DS Healthcare 10Q 2014 Q3 Quarterly report

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

FORM 10-Q

(MARK ONE)

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

For the quarterly period endedSeptember 30, 2014

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

For the transition period from _______ to _______.

Commission File No. 001-35763

DS HEALTHCARE GROUP, INC.

(Exact name of registrant as specified in its charter)


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

1601 Green Road, Deerfield Beach, Florida	33064
(Address of Principal Executive Offices)	(Zip Code)

(888) 404-7770
(Issuer’s Telephone Number, Including Area Code) ___________________________________________ (Former Name, if Changed Since Last Report)

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

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

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

Large accelerated filer¨

Accelerated filer¨

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

Smaller reporting companyþ

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

There were 16,142,268 shares of common stock outstanding as of November 12, 2014.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheets


	September 30,			December 31,
	2014			2013
	(Unaudited)
ASSETS

Current Assets
Cash	$	493,947		$	2,872,946
Accounts receivable, net		1,923,329			2,229,329
Inventories		3,605,081			2,702,579
Prepaid expenses and other current assets		276,367			289,885
Total Current Assets		6,298,724			8,094,739

Furniture and Equipment, net		245,694			206,958
Intangible Assets, net		1,202,006			1,346,389
Other Assets		136,485			66,506

TOTAL ASSETS	$	7,882,909		$	9,714,592

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	1,261,883		$	2,230,723
Accrued expenses		982,841			945,949
Credit facility		-			582,383
Other current liabilities		747,259			286,282
Total Current Liabilities		2,991,983			4,045,337

Long Term Debt, net of current portion		27,918			36,425

TOTAL LIABILITIES		3,019,901			4,081,762

COMMITMENTS AND CONTINGENCIES

Shareholders' Equity
Preferred stock, $0.001 par value, 30 million shares authorized: 0 shares issued and outstanding at September 30, 2014 and December 31, 2013		—			—
Common stock, $0.001 par value, 300 million shares authorized: 16,142,268 and 15,843,005 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		16,142			15,843
Additional paid-in-capital		14,776,754			14,163,595
Stock subscription		(2,500	)		(194,500	)
Accumulated deficit		(9,841,037	)		(8,307,420	)
Accumulated comprehensive income		(47,921	)		(12,462	)
Total Shareholders' Equity		4,901,438			5,665,056
Non-Controlling Interest		(38,430	)		(32,226	)

Total Shareholders' Equity		4,863,008			5,632,830

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	7,882,909		$	9,714,592

See accompanying notes to condensed consolidated financial statements

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

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013

Net Revenue	$	3,278,117		$	3,200,189		$	9,707,504		$	10,593,035

Cost of Goods Sold		813,671			1,437,763			3,819,078			5,454,840

Gross Profit		2,464,446			1,762,426			5,888,426			5,138,195

Operating Costs and Expenses:
Selling and marketing
Commissions and consulting		320,594			463,105			1,160,930			948,146
Other selling and marketing expenses		591,751			718,792			1,915,675			1,885,116
		912,345			1,181,897			3,076,605			2,833,262
General and administrative
Salary and personnel costs		610,998			488,113			1,752,738			1,446,789
Professional fees and consulting costs		592,444			419,180			1,650,219			1,157,566
Other general and administrative expenses		465,365			455,048			938,330			1,636,220
		1,668,807			1,362,341			4,341,287			4,240,575

Total operating costs and expenses		2,581,152			2,544,238			7,417,892			7,073,837

Operating Loss		(116,706	)		(781,812	)		(1,529,466	)		(1,935,642	)

Other Income (Expense)
Loss on conversion of debt		—			(289,600	)		—			(289,600	)
Interest expense		(8,888	)		(23,327	)		(58,876	)		(84,888	)
Other		57,766			23,357			66,715			24,018

Total other income (expense)		48,878			(289,570	)		7,839			(350,470	)

Loss Before Income Taxes		(67,828	)		(1,071,382	)		(1,521,627	)		(2,286,112	)

Income Tax (Benefit) Expense		(13,332	)		(16,571	)		18,194			(5,683	)

Net Loss		(54,496	)		(1,054,811	)		(1,539,821	)		(2,280,429	)

Net Loss Attributable to Non-Controlling Interest		—			(1,405	)		(6,204	)		(11,966	)

Net Loss Attributable to Common Shareholders	$	(54,496	)	$	(1,053,406	)	$	(1,533,617	)	$	(2,268,463	)

Basic and Diluted Earnings per Share:
Weighted average shares outstanding		16,091,202			12,557,240			16,035,509			12,303,089
Loss per share	$	0.00		$	(0.08	)	$	(0.10	)	$	(0.19	)

Other Comprehensive Loss:
Foreign currency translation adjustment	$	(20,567	)	$	(18,754	)	$	(35,459	)	$	(13,167	)
Comprehensive loss	$	(75,063	)	$	(1,072,160	)	$	(1,569,076	)	$	(2,281,630	)

