item 14 principal accounting fees services currently board reviews approves audit permissible nonaudit services performed independent registered public accounting firm jewett schwartz wolfe associates “jsw” well fees charged services review nonaudit service appointment jsw company’s independent registered public accounting firm board considered whether provision services compatible maintaining independence services provided fees charged jsw approved board acting audit committee following table shows fees year ended december 31 2009 2008 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 fees relate review registration statement form 10 amended registration statement form s1 amended part iv item 15 item 14 principal accounting fees services following table shows fees paid us marcum llp current independent registered public accounting firm year ended december 31 2014 december 31 2013 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees reasonably related performance audit review annual financial statements reported policy preapproval fees audit committee reviews approves audit permissible nonaudit services performed current independent registered public accounting firm marcum llp well fees charged services review nonaudit service appointment marcum llp independent registered public accounting firm audit committee considered whether provision services compatible maintaining independence part iv item 15 item 14 principal accounting fees services following table shows fees paid us marcum llp malonebaily bf borgers cpa current independent registered public accounting firm 2015 2014 company engaged malonebaily llp “malonebaily” independent registered public accounting firm may 2 2016 august 10 2016 malonebaily dismissed company paid malonebaily 190000 date billed 250000 unfinished services company brought certain prelitigation disputes malonebaily settlement discussions reimbursement fees paid date 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees reasonably related performance audit review annual financial statements reported 3 fees relate agreed upon work assist company’s evaluation potential acquisitions policy preapproval fees audit committee reviews approves audit permissible nonaudit services performed current independent registered public accounting firm bf borgers cpa pc well fees charged services review nonaudit service appointment bf borgers cpa pc independent registered public accounting firm audit committee considered whether provision services compatible maintaining independence part iv item 15 item 14 principal accounting fees services currently board reviews approves audit permissible nonaudit services performed independent registered public accounting firm cherry bekaert holland llp “cbh” rbsm llp “rbsm” well fees charged services review nonaudit service appointment cbh company’s independent registered public accounting firm board considered whether provision services compatible maintaining independence services provided fees charged cbh rbsm approved board acting audit committee following table shows fees years ended december 31 2011 2010 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees relate review recent registration statement form s1 amended part iv item 15 item 14 principal accounting fees services following table shows fees paid us cherry bekaert llp prior independent registered public accounting firm year ended december 31 2012 marcum llp current independent registered public accounting firm year ended december 31 2013 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees relate review registration statement 333183558 form s1 amended subsequently withdrawn policy preapproval fees audit committee reviews approves audit permissible nonaudit services performed current independent registered public accounting firm marcum llp well fees charged services review nonaudit service appointment marcum llp independent registered public accounting firm audit committee considered whether provision services compatible maintaining independence services provided fees charged cherry bekaert llp prior independent registered public accounting firm approved audit committee 2012 part iv item 15 item 14 principal accounting fees services following table shows fees paid us marcum llp malonebaily bf borgers cpa current independent registered public accounting firm 2016 2015 company engaged malonebaily llp “malonebaily” independent registered public accounting firm may 2 2016 august 10 2016 malonebaily dismissed company paid malonebaily 90000 date billed 250000 unfinished services company brought certain prelitigation disputes malonebaily december 8 2016 received 100000 settlement reimbursement fees paid date 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees reasonably related performance audit review annual financial statements reported 3 fees relate agreed upon work assist company’s evaluation potential acquisitions policy preapproval fees audit committee reviews approves audit permissible nonaudit services performed current independent registered public accounting firm bf borgers cpa pc well fees charged services review nonaudit service appointment bf borgers cpa pc independent registered public accounting firm audit committee considered whether provision services compatible maintaining independence part iv item 15 item 14 principal accounting fees services currently board reviews approves audit permissible nonaudit services performed independent registered public accounting firm cherry bekaert llp “cb” well fees charged services review nonaudit service appointment cb company’s independent registered public accounting firm board considered whether provision services compatible maintaining independence services provided fees charged cb approved board acting audit committee following table shows fees years ended december 31 2011 2012 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 audit related fees relate review recent registration statements form s1 amended part iv item 15 item 14 principal accounting fees services currently board reviews approves audit permissible nonaudit services performed independent registered public accounting firm jewett schwartz wolfe associates “jsw” rbsm llp “rbsm” well fees charged services review nonaudit service appointment jsw company’s independent registered public accounting firm board considered whether provision services compatible maintaining independence services provided fees charged jsw rbsm approved board acting audit committee following table shows fees years ended december 31 2009 2010 1 audit fees relate audit annual financial statements review interim quarterly financial statements 2 fees relate review registration statement form 10 amended registration statement form s1 amended part iv item 15 item 7 management’s discussion analysis financial condition results operation read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” registration statement discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies financial statements prepared accordance accounting principles generally accepted united states america preparation financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements use estimates financial statements prepared accordance accounting principles generally accepted united states accordingly require management make estimates assumptions affect reported amounts assets liabilities date financial statements reported amounts revenues expenses reporting period specifically management estimated expected shelf life inventory future economic benefit prepaid slotting allowances trade credits marketing initiatives ability generate sufficient business support expand production capacity potential inventory distribution requirements well obsolescence net operating loss tax purposes actual results could differ estimates risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors adverse changes areas could negatively impact company’s financial position results operations cash flows cash equivalents maintain cash bank deposit accounts federally insured company considers highly liquid investments original maturity three months less cash equivalents december 31 2009 2008 cash equivalents included cash hand cash bank accounts receivables accounts receivable reported net realizable value company established allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information estimating credit risk management considers customer’s specific performance history vendors credit bureau reports industry reputation year ended december 31 2009 15510 charged allowance uncollectible accounts inventory reported lower end cost market firstin firstout fifo method inventory subject expiration accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence inventory stored third party fulfillment facilities also perform shipping functions revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 revenue recognition establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange date product returns occurred considered material company established product return reserve company estimates future returns current product sales also immaterial research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses statements operations results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated audited financial statements years ended december 31 2009 december 31 2008 discussion intended supplement highlight information contained read conjunction financial statements related notes selected financial data presented elsewhere prospectus year ended december 31 2009 “ytd2009” year ended december 31 2008 “ytd2008” revenues total revenues increased 753329 272 3519804 ytd2009 2766475 ytd2008 company’s product revenues represent primarily sales revita spectral dnc together represent 43 total sales oligo dx spectral dncl spectral rs together account approximately 20 total sales revenues increased result company’s efforts establish distribution agreements distributors several global target markets company conducts significant portion business cellway international inc wr group exclusive distribution agreements revenues cellway international inc agreement wr group agreement accounted approximately 19 23 respectively company’s total revenues 2009 cost goods sold total cost goods sold increased 34888 33 1103443 ytd2009 1068555 ytd2008 sales mix production cost structure remained consistent 2008’s structure would expected 204906 increase related 272 increase sales however 2009 able offset potential increase 170018 result transferring portion production activities outsourcing “inhouse” production negotiating better pricing materials suppliers selling marketing costs selling marketing costs increased 374598 453 1201874 ytd2009 827276 ytd2008 increase primarily due following increases · 83032 consulting commission costs due increased costs expanding customer base distribution representatives growing sales · 192724 freight shipping costs also resulting expanding sales changes shipping methods · 180046 marketing promotion costs incurred broaden product offering promote additional sales · 10066 product development costs resulting expanding product offering decreases · 54699 warehousing costs result transferring portion outsourced warehousing activities “in house” facilities · 28922 postage costs result transferring portion shipping activities larger faster parcel service · 7649 net selling marketing costs general administrative costs general administrative costs increased 367917 287 1649808 ytd2009 1281892 ytd2008 increase due following increases · 225010 personnel costs due increased staffing result expanding operations · 299848 professional fees attorneys accountants related costs going public sec reporting draft review various new business arrangements promote expanding sales · 38442 rent expense associated additional facilities decreases · 195383 net various general administrative costs primarily result general costs 2008 repeat 2009 fourth quarter 2009 discovered theft approximately 25000 employee company employee terminated company attempting recover funds income expense income expenses increased 133111 119102 income ytd2009 14009 expense ytd2008 increase primarily result gains realized favorably settling certain claims made prior vendors net loss result various fluctuations discussed net loss decreased 109037 24 316220 net loss ytd2009 425257 net loss ytd2008 liquidity capital resources working capital 600278 december 31 2009 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations along increased costs working capital required grow business satisfied initial contribution founders 2007 subscriptions purchase shares private placement began accepting subscriptions early 2009 based current plans next 12 months anticipate additional revenues earned expanded product line broadened distribution channels primary organic source funds future operating activities 2010 fund continued expansion product line extend reach broader markets including foreign markets may rely bank borrowing available private placement securities year ended december 31 2009 company accepted aggregate 1000600 23 investors subscribe 4883096 common shares private placement memorandum “ppm” ppm provides issuance costs 30 amounted 364132 relation transactions result company netted 856642 proceeds subscription cash flows year ended december 31 2009 cash flows operating activities operating activities used net cash year ended december 31 2009 510525 net cash used reflects adjusted net loss year ended approximately 250231 adjusted various items impact net income impact cash period depreciation amortization net cash used also reflects 243294 cash used net changes working capital items primarily financing provided vendors included · 247905 used increase accounts receivable result increased sales · 427150 used increase inventory support increased sales · 15667 provided decrease prepaid expenses current assets result decreased prepaid issuance costs 2008 repeat 2009 · 436360 provided increase accounts payable accrued expenses result additional purchases vendors support expanded sales accrued warrant expense supplier claims · 44267 used decrease current liabilities primarily result customer deposits received 2008 used 2009 orders cash flows used investing activities investing activities provided 2635 net cash year ended december 31 2009 net cash provided primarily composed capital expenditures furniture equipment offset recovery prior advances 29587to related parties develop additional brands distribution channels cash flows financing activities financing activities provided net cash 625420 year ended december 31 2009 raised approximately 1000600 subscriptions sale common stock 300180 issuance costs partially offset 75000 repurchase stock financial position total assets total assets increased 1476795 1519 2444423 december 31 2009 967628 december 31 2008 primarily result net increase current assets 783919and increase assets result prepaying exclusive distribution agreement brazil partially offset net decrease furniture equipment 8827 net decrease advances 29587 reductions advances related parties current assets net increase current assets associated 427150 increase inventory levels 247905 increase accounts receivable 117531 increase cash decrease prepaid expenses 8667 inventory levels increased 1468 part result change production methodology stock raw materials support increased batch production runs 5000 units 10000 20000 units effort reduce production costs support inhouse formulation finish product rather continuing rely solely outsourced formulation production increased inventory level hand december 31 2009 represents approximately 651 cogs 78 month supply based sell rate achieved year ended december 31 2009 management believes sales achieved 2009 continue throughout fiscal year 2010 management also understands inventory decisions result inventory turnover rate 15 times management intends improve turnover rate future ultimate goal achieve least 3 times inventory turnover rate satisfactorily explored alternative production methodologies established profitable sustainable production cost structure management projections inventory turnover rate goal may achieved part decision management considered potential impairment costs storage costs associated slow turning inventory embarking decisions management consulted chemist determined materials components shelf life 35 years even active ingredients whose normal shelf life relatively short 6 months stabilized extended mixed finished product accordingly management concluded impairment reserves required december 31 2009 accounts receivable accounts receivable increased 247905 increase represents 561 increase accounts receivable balance december 31 2009 increase result addition new distributors management believes current receivables collectable cash increase cash explained fully following discussion cash flows sales equity securities 2009 began accepting subscriptions sale shares common stock nonus resident investors placement common stock currently open intended meet exemptions regulation securities act funds received sale common stock used operational purposes received funded subscriptions less selling expenses finder’s fees follows table funded subscriptions less selling expenses material commitments none balance sheet arrangements none quantitative qualitative disclosures market risk none recent accounting pronouncements recent accounting pronouncements company adopted required adopt future summarized june 2009 fasb issued final statement sfas 168 “the fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162” sfas 168 made fasb accounting standards codification single source us gaap used nongovernmental entities preparation financial statements except rules interpretive releases sec authority federal securities laws sources authoritative accounting guidance sec registrants codification meant simplify user access authoritative accounting guidance reorganizing us gaap pronouncements roughly 90 accounting topics within consistent structure purpose create new accounting reporting guidance codification supersedes existing nonsec accounting reporting standards effective company beginning july 1 2009 following sfas 168 board issue new standards form statements fasb staff positions emerging issues task force abstracts instead issue accounting standards updates asu fasb consider asus authoritative right updates serve update codification provide background information guidance provide bases conclusions changes codification august 2009 fasb issued asu 200905 includes amendments subtopic 82010 “fair value measurements disclosuresoverall” update provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using one techniques provided update amendments asu clarify reporting entity required include separate input adjustment inputs relating existence restriction prevents transfer liability also clarifies quoted price active market identical liability measurement date quoted price identical liability traded asset active market adjustments quoted price asset required level 1 fair value measurements guidance provided asu effective first reporting period including interim periods beginning issuance adoption standard material impact company’s consolidated financial position results operations september 2009 fasb issued asu 200906 income taxes topic 740 ”implementation guidance accounting uncertainty income taxes disclosure amendments nonpublic entities” provides implementation guidance accounting uncertainty income taxes well eliminates certain disclosure requirements nonpublic entities currently applying standards accounting uncertainty income taxes update shall effective interim annual periods ending september 15 2009 entities deferred application accounting uncertainty income taxes accordance paragraph 74010651e update shall effective upon adoption standards adoption standard expected impact company’s consolidated financial position results operations since accounting standard update provides implementation disclosure amendments september 2009 fasb published asu 200912 “fair value measurements disclosures topic 820 investments certain entities calculate net asset value per share equivalent” asu amends subtopic 82010 “fair value measurements disclosures overall” permit reporting entity measure fair value certain investments basis net asset value per share investment equivalent asu also requires new disclosures major category investments including attributes investments within scope amendment codification guidance update effective interim annual periods ending december 15 2009 early application permitted company process evaluating impact standard consolidated financial position results operations adoption standard impact company’s consolidated financial position results operations october 2009 fasb published asu 200913 “revenue recognition topic 605multiple deliverable revenue arrangements” addresses accounting multipledeliverable arrangements enable vendors account products services deliverables separately rather combined unit specifically guidance amends criteria subtopic 60525 “revenue recognitionmultipleelement arrangements” separating consideration multipledeliverable arrangements guidance establishes selling price hierarchy determining selling price deliverable based vendorspecific objective evidence b thirdparty evidence c estimates guidance also eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method also requires expanded disclosures guidance update effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted adoption standard impact company’s consolidated financial position results operations october 2009 fasb published asu 200914 “software topic 985certain revenue arrangements include software elements” changes accounting model revenue arrangements include tangible products software elements guidance tangible products containing software components nonsoftware components function together deliver tangible products essential functionality excluded software revenue guidance subtopic 985605 “softwarerevenue recognition” addition hardware components tangible product containing software components always excluded software revenue guidance asu effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted adoption standard impact company’s consolidated financial position results operations asus effective december 31 2009 expected significant effect company’s consolidated financial position results operations risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry incurred recent losses may incur losses future may adversely affect financial condition incurred net losses 323220 year ended december 31 2009 incurred net losses years ended december 31 2008 december 31 2007 amounts 425257 5436 respectively event unable sustain increased gross margins reduced costs andor continue generate sufficient additional revenues offset costs levels achieved year ended december 31 2009 better may continue sustain losses business plan financial condition materially adversely affected ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able sustain profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments may adversely affect margins lose one customers sell products 20 distributors directly 1000 customers longterm agreements several distributors majority customers may cancel purchase order defer shipments products time maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect margins ability maintain profitability fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able use proprietary knowhow offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit could expose us following risks among others may required · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers significant portion raw materials suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase majority raw material approximately eight different suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance three primary suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials costs passed customers failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders could result lost orders revenue rely thirdparty suppliers manufacturers provide raw materials products produce products limited control suppliers manufacturers may able obtain quality products timely basis sufficient quantity substantially products manufactured unaffiliated manufacturers may longterm contracts suppliers manufacturing sources expect compete companies raw materials production import capacity assurance significant disruption supply raw materials intended sources event disruption would able locate alternative suppliers materials comparable quality acceptable price addition cannot certain unaffiliated manufacturers able fill orders timely manner experience significant increased demand need replace existing manufacturer assurance additional supplies raw materials additional manufacturing capacity available required terms acceptable us supplier manufacturer would allocate sufficient capacity us order meet requirements addition even able expand existing find new manufacturing raw material sources may encounter delays production added costs result time takes train suppliers manufacturers methods products quality control standards delays interruption increased costs supply raw materials manufacture products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers manufacturers continue provide raw materials manufacture products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control manufacturers products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products although seek ensure infringe intellectual property rights others assurance third parties assert intellectual property infringement claims us like retailers distributors manufacturers skin care personal care products face inherent risk exposure product liability claims event use products sell results injury management believes currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur certain individuals groups individuals may seek monetary retribution business may adversely affected unfavorable publicity within skin care personal care market believe skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers manufacturers dependent services third parties purchase products thirdparty suppliers manufacturers pursuant purchase orders without longterm agreements event current supplier manufacturer unable meet manufacturing delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers manufacturers