inventory turnover rate goal may be achieved.

As part of its decision, management has considered the potential impairment costs and storage costs associated with slow turning inventory. Before embarking on these decisions management consulted its chemist and determined that most of its materials and components had a shelf life of 3-5 years. Even its active ingredients, whose normal shelf life is a relatively short 6 months, is stabilized and extended, when mixed into finished product. Accordingly, management has concluded that no impairment reserves are required at June 30, 2010.

Accounts Receivable – Our accounts receivable at June 30, 2010 were $798,420. This represents a 15.8% increase in the accounts receivable balance at December 31, 2009. The increase is the result of expanded sales and customer base. Management believes that its current receivables are collectable and have adequately reserved those in doubt.

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Cash– The decrease in cash is explained more fully by the following discussion of cash flows.

Cash Flows for the Three months June 30, 2010

Cash Flows from Operating Activities

Operating activities used net cash for the six months ended June 30, 2010 of $422,116. Net cash used reflects cash provided by adjusted net income for the period ended of approximately $420,822, as adjusted for various items which impact net income but do not impact cash during the period, such as depreciation and amortization. Net cash used also reflects $842,938 of cash used to support net changes in working capital items, which included:

·

a $139,228 increase in accounts receivable as a result of expanded sales;

·

a $408,316 increase in inventory costs due to the increase in raw materials and bulk materials for current production;

·

a $313,231 decrease in accounts payable as a result of satisfying certain outstanding vendor balances, and

·

a $17,837 net increase in other current payables and decrease in other current receivables.

Cash Flows used in Investing Activities

Our investing activities used $16,557 in net cash during the six months ended June 30, 2010. Net cash used is composed of additional deposits required on for new leased facilities and the acquisition of new inventory management software.

Cash Flows from Financing Activities

Our financing activities provided net cash of approximately $322,000 for the six months ended June 30, 2010. We raised approximately $460,000 through sales of our common stock at $0.18 - $0.15 per share, net of $138,000 in issuance costs.

Recent Accounting Pronouncements

See footnotes to the financial statements provided herein.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to Smaller Reporting Company.

ITEM 4T.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Principal Executive Officer/Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company’s disclosure control objectives. The Company’s Principal Executive Officer/Principal Accounting Officer has concluded that the Company’s disclosure controls and procedures are effective at this reasonable assurance level as of the end of period covered by this report.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected or are likely to materially affect the Company’s internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not Applicable to Smaller Reporting Company.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2010, the Company issued an aggregate of 1,112,000 shares of common stock to two foreign investors in consideration of gross proceeds of $200,000 under a private placement pursuant to Regulation S under the Securities Act of 1933, as amended (the “Act”). The Company paid fees and commissions of approximately $60,000. As a result, the Company netted $140,000 in proceeds from the subscription. The certificates representing the shares contain legends restricting transferability absent registration or applicable exemption. In addition, the Company issued a warrant to purchase 111,200 shares of common stock exercisable at $0.01 per share to a consultant that assisted in the offering.

During the three months ended March 31, 2010, the Company issued 25,000 shares of its common stock to a service provider in consideration of sales training services. The shares were issued pursuant to the exemption from registration provided under Section 4(2) of the Act. The service provider had access to information concerning the Company and an opportunity to ask questions about the Company. The certificate representing the shares contains a legend restricting its transferability absent registration or applicable exemption.

During the six months ended June 30, 2010, the Company issued an aggregate of 1,734,000 shares of common stock to two foreign investors in consideration of gross proceeds of $260,000 under a private placement pursuant to Regulation S under the Act. The Company paid fees and commissions of approximately $78,000. As a result, the Company netted $182,000 in proceeds from the subscription. The certificates representing the shares contain legends restricting transferability absent registration or applicable exemption. In addition, the Company issued a warrant to purchase 173,400 shares of common stock exercisable at $0.01 per share to a consultant that assisted in the offering.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

(REMOVED)

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

EXHIBIT NO.	DESCRIPTION
3.1	Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated January 13, 2007(1)
3.2	Amendment to Amended and Restated Articles of Incorporation of Divine Skin, Inc., dated January 14, 2009(2)
3.3	Bylaws of Divine Skin, Inc.(1)
10.1	2009 Divine Skin, Inc. Equity Incentive Plan(1)
10.2	Kane Concourse Lease Agreement(1)
10.2.1	Kane Concourse Lease Termination Agreement(1)
10.2.2	Meridian Center Lease Agreement, as amended(1)
10.3	Consulting Agreement(1)
10.4	Form of Exclusive Distribution Agreement(1)
10.5	Amendment to Gamma Investors Exclusive Distribution Agreement(3)
10.6	Form of Regulation S Subscription Agreement(3)
10.7	Form of Section 4(2) Subscription Agreement(3)
10.8	Form of Services Agreement(3)
21.1	List of subsidiaries of the Company(1)
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Provided herewith)
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Provided herewith)
32.1	Certification Pursuant to Section 1350 (Provided herewith)
32.2	Certification Pursuant to Section 1350 (Provided herewith)
99.1	Code of Ethics(4)

———————

(1)

Previously filed on Form 10 registration statement, as amended.

(2)

Previously filed on Form 10-Q for period ended September 30, 2010.

(3)

Previously filed on Form S-1 registration statement, as amended (333-163449).

(4)

Previously filed on Form 10-K Annual Report for the year ended December 31, 2009.

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SIGNATURES

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

Date:   August 15, 2010
	DIVINE SKIN, INC.
	By:	/s/ Daniel Khesin
		Daniel Khesin
		President, Chief Executive Officer,
		Chief Financial Officer/
		Principal Accounting Officer

26