See accompanying notes to condensed consolidated financial statements

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

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended September 30,
	2014			2013
Cash Flows from Operating Activities:
Net Loss	$	(1,539,821	)	$	(2,280,429	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		217,426			283,730
Amortization of deferred issuance costs		—			47,908
Loss on disposal of fixed assets		7,305			5,126
(Recovery) provision for bad debts		(60,303	)		319,756
(Recovery) provision for obsolete inventory		(214,775	)		12,527
Stock issued for services		117,173			467,345
Loss on extinguishment of debt		—			289,600
Changes in operating assets and liabilities:
Accounts receivable		366,303			3,622
Inventories		(687,727	)		879,024
Prepaid expenses and other current assets		322,405			(148,950	)
Accounts payable		(968,840	)		(39,913	)
Accrued expenses		176,452			(263,330	)
Other current liabilities		460,977			73,409
Net cash used in operating activities		(1,803,425	)		(350,575	)

Cash Flows from Investing Activities:
Purchase of furniture and equipment		(126,506	)		(41,018	)
Purchase of injection molds		—			(35,139	)
Proceeds from disposal of fixed asset		—			20,039
Purchase of brand rights related parties		—			(4,307	)
Security deposits		(12,141	)		10,801
Purchase of Mexican customer list		—			19,727
Net cash used in investing activities		(138,647	)		(29,897	)

Cash Flows from Financing Activities:
Net (repayments) proceeds of credit facility		(582,383	)		127,430
Proceeds of shareholders' loans		—			310,000
Repayment of loans and notes		(8,507	)		(95,335	)
Repayments of related parties		—			17,973
Proceeds from sale of stock subscription		—			10,000
Proceeds from sale of common stock		192,000			406,300
Less issuance cost		(10,000	)		(31,260	)
Net cash (used in) provided by financing activities		(408,890	)		745,108

Effect of exchange rate changes on cash		(28,037	)		(13,167	)

(Decrease) increase in cash		(2,378,999	)		351,469
Cash, Beginning of Period		2,872,946			412,488

Cash, End of Period	$	493,947		$	763,957

Supplemental Information:
Cash paid for interest	$	49,988		$	—
Cash paid for taxes	$	—		$	—
Supplemental Noncash Investing and Financing Activities
Stock issued to satisfy accrual	$	5,000			—
Conversion of shareholder loans to equity	$	—		$	843,600
Conversion of preferred shares to common shares	$	—		$	5,500

See accompanying notes to condensed consolidated financial statements

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

Condensed Consolidated Statements of Changes in Equity

For the Period From January 1, 2014 to September 30, 2014

Additional

Subscription/

Other

Total

Non-

Preferred Stock

Common Stock

Paid In

Stock

Accumulated

Comprehensive

Shareholders'

Controlling

Total

Shares

Amount

Shares

Amount

Capital

Receivable

Deficit

Income

Equity

Interest

Equity

January 1, 2014

—

15,843,005

15,843

14,163,595

(194,500

)

(8,307,420

)

(12,462

)

5,665,056

(32,226

)

5,632,830

Shares Issued:

Sold to private investors

5,000

4,995

5,000

Private investment in public equity

192,000

Less: Issuance costs

(10,000

)

(10,000

)

(10,000

)

For services

Investor relations

48,000

106,512

106,560

Settlement of claim

74,513

125,579

125,653

Distributor award

8,000

19,512

19,520

Consulting

160,000

160

358,240

358,400

Board of Directors

3,750

8,321

8,325

Other Comprehensive Income

(35,459

)

(35,459

)

(35,459

)

2014 Net Loss (9 months)

(1,533,617

)

(1,533,617

)

(6,204

)

(1,539,821

)

September 30, 2014 (Unaudited)

—

16,142,268

16,142

14,776,754

(2,500

)

(9,841,037

)

(47,921

)

4,901,438

(38,430

)

4,863,008

See accompanying notes to condensed consolidated financial statements

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

(unaudited)

NOTE 1. – ORGANIZATION AND NATURE OF BUSINESS

Terms and Definitions


	ASC	Accounting Standards Codification
	ASU	Accounting Standards Update
	FASB	Financial Accounting Standards Board
	FIFO	First-in, First-out
	US GAAP	Accounting principles generally accepted in the United States of America
	SEC	Securities and Exchange Commission
	2013-QTR	Three months ended September 30, 2013
	2013-YTD	Nine months ended September 30, 2013
	2014-QTR	Three months ended September 30, 2014
	2014-YTD	Nine months ended September 30, 2014
	VIE	Variable Interest Entity

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. The Company has grown steadily over the last few years with 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 condensed consolidated financial statements are prepared using the accrual basis of accounting where revenues and expenses are recognized in the period in which they were incurred. The basis of accounting conforms to US GAAP.

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

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

(unaudited)

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

Interim Condensed Consolidated Financial Statements

The interim condensed consolidated financial statements presented herein have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. The interim condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements and related disclosures included in the Company’s Annual Report on form 10-K, filed with the SEC on April 4, 2014. In the opinion of management, all adjustments (consisting only of those of a normal recurring nature) which are necessary to provide a fair presentation of financial position as of September 30, 2014 and the related operating results and cash flows for the interim periods presented have been made. The results of operations for the periods presented are not necessarily indicative of the results to be expected for future periods or for the year ending December 31, 2014.

Use of Estimates

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


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

Cash

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

Accounts Receivable

Accounts receivable are reported at their net realizable value. The Company establishes an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. The Company also provides for allowances against accounts receivables for product returns and cooperative advertising allowances. At September 30, 2014 and December 31, 2013, the allowance for uncollectable accounts was $245,011 and $305,314, respectively, $210,000 at both dates for defectives and product returns and $60,000 at both dates for advertising credits.