none agreements long term also rely thirdparty carriers product shipments including shipments distribution facilities therefore subject risks including employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations skin care hair care personal care product markets intensely competitive strengthening competitors could harm business skin care hair care personal care products industry intensely competitive many competitors greater name recognition financial resources may give competitive advantage competitors may also able devote greater resources marketing promotional pricing campaigns may influence continuing potential independent associates members buy products competitors rather us competition could adversely affect business current market share many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains risks related common stock market common stock limited persons purchase common stock may able resell shares purchase price paid common stock trades bulletin board liquid market currently limited public market common stock cannot assure active public market common stock develop sustained future active market common stock develop sustained price may continue decline subject “penny stock” rules brokers cannot generally solicit purchase common stock adversely affects liquidity market price sec adopted regulations generally define “penny stock” equity security market price less 500 per share subject specific exemptions market price common stock bulletin board substantially less 500 per share therefore currently considered “penny stock” according sec rules designation requires brokerdealer selling securities disclose certain information concerning transaction obtain written agreement purchaser determine purchaser reasonably suitable purchase securities due factors beyond control stock price may volatile following factors could affect market price common stock · failure increase revenue succeeding quarter · failure achieve maintain profitability · failure meet revenue earnings guidance · loss distribution relationships · sale large amount common stock shareholders · announcement pending completed acquisition failure complete proposed acquisition · adverse court ruling regulatory action · failure meet financial analysts’ performance expectations · changes earnings estimates recommendations financial analysts · changes market valuations similar companies · short selling activities · announcement change direction business · inability manage international operations · actual anticipated variations quarterly forecasted results operations · announcements us competitors significant contracts acquisitions commercial relationships joint ventures capital commitments past following periods volatility market price company’s securities class action litigation often instituted securities class action suit us could result substantial costs divert management’s time attention would otherwise used benefit business may able attract attention major brokerage firms could material impact upon price common stock likely securities analysts major brokerage firms provide research coverage common stock since firm cannot recommend purchase common stock penny stock rules referenced earlier risk factor absence coverage limits likelihood active market develop common stock may also make difficult us attract new investors times acquire additional capital shares eligible sale convertible shares future could negatively affect stock price dilute shareholders market price common stock could decline result sales large number shares common stock perception sales could occur might also make difficult us raise funds issuance securities december 31 2009 89986001 issued outstanding shares common stock officers directors hold control 82017905 shares common stock excluding outstanding preferred shares date registration statement 10000000 shares series preferred stock convertible shares common stock one basis preferred shares held officers directors shares vote 1 2 basis vote common stock except otherwise required florida law issued options securities equity incentive plan however may issue andor register additional shares options warrants future connection acquisitions compensation otherwise cannot predict effect market sales shares held stockholder availability shares future sale market price common stock item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies consolidated financial statements prepared accordance accounting principles generally accepted united states america preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation consolidated financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company incurs formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses consolidated statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated financial statements years ended december 31 2014 2013 discussion intended supplement highlight information contained read conjunction consolidated financial statements related notes selected financial data presented elsewhere report year ended december 31 2014 year ended december 31 2013 revenues net total net revenues decreased 237396 17 13651661 2013 13414265 2014 product revenues represent primarily sales revita cor individually exceeded 10 total sales collectively represented 38 total sales addition spectral dncn represents 7 total sales revenue polaris nr09 spectral dnc 5 represent 5 net revenue products individually exceeded 5 total sales consolidated net revenues slightly decreased primarily due decrease us net revenue offset increases net revenues generated mexican subsidiary saw slightly weaker sales due stronger dollar compared mexican peso revenue mexican subsidiary also impacted shipments q4 rolled q1 2015 due shipping recognizing business originating q4 q1 shppied decrease us net revenue result 23 weakerthanexpected first quarter 2014 caused product backorders revenues international sales experienced delays international product registrations effective november 1 2012 purchased essentially 100 outstanding common stock ds mexico former mexican distributor subsidiary generated approximately 39 million 29 million net revenues years ended december 31 2014 2013 respectively continue marketing sales efforts expand customer base primary focus expanding distributors domestic foreign conduct significant portion business various distributors exclusive distribution agreements revenues top ten customers accounted approximately 49 41 total revenues years ended december 31 2014 2013 respectively cost goods sold total cost goods sold decreased 1662434 239 6943043 2013 5280909 2014 decrease cost goods sold relates following · 162462 reduction obsolescence reserve · 237396 decrease result decreased sales · 1262575 cost cutting initiatives achieved cost cutting measures undertaken q2 q3 2014 cost cutting measures included improved purchasing planning decrease labor expenses reducing overtime labor improved output forecast curtailment expediting orders shipments optimizing formulations avoid wastage improved packaging efficiencies cost increasing manufacturing output profitability improved cost resulting improved gross profit also attributable increased sales higher margin gross profit mexican subsidiary increased sales higher margin polaris products sales newly introduced online platform also contributed increased gross margin cost cutting efforts initiated q2 q3 2014 partially offset onetime charges associated increased production delivery costs incurred addressing order backlog cost cutting efforts initiated functionally included · departmental restructuring improve production scheduling reduce backorders · negotiating improved cost suppliers · reducing freight costs avoid expediting shipments · improving formulations improve efficacy reduce production costs consequently gross margin improved 49 2013 61 2014 us operations accounting 75 2013 64 2014 gross margin dollars ds mexico accounting 25 2013 36 2014 gross margin dollars selling marketing costs selling marketing costs increased 352206 94 3747213 2013 4099419 2014 increase due following increases · 120000 product development result addition director rd increased effort optimize current products · 115688 freight shipping costs result onetime accommodation customers experienced significant delays backorders 2013 also result increased international shipping new existing customers · 45493 travel entertainment costs incurred expand promote global sales · 32857 marketing promotion costs result promoting new customers expanded business new customers ds mexico · 38168 sales marketing items general administrative costs general administrative costs decreased 664790 111 5964570 2013 5299780 2014 decrease due following decreases · 377074 depreciation amortization resulting impairment certain intangible assets fully amortizing certain intangible assets us · 142732 licenses permits due one time credit 2014 120000 resulting cancellation nutra origin license · 135046 bad debts primarily result successful collection efforts · 24470 due reduced profitability bonus mexico partially offset reductions us payroll result cost cutbacks · 76463 legal services result resolving certain litigation modifications fee structure · 56746 credit card fees due renegotiation merchant services contract reduction payments made credit card forgoing decreases partially offset following increases · 39601 insurance result expanded coverage · 33813 rent primarily result rate increases · 16098 utilities due “second shift” production peak loads · 58229 various general administrative costs primarily associated ds mexico liquidity capital resources cash equivalents 1128556 working capital 3767179 december 31 2014 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations working capital required grow business satisfied initial contribution founders 2007 sales common stock credit financing sustained operational losses since inception december 31 2014 accumulated deficit 9613375 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern commenced implementing continue implement various measures address financial condition including increasing gross profit margins reducing operational costs overhead continuing seek debt equity financing however assurances company able raise additional capital favorable terms company party credit facility provided asset based lending collateralized assets company credit facility secured 70 qualified accounts receivable 40 eligible finished goods inventory provided interest bank fees 8 per annum renewed reduced 200000 credit facility subsequently expired august 15 2014 fully repaid credit facility personally guaranteed chief executive officer december 31 2014 2013 company 0 582383 outstanding respectively also satisfied working capital requirements 2014 2013 sale common stock advances third parties third quarter 2014 entered note 350000 structured replacement previous abl credit facility note secured finished goods bears interest 1 per month note originally matured march 28 2015 extended may 28 2015 also third quarter 2014 received 24360 short term advance dr fernando tamez president mexican operations supplement temporary cash flow timing issues mexican subsidiary advance unsecured noninterest bearing cash flows year ended december 31 2014 cash flows operating activities operating activities used net cash year ended december 31 2014 1508764 amount two primary components net loss adjusted noncash items changes operating assets liabilities net loss adjusted various items impact net loss impact cash period issuance warrants stock services depreciation amortization resulted net loss adjusted noncash items 477807 added changes operating assets liabilities used cash 1030957 follows · 456513 provided decrease gross accounts receivable including noncash effect changes allowance doubtful accounts · 1119486 used increased inventory levels associated reducing backorders · 1000858 used reduce accounts payable outstanding vendor balances · 21163 provided accrued expenses result increase certain accrued expenses commissions · 611711 provided net changes current assets liabilities primarily result changes current liabilities primarily related increases customer deposits approximately 112000 credit cards approximately 143000 marketing programs approximately 228000 cash flows used investing activities investing activities used 143148 net cash year ended december 31 2014 net cash used primarily composed following · 130078 used purchase equipment production us sales operations mexico · 32141 used increase security deposits primarily facilities lease · 5750 used purchase injection molds · 24822 provided sale fixed assets cash flows financing activities financing activities used 56812 net cash result following · 582383 used net repayments asset based credit facility · 350000 provided advances short term asset based credit facility · 11429 used repay loans notes · 187000 provided sale common stock private placement initiated december 2013 less issuance costs financial position total assets total assets decreased 1117589 115 9714592 december 31 2013 8597002 december 31 2014 primarily result decrease cash also net decrease current assets 893762 components discussed decrease total assets also result increase 21741 assets considered nominal decrease 551 furniture equipment net also nominal decrease 245016 intangible assets due amortization impairment current assets net decrease current assets 893762 primarily associated decrease cash 1744390 result net use cash operational activities 420151 decrease accounts receivables decreases partially offset 1281948 net increase inventory net changes primarily driven changes sales factors specifically discussed follows inventory levels increased 474 result efforts reduce backorders increased skus anticipation increased future sales inventory hand increased average inventory represents approximately 63 cogs five month supply based sell rate achieved year ended december 31 2014 resulting inventory turnover rate 16 times intend improve turnover rate future ultimate goal achieve least 30 times inventory turnover rate 2015 satisfactorily explored alternative production methodologies established profitable sustainable production cost structure target turnover result stocking chemicals materials anticipation planned sales increases custommade inventory 2015 accounts receivable net accounts receivable net decreased 420151 primarily result decrease credit sales due large prepaid sales year end 2014 prepaid expenses current assets prepaid expenses comparable less 15 change 2013 material commitments short term credit facility fourth quarter 2014 company replaced asset based lending facility 350000 short term credit facility funded private party short term financing originally matured march 28 2015 extended may 28 2015 provides interest 1 per month facility secured company’s finished goods inventory 2014 company accrued 7000 interest balance sheet arrangements none recent accounting pronouncements fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management assess every reporting period whether substantial doubt entity’s ability continue going concern provide related footnote disclosures amendments define substantial doubt exists relevant conditions events considered aggregate indicate probable entity unable meet obligations become due within one year date financial statements issued available issued management identifies conditions events raise substantial doubt entity’s ability continue going concern management disclose 1 principal conditions events raised substantial doubt 2 management’s evaluation significance events management also consider whether plans intended mitigate conditions events alleviate substantial doubt management disclose information enables users understand plans alleviated substantial doubt amendments asu effective annual period ending december 15 2016 annual periods interim periods thereafter adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201412 compensation stock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu requires performance target affects vesting could achieved requisite service period treated performance condition performance target reflected estimating grant date fair value award update clarifies compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered amendments asu effective annual periods interim periods within annual periods beginning december 15 2015 earlier adoption permitted adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201409 revenue contracts customers asu supersedes revenue recognition requirements accounting standards codification 605 revenue recognition industryspecific guidance throughout codification standard requires entity recognizes revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu effective january 1 2017 applied retrospectively prior reporting period presented retrospectively cumulative effect initially applying asu recognized date initial application entities nonpublic entities amendments asu effective annual reporting periods beginning december 15 2017 interim periods within annual periods beginning december 15 2018 nonpublic entity may elect apply guidance earlier however prescribed asu company yet determined effect adoption standard impact companys consolidated financial position results operations march 2013 fasb issued asu 201305 “foreign currency matters parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity” amendment allows entity release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity effective fiscal years interim reporting periods beginning december 15 2013 early adoption permitted adoption guidance material impact consolidated financial statements related disclosures july 2013 fasb issued asu 201311 “presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments update require unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except limited circumstances amendments update require new recurring disclosures new guidance applied prospectively interim annual periods beginning december 15 2013 adoption asu 201311 material impact company’s consolidated financial statements management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry net loss 1312159 3225290 years ended december 31 2014 december 31 2013 respectively historically incurred losses may incur losses future may adversely affect financial condition net loss 1312159 3225290 years ended december 31 2014 2013 respectively event unable increase gross margins reduced costs andor generate sufficient additional revenues offset costs may continue sustain losses future independent registered public accounting firm’s report contains explanatory paragraph expresses substantial doubt ability continue going concern december 31 2014 accumulated deficit 9613375 primarily result recurring losses operations negative cash flows accumulated deficit independent registered public accounting firm included report year ended december 31 2014 explanatory paragraph expressing substantial doubt ability continue going concern ability continue going concern contingent upon among factors ability obtain sufficient financing support operations ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able reach profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments lose one customers may adversely affect financial position results operations longterm agreements several distributors majority customers may cancel purchase order defer shipments products time furthermore distributors terminate agreements company relatively short notice maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect financial position results operations fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party studies clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials would require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology additionally assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit may require us · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers raw materials purchase per order basis without long term contracts suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase raw materials suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays decreased sales tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials reasonable costs failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders resulting lost orders revenue rely thirdparty suppliers compounders provide raw materials products compound products control suppliers compounders may able obtain quality products timely basis sufficient quantity substantially products compounded unaffiliated compounders longterm contracts suppliers compounding sources expect compete companies raw materials production import capacity experience significant increased demand need replace existing compounder assurance additional supplies raw materials additional compounding capacity available required terms acceptable us supplier compounder would allocate sufficient capacity us order meet requirements addition even able expand existing find new compounding raw material sources may encounter delays production added costs result time takes train suppliers compounding methods products quality control standards delays interruption increased costs supply raw materials compounding products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers compounding continue provide raw materials compounding products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control compounding products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold one patent pending review uspo currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products like distributors manufacturers hair care skin care personal care products face inherent risk exposure product liability claims event use products sell results injury believe currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future predict effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur individuals may seek monetary retribution future could subject additional laws regulations promulgated fda federal state foreign regulatory authorities subject stringent interpretations current laws regulations may adversely impact business operations unable predict nature future laws regulations interpretations applications predict effect additional governmental regulations administrative orders promulgated would business future fda governmental regulatory bodies could require reformulation certain products meet new standards fda approval prior marketing sale certain products requirements could materially adverse affect business financial condition results operations cash flows cost comply new changing regulations could material furthermore cannot provide assurances product would ultimately comply new changing regulations business may adversely affected unfavorable publicity within skin care personal care market believe hair care skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting hair care skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers compounders dependent services third parties purchase products thirdparty suppliers compounders pursuant purchase orders without longterm agreements event current supplier compounder unable meet compounding delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers compounders none agreements long term also rely thirdparty carriers product shipments including shipments warehouse facilities therefore subject risks including limited employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations website internal systems may subject intentional disruption could adversely impact reputation future sales could target cyberattacks designed penetrate network security internal systems misappropriate proprietary information andor cause interruptions services delay delivery products customers actual perceived breach network security occurs may expose us loss information litigation possible liability security breach could also divert efforts technical management personnel addition security breach could impair ability operate business happens reputation could harmed revenues could decline business could suffer involved several litigation matters could harm business brand reputation financial condition results operations involved lawsuits involving various suppliers service providers litigation party may result onerous unfavorable judgment may reversed upon appeal may decide settle lawsuits unfavorable terms addition defending claims costly impose significant burden management employees may receive unfavorable preliminary interim rulings course litigation negative outcome could result payments monetary damages adverse effects market price common stock changes business practices accordingly business brand reputation financial condition results operations could materially adversely affected many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains identified material weaknesses internal control financial reporting fail develop maintain effective system internal controls may able accurately report financial results prevent fraud result current potential shareholders could lose confidence financial reporting would harm business trading price stock december 31 2014 chief executive officer chief financial officer concluded internal controls financial reporting effective providing reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles process remediating material weaknesses yet able complete remediation efforts mitigate current limited resources limited employees rely heavily direct management oversight transactions along use legal accounting professionals grow expect increase number employees enable us adequate resources within internal control framework take additional time design implement test controls procedures required enable management conclude internal control financial reporting effective cannot time estimate long take complete remediation efforts cost efforts cannot assure measures plan take effective mitigating preventing significant deficiencies material weaknesses internal control financial reporting failure maintain implement required new improved controls difficulties encounter implementation could result additional material weaknesses cause us fail meet periodic reporting obligations existence material weakness could result errors financial statements could result restatements financial statements cause us fail meet reporting obligations cause investors lose confidence reported financial information leading decline trading price stock refer “controls procedures” discussion chief executive officer chief financial officer received reimbursement expenses payments employment agreement may violation section 402 sarbanesoxley act 2002 throughout year ended 2014 three months ended march 31 2015 daniel khesin companys chief executive officer chief financial officer received addition base compensation reimbursement expenses approximately 82000 nonbusiness related goods services furthermore mr khesin received cash payments approximately 50000 2014 pursuant executive employment agreement payable shares companys common stock fiscal year end mr khesin believed payments received satisfaction certain bonus perquisites earned monthly basis employment agreement payments required approval compensation committee approval received subsequent year ended december 31 2014 section 402 sarbanes oxley act 2002 prohibits advances loans director executive officer public company audit committee concluded payments made mr khesin prior board approval violation section 402 sarbanes oxley act 2002 event determined payments violation sarbanes oxley act violation could material adverse effect company including limited criminal civil administrative sanctions penalties investigations addition potential securities litigation see controls procedures executive compensation depend heavily services daniel khesin loss mr khesin could materially harm company rely daniel khesin chief executive chief financial officer loss services mr khesin could materially harm business entered employment agreement mr khesin presently maintain keyman life insurance policy mr khesin risks related common stock common stock may affected limited trading volume may fluctuate significantly limited public market common stock assurance active trading market common stock develop result could adversely affect shareholders’ ability sell common stock short time periods possibly thinly traded common stock volatile common stock traded active public market common stock experienced likely experience future significant price volume fluctuations could adversely affect market price common stock without regard operating performance addition believe factors quarterly fluctuations financial results changes overall economy condition financial markets could cause price common stock fluctuate substantially currently intend pay dividends common stock consequently investor’s ability achieve return investment depend appreciation price common stock currently intend invest future earnings fund development growth business payment dividends discretion board directors depend results operations factors board directors may deem relevant pay dividends shareholder’s ability achieve return investment company depend future appreciation market price company’s common stock guarantee company’s common stock appreciate value even maintain price shareholder initially purchased common stock shares common preferred stock available issuance shares eligible future sale introduced market could dilute current stockholders andor hurt stock price authorized issue 300000000 shares common stock 30000000 shares preferred stock exercise outstanding options andor warrants may cause substantial dilution hold shares common stock prior exercises addition sales substantial amounts common stock public market holders perceptions sales may take place may lower common stocks market price may sell authorized unissued common stock satisfy funding requirements also authorized issue 30000000 shares preferred stock without stockholder approval future series class preferred stock may rights superior rights holders common stock sale proposed sale substantial amounts common preferred stock may adversely affect market price common stock price stockholders may also experience substantial dilution december 16 2014 received letter listing qualifications department staff nasdaq stock market “nasdaq” notifying company last 30 consecutive business days bid price company’s common stock closed 100 per share minimum closing bid price required continued listing requirements nasdaq listing rule 5550a2 would subject common stock delisting nasdaq accordance listing rule 5810c3a company 180 calendar days june 15 2015 regain compliance minimum bid price rule regain compliance closing bid price company’s common stock must least 100 per share minimum ten consecutive business days longer period time nasdaq staff may require circumstances generally 20 consecutive business days june 15 2015 common stock achieve compliance june 15 2015 company may eligible additional 180day period regain compliance meets continued listing requirement market value publicly held shares initial listing standards exception bid price requirement provides written notice nasdaq intention cure deficiency second compliance period effecting reverse stock split necessary delisted upon time common stock quoted otc markets common stock would deemed “penny stock” term defined securities exchange act 1934 brokerdealers dealing penny stocks required provide potential investors document disclosing risks penny stocks moreover brokerdealers required determine whether investment penny stock suitable investment prospective investor requirements may reduce potential market common stock reducing number potential investors may make difficult investors common stock sell shares third parties otherwise dispose could cause stock price decline item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies consolidated financial statements prepared accordance accounting principles generally accepted united states america preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation consolidated financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company incurs formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses consolidated statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated financial statements 2015 2014 discussion intended supplement highlight information contained read conjunction consolidated financial statements related notes selected financial data presented elsewhere report year ended december 31 2015 year ended december 31 2014 revenues net product revenues represent primarily sales revita individually exceeded 10 total sales collectively represented 236 total sales addition spectral dncn represents 8 total sales revenue spectral dnc 8 net revenue products individually exceeded 5 total sales continue marketing sales efforts expand customer base primary focus expanding distributors domestic foreign conduct significant portion business various distributors exclusive distribution agreements revenues top ten customers accounted approximately 46 44 total revenues 2015 2014 respectively total net revenues decreased 1549355 12 13327115 2014 11777760 2015 decrease consolidated net revenues due decrease mexican net revenue us net revenue caused increase bad debt delays shipping products mexican net revenue decreased 680063 177 3832045 2014 3151982 2015 decrease mexican net revenue 556358 related strengthening us dollar versus mexican peso remaining decrease mexican net revenue 123705 3 significant us net revenue also decreased 869292 92 9495070 2014 8625778 2015 decreased us net revenue primarily due weaker demand products increased bad debts delays shipping cost goods sold total cost goods sold decreased 84458 15 5461976 2014 5377518 2015 increase total cost goods sold due increase us cost goods sold partially offset decrease mexican cost goods sold us cost goods sold increased 113453 3 3842652 2014 3956106 2015 increase us cost goods sold primarily due reversal barter credits issued exchange slow moving merchandise qualify revenue asc 605 mexican cost goods sold decreased 482151 22 2212721 2014 1730570 decrease mexican cost goods sold primarily due strengthening us dollar versus mexican peso approximately 305463 without effect changes foreign currency translation rates mexican cost goods sold would decreased 176688 8 decrease mexican cost goods sold primarily due decrease sales overall increase cost goods sold contributed decline overall gross margin 5 59 2014 54 2015 consolidated gross profit decreased 1464897 186 7865139 2014 6400242 2015 total decrease gross profit us gross profit decreased 982745 17 5652418 2014 4669672 2015 mexican gross profit decreased 482152 28 2212721 2014 1730570 2015 selling marketing costs selling marketing costs increased 3035660 71 4281458 2014 7317118 2015 increase due following · 231976 commission consulting primarily result increase personnel incentives · 2771672 marketing promotion primarily result stock based compensation costs 2296200 educational training sample programs · 32007 selling marketing expenses primarily result general increase travel related costs general administrative costs general administrative costs increased 4240802 775 5472093 2014 9712895 2015 increase due following · 2020806 salary personnel costs mainly due increase stock based compensation cost 2210097 offset decrease payroll costs 189291 · 1694907 professional fees legal outsourced accounting acquisition related accounting legal fees · 356250 impairment brazilian distribution agreement · 460445 due provision bad debts · 57183 due increased insurance premiums offset decrease · 116389 depreciation expense due write brazil distribution rights · 99329 bank service charges · 133071 general administrative costs liquidity capital resources cash equivalents 4517604 working capital 6615258 december 31 2015 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations working capital required grow business satisfied initial contribution founders 2007 sales common stock credit financing including borrowings third parties sustained operational losses since inception december 31 2015 accumulated deficit 20987750 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern commenced implementing continue implement various measures address financial condition including increasing gross profit margins reducing operational costs overhead continuing seek debt equity financing however assurances company able raise additional capital favorable terms also satisfied working capital requirements 2015 2014 sale common stock borrowings third parties bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 december 31 2015 remaining outstanding amount bank loan mxn 479461 27651 bears interest 1228 july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2015 remaining outstanding amount bank loan mxn 2764743 159445 bears annual interest 93 promissory notes fourth quarter 2014 company entered 350000 promissory note private party promissory note due may 28 2015 june 1 2015 parties agreed convert note plus accrued interest common shares company september 15 2015 issued 191202 common shares valued 387100 lender 2015 company entered 450000 promissory note amended september 1 2015 note secured inventory provided interest 1 per month maturity date december 31 2015 connection issuing note company also issued warrants purchase 30000 common shares 085 per share expiration date april 20 2017 10000 common shares 250 per share expiration date september 1 2017 warrants aggregate estimated fair value 26048 september 15 2015 warrant 30000 common shares exercised note paid full december 23 2015 excluding accrued interest 22933 cash flows year ended december 31 2015 cash flows operating activities operating activities used 2509212 net cash 2015 compared 1583567 net cash used 2014 increase 925645 5845 net cash used operating activities 2509212 due increased net loss 10742806 partially offset increased noncash items 8540426 changes operating assets liabilities 306932 additional details see consolidated statements cash flows consolidated financial statements cash flows investing activities investing activities used 7137 net cash 2015 compared 68345 net cash used 2014 decrease net cash used investing 61208 primarily due reduction purchase furniture equipment 122942 offset proceeds disposal fixed assets 61734 additional details see consolidated statements cash flows consolidated financial statements cash flows financing activities financing activities provided 5746595 net cash 2015 compared 56833 cash used 2014 change cash flows financing activities 5803407 primarily due net proceeds private placement 4514000 proceeds sale common stock 1020000 net proceeds loans notes 187095 additional details see consolidated statements cash flows consolidated financial statements financial position total assets total assets increased 8281328 december 31 2014 10715426 december 31 2015 increase total assets 2434098 293 result increase current assets partially offset decrease noncurrent assets current assets current assets increased 6948213 december 31 2014 10715426 december 31 2015 increase current assets 3116144 44 attributable increases cash equivalents prepaid current assets accounts receivable net partially offset decrease inventories net cash equivalents cash equivalents increased 1128556 december 31 2014 4517604 december 31 2015 increase cash equivalents 3389048 primarily related cash provided financing activities 5746595 partially offset cash used operating activities 2509212 additional details see consolidated statements cash flows consolidated financial statements inventories net inventories net decreased 3862532 december 31 2014 3733213 december 31 2015 decrease inventories net 129319 33 result decreased demand line decline revenue accounts receivable net accounts receivable net increased 1678411 december 31 2014 1557560 december 31 2015 increase accounts receivable net 120851 72 primarily result reduced terms increased bad debt given certain customers prepaid expenses current assets prepaid current assets increased 278714 december 31 2014 255980 december 31 2015 increase prepaid current assets 22734 primarily related prepaid vendor trade credits received certain sales company’s slower moving inventory prepaid marketing noncurrent assets noncurrent assets decreased 1101373 december 31 2014 483765 december 31 2015 decrease noncurrent assets 617608 56 attributable decreases intangible assets net 617608 56 furniture equipment net 69956 41 compared december 31 2014 decrease intangible assets due 337500 impairment related brazilian distributor rights 125251 amortization expenses 154857 foreign currency translation loss related mexican subsidiary nonusd functional currency entity decrease furniture equipment net mainly related depreciation expenses total liabilities total liabilities decreased 3765589 december 31 2014 3422271 december 31 2015 decrease total liabilities 343418 9 attributable decrease current liabilities partially offset increase longterm debt net current portion current liabilities current liabilities decreased 3740692 december 31 2014 3307221 december 31 2015 decrease current liabilities 433471 12 attributable aggregate net decrease 180513 5 accounts payable accrued expenses current liabilities decrease 252958 note payable aggregate net decrease accounts payable accrued expenses current liabilities related part lower business volume timing payments decrease note payable related note plus accrued interest common shares company issued 191202 common shares valued 387100 september 15 2015 long term debt net current portion long term debt net current portion increased 24997 december 31 2014 115050 december 31 2015 increase 90053 360 primarily related new bank loans obtained company’s mexican subsidiary see “material commitments” additional information material commitments bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 december 31 2015 remaining outstanding amount bank loan mxn 479461 27651 bears interest 1228 july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2015 remaining outstanding amount bank loan mxn 2764743 159445 bears interest 93 promissory notes fourth quarter 2014 company entered 350000 promissory note private party promissory note due may 28 2015 june 1 2015 parties agreed convert note plus accrued interest common shares company september 15 2015 issued 191202 common shares valued 387100 lender 2015 company entered 450000 promissory note amended september 1 2015 note secured inventory provided interest 1 per month maturity date december 31 2015 note paid full december 23 2015 excluding accrued interest 22933 balance sheet arrangements none recent accounting pronouncements february 2016 financial accounting standard board “fasb” issued accounting standards update “asu” 201602 leases topic 842 asu 201602 requires lessee recognize assets liabilities arise operating leases lessee recognize statement financial position liability make lease payments lease liability rightofuse asset representing right use underlying asset lease term leases term 12 months less lessee permitted make accounting policy election class underlying asset recognize lease assets lease liabilities transition lessees lessors required recognize measure leases beginning earliest period presented using modified retrospective approach public business entities apply amendments asu 201602 fiscal years beginning december 15 2018 including interim periods within fiscal years ie january 1 2019 calendar year entity early application permitted public business entities nonpublic business entities upon issuance company yet determined effect adoption standard company’s consolidated financial position results operations january 2016 fasb issued accounting standards update 201601 “financial instrumentsoverall subtopic 82510 recognition measurement financial assets financial liabilities” “asu 201601” addresses certain aspects recognition measurement presentation disclosure financial statements guidance effective first quarter fiscal year 2019 early adoption permitted company currently evaluating impact guidance consolidated financial statements september 2015 fasb issued asu 201516 business combinations topic 805 simplifying accounting measurement period adjustments asu simplifies accounting adjustments made provisional amounts recognized business combination amendments eliminate requirement retrospectively account adjustments asu require acquirer recognize adjustments provisional amounts identified measurement period reporting period adjustment amounts determined also requires acquirer record period’s financial statements effect earnings changes depreciation amortization income effects result change provisional amounts calculated accounting completed acquisition date asu effective annual interim reporting periods beginning december 15 2016 currently evaluating whether adoption new guidance significant impact consolidated financial statements disclosures july 2015 fasb issued asu 201511 inventory simplifying measurement inventory asu simplifies guidance subsequent measurement inventory requiring inventory within scope update measured lower cost net realizable value rather lower cost market asu effective annual interim reporting periods beginning december 15 2016 currently evaluating whether adoption new guidance significant impact consolidated financial statements disclosures april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs standard amends existing guidance require debt issuance costs presented balance sheet deduction carrying amount related debt liability instead deferred charge asu effective retrospective basis annual interim reporting periods beginning december 15 2015 early adoption permitted adoption standard expected material impact companys consolidated financial position results operations fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management assess every reporting period whether substantial doubt entity’s ability continue going concern provide related footnote disclosures amendments define substantial doubt exists relevant conditions events considered aggregate indicate probable entity unable meet obligations become due within one year date financial statements issued available issued management identifies conditions events raise substantial doubt entity’s ability continue going concern management disclose 1 principal conditions events raised substantial doubt 2 management’s evaluation significance events management also consider whether plans intended mitigate conditions events alleviate substantial doubt management disclose information enables users understand plans alleviated substantial doubt amendments asu effective annual period ending december 15 2016 annual periods interim periods thereafter adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201412 compensation stock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu requires performance target affects vesting could achieved requisite service period treated performance condition performance target reflected estimating grant date fair value award update clarifies compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered amendments asu effective annual periods interim periods within annual periods beginning december 15 2015 earlier adoption permitted adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201409 revenue contracts customers asu supersedes revenue recognition requirements accounting standards codification 605 revenue recognition industryspecific guidance throughout codification standard requires entity recognizes revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu effective january 1 2017 applied retrospectively prior reporting period presented retrospectively cumulative effect initially applying asu recognized date initial application entities nonpublic entities amendments asu effective annual reporting periods beginning december 15 2017 interim periods within annual periods beginning december 15 2018 nonpublic entity may elect apply guidance earlier however prescribed asu company yet determined effect adoption standard impact companys consolidated financial position results operations management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis overview divine skin inc florida corporation organized january 26 2007 divine skin inc subsidiaries collectively “company” “divine skin” develop market sell products skin care hair care health care needs predecessors company developing marketing hair care personal care products ten years january 2007 operations divine skin inc new york company terminated assets distributed shareholders company currently conducts business “divine skin” trade name also “ds laboratories” trade name 100 outstanding common shares ds laboratories inc florida company formed january 2007 secure ds laboratories trade name issued outstanding shares ds laboratories transferred company nominal consideration january 2009 january 2009 company also acquired 100 outstanding shares sigma development holding co inc nominal amount sigma founded vice president’s father sigma founded upscale brand addition company’s product portfolio sigma operated related separate entity acquisition subsequent acquisition sigma operates wholly owned subsidiary company currently distribute hair growth products facial moisturizers antiaging facial cleansers sigma march 2009 polaris labs inc founded wholly owned subsidiary company polaris founded marketing purposes distribute polaris branded versions company’s products physicians foreign distributors currently distribute hair care products polaris company currently maintains network specialty retailers across north america distributors throughout europe asia south america divine skin researches formulates products currently offer skin care personal care hair care products develop market sell products specialty retailers spas salons distributors products produced various third party manufacturers orderbyorder basis significant accounting policies financial statements prepared accordance accounting principles generally accepted united states america preparation financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower end cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange product returns allowances 2011 approximately 613000 company established product return reserve 100252 december 31 2011 research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated audited financial statements years ended december 31 2010 december 31 2011 discussion intended supplement highlight information contained read conjunction financial statements related notes selected financial data presented elsewhere prospectus year ended december 31 2011 “ytd2011” year ended december 31 2010 “ytd2010” revenues net total net revenues increased 4228056 777 5444805 ytd2010 9672861 ytd2011 company’s product revenues represent primarily sales revita spectral dnc collectively represent 38 total sales revita cor spectral dncl together account approximately 17 total sales introduction packs containing assortment new products accounted 9 total sales 2011 revenues increased result company’s efforts establish distribution agreements distributors several global target markets general increase market acceptance products company conducts significant portion business cellway international inc wr group exclusive distribution agreements revenues agreements accounted approximately 27 company’s total revenues 2011 cost goods sold total cost goods sold increased 2868801 1523 1883160 ytd2010 4751961 ytd2011 increase due increase sales changes formula costs production sales mix production cost structure remained consistent 2010’s structure would expected 1373991 increase related increase sales therefore 2011 1377971 increase cost goods sold attributable changes product mix increased material costs increased production costs acquire market share selling marketing costs selling marketing costs increased 1229807 756 1626675 ytd2010 2856482 ytd2011 increase primarily due following increases · 838163 consulting commission costs majority due increased costs distribution representatives related expansion customer base growing sales · 180681 marketing promotion costs incurred broaden product offering promote additional sales · 71858 warehousing costs result transferring portion outsourced warehousing activities “in house” facilities · 56784 product development resulting improving formulas expanding product lines · 76150 travel entertainment costs incurred expand promote additional sales · 14403 net selling marketing costs partially offset decreases · 8232 postage result increased use electronic media general administrative costs general administrative costs increased 934318 440 2123670 ytd2010 3057988 ytd2011 increase due following increases · 264849 personnel costs due increased staffing result expanding operations · 85055 amortization depreciation expense associated primarily