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

(unaudited)

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

Inventories

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

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 Company recorded $73,837 and $77,049 in depreciation expense during 2014-YTD and 2013-YTD, respectively. Accumulated depreciation was $300,604 and $238,051 at September 30, 2014 and December 31, 2013, 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.

Revenue Recognition

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. Shipping and handling costs are included in cost of goods sold.

Research and Development

The Company currently maintains a functional laboratory employing a full time chemist, a part time chemist/consultant and a lab technician that identify new technology, test product alternatives and improve existing formulations. In addition, our founder and CEO devotes a substantial portion of his time in identifying new technologies and formulations to develop new products and improve existing products with the newest technology available. Such activities are expensed in the year incurred. Such costs include laboratory supplies, salaries, materials and consultant fees. These costs are classified as product development, salaries, selling, general and administrative expenses in the condensed consolidated statements of operations, and amounted to $51,468 and $60,339 for 2014-QTR and 2013-QTR, respectively and $209,445 and $137,039 for 2014-YTD and 2013-YTD, 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.

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

(unaudited)

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

Subsequent Events

Management has evaluated subsequent events or transactions occurring through the date the financial statements were issued. Management concluded that no additional subsequent events required disclosure in these condensed consolidated financial statements except as disclosed.

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 entity operating outside of the United States 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.

Earnings Per Share

Potentially dilutive securities are excluded from the computation of diluted net loss per share for all of the periods presented in the accompanying condensed consolidated statements of operations because the reported net loss in each of these periods results in their inclusion being antidilutive. Antidilutive securities, which consist of stock options and warrants that are not included in the diluted net loss per share calculation, consisted of an aggregate of 286,526 shares as of September 30, 2014 and 2013.

NOTE 3. – LIQUIDITY and GOING CONCERN

We have sustained operational losses since our inception. At September 30, 2014, we had an accumulated deficit of $9,841,037. 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.

As of September 30, 2014, we had $493,947 in cash. While we have historically financed our operations and growth primarily through the successful issuance and sale of shares of our common stock, a line of credit and the issuance of promissory notes, the Company has started several new revenue initiatives creating additional revenue streams for the Company. Some of these initiatives include: establishing an online store (Shop.DSLaboratories.com) which became operational in the third quarter of 2014 generating $58,504 in net revenueand establishing a hair treatment clinic which is scheduled to open late November 2014. We are also renegotiating our arrangements for providing a private label product to a Fortune 500 healthcare companyand have taken steps to increase our domestic and international presence. Although we cannot predict our success with these products or projects, 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.
·	We completed an operational budget for 2014 that sets changes in our processes to focus on profitability in fourth quarters of 2014. We are also implementing a feedback process with improved interdepartmental communication.

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

(unaudited)

NOTE 3. – LIQUIDITY and GOING CONCERN (Continued)

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

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS

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 issubstantial doubt about the entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments define thatsubstantial 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 condensed 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 condensed consolidated financial position and results of operations.

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

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

(unaudited)

NOTE 4. – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

In March 2013, FASB issued ASU 2013-05, “Foreign Currency Matters: Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” an amendment which allows an entity to release cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This is effective for fiscal years and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements or related disclosures.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,”. The amendments in this update require that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except under a few limited circumstances. The amendments in this update do not require new recurring disclosures. This new guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s condensed consolidated financial statements.

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

NOTE 5. – INVENTORIES

Significant components of inventory at September 30, 2014 and December 31, 2013 consist primarily of:


	2014			2013

Bulk product and raw materials	$	2,604,956		$	1,930,848
Work in process		84,198			192,319
Merchandise inventory		1,123,945			965,127
Inventory in transit		126,927			164,005
Less: Allowance		(334,945	)		(549,720	)
	$	3,605,081		$	2,702,579

Management evaluated the inventory at September 30, 2014 and December 31, 2013 and reserved $334,945 and $549,720, 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.

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

(unaudited)

NOTE 6. – INTANGIBLE ASSETS

Significant components of intangible assets at September 30, 2014 and December 31, 2013 consist of:


	2014			2013
Distribution rights in Brazil	$	750,000		$	750,000
Less: Accumulated amortization		(375,000	)		(318,750	)
Net distribution rights		375,000			431,250

Pure Guild brand rights		159,086			159,086
Less: Accumulated amortization		(103,657	)		(92,570	)
Net brand rights		55,429			66,516

DS Mexico customer list		932,000			932,000
Less: Accumulated amortization		(194,867	)		(119,662	)
Net customer list		737,133			812,338

Goodwill		34,444			36,285
	$	1,202,006		$	1,346,389

Brazilian distribution rights – During 2009, the Company issued 300,000 shares of common stock to a Brazilian distributor in exchange for 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. $18,750 was amortized during both the three months ending September 30, 2014 and 2013, respectively. $56,250 was amortized during both the nine months ending September 30, 2014 and 2013, respectively.

Pure Guild brand rights – During the 3rd quarter of 2009, we entered into an agreement with a customer/distributor to develop a private label brand of premium products and associated packaging materials. The Pure Guild brand of products was the result. As part of this project we obtained a 50% interest in the Pure Guild brand and the permanent exclusive rights to manufacture the Pure Guild products. In exchange for these rights, we provided $106,666 of product representing approximately 70% the initial stocking order. These rights were being amortized over 5 years, representing the basic term of the supplier agreement.