amortizing various deferred costs prepaid operations consulting exclusive distribution rights agreement · 85218 increased bad debts result expanded sales · 452366 professional fees financial consultants fees attorneys accountants related costs regulatory filings reporting · 38428 rent result expanded facilities · 58041 net various general administrative costs partially offset decreases · 49639 office expenses income decreased 26209 674 38887 income ytd2010 12678 income ytd2011 decrease primarily result non reoccurring gains realized ytd2010 favorably settling certain claims made prior vendors net loss net loss increased 831079 5312 149813 net loss ytd2010 980892 loss ytd2011 liquidity capital resources working capital 4306774 december 31 2011 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations along increased costs working capital required grow business satisfied initial contribution founders 2007 subscriptions purchase shares private placement began accepting subscriptions early 2009 private sales common stock recent securities purchase agreement based current plans next 12 months anticipate current working capital additional revenues earned expanded product line broadened distribution channels primary organic source funds future operating activities 2012 fund continued expansion product line extend reach broader markets including foreign markets may rely bank borrowing available private placement securities year ended december 31 2011 company accepted aggregate 2069500 16 investors subscribe 8039281 shares common stock private placement pursuant section 42 securities act regulation promulgated thereunder private placement provides issuance costs 459769 consisted 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds result company netted 1609731 proceeds subscription also year ended december 31 2011 company closed securities purchase agreement aggregate 1730000 4 investors subscribe 6178572 shares common stock spa provides issuance costs amounted 140100 cash 24674 warrants result company netted 1565226 proceeds subsequent events march 30 2012 company closed 15 million credit facility provided financial institution credit facility provides asset based lending collateralized assets company advances based 80 qualified accounts receivable 40 finished goods inventory credit facility provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum expires march 24 2014 may renewed certain conditions credit facility personally guaranteed chief executive officer certain conditions may called upon demand credit facility also provides referral fee 4 per annum 3 years cash flows year ended december 31 2011 cash flows operating activities operating activities used net cash year ended december 31 2011 2013053 net cash used reflects adjusted net loss year ended approximately 183395 adjusted various items impact net income impact cash period issuance warrants depreciation amortization net cash used also reflects 1829658 cash used net changes working capital items primarily financing provided vendors included · 1304182 used increase accounts receivable result increased sales · 993105 used increase inventory support increased sales · 417003 provided increase accounts payable accrued expenses result expanded payment terms suppliers · 50626 provided increase current liabilities assets net cash flows used investing activities investing activities used 48640 net cash year ended december 31 2011 net cash used composed primarily purchases furniture equipment cash flows financing activities financing activities provided net cash 3199631 year ended december 31 2011 raised capital private sale common shares private qualified investors recent securities purchase agreement financial position total assets total assets increased 3160132 1073 2943860 december 31 2010 6103992 december 31 2011 primarily result net increase current assets 3228880 components discussed net increase furniture equipment 34156 increases total assets partially offset decreases intangible assets 102905 increase cash 1137938 current assets net increase current assets 3228880 primarily associated 993105 increase inventory levels 1150499 increase accounts receivable decrease current assets 52661 1137938 increase cash net increases primarily driven need support increased sales specifically discussed follows inventory levels increased 84 primarily increased materials support expanded production keep pace increasing sales increased inventory hand december 31 2011 represents approximately 353 cogs 42 month supply based sell rate achieved year ended december 31 2011 management believes sales achieved 2011 continue throughout fiscal year 2012 management also understands inventory decisions result inventory turnover rate 28 times management intends maintain turnover rate future ultimate goal achieve least 3 times inventory turnover rate satisfactorily explored alternative production methodologies established profitable sustainable production cost structure improving inventory turns reduces cash required support expanding sales accounts receivable accounts receivable increased 1150499 increase represents 1559 increase accounts receivable balance december 31 2011 increase result general increase sales addition new distributors management believes current receivables collectable increase also result high portion fourth quarter sales occurring last month quarter enough time collect consistent normal collection cycle cash 1137938 increase cash explained fully preceding discussion cash flows referring consolidated statements cash flows included financial statements sales equity securities 2011 company raised capital two capital sources private sale shares qualified investors security purchase agreement discussed table capital funding less selling expenses material commitments none balance sheet arrangements none quantitative qualitative disclosures market risk applicable smaller reporting companies recent accounting pronouncements recent accounting pronouncements company adopted required adopt future summarized revenue recognition january 1 2011 company adopted fasb asu 200913 “revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force” asu amended criteria evaluate individual delivered items multiple deliverable arrangement allocate consideration received adoption guidance material impact company’s consolidated financial statements fair value measurement may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap international financial reporting standards ifrs asu issued provide largely identical guidance fair value measurement disclosure requirements entities disclose fair value asset liability instrument classified shareholders equity consolidated financial statements provided international accounting standards boards new ifrs 13 fair value measurement asu extend use fair value rather provides guidance fair value applied already required permitted gaap guidance applied prospectively interim annual periods beginning december 15 2011 early adoption permitted period adoption reporting entity required disclose change valuation technique related inputs results applying asu quantify total effect practicable company believes adoption guidance material impact financial statement disclosures fair value financial instruments company records financial assets liabilities fair value defined applicable accounting standards exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measure date company uses valuation techniques measure fair value maximizing use observable outputs minimizing use unobservable inputs standard describes fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value following level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs include management’s best estimate market participants would use pricing asset liability measurement date inputs unobservable market significant instrument’s valuation comprehensive income june 2011 fasb issued new guidance gives entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total comprehensive income entity also required present face financial statements reclassification adjustments items reclassified comprehensive income net income statementss components net income components comprehensive income presented guidance applied retrospectively fiscal periods interim periods within years beginning december 15 2011 early adoption permitted december 2011 fasb issued new guidance deferring changes june 2011 relating presentation classification adjustments company’s adoption new guidance related presentation reclassification adjustments january 1 2012 expected material impact consolidated financial position results operations cash flows intangibles goodwill september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment gives entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit step 1 goodwill impairment test entities determine basis qualitative factors fair value reporting unit likely less carrying amount twostep impairment test would required otherwise testing would needed amended guidance effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted company believes adoption guidance material impact consolidated financial statements variety proposed otherwise potential accounting standards currently study standardsetting organizations various regulatory agencies tentative preliminary nature proposed standards management determined whether implementation proposed standards would material company’s consolidated financial statements asus effective december 31 2010 expected significant effect company’s consolidated financial position results operations risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry net loss 149813 980892for year ended december 31 2010 year ended december 31 2011 respectively historically incurred losses may incur losses future may adversely affect financial condition net loss 149813 980892 year ended december 31 2010 year ended december 31 2011 respectively also incurred net losses 316222 year ended december 31 2009 event unable sustain increased gross margins reduced costs andor continue generate sufficient additional revenues offset costs levels achieved year ended december 31 2012 better may sustain losses future ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able sustain profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments may adversely affect margins lose one customers longterm agreements several distributors majority customers may cancel purchase order defer shipments products time furthermore distributors terminate agreements company relatively short notice maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect margins ability maintain profitability fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able use proprietary knowhow offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit could expose us following risks among others may required · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers significant portion raw materials suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase majority raw material approximately eight different suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance three primary suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials costs passed customers failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders could result lost orders revenue rely thirdparty suppliers manufacturers provide raw materials products produce products limited control suppliers manufacturers may able obtain quality products timely basis sufficient quantity substantially products manufactured unaffiliated manufacturers may longterm contracts suppliers manufacturing sources expect compete companies raw materials production import capacity assurance significant disruption supply raw materials intended sources event disruption would able locate alternative suppliers materials comparable quality acceptable price addition cannot certain unaffiliated manufacturers able fill orders timely manner experience significant increased demand need replace existing manufacturer assurance additional supplies raw materials additional manufacturing capacity available required terms acceptable us supplier manufacturer would allocate sufficient capacity us order meet requirements addition even able expand existing find new manufacturing raw material sources may encounter delays production added costs result time takes train suppliers manufacturers methods products quality control standards delays interruption increased costs supply raw materials manufacture products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers manufacturers continue provide raw materials manufacture products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control manufacturers products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products although seek ensure infringe intellectual property rights others assurance third parties assert intellectual property infringement claims us like retailers distributors manufacturers skin care personal care products face inherent risk exposure product liability claims event use products sell results injury management believes currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur certain individuals groups individuals may seek monetary retribution future could subject additional laws regulations fda federal state foreign regulatory authorities subject stringent interpretations current laws regulations may adversely impact business operations unable predict nature future laws regulations interpretations applications predict effect additional governmental regulations administrative orders promulgated would business future fda governmental regulatory bodies could require reformulation certain products meet new standards fda approval prior marketing sale certain products requirements could materially adverse affect business financial condition results operations cash flows cost comply new changing regulations could material furthermore provide assurances product would ultimately comply new changing regulations business may adversely affected unfavorable publicity within skin care personal care market believe skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers manufacturers dependent services third parties purchase products thirdparty suppliers manufacturers pursuant purchase orders without longterm agreements event current supplier manufacturer unable meet manufacturing delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers manufacturers none agreements long term also rely thirdparty carriers product shipments including shipments distribution facilities therefore subject risks including employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations skin care hair care personal care product markets intensely competitive strengthening competitors could harm business skin care hair care personal care products industry intensely competitive many competitors greater name recognition financial resources may give competitive advantage competitors may also able devote greater resources marketing promotional pricing campaigns may influence continuing potential independent associates members buy products competitors rather us competition could adversely affect business current market share many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains risks related common stock market common stock limited persons purchase common stock may able resell shares purchase price paid common stock trades bulletin board liquid market currently limited public market common stock cannot assure active public market common stock develop sustained future active market common stock develop sustained price may continue decline subject “penny stock” rules brokers cannot generally solicit purchase common stock adversely affects liquidity market price sec adopted regulations generally define “penny stock” equity security market price less 500 per share subject specific exemptions market price common stock bulletin board substantially less 500 per share therefore currently considered “penny stock” according sec rules designation requires brokerdealer selling securities disclose certain information concerning transaction obtain written agreement purchaser determine purchaser reasonably suitable purchase securities due factors beyond control stock price may volatile following factors could affect market price common stock · failure increase revenue succeeding quarter · failure achieve maintain profitability · failure meet revenue earnings guidance · loss distribution relationships · sale large amount common stock shareholders · announcement pending completed acquisition failure complete proposed acquisition · adverse court ruling regulatory action · failure meet financial analysts’ performance expectations · changes earnings estimates recommendations financial analysts · changes market valuations similar companies · short selling activities · announcement change direction business · inability manage international operations · actual anticipated variations quarterly forecasted results operations · announcements us competitors significant contracts acquisitions commercial relationships joint ventures capital commitments past following periods volatility market price company’s securities class action litigation often instituted securities class action suit us could result substantial costs divert management’s time attention would otherwise used benefit business may able attract attention major brokerage firms could material impact upon price common stock likely securities analysts major brokerage firms provide research coverage common stock since firm cannot recommend purchase common stock penny stock rules referenced earlier risk factor absence coverage limits likelihood active market develop common stock may also make difficult us attract new investors times acquire additional capital shares eligible sale convertible shares future could negatively affect stock price dilute shareholders market price common stock could decline result sales large number shares common stock perception sales could occur might also make difficult us raise funds issuance securities december 31 2011 105029613 issued outstanding shares common stock officers directors held controlled 72440366 shares common stock excluding outstanding preferred shares date report 10000000 shares series preferred stock convertible shares common stock one basis preferred shares held officers directors founders shares vote 1 2 basis vote common stock except otherwise required florida law shares series preferred stock convertible shares common stock onetoone basis time discretion holder automatically september 15 2012 addition december 31 2011 company outstanding approximately 2538130 warrants exercisable 001 per share 2004450 warrants exercisable 050 per share issued options securities equity incentive plan however may issue andor register additional shares options warrants future connection acquisitions compensation otherwise cannot predict effect market sales shares held stockholder availability shares future sale market price common stock item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies consolidated financial statements prepared accordance accounting principles generally accepted united states america preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation consolidated financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company incurs formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses consolidated statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated financial statements years ended december 31 2013 december 31 2012 discussion intended supplement highlight information contained read conjunction consolidated financial statements related notes selected financial data presented elsewhere report year ended december 31 2013 year ended december 31 2012 revenues net total net revenues increased 2427237 216 11224424 2012 13651661 2013 product revenues represent primarily sales revita cor individually exceeded 10 total sales collectively represented 40 total sales addition spectral dncn represents 9 total sales products individually exceeded 5 total sales revenues increased primarily due carryover unfilled orders december 31 2012 addition mexican subsidiary effective november 1 2012 purchased essentially 100 outstanding common stock ds mexico former mexican distributor resulted approximate 29 million additional net revenues external customers year ended december 31 2013 furthermore recognized revenues approximately 19 million product ordered december 2012 unable fulfill prior december 31 2012 subsequently shipped year ended december 31 2013 continue marketing sales efforts expand customer base primary focus expanding distributors domestic foreign conduct significant portion business various distributors exclusive distribution agreements revenues top ten customers accounted approximately 41 total revenues year ended december 31 2013 cost goods sold total cost goods sold increased 193386 29 6749657 2012 6943043 2013 small increase primarily related increase sales addition mexican subsidiary gross margin percentage periods 399 2012 491 2013 us operations accounting 75 gross margin dollars approximately 5033000 mexico accounting 25 gross margin dollars approximately 1675000 selling marketing costs selling marketing costs decreased 89326 23 3836540 2012 3747213 2013 decrease due following decreases · 25657 product development result increased effort optimize current products · 13505 telephone costs result primarily lower rates · 345743 consulting commissions result reduced staffing restructuring sales incentive programs increase effectiveness forgoing decreases partially offset following increases · 65797 marketing promotion costs result product launch promoting new customers expanded business new customers consolidation ds mexico · 208606 freight shipping costs result onetime accommodation customers experienced significant delays backorders 2013 also result increased international shipping new existing customers · 23681 travel entertainment costs incurred expand promote global sales · 2505 sales marketing items general administrative costs general administrative costs increased 2004700 472 4249470 2012 6254170 2013 increase due following increases · 689471 personnel costs primarily associated mexican operations accounted 885021 increase due reporting full year mexican operations 2013 increase partially offset decrease us based personnel costs 195550 result cost cutbacks · 269096 accounting financial services primarily result increased assurance services · 272211 investor relations services primarily stock based compensation incurred improve market awareness · 33920 corporate governance public relations costs established full time active board 2013 enhanced public relations efforts · 86174 insurance result expanded coverage · 60526 rent primarily result rate increases · 454699 administration costs · 423449 depreciation amortization increased intangible assets added newly acquired mexican distributor along increased amortization associated customer acquired mexican acquisition · 79884 various general administrative costs primarily associated consolidation ds mexico forgoing increases partially offset following decrease · 216324 decrease legal services result resolving certain litigation modifications fee structure · 148406 bad debts primarily result successful collection efforts liquidity capital resources cash equivalents 2872946 working capital 4049402 december 31 2013 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations working capital required grow business satisfied initial contribution founders 2007 private sales common stock credit financing despite losses 2013 2012 believe increasing sales gross profit margins maintaining current operational structure administrative expenses minimize cash needed support current operations largest consumption cash working capital necessary support expanding sales sale additional equity debt securities convertible result dilution stockholders incurrence indebtedness would result increased fixed obligations may also result covenants would restrict operations conditions raise substantial doubt company’s ability continue going concern commenced implementing continue implement various measures address financial condition including increasing gross profit margins reducing operational costs overhead continuing seek debt equity financing however assurances company able raise additional capital favorable terms april 6 2012 closed 15 million credit facility provided financial institution credit facility provides asset based lending collateralized assets advances based 70 qualified accounts receivable 40 eligible finished goods inventory credit facility amended provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum renewed 10 million credit facility renewed 90 days june 30 2014 credit facility personally guaranteed chief executive officer certain conditions may called upon demand event default events include limited failure pay amount due agreement failure perform material term covenant bankruptcy federal state tax lien filed company occurrence court order restrains part business loan agreement also provides certain covenants precludes us following except ordinary course business making distributions shareholders assigning exchanging disposing collateral permit create liens upon collateral pay dividends make loans advances including officers employees assume guaranty endorse become directly contingently liable issue evidence indebtedness transactions affiliates less favorable terms compared market sale transfer dispose substantially assets operating subsidiary entering transaction results change control company compliance covenants credit facility except provide bank 2012 tax return within 90 days year end waived credit facility also provides referral fee 4 per annum three years december 31 2013 outstanding balance 582383 credit facility 175115 available borrow advance formulas qualified accounts receivable finished goods inventory december 31 2013 also satisfied working capital requirements 2013 2012 sale common stock advances related parties third parties december 10 2012 received unsecured loan 314000 one consultants also shareholder company loan noninterest bearing matured december 11 2013 first quarter 2013 also received additional 240000 consultantshareholder loans converted 456000 shares common stock september 27 2013 also received loan daniel khesin chief executive officer 39000 loan unsecured noninterest bearing