During the second quarter of 2012, we acquired the remaining 50% ownership of the Pure Guild brand from our customer/distributor in exchange for release from the exclusive supplier agreement so that we may pursue promotion of the brand through our existing distributor network. As a convenience, we also accepted return of their remaining Pure Guild inventory, which amounted to $50,000, based on the original sales price. Because we have begun to revitalize the brands position in the market, we will modify the amortization term to appropriately reflect the remaining unamortized brand rights combined with the additional brand rights acquired, to 6 years. $3,695 has been amortized during both the three months ending September 30, 2014 and 2013, respectively. $11,087 has been amortized during both the nine months ending September 30, 2014 and 2013, respectively.

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. Accordingly, the Company recognized $25,418 and $25,417 of amortization expense in the three months ended September 30, 2014 and 2013, respectively. $75,205 and $73,558 of amortization expense in the nine months ended September 30, 2014 and 2013, respectively.

Goodwill– Also 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 asset is not being amortized; however the Company will access the asset for impairment annually. At September 30, 2014, no impairment was considered necessary.

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

(unaudited)

NOTE 6. – INTANGIBLE ASSETS (Continued)

The following table represents the amortized cost of the various assets over the remaining years; the weighted average remaining period is 6.24 years.


	2014		2015		2016		2017		Beyond		Total
Asset:
Brazil distribution rights	$	18,750	$	75,000	$	75,000	$	75,000	$	131,250	$	375,000
Pure Guild brand rights		3,695		14,780		14,780		14,780		7,394		55,429
Mexican Customer list		25,875		103,500		103,500		103,500		400,758		737,133
	$	48,320	$	193,280	$	193,280	$	193,280	$	539,402	$	1,167,562

NOTE 7. – ACCRUED EXPENSES

Accrued expenses at September 30, 2014 and December 31, 2013 consist of:


	2014		2013
Advertising and marketing	$	—	$	12,264
Commissions		252,976		261,151
Deferred commissions		52,837		—
Director services		15,000		18,750
Facilities		4,120		12,535
Fees / interest		—		21,003
Investor relations		557,066		405,703
Legal		27,480		—
Production materials		50,000		144,543
Personnel		5,483		70,000
Warehouse		17,879		—
	$	982,841	$	945,949

Investor relations – The reported amount is related to various agreements, dating back to August 2013, to perform investor relations services. The services are payable in shares of our common stock, valued based on the day the services were deemed completed and the right to receive shares were earned. The obligation may be settled in cash or the issuance of 342,154 shares of our common stock, at the Company’s discretion.

NOTE 8. – OTHER CURRENT LIABILITIES

Other current liabilities at September 30, 2014 and December 31, 2013 consist of:


	2014		2013
Customer deposits	$	112,227	$	29,959
Credit cards		205,271		47,597
Marketing and promotional programs		146,588		—
VAT Taxes payable		126,100		142,848
Current portion of long term debt		11,260		10,770
Insurance premium financing		—		4,770
Vendor financing		25,174		50,338
Warehouse wages		16,873		—
Advance for vehicle purchases		19,112		—
Promotional gift cards		1,859		—
Other current liabilities		82,795		—
	$	747,259	$	286,282

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

(unaudited)

NOTE 9. – DEBT FINANCING

Credit Facility – During 2013 and through August 15, 2014, the Company was party to a credit facility which provided for asset based lending collateralized by all assets of the Company. The credit facility provided for advances based on 70% of qualified accounts receivable and 40% of eligible finished goods inventory and provided for interest and bank fees, which aggregated to 8% (prime plus 3% plus 1.75% asset monitoring fees and other fees) per annum. The credit facility was paid in full on August 15, 2014.

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

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


	2014		2015		2016		2017		Total
Current Portion of Long Term Debt	$	2,753	$	8,507	$	—	$	—	$	11,260
Long Term Debt		—		2,922		12,127		12,869		27,918
Total	$	2,753	$	11,429	$	12,127	$	12,869	$	39,178

NOTE 10. – COMMITMENTS AND CONTINGENCIES

During the nine months ended September 30, 2014 and the year ended December 31, 2013, the Company operated under several material agreements as listed below:

Lease for office and production facilities –


	·	The Company is party to a lease for a total of 1,875 square feet in sales facilities located in Ashville, North Carolina. The leases provide for monthly rent of $4,725 throughout the lease term which both expire on December 31, 2015. Effective September 30, 2014 the Company has relocated this office to its Florida headquarters and is in negotiations with the landlord to formalize the lease termination.

	·	The Company was party to a lease for 50,000 square feet in warehouse and corporate office space located in Deerfield Beach, Florida, which expired in July 2014. On June 25, 2014, commencing August 1, 2014, the Company completed negotiations for a new lease for the same Deerfield Beach location. The terms of the new lease provide for $6.00 per square foot or $24,720 per month base rent plus $10,918 monthly in operating expenses and terminates on July 31, 2019. The lease provides for annual increases in the monthly base rent of $0.24- $0.27 per square foot.

The Company’s Mexican facility leases 246 square feet of office space and 1,230 square feet of warehouse Mexico City, Mexico, which expires in July 2015. The leases provide for monthly rent of $1,408.