matured december 25 2013 december 31 2013 loan repaid january 20 2013 received unsecured loan 70000 gamma investors also shareholder loan bears interest 3 per month matured may 20 2013 loan repaid full along 4500 accrued interest third quarter 2013 company sold 381192 shares common stock four private investors prices ranging 100 115 per share total 406300 fourth quarter 2013 company sold aggregate 8943 shares private investor 112 per share total 10000 fees paid third party transaction company also sold 1965000 shares private placement “pipe” offering 11 accredited investors 160 per share gross proceeds 3144000 received two tranches first december 2013 2942000 second january 2014 202000 fees paid registered brokerdealer legal counsel resulting issuance costs 151051 netted proceeds cash flows year ended december 31 2013 cash flows operating activities operating activities used net cash year ended december 31 2013 980057 amount two primary components net loss adjusted noncash items changes operating assets liabilities net loss adjusted various items impact net loss impact cash period issuance warrants stock services depreciation amortization resulted net loss adjusted noncash items 1284487 partially offset changes operating assets liabilities provided cash 304430 follows · 193733 used increase gross accounts receivable including noncash effect changes allowance doubtful accounts · 701651 provided reduction inventory associated utilization excess inventory components · 296816 used decrease accounts payable resulting reducing outstanding vendor balances · 241067 provided accrued expenses result reduction certain accrued expenses commissions · 147738 used net changes current assets liabilities primarily result cash paid certain prepaid advertising programs mexican operations cash flows used investing activities investing activities used 81958 net cash year ended december 31 2013 net cash used primarily composed following · 46794 used purchase equipment production us sales operations mexico · 35139 used purchase injection molds · 25 used nominal activities cash flows financing activities financing activities provided 3534935 net cash result following · 133725 provided advances net repayments asset based credit facility · 310000 provided shareholder loans · 117752 used repay loans notes primarily shareholder loans · 10000 provided subscription purchase common shares investor · 17973 provided related party repayments · 390040 provided net issuance costs private investors exchange 390135 common shares · 2790949 provided net issuance costs private placement offering exchange 1965000 common shares financial position total assets total assets increased 1489916 181 8224676 december 31 2012 9714592 december 31 2013 primarily result cash generated private placement offering net increase current assets 1943496 components discussed increase total assets also result decrease 20383 assets considered nominal decrease 86762 furniture equipment net primarily due depreciation decrease 328463 intangible assets due amortization current assets net increase current assets 1943496 primarily associated increase cash 2460457 primarily result private placement well 103688 increase accounts receivable 130721 increase prepaid expenses current assets increases partially offset 751371 decrease inventory levels net changes primarily driven changes sales factors specifically discussed follows inventory levels decreased 218 result efforts utilize excess inventory although inventory hand decreased average inventory represents approximately 44 cogs five month supply based sell rate achieved year ended december 31 2013 resulting inventory turnover rate 22 times intend improve turnover rate future ultimate goal achieve least 30 times inventory turnover rate 2014 satisfactorily explored alternative production methodologies established profitable sustainable production cost structure target turnover result stocking chemicals materials anticipation planned sales increases 2014 accounts receivable net accounts receivable net increased 103688 primarily result decrease allowance doubtful accounts prepaid expenses current assets prepaid expenses increased 82 primarily result advances services mexico material commitments none balance sheet arrangements none recent accounting pronouncements july 2012 fasb issued asu 201202 “intangiblesgoodwill topic 350 testing indefinitelived intangible assets impairment asu simplifies entities test indefinitelived intangible assets impairment improve consistency impairment testing requirements among longlived asset categories amended standards permit assessment qualitative factors determine whether likely fair value indefinitelived intangible asset less carrying value assets assessment concludes likely fair value carrying value amended standards eliminate requirement perform quantitative impairment testing outlined previously issued standards guidance effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted adoption standard material impact company’s consolidated financial position results operations february 2013 fasb issued asu 201302 “reporting amounts reclassified accumulated comprehensive income” amendments update require entity provide information amounts reclassified accumulated comprehensive income component addition entity required present either face income statement notes thereto significant amounts reclassified accumulated comprehensive income respective net income line item new guidance applied prospectively interim annual periods beginning december 15 2012 adoption asu 201302 material impact company’s consolidated financial statements march 2013 fasb issued asu 201305 “foreign currency matters parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity” amendment allows entity release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity effective fiscal years interim reporting periods beginning december 15 2013 early adoption permitted adoption guidance material impact consolidated financial statements related disclosures july 2013 fasb issued asu 201311 “presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments update require unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except limited circumstances amendments update require new recurring disclosures new guidance applied prospectively interim annual periods beginning december 15 2013 adoption asu 201311 material impact company’s consolidated financial statements management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry net loss 3623110 3225290 years ended december 31 2012 december 31 2013 respectively historically incurred losses may incur losses future may adversely affect financial condition net loss 3623110 3225290 years ended december 31 2012 december 31 2013 respectively event unable attain increased gross margins reduced costs andor generate sufficient additional revenues offset costs may continue sustain losses future ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able reach profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments lose one customers may adversely affect financial position results operations longterm agreements several distributors majority customers may cancel purchase order defer shipments products time furthermore distributors terminate agreements company relatively short notice maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect financial position results operations fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party studies clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials would require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology additionally assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit may require us · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers raw materials purchase per order basis without long term contracts suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase raw materials suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays decreased sales tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials reasonable costs failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders resulting lost orders revenue rely thirdparty suppliers compounders provide raw materials products compound products limited control suppliers compounders may able obtain quality products timely basis sufficient quantity substantially products compounded unaffiliated compounders may longterm contracts suppliers compounding sources expect compete companies raw materials production import capacity experience significant increased demand need replace existing compounder assurance additional supplies raw materials additional compounding capacity available required terms acceptable us supplier compounder would allocate sufficient capacity us order meet requirements addition even able expand existing find new compounding raw material sources may encounter delays production added costs result time takes train suppliers compounding methods products quality control standards delays interruption increased costs supply raw materials compounding products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers compounding continue provide raw materials compounding products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control compounding products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold one patent pending review uspo currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products like distributors manufacturers skin care personal care products face inherent risk exposure product liability claims event use products sell results injury believe currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future predict effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur individuals may seek monetary retribution future could subject additional laws regulations promulgated fda federal state foreign regulatory authorities subject stringent interpretations current laws regulations may adversely impact business operations unable predict nature future laws regulations interpretations applications predict effect additional governmental regulations administrative orders promulgated would business future fda governmental regulatory bodies could require reformulation certain products meet new standards fda approval prior marketing sale certain products requirements could materially adverse affect business financial condition results operations cash flows cost comply new changing regulations could material furthermore cannot provide assurances product would ultimately comply new changing regulations business may adversely affected unfavorable publicity within skin care personal care market believe hair care skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting hair care skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers compounders dependent services third parties purchase products thirdparty suppliers compounders pursuant purchase orders without longterm agreements event current supplier compounder unable meet compounding delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers compounders none agreements long term also rely thirdparty carriers product shipments including shipments warehouse facilities therefore subject risks including limited employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations website internal systems may subject intentional disruption could adversely impact reputation future sales could target cyberattacks designed penetrate network security internal systems misappropriate proprietary information andor cause interruptions services delay delivery products customers actual perceived breach network security occurs may expose us loss information litigation possible liability security breach could also divert efforts technical management personnel addition security breach could impair ability operate business happens reputation could harmed revenues could decline business could suffer involved several litigation matters could harm business brand reputation financial condition results operations involved lawsuits involving various suppliers service providers litigation party may result onerous unfavorable judgment may reversed upon appeal may decide settle lawsuits unfavorable terms addition defending claims costly impose significant burden management employees may receive unfavorable preliminary interim rulings course litigation negative outcome could result payments monetary damages adverse effects market price common stock changes business practices accordingly business brand reputation financial condition results operations could materially adversely affected many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains identified material weaknesses internal control financial reporting fail develop maintain effective system internal controls may able accurately report financial results prevent fraud result current potential shareholders could lose confidence financial reporting would harm business trading price stock december 31 2013 chief executive officer chief financial officer concluded internal controls financial reporting effective providing reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles process remediating material weaknesses yet able complete remediation efforts mitigate current limited resources limited employees rely heavily direct management oversight transactions along use legal accounting professionals grow expect increase number employees enable us implement adequate segregation duties within internal control framework take additional time design implement test controls procedures required enable management conclude internal control financial reporting effective cannot time estimate long take complete remediation efforts cost efforts cannot assure measures plan take effective mitigating preventing significant deficiencies material weaknesses internal control financial reporting failure maintain implement required new improved controls difficulties encounter implementation could result additional material weaknesses cause us fail meet periodic reporting obligations existence material weakness could result errors financial statements could result restatements financial statements cause us fail meet reporting obligations cause investors lose confidence reported financial information leading decline trading price stock independent registered public accounting firms report contains explanatory paragraph expresses substantial doubt ability continue going concern december 31 2013 accumulated deficit 8307420 primarily result recurring losses operations negative cash flows accumulated deficit independent registered public accounting firm included report year ended december 31 2013 explanatory paragraph expressing substantial doubt ability continue going concern ability continue going concern contingent upon among factors ability obtain sufficient financing support operations depend heavily services daniel khesin loss mr khesin could materially harm company rely daniel khesin chief executive chief financial officer loss services mr khesin could materially harm business entered employment agreement mr khesin presently maintain keyman life insurance policy mr khesin risks related common stock common stock may affected limited trading volume may fluctuate significantly limited public market common stock assurance active trading market common stock develop result could adversely affect shareholders’ ability sell common stock short time periods possibly thinly traded common stock volatile common stock traded active public market common stock experienced likely experience future significant price volume fluctuations could adversely affect market price common stock without regard operating performance addition believe factors quarterly fluctuations financial results changes overall economy condition financial markets could cause price common stock fluctuate substantially currently intend pay dividends common stock consequently investor’s ability achieve return investment depend appreciation price common stock currently intend invest future earnings fund development growth business payment dividends discretion board directors depend results operations factors board directors may deem relevant pay dividends shareholder’s ability achieve return investment company depend future appreciation market price company’s common stock guarantee company’s common stock appreciate value even maintain price shareholder initially purchased common stock shares common preferred stock available issuance shares eligible future sale introduced market could dilute current stockholders andor hurt stock price authorized issue 300000000 shares common stock 30000000 shares preferred stock exercise outstanding options andor warrants may cause substantial dilution hold shares common stock prior exercises addition sales substantial amounts common stock public market holders perceptions sales may take place may lower common stocks market price may sell authorized unissued common stock satisfy funding requirements also authorized issue 30000000 shares preferred stock without stockholder approval future series class preferred stock may rights superior rights holders common stock sale proposed sale substantial amounts common preferred stock may adversely affect market price common stock price stockholders may also experience substantial dilution item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies consolidated financial statements prepared accordance accounting principles generally accepted united states america preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation consolidated financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation potential acquisitions factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company’s revenue recognition policies compliance asu 201409 “revenue contracts customers” establishes core principle revenue recognition entity recognize revenue depict transfer goods services customers amount reflects consideration entity expects entitled exchange good services company recognizes revenue following four criteria met · identify contracts customer · identify separate performance obligations contract · determine transaction price · allocate transaction price separate performance obligations shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company incurs formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses consolidated statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated financial statements 2016 2015 discussion intended supplement highlight information contained read conjunction consolidated financial statements related notes selected financial data presented elsewhere report year ended december 31 2016 year ended december 31 2015 net revenues total net revenue increased 1169415 99 11777760 2015 12947175 2016 increase net revenue due increase net revenue us mexico net revenue us increased 687061 8 8625778 2015 9312838 2016 net revenue mexico increased 482355 153 3151982 2015 3634337 2016 increase mexico 397422 net revenue mexico 84933 176 related strengthening us dollar versus mexican peso increase total net revenues us primarily due marketing sales efforts expand customer base primary focus expanding distributors domestic foreign cost goods sold total cost goods sold increased 1124353 21 5377518 2015 6501871 2016 us cost goods sold increased 950161 24 3956106 2015 4906266 2016 increase us cost goods sold totaling 950161 primarily due increase net revenue 687061 charge inventory obsolescence totaling approximately 272000 cost goods sold mexico increased 174192 12 1421412 2015 1595605 2016 increase cost goods sold mexico totaling 143520 primarily due increase net revenue 30672 176 related strengthening us dollar versus mexican peso gross profit overall increase cost goods sold percentage net revenue contributed decrease overall gross margin 54 2015 50 2016 consolidated gross profit increased 45062 1 6400242 2015 6445304 2016 total increase gross profit gross profit us decreased 263100 56 4669672 2015 4406572 2016 gross profit mexico increased 308163 178 1730570 2015 2038732 2016 selling marketing costs selling marketing costs decreased 4203892 47 9020546 2015 4816654 2016 decrease due following · 2442670 commissions consulting primarily result decrease personnel costs 341993 311000 commissions stock compensation costs 1602620 recorded 2015 · 1895045 marketing promotion primarily result 2118666 common stock issued distributor hong kong incentive offset increase 295244 online marketing general administrative costs general administrative costs increased 762415 10 7601823 2015 8364238 2016 increase due following · 1142330 professional fees legal outsourced accounting audit fees · 151025 salary personnel costs mainly due increase stock based compensation offset decrease · provision bad debt 497853 income expenses expense decreased 281627 389984 expense 2015 108357 expense 2016 decrease result charge impaired intangible brand right agreement 337500 2015 offset acquisition loss reserve associated attempted brazilian acquisition 250000 increased income 169901 interest income 33226 liquidity capital resources cash equivalents 322319 working capital 279218 december 31 2016 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations working capital required grow business satisfied initial contribution founders 2007 sales common stock credit financing including borrowings third parties sustained operational losses since inception december 31 2016 accumulated deficit 27918109 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern commenced implementing continue implement various measures address financial condition including increasing gross profit margins reducing operational costs overhead continuing seek debt equity financing however assurances company able raise additional capital favorable terms equipment loan august december 2016 company’s mexican subsidiary obtained equipment loan mxn 848500 41050 payable monthly installments 30 months payment began september 2016 december 31 2016 remaining outstanding amount equipment loan mxn 514657 24906 bears annual interest 0 bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 bears interest 1228 december 31 2016 remaining outstanding repaid july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2016 remaining outstanding amount bank loan mxn 1771802 85743 bears annual interest 93 cash flows year ended december 31 2016 cash flows operating activities operating activities used 4245464 net cash 2016 compared 2509212 net cash used 2015 increase 1736252 69 net cash used operating due decreased net loss 3803448 decrease noncash items 6890180 increase changes operating assets liabilities 1350478 additional details see consolidated statements cash flows consolidated financial statements cash flows investing activities investing activities used 48582 net cash 2016 compared 7137 net cash used 2015 decrease net cash used investing 41445 primarily due reduction purchase furniture equipment additional details see consolidated statements cash flows consolidated financial statements cash flows financing activities financing activities used 88574 net cash 2016 compared 5746595 cash used 2015 change cash flows financing activities 5835168 primarily due net proceeds private placement 4514000 proceeds sale common stock 1020000 proceeds issuance warrants 25500 2015 additional details see consolidated statements cash flows consolidated financial statements financial position total assets total assets decreased 10715426 december 31 2015 5718284 december 31 2016 decrease total assets 4997142 47 result increase current assets partially offset decrease noncurrent assets current assets current assets decreased 10064357 december 31 2015 4716296 december 31 2016 decrease current assets 5348061 53 attributable decreases cash equivalents decrease inventories decrease prepaid current assets offset increase accounts receivable net cash equivalents cash equivalents decreased 4517604 december 31 2015 322319 december 31 2016 decrease cash equivalents 4195285 primarily related cash proceeds sale stocks warrants 5559000 2015 used 2016 additional details see consolidated statements cash flows consolidated financial statements inventories net inventories net decreased 3733213 december 31 2015 2251005 december 31 2016 decrease inventories net 1482208 40 result reserve obsolescence 272000 reduction inventory hand result increase demand back orders accounts receivable net accounts receivable net increased 1557560 december 31 2015 2028360 december 31 2016 increase accounts receivable net 470800 30 primarily result sales recorded last quarter 2016 compare period 2015 prepaid expenses current assets prepaid current assets decreased 255980 december 31 2015 114612 december 31 2016 decrease prepaid current assets 141368 primarily related amortization prepaid marketing expenses 2015 noncurrent assets noncurrent assets increased 651069 december 31 2015 1001988 december 31 2016 increase noncurrent assets 350919 54 attributable increase furniture equipment net 6992 488054 related party receivable fernando tamez distributor spain offset 143470 amortization expenses associated intangible assets total liabilities total liabilities increased 3422271 december 31 2015 4484665 december 31 2016 increase total liabilities 1062394 31 attributable decrease current liabilities partially offset increase longterm debt net current portion current liabilities current liabilities increased 3307221 december 31 2015 4437078 december 31 2016 increase current liabilities 1129857 34 attributable aggregate net increase 1315605 accounts payable current liabilities offset aggregate decrease 185748 accrued expenses short term debt aggregate net increase accounts payable current liabilities related part higher business volume timing payments long term debt net current portion longterm debt net current portion decreased 115050 december 31 2015 47587 december 31 2016 decrease 67463 59 primarily related bank loans payments see “material commitments” additional information material commitments equipment loan august december 2016 company’s mexican subsidiary obtained equipment loan mxn 848500 41050 payable monthly installments 30 months payment began september 2016 december 31 2016 remaining outstanding amount equipment loan mxn 514657 24906 bears annual interest 0 bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 december 31 2016 bank loan repaid july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2016 remaining outstanding amount bank loan mxn 177180213 85744 bears