The Company accounts for its facility leases using the straight-line method and incurred $74,605 and $38,226 in total rent expense in the three months ended September 30, 2014 and 2013, respectively. The Company incurred $156,393 and $117,702 in total rent expense in the nine months ended September 30, 2014 and 2013, respectively.

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

(unaudited)

NOTE 10. – COMMITMENTS AND CONTINGENCIES (Continued)

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


	2014		2015		2016		2017		2018		Beyond		Total
Facility Leases
Deerfield, FL (HQ/Production)	$	106,914	$	432,600	$	444,672	$	457,238	$	470,298	$	278,882	$	2,190,604
Ashville, NC (Sales)		28,347		56,695		—		—		—		—		85,042
Mexico City, Mexico (Sales)		4,226		5,588		—		—		—		—		9,814
	$	139,487	$	494,883	$	444,672	$	457,238	$	470,298	$	278,882	$	2,285,460

Pending and threatened litigation –

We and our chief executive officer, individually, were named in a lawsuit brought in the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida in 2012 by a former contractor claiming wrongful termination. Plaintiff’s complaint alleges $85,000 in back salary, performance bonus and a 40,000 share grant. The claim was settled in April 2014 for 21,513 shares of common stock with a fair value of $40,000 on the date of the agreement. See Note 11.

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

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

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

Purchase commitments

In order to secure an adequate supply of raw materials, the Company executes purchase orders to its suppliers as evidence of its intent to purchase materials. Purchase orders outstanding at September 30, 2014 totaled $1,234,788.

Contract contingencies

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

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

(unaudited)

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 closing price of the stock on the date immediately preceding such issuance.

Under a Securities Purchase Agreement dated December 24, 2013, as amended (the “Securities Purchase Agreement”), the Company sold 1,965,000 shares under a private placement, to a series of investors under a Securities Purchase Agreement at $1.60 per share for a total of $3,144,000. Fees were paid to a registered broker-dealer and legal counsel resulting in issuance costs of $151,051. Under the Securities Purchase Agreement, the Company has agreed to restrict the issuance of shares of Common Stock or common stock equivalents for a period of approximately nine months from the closing date, subject to certain exceptions. In addition, subject to certain exceptions, if during a period of twelve months from the closing date of the Securities Purchase Agreement, the Company issues additional shares of Common Stock or common stock equivalents (the “Additional Shares”) at a purchase, exercise or conversion price less than $1.60 (such price subject to adjustment for splits, recapitalizations and reorganizations), then the Company shall issue additional shares of Common Stock to the purchasers so that the effective purchase price per share paid for the Common Stock shall be the same per share purchase, exercise or conversion price of the Additional Shares; provided, however, the Additional Shares, when aggregated with all issuances under the Securities Purchase Agreement, shall not exceed 19.99% of the issued and outstanding Common Stock of the Company immediately prior to the closing date of the Securities Purchase Agreement.

During the first quarter of 2014, the Company issued 8,000 shares of common stock to distributors for achieving sales goals valued at $2.44 per share, which resulted in a sales allowance of $19,520. We also issued 208,000 shares of common stock in aggregate to two investor relations (“IR”) firms for services valued at $2.24 average per share or $464,960 in total. We also issued 5,000 shares of common stock to an investor. We also issued an aggregate of 3,750 shares of common stock to our three directors for services rendered valued at $2.22 average per share or $8,325 in total.

During the second quarter of 2014, the Company issued 20,513 shares of common stock in settlement of a lawsuit originated by a former employee valued at $40,000.

During the third quarter of 2014, the Company issued in aggregate, 54,000 shares of common stock to a consultant and an employee for services rendered, at a value of $85,654.

NOTE 12. – SIGNIFICANT CUSTOMERS

Our product revenues represent primarily sales of Revita and Revita Cor which individually exceed 10% of total sales and collectively represent 41% of net revenue. Spectral DNC-N represents 7% of net revenue and Polaris NR09 and Spectral DNC 5% each represent 5% of net revenue. The Company sells its products to several types of customer, which primarily include distributors and salons, several of which represent individually in excess of 10% of total net revenue during 2014-QTR and 2013-QTR. During 2014-YTD and 2013-YTD, our top ten customers generated 47% and 42% of our net revenue, respectively.

There were no sales to customers individually in excess of 10% of total sales during 2013-YTD. Sales to customers individually in excess of 10% of net revenue during 2014-YTD and their accounts receivable at September 30, 2014 were:


Customer	Sales Amount	Percent	Accounts Receivable	Percent

C	$ 1,447,704	15%	$ 0	0%

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

(unaudited)

NOTE 13. – SIGNIFICANT VENDORS

The Company purchases its raw materials from various foreign and domestic suppliers several of which represent individually in excess of 10% of total purchases. Purchases 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 vendors during 2014-YTD and their accounts payable at September 30, 2014 were:


Vendor	Purchase Amount	Percent	Accounts Payable	Percent

C	$ 789,233	21%	$63,213	6%

Purchases from significant venders during 2013-YTD and their accounts payable at September 30, 2013 were:


Vendor	Purchase Amount	Percent	Accounts Payable	Percent

A	$ 526,787	17%	$ 297,305	18%
C	$ 530,515	17%	$ 82,868	5%

NOTE 14. – 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 both 2014-YTD and 2013-YTD as follows:


	2014		2013
Net Revenue:
North America	$	3,911,426	$	6,888,894
International		5,796,078		3,704,141
	$	9,707,504	$	10,593,035


Furniture and Equipment, Net:
North America	$	166,510	$	112,456
International		79,184		120,068
	$	245,694	$	232,524

ITEM 2.

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

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

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

Significant Accounting Policies

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

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

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

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

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

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

Revenue Recognition – The Company’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.

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

Results of Operations

Three Months Ended September 30, 2014 as Compared to the Three Months Ended September 30, 2013

Revenues, net – Total net revenues increased $77,928 or 2.4%, from $3,200,189 for the three months ended September 30, 2013 to $3,278,117 for the three months ended September 30, 2014. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 41% of total sales for the period. In addition, Spectral DNC-N represents approximately 7% of total sales for each period along with Polaris NR09 and spectral DNC 5% which represents 5% each of net revenue.

Net revenue from our Mexican subsidiary increased 24.2% in 2014-QTR compared to 2013-QTR, accounting for $952,472 (27.6%) and $766,756 (23.9%) of consolidated net sales for the three months ended September 30, 2014 and 2013 respectively. The increase in net revenue from our Mexican subsidiary contributed significantly to the overall increase in net revenue. The increase in overall revenue is also attributable to increased sell-through in foreign markets. Sales generated from US operations have declined as a result of ending the quarter with approximately $1.2 million in open orders for future delivery and backorders, which customers have agreed to pick up in the fourth quarter due to our timing in completing their orders. These orders have since been shipped and the issue of backorders has improved dramatically. Our international initiative, while growing, has slowed due to unforeseen delays in obtaining licenses and clearance from various international agencies in the target countries, some of which have already been corrected during 2014-QTR. We continue our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributor base, both domestic and foreign. We conduct a significant portion of business with various distributors under exclusive distribution agreements. Revenues from our top ten customers accounted for approximately 33.6% and 42.4% of our total revenues during the three months ended September 30, 2014 and September 30, 2013, respectively.

Cost of Goods Sold – Total cost of goods sold decreased $624,092 or 43.4%, from $1,437,763 (2013-QTR) to $813,671 (2014-QTR). We began additional cost cutting efforts at the end of the quarter ended June 30, 2014 that included improved sales mix, reformulations, utilizing previously expensed components, cost reductions and restructuring of:

$97,200 reduction in obsolete inventory,

$177,500 reduction in freight costs due to eliminating expedited delivery to meet production schedules,

$163,600 reduction in cost of goods sold as a result of an approximately $487,000 increase in sales of Polaris product which yields higher gross profit and reduced cost per unit sold compared to our core product line, and

$75,000 reduction of bill of materials costs as a result of reformulation efforts to remove expensive components and maintain efficacy.

Consequently, the gross margin has improved from 55.1% (2013-QTR) to 75.2% (2014-QTR), with US operations accounting for $1,336,419 or 75.8% (2013-QTR) and $1,920,655 or 77.9% (2014-QTR) of the gross margin dollars and with DS Mexico accounting for $426,007 or 24.2% (2013-QTR) and $543,791 or 22.1% (2014-QTR) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs decreased $269,552 or 22.8% from $1,181,897 (2013-QTR) to $912,345 (2014-QTR). The decrease was due to the following:


	–	Decreases of:


	·	$198,806 reduction for freight and shipping costs, as a result of a reduction in the number of shipments requiring expedited handling, and


	·	$142,512 for consulting and commissions, as a result of decreased sales and support staffing.


	–	Partially offset by increases of:


	·	$47,936 for travel and entertainment as a result of certain strategy changes to enhance customer relations, and


	·	$23,830 for other sales and marketing expenses.

General and Administrative Costs – General and administrative costs increased $306,466 or 22.5%, from $1,362,341 (2013-QTR) to $1,668,807 (2014-QTR). The increase is due to the following:

–

Increases of:

$173,264 for professional fees primarily associated with investor relations services which in part were non-cash compensation. Professional fees associated with accounting services were also incurred and was also non-cash compensation,

$122,884 for personnel costs of which US operations recorded a $58,000 reduction which was offset by an approximately $181,000 increase attributed to our Mexican operations. The increase in Mexican operational costs resulted from increases in staffing to support increased sales

$36,379 for rent as a result of increases in renewal terms for the lease on our headquarters,

$29,874 for insurance as a result of increased premiums associated with increased sales and inventory, and

$139,869 for other general and administrative costs which included certain one-time credit recorded in the prior period that did not repeat in the current period.

–

Partially offset by decreases of:

· $195,804 in depreciation and amortization primarily associated with reduced amortization as a result of fully amortizing certain intangibles of our Mexican operations in December 2013. In addition, the Nutra Origin intangible asset, which was part of US operations, was fully impaired in December 2013 and accordingly, further reduced quarterly amortization in the third quarter of 2014 compared to the third quarter of 2013.

Nine Months Ended September 30, 2014 as Compared to the Nine Months Ended September 30, 2013

Revenues, net – Total net revenues decreased $885,531 or 8.4%, from $10,593,035 for the nine months ended September 30, 2013 to $9,707,504 for the nine months ended September 30, 2014. Our product revenues represent primarily sales of Revita and Revita Cor, which individually exceeded 10% of total sales and collectively represented approximately 41% of total sales for the period. In addition, Spectral DNC-N represents approximately 7% of total sales for each period along with Polaris NR09 and Spectral DNC 5% which represent 5% each of net revenue.