annual interest 93 balance sheet arrangements none recent accounting pronouncements february 2016 financial accounting standard board “fasb” issued accounting standards update “asu” 201602 leases topic 842 asu 201602 requires lessee recognize assets liabilities arise operating leases lessee recognize statement financial position liability make lease payments lease liability rightofuse asset representing right use underlying asset lease term leases term 12 months less lessee permitted make accounting policy election class underlying asset recognize lease assets lease liabilities transition lessees lessors required recognize measure leases beginning earliest period presented using modified retrospective approach public business entities apply amendments asu 201602 fiscal years beginning december 15 2018 including interim periods within fiscal years ie january 1 2019 calendar year entity early application permitted public business entities nonpublic business entities upon issuance company yet determined effect adoption standard company’s consolidated financial position results operations january 2016 fasb issued accounting standards update 201601 “financial instrumentsoverall subtopic 82510 recognition measurement financial assets financial liabilities” “asu 201601” addresses certain aspects recognition measurement presentation disclosure financial statements guidance effective first quarter fiscal year 2019 early adoption permitted company currently evaluating impact guidance consolidated financial statements september 2015 fasb issued asu 201516 business combinations topic 805 simplifying accounting measurement period adjustments asu simplifies accounting adjustments made provisional amounts recognized business combination amendments eliminate requirement retrospectively account adjustments asu require acquirer recognize adjustments provisional amounts identified measurement period reporting period adjustment amounts determined also requires acquirer record period’s financial statements effect earnings changes depreciation amortization income effects result change provisional amounts calculated accounting completed acquisition date asu effective annual interim reporting periods beginning december 15 2016 adoption new guidance significant impact consolidated financial statements disclosures july 2015 fasb issued asu 201511 inventory simplifying measurement inventory asu simplifies guidance subsequent measurement inventory requiring inventory within scope update measured lower cost net realizable value rather lower cost market asu effective annual interim reporting periods beginning december 15 2016 adoption new guidance significant impact consolidated financial statements disclosures april 2015 fasb issued asu 201503 interest imputation interest subtopic 83530 simplifying presentation debt issuance costs standard amends existing guidance require debt issuance costs presented balance sheet deduction carrying amount related debt liability instead deferred charge asu effective retrospective basis annual interim reporting periods beginning december 15 2015 early adoption permitted adoption standard expected material impact companys consolidated financial position results operations fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management assess every reporting period whether substantial doubt entity’s ability continue going concern provide related footnote disclosures amendments define substantial doubt exists relevant conditions events considered aggregate indicate probable entity unable meet obligations become due within one year date financial statements issued available issued management identifies conditions events raise substantial doubt entity’s ability continue going concern management disclose 1 principal conditions events raised substantial doubt 2 management’s evaluation significance events management also consider whether plans intended mitigate conditions events alleviate substantial doubt management disclose information enables users understand plans alleviated substantial doubt amendments asu effective annual period ending december 15 2016 annual periods interim periods thereafter adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201412 compensation stock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu requires performance target affects vesting could achieved requisite service period treated performance condition performance target reflected estimating grant date fair value award update clarifies compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered amendments asu effective annual periods interim periods within annual periods beginning december 15 2015 earlier adoption permitted adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201409 revenue contracts customers asu supersedes revenue recognition requirements accounting standards codification 605 revenue recognition industryspecific guidance throughout codification standard requires entity recognizes revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu effective january 1 2017 applied retrospectively prior reporting period presented retrospectively cumulative effect initially applying asu recognized date initial application entities nonpublic entities amendments asu effective annual reporting periods beginning december 15 2017 interim periods within annual periods beginning december 15 2018 nonpublic entity may elect apply guidance earlier however prescribed asu company completed review requirements asu 201409 current accounting policies focused accounting sales discounts shipping sales taxes incentives result review concluded current accounting policies line new standard business model evolves continue review group’s contracts transactions customers ensure compliance ifrs 15 adoption management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements item 7a item 7 management’s discussion analysis financial condition results operation introductory statements information included incorporated reference filing may contain forwardlooking statements information may involve known unknown risks uncertainties factors may cause actual results performance achievements materially different future results performance achievements expressed implied forwardlooking statements forwardlooking statements involve assumptions describe future plans strategies expectations generally identifiable use words “may” “will” “should” “expect” “anticipate” “estimate” “believe” “intend” “project” negative words variations words comparable terminology filing contains forwardlooking statements regarding among things projected sales profitability b company’s growth strategies c company’s future financing plans company’s anticipated needs working capital actual events results may differ materially discussed forwardlooking statements result various factors including without limitation matters described filing generally light risks uncertainties assurance forwardlooking statements contained filing fact occur read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies consolidated financial statements prepared accordance accounting principles generally accepted united states america preparation consolidated financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes consolidated financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation consolidated financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors adverse changes areas could negatively impact company’s financial position results operations cash flows accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost goods sold research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses consolidated statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated financial statements years ended december 31 2012 december 31 2011 discussion intended supplement highlight information contained read conjunction consolidated financial statements related notes selected financial data presented elsewhere report year ended december 31 2012 year ended december 31 2011 revenues net total net revenues increased 1551562 16 9672861 2011 11224424 2012 product revenues represent primarily sales revita spectral dnc individually exceeded 10 total sales collectively represented 34 total sales products individually exceeded 5 total sales revita cor spectral dncl collectively accounted another 15 total sales also sell “intro deals” assortment primary products means introducing products new customers sales intro deals accounted another 8 total sales revenues increased primarily due extensive marketing sales efforts expand customer base primary focus expanding distributors domestic foreign conduct significant portion business various distributors exclusive distribution agreements revenues six distributors accounted approximately 40 total revenues 2012 addition effective november 1 2012 purchased essentially 100 outstanding common stock ds mexico former mexican distributor resulted approximate 470000 revenues two month period consolidated operations three months ended june 30 2012 acquired wholly owned interest brand “pure guild” distribution partner year ended december 31 2012 sales pure guild products nominal therefore timing acquisition impact results operations effective october 29 2012 acquired brand “nutra origin” year ended december 31 2012 sales nutra origin products approximately 247000 purchase cost nutra origin products approximately 30 gross sales cost excludes sales marketing general administrative expense could attributable products therefore timing acquisition would nominal impact results operations occurred beginning period cost goods sold total cost goods sold increased 1997694 42 4751961 2011 6749657 2012 approximately 817000 increase related increase sales however volume sales increased also provided certain discounts customers incentive increase purchases new products establish new accounts furthermore 500000 due obsolete slow moving inventory charged 2012 primarily relating formula packaging changes certain slow moving items addition 2012 approximately 1 million increase cost goods sold attributable changes product mix lost efficiencies resulting certain sales occurring near calendar year end increased production costs selling marketing costs selling marketing costs increased 980058 34 2856482 2011 3836540 2012 increase due following increases · 426328 consulting commissions primarily relates engagement third parties identify establish new markets products · 101899 freight shipping costs partially result sales increases partially result higher volume international shipping · 228336 marketing promotion costs primarily drive increase sales · 209763 travel entertainment costs incurred expand promote sales · 43381 product development result increased efforts improve products · 1593 sales marketing costs partially offset decrease · 31243 warehousing expense result consolidation warehouse facilities general administrative costs general administrative costs increased 1191482 39 3057988 2011 4249470 2012 increase due following increases · 314609 professional fees financial consultants lesser extent attorneys accountants related costs investor relations regulatory filings reporting · 458530 personnel costs due increased staffing result expanding sales operations groups · 83635 insurance result increased costs coverage due increased operations sales along new policies director officer insurance place prior period · 94534 bad debt result increased sales relaxed credit terms support sales · 33950 credit card fees result increased sales increased use credit cards mode payment · 57477 bank wire charges supporting increased international venders customers general sales increases · 124661 licenses permits result required licenses international distribution nasdaq listing fees · 73386 various general administrative costs partially offset decrease · 49300 rent result consolidation executive offices four smaller warehouses new lease pompano facilities income decreased 24545 194 12678 income 2011 11867 expense 2012 decrease result 50305 increase interest expense partially offset additional 16800 due return treasury 5000 shares common stock previously issued consultant 21638 income net loss result operational matters discussed net loss increased 2642218 269 980892 net loss 2011 3623110 net loss 2012 anticipated recognizing revenues approximately 2000000 product orders december 2012 unable fulfill prior december 31 2012 subsequently shipped three months ended march 31 2013 liquidity capital resources cash equivalents 412488 working capital 2089756 december 31 2012 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations along increased costs working capital required grow business satisfied initial contribution founders 2007 private sales common stock year ended december 31 2011 accepted aggregate 2069500 16 investors subscribe 803928 shares common stock private placements private placements provided issuance costs 30 amounted 459769 result netted 1609731 proceeds subscription also year ended december 31 2011 closed securities purchase agreement aggregate 1730000 4 investors purchase 617857 shares common stock securities purchase agreement provided issuance costs amounted 140100 cash 24674 warrants result netted 1565226 proceeds furthermore august 17 2012 august 23 2012 received gross proceeds 732000 three foreign investors consideration issuance 292800 shares common stock received net proceeds 585600 private offering payment selling commissions fees expenses based current plans next 12 months require approximately 2000000 expand product line reach additional domestic foreign markets broadened distribution channels despite losses 2011 2012 believe long minimize certain sales marketing expenses required cash support current operations minimal event receive funding suspend continued expansion rely bank borrowings available additional private placement securities fund expansion sale additional equity debt securities convertible could result dilution stockholders incurrence indebtedness would result increased fixed obligations could also result covenants would restrict operations april 6 2012 closed 15 million credit facility provided financial institution credit facility provides asset based lending collateralized assets advances based 80 qualified accounts receivable 40 finished goods inventory credit facility provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum expires march 24 2014 may renewed certain conditions credit facility personally guaranteed chief executive officer certain conditions may called upon demand event default events include limited failure pay amount due agreement failure perform material term covenant bankruptcy federal state tax lien filed company occurrence court order restrains part business loan agreement also provides certain covenants requires us maintain life insurance policy chief executive officer benefit financial institution precludes us following except ordinary course business making distributions shareholders assigning exchanging disposing collateral permit create liens upon collateral pay dividends make loans advances including officers employees assume guaranty endorse become directly contingently liable issue evidence indebtedness transactions affiliates less favorable terms compared market sale transfer dispose substantially assets operating subsidiary entering transaction results change control company compliance covenants credit facility except obtained life insurance policy chief executive officer provide bank 2012 tax return within 90 days year end fourth quarter 2012 certain invoices submitted financing improperly supported bank aware matters provided us applicable waivers credit facility also provides referral fee 4 per annum three years december 31 2012 drawn 448658 credit facility 410451 available borrow advance formulas qualified accounts receivable finished goods inventory december 31 2012 discussing credit lender include international accounts receivable order increase borrowing base sales end users outside us increased substantially past 24 months also satisfied working capital requirements 2012 advances related parties third parties december 10 2012 received unsecured loan 314000 one consultants also shareholder company loan noninterest bearing matures december 11 2013 first quarter 2013 also received additional 240000 consultantshareholder loan unsecured noninterest bearing matures december 11 2013 also received loan daniel khesin chief executive officer 39000 loan unsecured noninterest bearing matures december 25 2013 cash flows year ended december 31 2012 cash flows operating activities operating activities used net cash year ended december 31 2012 approximately 1810173 amount two primary components net loss adjusted noncash items changes operating assets liabilities net loss adjusted various items impact net loss impact cash period issuance warrants stock services depreciation amortization resulted net cash used operating activities 1899036 changes operating assets liabilities reflect 88863 cash provided net changes working capital items support expanding sales follows · 48800 provided decrease accounts receivable · 1619787 used increase inventory support increased sales · 1347237 provided increase accounts payable accrued expenses result increased credit availability suppliers · 312613 provided net increase current assets liabilities cash flows used investing activities investing activities used 77040 net cash year ended december 31 2012 net cash used primarily composed following · 160753 used purchase equipment primarily production · 38426 used purchase injection molds · 143847 used purchase additional brand rights · 297452 provided purchase mexican distributor · 31466 used deposits matters cash flows financing activities financing activities provided 1015358 net cash result borrowings net repayments asset based credit facility private placement common stock year ended december 31 2012 received advances 7025000 made repayments totaling 6365133 furthermore august 2012 received gross proceeds 732000 three foreign investors consideration issuance 292800 shares common stock received net proceeds 585600 private offering payment selling commissions fees expenses financial position total assets total assets increased 2120684 35 6103992 december 31 2011 8224676 december 31 2012 primarily result increase inventory receivables acquisition mexican distributor addition net increase current assets 745723 components discussed increase total assets also result increase 71750 assets primarily due recording recovery brazilian jv investment new injection mold cost increase 240703 furniture equipment due new production equipment net depreciation increase 1044535 intangible assets due purchase additional pure guild nutra origin brand rights net amortization mexican distributor current assets net increase current assets 745723 primarily associated 1279166 increase inventory levels 237188 increase net accounts receivable increase prepaid expenses current assets 101224 result prepaid rent insurance taxes increase partially offset decrease cash 871855 net changes primarily driven need support increased sales specifically discussed follows inventory levels increased 58 primarily increased materials support expanded production keep pace planned sales 2013 increased inventory hand december 31 2012 represents approximately 45 cogs 5 month supply based sell rate achieved year ended december 31 2012 annualized resulting inventory turnover rate 22 times intend improve turnover rate future ultimate goal achieve least 30 times inventory turnover rate 2013 satisfactorily explored alternative production methodologies established profitable sustainable production cost structure target turnover result stocking chemicals materials anticipation planned sales increases 2013 accounts receivable accounts receivable increased 12 primarily result substantial portion sales occurring weeks preceding year end lesser extent extension terms new customers initial orders believe current receivables collectable allowances provided adequate standard credit terms 30 days net 2125641 accounts receivable balance december 31 2012 approximately 61 collected april 15 2013 lower historical average rate collections due extended credit terms offered attract new customers 2012 believe extended terms adversely affect collectability accounts receivable december 31 2012 prepaid expenses prepaid expenses increased 174 primarily result prepaid rent insurance taxes cash decrease cash explained fully previous discussion cash flows material commitments none balance sheet arrangements none recent accounting pronouncements july 2012 fasb issued asu 201202 intangibles goodwill topic 350 testing indefinitelived intangible assets impairment permits entity make qualitative assessment whether likely reporting unit’s fair value less carrying amount entity support conclusion likely fair value reporting unit less carrying amount entity required take action amendments effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted company expect adoption asu 201202 material impact company’s financial position results operations cash flows recently issued accounting standards expected material effect company’s financial condition results operations cash flows risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry auditors reported substantial doubts ability continue going concern consolidated financial statements prepared assuming continue going concern since inception experienced recurring losses operations losses caused accumulated deficit approximately 51 million december 31 2012 factors among others raise substantial doubt ability continue going concern consolidated financial statements include adjustments might result outcome uncertainty anticipate continue incur losses future periods successful significantly increasing revenues andor reducing operating expenses assurances able raise revenues level supports profitable operations provides sufficient funds pay obligations unable meet obligations would required raise additional debt equity financing available may dilute shareholders’ ownership interest company raise capital future issuing additional securities shareholders may experience dilution decline value shares common stock net loss 3623110 980892 years ended december 31 2012 december 31 2011 respectively historically incurred losses may incur losses future may adversely affect financial condition net loss 3623110 980892 years ended december 31 2012 december 31 2011 respectively event unable sustain increased gross margins reduced costs andor continue generate sufficient additional revenues offset costs levels achieved year ended december 31 2012 better may sustain losses future ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able reach profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments lose one customers may adversely affect financial position results operations longterm agreements several distributors majority customers may cancel purchase order defer shipments products time furthermore distributors terminate agreements company relatively short notice maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect financial position results operations fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party studies clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials would require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology additionally assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit may require us · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers raw materials purchase per order basis without long term contracts suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase raw materials suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays decreased sales tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials reasonable costs failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders resulting lost orders revenue rely thirdparty suppliers manufacturers provide raw materials products produce products limited control suppliers manufacturers may able obtain quality products timely basis sufficient quantity substantially products manufactured unaffiliated manufacturers may longterm contracts suppliers manufacturing sources expect compete companies raw materials production import capacity experience significant increased demand need replace existing manufacturer assurance additional supplies raw materials additional manufacturing capacity available required terms acceptable us supplier manufacturer would allocate sufficient capacity us order meet requirements addition even able expand existing find new manufacturing raw material sources may encounter delays production added costs result time takes train suppliers manufacturers methods products quality control standards delays interruption increased costs supply raw materials manufacture products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers manufacturers continue provide raw materials manufacture products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control manufacturers products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products like distributors manufacturers skin care personal care products face inherent risk exposure product liability claims event use products sell results injury believe currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future predict effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur individuals may seek monetary retribution future could subject additional laws regulations promulgated fda federal state foreign regulatory authorities subject stringent interpretations current laws regulations may adversely impact business operations unable predict nature future laws regulations interpretations applications predict effect additional governmental regulations administrative orders promulgated would business future fda governmental regulatory bodies could require reformulation certain products meet new standards fda approval prior marketing sale certain products requirements could materially adverse affect business financial condition results operations cash flows cost comply new changing regulations could material furthermore cannot provide assurances product would ultimately comply new changing regulations business may adversely affected unfavorable publicity within skin care personal care market believe skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers manufacturers dependent services third parties purchase