Net revenue from our Mexican subsidiary increased 23% in 2014-YTD compared to 2013-YTD, accounting for $2,556,650 (26.3%) and $2,078,892 (19.6%) of consolidated net sales for the nine months ended September 30, 2014 and 2013 respectively. The increase in net revenue from our Mexican subsidiary contributed significantly to reducing the overall decrease in net revenue. The decrease in overall revenue is attributable to decreased sell-through in foreign markets as a result of pending licensing. Sales generated from US operations have declined due to ending the quarter on September 30, 2014 with approximately $1 million in backorders and open orders in the system, orders which customers have agreed to pick up in the third quarter due to our timing in completing their orders. These orders have since been shipped and the issue of continuous backorders continues to improve. Our international initiative, while growing, has slowed due to unforeseen delays in obtaining licenses and clearance from various international agencies in the target countries. We continue our marketing and sales efforts to expand our customer base, with our primary focus on expanding our distributor base, both domestic and foreign. We conduct a significant portion of business with various distributors under exclusive distribution agreements. Revenues from our top ten customers accounted for approximately 42.7% and 42.3% of our total revenues during the nine months ended September 30, 2014 and September 30, 2013, respectively.

Cost of Goods Sold – Total cost of goods sold decreased $1,635,762 or 30.0%, from $5,454,840 (2013-YTD) to $3,819,077 (2014-YTD). The decrease in cost of goods sold relates to the following:

a $214,775 reduction in the obsolescence reserve,

$354,212 as a result of decreased sales and

approximately $934,355 in cost cutting initiatives were achieved.

Cost cutting efforts initiated in Q2 2014 were partially offset by one time charges associated with increased production and delivery costs incurred in addressing the order backlog. The cost cutting efforts initiated, functionally included:

departmental restructuring to improve production scheduling to reduce backorders,

negotiating improved cost from suppliers,

reducing freight costs and avoid expediting shipments, and

improving formulations to improve efficacy and reduce production costs.

Consequently, the gross margin has improved from 48.5% (2013- YTD) to 60.7% (2014-YTD), with US operations accounting for $3,880,755 or 75.5% (2013-YTD) and $4,413,080 or 74.9% (2014-YTD) of the gross margin dollars with DS Mexico accounting for $1,257,440 or 24.5% (2013-YTD) and $1,475,346 or 25.1% (2014-YTD) of gross margin dollars.

Selling and Marketing Costs – Selling and marketing costs increased $243,343 or 8.6% from $2,833,262 (2013-YTD) to $3,076,605 (2014-YTD). The increase was due to the following:


	–	Increases of:


	·	$116,167 for freight and shipping costs, as a result of increased sales to international and foreign customers and also as a result of increased shipping of samples to potential customers to support 2014 projected sales growth,


	·	$212,784 for consulting and commissions, as a result of approximately $162,000 directly related to increase sales and staffing in Mexico to support increased sales, with the balance associated with increased staffing to support planned growth in US operations,


	·	$72,406 for product development, primarily as a result of adding a chemist to head the product development efforts, and


	·	$48,288 for other sales and marketing items.


	–	Partially offset by decreases of:


	·	$206,302 for marketing and promotion costs as a resultofreduced programs and certain strategy changes that reduced costs.

General and Administrative Costs – General and administrative costs increased $100,712 or 2.4%, from $4,240,575 (2013-YTD) to $4,341,287 (2014-YTD). The decrease is due to the following:

–

Increases of:

$492,653 for professional fees and increased infrastructure to support our growing sales, primarily an increase in our investor relations services program (primarily non-cash stock based compensation) to improve market awareness. All other categories of professional fees, such as legal and accounting, were essentially the same as the prior period,


	·	$305,949 for personnel costs of which our Mexican operations accounted for essentially all of the increase due to expansion of these operations. The personnel costs related to US operations, including management and administrative personnel remained relatively stable,


	·	$56,737 for insurance as a result of increased premiums associated with increased sales and inventory, and


	·	$66,772 for other general and administrative expenses.


	–	Partially offset by decreases of:


	·	$338,571 in depreciation and amortization, primarily associated with reduced amortization as a result of fully amortizing certain intangibles of our Mexican operations in December 2013. In addition, the Nutra Origin intangible, which was part of US operations, was fully impaired in December 2013 and accordingly, no further amortization has been incurred,


	·	$375,688 for bad debt as a result of reducing extended customer terms and conditions and tighter credit policies, and


	·	$107,140 for license and permits and NASDAQ listing fees.

Liquidity and Capital Resources

We had cash of $493,947 and working capital of $3,306,741 at September 30, 2014. Our operating and capital requirements in connection with supporting our expanding operations and introducing new products have been and will continue to be significant to us. Since inception, our losses from operations and working capital required to grow our business were satisfied primarily through the private sales of our common stock and by credit financing.

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

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

Cash Flows for the Nine Months Ended September 30, 2014

Cash Flows from Operating Activities

Operating activities used net cash for the nine months ended September 30, 2014 of $1,472,995. In addition, changes in operating assets and liabilities used cash of $330,430 as follows:


	·	$366,303 provided by a decrease in gross accounts receivable not including the non-cash effect of changes in the allowance for doubtful accounts,
	·	$687,727 used by an increase in inventory component levels resulting from implementing a purchasing strategy at 130% of sales projections, in an effort to reduce or eliminate backorders and improve customer satisfaction,
	·	$968,840 used by a decrease in accounts payable resulting from efforts to reduce outstanding vendor balances and restore normalized vendor relations,
	·	$176,452 provided by an increase in accrued expenses as a result of an increase in certain accrued expenses such as commissions due, and
	·	$783,382 provided by net changes in other current assets and liabilities primarily as a result of increased liabilities associated with the expansion of our Mexican operations.

Cash Flows used in Investing Activities

Our investing activities used $138,647 in net cash during the nine months ended September 30, 2014. Net cash used is primarily the result of equipment purchases for production in the US and sales operations in Mexico.

Cash Flows from Financing Activities

Our financing activities used $408,890 in net cash during the nine months ended September 30, 2014, primarily as a result of the following:


	·	$582,383 used for repayments, net of advances, of our asset based credit facility, and
	·	$182,000 provided, net of issuance cost, from the second tranche our December 2013 private placement.

Financial Position

Total Assets – Our total assets decreased $1,831,683 or 19% from $9,714,592 as of December 31, 2013 to $7,882,909 as of September 30, 2014, primarily as a result of the cash used to repay creditors and increase inventory components. There was a net decrease in current assets of $1,796,015 the components of which are discussed further below. The decrease in total assets was also the result of a decrease of $144,383 in Intangible assets, due to amortization, which was partially offset by a increase of $69,978 in other assets and a 38,736 increase in assets net of depreciation.

Current Assets – The net decrease in current assets of $1,796,015 was primarily associated with a decrease in cash of $2,378,999, primarily to support operations, along with a $306,000 decrease in accounts receivable. These decreases were partially offset by a $902,502 increase in inventory levels and a $13,518 decrease in prepaids and other current assets. These net changes are primarily driven by changes in sales and other factors more specifically discussed below:

Inventory – Inventory levels increased 33% from December 31, 2013 to September 30, 2014, as a result of efforts to replenish inventory in key raw material components in anticipation of higher sales in the later half of 2014. Our operations group engaged in a purchase program commencing in first quarter 2014 in an effort to reduce order backlog or backorders.

Average inventory represents approximately 60% of COGS or over a seven month supply based on the sell through rate achieved for the nine months ended September 30, 2014, resulting in an inventory turnover rate of 1.7 times. This inventory turn rate should improve as we ramp up key components to smooth production timing.

Accounts Receivable, net – Accounts receivable decreased $306,000, primarily as a result of strong collections of Q2 2014 sales along with a slowdown of the creation of new receivables resulting from slower production in first and second quarters of 2014 while inventory components were replenished, as previously discussed.

Prepaid Expenses and other current assets – Prepaid expenses increased 4.7%, primarily as a result of advances in stock for services.

Material Commitments

None.

Off Balance Sheet Arrangements

None.

Recent Accounting Pronouncements

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

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

In connection with the preparation of this Form 10–Q, our management, including the CEO and CFO, updated its December 31, 2013 evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2014. As described below, management has identified material weaknesses in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. As a result of those material weaknesses, our management has concluded that, as of September 30, 2014, our disclosure controls and procedures were not effective, as a result of certain material weaknesses.

The specific material weaknesses that management identified in our internal controls as of September 30, 2014 that persist are as follows:


	·	We did not have adequate staffing resources to provide appropriate review and supervision for all necessary areas and our general staff do not have the necessary training to perform appropriate analytical or review procedures.
	·	We did not have a sufficient number of adequately trained technical accounting and external reporting personnel to support standalone external financial reporting under SEC requirements.
	·	We did not have personnel with sufficient experience with United States generally accepted accounting principles to address complex transactions.
	·	We did not maintain a fully automated financial consolidation and reporting system and as a result, extensive manual analysis, reconciliations and adjustments were required in order to produce financial statements for external reporting purposes.

Plans for Remediation of Material Weaknesses

We have begun implementing changes to strengthen our internal controls and will continue to implement remediation plans for the identified material weaknesses and expect the work on the plan will continue throughout 2014, as financial resources permit. The Company hired a Controller in March 2014 and plans to hire a full-time Chief Financial Officer, both of whom who will be on-site. The Company is currently formalizing its policies and procedures in writing and to improve the integration of its financial consolidation and reporting system into non- accounting departments. Where appropriate, the Company is receiving advice and assistance from third-party experts as it implements and refines its remediation plan.

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

Changes in Internal Control over Financial Reporting

Except as otherwise stated above, there were no changes in our internal control over financial reporting or in other factors during the quarter ended September 30, 2014, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

Not Applicable to smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

During the third quarter of 2014, the Company issued in aggregate, 54,000 shares of common stock to a full time consultant and an employee for services rendered. The shares were valued at between $1.08 - $1.63 per share, which resulted in an expense of $85,654.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS


Exhibit Number		Description

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

SIGNATURES

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


Date: November 14, 2014	DS HEALTHCARE GROUP, INC.

	By:	/s/ Daniel Khesin
		Daniel Khesin
		President, Chief Executive Officer,
		Chief Financial Officer/
		Principal Accounting Officer

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DS Healthcare (DSKX) Inactive 10-Q2014 Q3 Quarterly report

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