products thirdparty suppliers manufacturers pursuant purchase orders without longterm agreements event current supplier manufacturer unable meet manufacturing delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers manufacturers none agreements long term also rely thirdparty carriers product shipments including shipments distribution facilities therefore subject risks including limited employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations website internal systems may subject intentional disruption could adversely impact reputation future sales could target cyberattacks designed penetrate network security internal systems misappropriate proprietary information andor cause interruptions services delay delivery products customers actual perceived breach network security occurs may expose us loss information litigation possible liability security breach could also divert efforts technical management personnel addition security breach could impair ability operate business happens reputation could harmed revenues could decline business could suffer involved several litigation matters could harm business brand reputation financial condition results operations involved several lawsuits involving various suppliers service providers litigation party may result onerous unfavorable judgment may reversed upon appeal may decide settle lawsuits unfavorable terms addition defending claims costly impose significant burden management employees may receive unfavorable preliminary interim rulings course litigation negative outcome could result payments monetary damages adverse effects market price common stock changes business practices accordingly business brand reputation financial condition results operations could materially adversely affected many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains none employees significant us gaap accounting experience failed maintain effective system internal control financial reporting result current potential shareholders could lose confidence financial reporting would harm business trading price stock current employees relatively inexperienced united states generally accepted accounting principles “us gaap” related internal control procedures required us public companies although currently engage consulting firm expertise us gaap internal control financial reporting currently effective providing reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles could result errors financial statements future periods could cause us restate financial statements identified material weaknesses internal control financial reporting fail develop maintain effective system internal controls may able accurately report financial results prevent fraud result current potential shareholders could lose confidence financial reporting would harm business trading price stock december 31 2012 chief executive officer chief financial officer concluded internal controls financial reporting effective providing reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance us generally accepted accounting principles process remediating material weaknesses yet able complete remediation efforts mitigate current limited resources limited employees rely heavily direct management oversight transactions along use legal accounting professionals grow expect increase number employees enable us implement adequate segregation duties within internal control framework take additional time design implement test controls procedures required enable management conclude internal control financial reporting effective cannot time estimate long take complete remediation efforts cost efforts cannot assure measures plan take effective mitigating preventing significant deficiencies material weaknesses internal control financial reporting failure maintain implement required new improved controls difficulties encounter implementation could result additional material weaknesses cause us fail meet periodic reporting obligations existence material weakness could result errors financial statements could result restatements financial statements cause us fail meet reporting obligations cause investors lose confidence reported financial information leading decline trading price stock depend heavily services daniel khesin loss mr khesin failure mr khesin dedicate time business could materially harm company rely daniel khesin chief executive chief financial officer mr khesin currently dedicates substantially time company entered employment agreement mr khesin currently required dedicate time resources company loss services mr khesin mr khesin’s inability dedicate 100 time resources company could materially harm business addition presently maintain keyman life insurance policy mr khesin risks related common stock common stock may affected limited trading volume may fluctuate significantly common stock recently commenced quotation nasdaq limited public market common stock assurance active trading market common stock develop result could adversely affect shareholders’ ability sell common stock short time periods possibly thinly traded common stock volatile common stock traded active public market common stock experienced likely experience future significant price volume fluctuations could adversely affect market price common stock without regard operating performance addition believe factors quarterly fluctuations financial results changes overall economy condition financial markets could cause price common stock fluctuate substantially currently intend pay dividends common stock consequently investor’s ability achieve return investment depend appreciation price common stock currently intend invest future earnings fund development growth business payment dividends discretion board directors depend results operations factors board directors may deem relevant pay dividends shareholder’s ability achieve return investment company depend future appreciation market price company’s common stock guarantee company’s common stock appreciate value even maintain price shareholder initially purchased common stock shares common preferred stock available issuance shares eligible future sale introduced market could hurt stock price authorized issue 300000000 shares common stock 30000000 shares preferred stock april 15 2013 aggregate 12168014 shares common stock 5500000 shares series preferred stock issued outstanding total excludes 550000 shares common stock may issued upon conversion series preferred stock 286446 shares common stock may issued upon exercise outstanding warrants options exercise outstanding options andor warrants may cause substantial dilution hold shares common stock prior exercises addition sales substantial amounts common stock public market holders perceptions sales may take place may lower common stocks market price may sell authorized unissued common stock satisfy funding requirements also authorized issue 30000000 shares preferred stock without stockholder approval includes 5500000 shares series preferred stock currently issued outstanding future series class preferred stock may rights superior rights holders common stock holders shares series preferred stock entitled two votes per share series preferred stock converted basis matters voted shareholders series preferred shares automatically convert 550000 shares common stock september 2013 subject adjustment sale proposed sale substantial amounts common preferred stock may adversely affect market price common stock price stockholders may also experience substantial dilution ability obtain sufficient financing acceptable terms based current situation may able obtain sufficient financing acceptable terms fund planned expansion 2 million item 7a item 7 management’s discussion analysis financial condition results operation read following discussion analysis financial condition results operations together consolidated financial statements related notes appearing report information contained discussion analysis set forth elsewhere registration statement including information respect plans strategy business related financing includes forwardlooking statements involve risks uncertainties review “risk factors” registration statement discussion important factors could cause actual results differ materially results described implied forwardlooking statements contained following discussion analysis significant accounting policies financial statements prepared accordance accounting principles generally accepted united states america preparation financial statements requires management make estimates assumptions affect reported amounts assets liabilities revenues expenses note 2 notes financial statements describes significant accounting policies used preparation consolidated financial statements certain significant accounting policies considered critical accounting policies defined critical accounting policy defined one material presentation financial statements requires management make difficult subjective complex judgments could material effect financial condition results operations specifically critical accounting estimates following attributes 1 required make assumptions matters highly uncertain time estimate 2 different estimates could reasonably used changes estimate reasonably likely occur would material effect financial condition results operations estimates assumptions future events effects cannot determined certainty base estimates historical experience various assumptions believed applicable reasonable circumstances estimates may change new events occur additional information obtained operating environment changes historically minor included consolidated financial statements soon became known based critical assessment accounting policies underlying judgments uncertainties affecting application policies management believes consolidated financial statements fairly stated accordance accounting principles generally accepted united states present meaningful presentation financial condition results operations believe following critical accounting policies reflect significant estimates assumptions used preparation consolidated financial statements accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible inventory reported lower end cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange date product returns occurred considered material company established product return reserve long lived assets company adopted asc 36010 “furniture equipment” requires longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset asc 36010 also requires assets disposed reported lower carrying amount fair value less costs sell results operations following discussion analysis addresses major factors affected operations financial condition reflected consolidated audited financial statements years ended december 31 2009 december 31 2010 discussion intended supplement highlight information contained read conjunction financial statements related notes selected financial data presented elsewhere prospectus year ended december 31 2009 “ytd2009” year ended december 31 2010 “ytd2010” revenues net revenues increased 1932720 55 3519804 ytd2009 5452523 ytd2010 company’s product revenues represent primarily sales revita nr08 spectral dnc collectively represent 584 total sales revenues increased result company’s efforts establish distribution agreements distributors several global target markets general increase market acceptance products company conducts significant portion business cellway international inc wr group exclusive distribution agreements revenues agreements accounted approximately 439 company’s total revenues 2010 cost goods sold total cost goods sold increased 779717 71 1103443 ytd2009 1883160 ytd2010 increase due increase sales changes formula costs production approximately 689652 increase directly related increase sales approximately 90065 increase cost goods sold attributable changes product mix changes product formulation increased material costs selling marketing costs selling marketing costs increased 276322 23 1201874 ytd2009 1478196 ytd2010 increase primarily due following increases · 358975 consulting commission costs due increased costs expanding customer base distribution representatives growing sales · 13745 freight shipping costs also resulting expanding sales changes shipping methods · 17048 travel entertainment costs incurred expand promote additional sales · 4201 net selling marketing costs decreases · 50693 warehousing costs result transferring portion outsourced warehousing activities “in house” facilities · 48139 marketing promotion costs incurred broaden product offering promote additional sales · 18815 call center operations result discontinuance general administrative costs general administrative costs increased 622340 38 1649808 ytd2009 2272149 ytd2010 increase due following increases · 204144 personnel costs due increased staffing result expanding sales operations groups · 82439 amortization depreciation expense associated primarily amortizing various deferred costs exclusive distribution rights agreement · 222423 professional fees paid attorneys related various matters including limited sec fda trademark employment compliance matters ii accountants related costs sec compliance corporate compliance outsourced accounting services · 51515 office expenses associated supporting increased sales operations · 30370 increased bad debts write offs · 49329 net various general administrative costs decreases · 17879 repairs maintenance costs associated result timing repairs income net income net decreased 87934 74 119102 income ytd2009 31168 income ytd2010 decrease primarily result non reoccurring gains realized ytd2009 favorably settling certain claims made prior vendors tax provision benefit company incurred losses ytd2009 ytd2010 result company booked tax benefit time reasonable assurance company become profitable net loss result increase sales discussed net loss decreased 166409 53 316222 net loss ytd2009 149813 net loss ytd2010 liquidity capital resources working capital 1551167 december 31 2010 operating capital requirements connection supporting expanding operations introducing new products continue significant us since inception losses operations along increased costs working capital required grow business satisfied initial contribution founders 2007 subscriptions purchase shares private placement began accepting subscriptions early 2009 based current plans next 12 months anticipate additional revenues earned expanded product line broadened distribution channels primary organic source funds future operating activities 2011 fund continued expansion product line extend reach broader markets including foreign markets may rely bank borrowing available private placement securities year ended december 31 2009 company accepted aggregate 1220774 23 investors subscribe 4883096 shares common stock private placement pursuant section 42 securities act regulation promulgated thereunder private placement provides issuance costs 30 amounted 364132 result company netted 856642 proceeds subscription year ended december 31 2010 company accepted aggregate 844500 seven investors subscribe 4506000 shares common stock private placements pursuant section 42 securities act regulation promulgated thereunder private placements provided issuance costs 30 amounted 249600 result company netted 594900 cash flows year ended december 31 2010 cash flows operating activities operating activities used net cash year ended december 31 2010 591875 net cash used reflects adjusted net income year ended approximately 314081 adjusted various items impact net income impact cash period issuance warrants depreciation amortization operating activities also used 905956 net cash support net changes working capital items primarily financing provided vendors included · 77015 used increase accounts receivable result increased sales · 463572 used increase inventory support increased sales · 340589 used decrease accounts payable accrued expenses result reduced payment terms suppliers settlement supplier claims · 7768 used nominal increase current liabilities primarily result customer deposits received 2009 used 2010 orders cash flows used investing activities investing activities used 116069 net cash year ended december 31 2010 net cash used composed deferred marketing several promotion consulting agreements cash flows financing activities financing activities provided net cash 594900 year ended december 31 2010 raised approximately 844500 sales common stock 249600 issuance costs financial position total assets total assets increased 499436 20 2444423 december 31 2009 2943858 december 31 2010 primarily result net increase current assets 501544 components discussed net increases current assets partially offset net decrease furniture equipment 11178 along nominal increases assets current assets net increase current assets 501544 primarily associated 463572 increase inventory levels 48470 increase accounts receivable increase prepaid expenses 102546 decrease cash 113044 increases primarily driven need support increased sales specifically discussed follows inventory levels increased 64 part result change production methodology stock raw materials support increased batch production runs 5000 units 10000 20000 units effort reduce production delays resulting backlogs increased inventory level hand december 31 2010 represents approximately 469 cogs 56 month supply based sell rate achieved year ended december 31 2010 management believes sales achieved 2010 continue throughout fiscal year 2011 management also understands inventory decisions result inventory turnover rate 21 times management intends improve turnover rate future ultimate goal achieve least 3 times inventory turnover rate satisfactorily explored alternative production methodologies established profitable sustainable production cost structure management projections inventory turnover rate goal may achieved part decision management considered potential impairment costs storage costs associated slow turning inventory embarking decisions management consulted chemist determined materials components shelf life 35 years even active ingredients whose normal shelf life relatively short 6 months stabilized extended mixed finished product accordingly management concluded impairment reserves required december 31 2010 accounts receivable accounts receivable increased 48470 increase represents 7 increase accounts receivable balance december 31 2010 increase result general increase sales addition new distributors management believes current receivables collectable prepaid expenses assets prepaids increased 102546 increase represents 35000 advance consultant 65000 advertising costs deferred pending start campaign cash increase cash explained fully discussion cash flows sales equity securities 2009 began accepting subscriptions sale shares common stock nonus resident investors placement common stock currently open intended meet exemptions regulation securities act funds received sale common stock used operational purposes received funded subscriptions less selling expenses finder’s fees follows table funded subscriptions less selling expenses material commitments none balance sheet arrangements none quantitative qualitative disclosures market risk none recent accounting pronouncements discussion new accounting pronouncements affecting company refer note 3 consolidated financial statements risk factors investing common stock involves high degree risk carefully consider following risk factors deciding whether invest company additional risks uncertainties presently known us currently deem immaterial may also impair business operations financial condition events discussed risk factors occur business consolidated financial condition results operations prospects could materially adversely affected case value marketability common stock could decline risks related business industry net loss approximately 150000 year ended december 31 2010and historically incurred losses may incur losses future may adversely affect financial condition net loss 149813 year ended december 31 2010 incurred net losses 316222 year ended december 31 2009 event unable sustain increased gross margins reduced costs andor continue generate sufficient additional revenues offset costs levels achieved year ended december 31 2010 better may sustain losses future ability succeed depends ability grow business achieve profitability introduction new products services expansion distribution channels contributed significantly recent results must continue develop new innovative ways manufacture products expand distribution order maintain growth achieve profitability future growth profitability depend upon number factors including limited · ability manage costs · increasing level competition skin care personal care industry · ability continuously offer new improved products · ability maintain efficient timely costeffective production delivery products · ability maintain sufficient production capacity products · efficiency effectiveness sales marketing efforts building product brand awareness · ability identify respond successfully emerging trends skin care hair care personal care industry · level consumer acceptance products · regulatory compliance costs · general economic conditions consumer confidence may successful executing growth strategy even achieve targeted growth may able sustain profitability failure successfully execute material part growth strategy would significantly impair future growth ability attract sustain investments business majority revenue generated basis purchase orders rather long term purchase commitments may adversely affect margins lose one customers sell products 20 distributors directly 1000 customers longterm agreements several distributors majority customers may cancel purchase order defer shipments products time furthermore distributors terminate agreements company relatively short notice maintained longterm relationships many distributors experienced significant cancellation deferment customer orders lack longterm purchase commitments creates risk product demand may reduced orders canceled deferred furthermore inability rely enforceable purchase contracts limited visibility future customer demand actual revenue may different forecasts could adversely affect margins ability maintain profitability fail promote maintain brand market businesses operating results financial condition ability attract customers materially adversely affected success depends ability create maintain brand awareness product offerings may require significant amount capital allow us market products establish brand recognition customer loyalty many competitors market larger us substantially greater financial resources additionally many companies offering similar products already established brand identity within marketplace offer assurances successful establishing awareness brand allowing us compete market importance brand recognition continue increase low barriers entry industries operate may result increased number direct competitors promote brands may required continue increase financial commitment creating maintaining brand awareness may generate corresponding increase revenue justify costs products may require clinical trials establish benefit claims efficacy majority active ingredients current products undergone independent third party clinical trials establish benefit claims efficacy certain ingredients contained products future products may require clinical trials establish benefit claims safety efficacy trials require significant amount resources assurance trials favorable claims make products cumulative authority established trials sufficient support claims moreover findings methodology clinical trials subject challenge scientific bodies findings clinical trials challenged found insufficient support claims additional trials may required products may require reformation order us continue market current products future products marketed furthermore limited studies product ingredients combined product formulations accordingly assurance products even used directed effects intended event unable substantiate benefit claims efficacy event historical clinical trials refuted market acceptance products may decrease develop would detrimental effect business may unable protect intellectual property rights may subject intellectual property litigation infringement claims third parties intend protect unpatented trade secrets knowhow confidentiality license agreements third parties employees consultants controlling access distribution proprietary information however method may afford complete protection particularly foreign countries laws may protect proprietary rights fully united states unauthorized parties may copy otherwise obtain use products processes technology assurance others independently develop similar knowhow trade secrets third parties take actions affect rights value intellectual property similar proprietary rights reputation unable protect intellectual property infringement misappropriation companies may able use proprietary knowhow offer competitive products lower prices may able effectively compete companies also face risk claims infringed third parties’ intellectual property rights claims intellectual property infringement even without merit could expose us following risks among others may required · defend infringement claims expensive time consuming · cease making licensing using products incorporate challenged intellectual property · redesign reengineer rebrand products packaging · enter royalty licensing agreements order obtain right use third party’s intellectual property dependent upon suppliers significant portion raw materials suppliers dependent continued availability pricing raw materials either could negatively affect ability manage costs maintain profitable operating margins currently purchase majority raw material approximately eight different suppliers written purchase contracts supplier order may terminated rejected supplier time reliance open orders preference assurances suppliers reliance three primary suppliers creates risk supply raw materials may interrupted time may able timely source another supplier resulting delays tried minimize risks maintaining inventories consistent projected needs make assurances able maintain adequate stockpiles able acquire stockpile raw materials costs passed customers failure ensure steady supply raw material significant interruption supply raw materials could material adverse effect operations ability timely fulfill orders could result lost orders revenue rely thirdparty suppliers manufacturers provide raw materials products produce products limited control suppliers manufacturers may able obtain quality products timely basis sufficient quantity substantially products manufactured unaffiliated manufacturers may longterm contracts suppliers manufacturing sources expect compete companies raw materials production import capacity assurance significant disruption supply raw materials intended sources event disruption would able locate alternative suppliers materials comparable quality acceptable price addition cannot certain unaffiliated manufacturers able fill orders timely manner experience significant increased demand need replace existing manufacturer assurance additional supplies raw materials additional manufacturing capacity available required terms acceptable us supplier manufacturer would allocate sufficient capacity us order meet requirements addition even able expand existing find new manufacturing raw material sources may encounter delays production added costs result time takes train suppliers manufacturers methods products quality control standards delays interruption increased costs supply raw materials manufacture products could adverse effect ability meet retail customer consumer demand products result lower revenues net income short longterm addition assurance suppliers manufacturers continue provide raw materials manufacture products consistent standards may receive shipments product fail conform quality control standards event unless able obtain replacement products timely manner risk loss revenues resulting inability sell products related increased administrative shipping costs addition control manufacturers products fail meet standards unauthorized products could end marketplace without knowledge could harm reputation marketplace rely limited intellectual property protection important element competition currently trademark registration products rely common law trademark rights protect unregistered trademarks well trade dress rights common law trademark rights generally limited geographic area trademark actually used united states federal registration trademark enables registrant stop unauthorized use trademark third party anywhere united states intend register trademarks certain jurisdictions products sold currently patents products continue use current business strategy adding proprietary blends product formula name trademark proprietary blend formula makes formula replication challenging possible competitor believe adding proprietary blends make replication quite difficult expensive however extent patents products another company may replicate one products although seek ensure infringe intellectual property rights others assurance third parties assert intellectual property infringement claims us like retailers distributors manufacturers skin care personal care products face inherent risk exposure product liability claims event use products sell results injury management believes currently materially compliant regulations covering products may subjected various product liability claims including claims products sell contain contaminants improperly labeled include inadequate instructions use inadequate warnings concerning side effects interactions substances addition may forced defend lawsuits date never subject product liability claim cannot predict whether product liability claims brought us future effect resulting adverse publicity business moreover may adequate resources event successful claim us insurance protection inadequate thirdparty vendors indemnify us successful assertion product liability claims us could result potentially significant monetary damages addition interactions products similar products prescription medicines overthecounter drugs fully explored may also exposed claims relating product advertising product quality people may purchase products expecting certain physical results unique skin care personal care products perceive expected results occur certain individuals groups individuals may seek monetary retribution business may adversely affected unfavorable publicity within skin care personal care market believe skin care personal care markets significantly affected national media attention retail provider future scientific research publicity may favorable industry particular product may consistent earlier favorable research publicity dependence consumers’ perceptions adverse publicity associated illness adverse effects resulting use products similar products distributed companies future reports research perceived less favorable question earlier research could material adverse effect business financial condition results operations highly dependent upon consumers’ perceptions safety quality products well similar products distributed companies thus mere publication reports asserting skin care personal care products may harmful questioning efficacy could material adverse effect business financial condition results operations regardless whether reports scientifically supported whether claimed harmful effects would present dosages recommended products success dependent upon successful introduction new products success expanding demand existing brands believe growth net sales substantially dependent upon ability introduce products public present limited resources spend advertising marketing therefore rely large extent relationship strategic partners assist development distribution channels ability meet future obligations dependent large measure success product sales expect introduce additional products success new products dependent upon number factors including ability formulate products appeal consumers respond market trends timely manner assurance efforts formulate new products successful consumers accept new products addition products experiencing strong popularity rapid growth may maintain sales volumes time longterm contracts suppliers manufacturers dependent services third parties purchase products thirdparty suppliers manufacturers pursuant purchase orders without longterm agreements event current supplier manufacturer unable meet manufacturing delivery requirements time future may suffer shortterm interruptions delivery certain products establish alternative source believe alternative sources cases readily available also established working relationships several thirdparty suppliers manufacturers none agreements long term also rely thirdparty carriers product shipments including shipments distribution facilities therefore subject risks including employee strikes inclement weather associated carrier’s ability provide delivery services meet fulfillment shipping needs failure deliver products customers timely accurate manner would harm reputation business results operations skin care hair care personal care product markets intensely competitive strengthening competitors could harm business skin care hair care personal care products industry intensely competitive many competitors greater name recognition financial resources may give competitive advantage competitors may also able devote greater resources marketing promotional pricing campaigns may influence continuing potential independent associates members buy products competitors rather us competition could adversely affect business current market share many competitors substantially greater financial technical human resources competitors may succeed formulating products effective currently developed us progress researchers areas similar explored us may result competitive challenges addition academic institutions government agencies public private organizations conducting research may seek patent protection respect potentially competitive products may also establish exclusive collaborative licensing relationships competitors addition large pharmaceutical companies compete others us skin care personal care product industry increased competition companies could material adverse effect us companies greater financial resources available possess manufacturing distribution marketing capabilities far greater also face competition health food store mass market distribution channels private label products offered health natural food store chains drugstore chains mass merchandisers supermarket chains risks related common stock market common stock limited persons purchase common stock may able resell shares purchase price paid common stock trades bulletin board liquid market currently limited public market common stock cannot assure active public market common stock develop sustained future active market common stock develop sustained price may continue decline subject “penny stock” rules brokers cannot generally solicit purchase common stock adversely affects liquidity market price sec adopted regulations generally define “penny stock” equity security market price less 500 per share subject specific exemptions market price common stock bulletin board substantially less 500 per share therefore currently considered “penny stock” according sec rules designation requires brokerdealer selling securities disclose certain information concerning transaction obtain written agreement purchaser determine purchaser reasonably suitable purchase securities due factors beyond control stock price may volatile following factors could affect market price common stock · failure increase revenue succeeding quarter · failure achieve maintain profitability · failure meet revenue earnings guidance · loss distribution relationships · sale large amount common stock shareholders · announcement pending completed acquisition failure complete proposed acquisition · adverse court ruling regulatory action · failure meet financial analysts’ performance expectations · changes earnings estimates recommendations financial analysts · changes market valuations similar companies · short selling activities · announcement change direction business · inability manage international operations · actual anticipated variations quarterly forecasted results operations · announcements us competitors significant contracts acquisitions commercial relationships joint ventures capital commitments past following periods volatility market price company’s securities class action litigation often instituted securities class action suit us could result substantial costs divert management’s time attention would otherwise used benefit business may able attract attention major brokerage firms could material impact upon price common stock likely securities analysts major brokerage firms provide research coverage common stock since firm cannot recommend purchase common stock penny stock rules referenced earlier risk factor absence coverage limits likelihood active market develop common stock may also make difficult us attract new investors times acquire additional capital shares eligible sale convertible shares future could negatively affect stock price dilute shareholders market price common stock could decline result sales large number shares common stock perception sales could occur might also make difficult us raise funds issuance securities december 31 2010 94961001 issued outstanding shares common stock officers directors hold control 82017905 shares common stock excluding outstanding preferred shares date report 10000000 shares series preferred stock convertible shares common stock one basis preferred shares held officers directors shares vote 1 2 basis vote common stock except otherwise required florida law issued options securities equity incentive plan however may issue andor register additional shares options warrants future connection acquisitions compensation otherwise cannot predict effect market sales shares held stockholder availability shares future sale market price common stock item 7a item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 7a quantitative qualitative disclosures market risk required smaller reporting companies item 8 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 8 financial statements supplementary data requirements item found beginning page found elsewhere annual report item 9 item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits exhibit number description 31 amended restated articles incorporation divine skin inc dated january 13 2007 1 32 amendment amended restated articles incorporation divine skin inc dated september 15 2009 2 33 bylaws divine skin inc 1 101 2009 divine skin inc equity incentive plan 1 102 kane concourse lease agreement 1 1021 kane concourse lease termination agreement 1 1022 meridian center lease agreement amended 1 103 consulting agreement dated january 2009 1 104 form exclusive distribution agreement 1 105 amendment gamma investors exclusive distribution agreement 3 106 form regulation subscription agreement 3 107 form section 42 subscription agreement 3 108 form services agreement 3 211 list subsidiaries company 1 231 consent jewett schwartz wolfe associates 311 certification 312 certification 321 certification 322 certification 991 code ethics 1 incorporated reference company’s registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference company’s form 10q period ended september 30 2009 3 incorporated reference company’s registration statement form s1 securities exchange commission amended filed december 12 2009 file number 333163449 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date march 31 2010 divine skin inc daniel khesin daniel khesin chief executive officer principal executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin chief financial officer director march 31 2010 daniel khesin index consolidated financial statements report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements changes equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors shareholders divine skin inc dba ds laboratories audited accompanying consolidated balance sheets divine skin inc dba ds laboratories december 31 2009 2008 related consolidated statements operations changes shareholders’ equity cash flows years ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position divine skin inc dba ds laboratories december 31 2009 2008 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states jewett schwartz wolfe associates jewett schwartz wolfe associates hollywood florida march 31 2010 200 south park road suite 150 ● hollywood florida 33021 ● telephone 954 9225885 ● fax 954 9225957 member american institute certified public accountants ● florida institute certified public accountants private companies practice section aicpa ●registered public company accounting oversight board sec divine skin inc dba ds laboratories consolidated balance sheets see accompanying notes consolidated financial statements divine skin inc dba ds laboratories consolidated statements operations see accompanying notes consolidated financial statements divine skin inc dba ds laboratories consolidated statements changes equity year ended december 31 2009 year ended december 31 2008 see accompanying notes consolidated financial statements divine skin inc dba ds laboratories consolidated statements cash flows see accompanying notes consolidated financial statements divine skin inc dba ds laboratories notes consolidated financial statements note 1 organization nature business terms definitions aicpa american institute certified public accountants asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout gaap us generally accepted accounting principles applied united states ppm private placement memorandum offering 5000000 shares sec securities exchange commission sfas fas statement financial accounting standards q408 three months ended december 31 2008 q409 three months ended december 31 2009 ytd08 year ended december 31 2008 ytd09 year ended december 31 2009 organization nature business divine skin inc “company” “divine skin” “ds laboratories” “we” “us” “our” florida company organized laws state florida january 2007 predecessors including divine skin inc new york company developing marketing skin care personal care products ten years company grown steadily last years network top specialty retailers across north america distributors throughout europe asia south america divine skin researches develops products management believes keeps company forefront innovation management believes company currently leading innovator “liposome technology” acts carrier agent designed enhance action active ingredients contained pharmaceutical cosmeceutical products currently offer skin care aging cellulite hair loss personal care products majority products within following product lines · skin care trioxil® bisazulene gel acne treatment hydrovitancr skin cleanser keramene suppresses hair growth reduce shaving waxing depilatory chores · aging viterola antiaging aid contains viatrozene · cellulite oligodx® cream designed reduce appearance cellulite · hair loss spectraldncl advanced formulation address advanced androgenic alopecia male pattern baldness 4 greater norwood scale spectralrs® designed address multiple causes lead thinning hair revita hair growth stimulating shampoo · personal care nirena intimate feminine care cleanser divine skin inc dba ds laboratories notes consolidated financial statements note 1 organization nature business continued history company january 2007 operations divine skin inc new york company terminated assets distributed shareholders assets certain liabilities used capitalize divine skin inc florida corporation companies common shareholders company currently conducts business “divine skin” trade name also “ds laboratories” trade name shareholders also ds laboratories inc florida company formed january 2007 secure ds laboratories trade name essentially idle 2007 2008 operated “ds laboratories” trade name informal consent shareholders ds laboratories inc also shareholders ds laboratories inc legally registered entity filed fictitious name notification ds laboratories inc new york corporation closed december 2006 recapitalized florida corporation january 2007 divine skin inc florida corporation operated south florida since inception 2007 january 2008 company engaged two consultants assist developing production operations brazil means simplify regulatory requirements surrounding importation product production operations brazil yet fully commercialized costs associated exploring production alternative expensed january 2009 company acquired 100 outstanding shares ds laboratories inc florida corporation nominal amount ds laboratories inc florida corporation established january 2007 purposes holding trade brand name company recorded transactions fiscal years 2007 2008 ds laboratories inc florida corporation related separate entity acquisition subsequent acquisition ds laboratories inc florida corporation operates wholly owned subsidiary company january 2009 company acquired 100 outstanding shares sigma development holding co inc nominal amount sigma founded upscale brand addition company’s product portfolio sigma operated related separate entity acquisition subsequent acquisition sigma operates wholly owned subsidiary company march 2009 polaris labs inc founded wholly owned subsidiary company polaris founded distribute polaris branded versions company’s products marketing purposes sold physicians foreign distributors note 2 summary significant accounting policies basis accounting financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america principles consolidation presentation consolidated financial statements include accounts divine skin inc wholly owned operating subsidiaries ds laboratories inc florida corporation sigma development holding co inc polaris labs inc significant intercompany balances transactions eliminated consolidation certain reclassifications made 2008 results conform presentation used 2009 divine skin inc dba ds laboratories notes consolidated financial statements note 2 summary significant accounting policies continued use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors adverse changes areas could negatively impact company’s financial position results operations cash flows cash equivalents maintain cash bank deposit accounts federally insured company considers highly liquid investments original maturity three months less cash equivalents december 31 2009 2008 cash equivalents included cash hand cash bank accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible december 31 2009 2008 provision doubtful accounts 25000 0 respectively inventory reported lower end cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using 200 declining balance method estimated useful lives assets range 5 7 years expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets furniture equipment reviewed whenever events changes circumstances occur indicate possible impairment accordance asc topic 360 “accounting impairment disposal longlived assets” divine skin inc dba ds laboratories notes consolidated financial statements note 2 summary significant accounting policies continued revenue recognition company’s product revenues represent primarily sales revita spectral dnc together represent 54 total sales oligo dx spectral dncl spectral rs together account another 301 total sales revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange date product returns occurred considered material company established product return reserve research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses statements operations income taxes january 2007 company elected taxed subchapter chapter 1 internal revenue code sections 1361 1379 wherein earnings losses company passed shareholders become taxable income loss individuals january 2009 company accepted subscription common shares foreign investor company longer qualified subchapter election accordance asc topic 740 asc topic 205 registrants historical financial statements indicative ongoing entity include pro forma financial information reflects impact significant changes accordingly due change tax status january 2009 included pro forma deferred tax information note 9 earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company divine skin inc dba ds laboratories notes consolidated financial statements note 2 summary significant accounting policies continued segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders company operates one segment management reporting purposes note 3 recent accounting updates recent accounting pronouncements company adopted required adopt future summarized august 2009 fasb issued asu 200905 includes amendments subtopic 82010 “fair value measurements disclosuresoverall” update provides clarification circumstances quoted price active market identical liability available reporting entity required measure fair value using one techniques provided update amendments asu clarify reporting entity required include separate input adjustment inputs relating existence restriction prevents transfer liability also clarifies quoted price active market identical liability measurement date quoted price identical liability traded asset active market adjustments quoted price asset required level 1 fair value measurements guidance provided asu effective first reporting period including interim periods beginning issuance adoption standard material impact company’s consolidated financial position results operations september 2009 fasb issued asu 200906 income taxes topic 740 ”implementation guidance accounting uncertainty income taxes disclosure amendments nonpublic entities” provides implementation guidance accounting uncertainty income taxes well eliminates certain disclosure requirements nonpublic entities currently applying standards accounting uncertainty income taxes update shall effective interim annual periods ending september 15 2009 entities deferred application accounting uncertainty income taxes accordance paragraph 74010651e update shall effective upon adoption standards adoption standard expected impact company’s consolidated financial position results operations since accounting standard update provides implementation disclosure amendments september 2009 fasb published asu 200912 “fair value measurements disclosures topic 820 investments certain entities calculate net asset value per share equivalent” asu amends subtopic 82010 “fair value measurements disclosures overall” permit reporting entity measure fair value certain investments basis net asset value per share investment equivalent asu also requires new disclosures major category investments including attributes investments within scope amendment codification guidance update effective interim annual periods ending december 15 2009 early application permitted adoption standard expected impact company’s consolidated financial position results operations divine skin inc dba ds laboratories notes consolidated financial statements note 3 recent accounting updates continued october 2009 fasb published asu 200913 “revenue recognition topic 605multiple deliverable revenue arrangements” addresses accounting multipledeliverable arrangements enable vendors account products services deliverables separately rather combined unit specifically guidance amends criteria subtopic 60525 “revenue recognitionmultipleelement arrangements” separating consideration multipledeliverable arrangements guidance establishes selling price hierarchy determining selling price deliverable based vendorspecific objective evidence b thirdparty evidence c estimates guidance also eliminates residual method allocation requires arrangement consideration allocated inception arrangement deliverables using relative selling price method also requires expanded disclosures guidance update effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted adoption standard expected impact company’s consolidated financial position results operations october 2009 fasb published asu 200914 “software topic 985certain revenue arrangements include software elements” changes accounting model revenue arrangements include tangible products software elements guidance tangible products containing software components nonsoftware components function together deliver tangible products essential functionality excluded software revenue guidance subtopic 985605 “softwarerevenue recognition” addition hardware components tangible product containing software components always excluded software revenue guidance asu effective prospectively revenue arrangements entered materially modified fiscal years beginning june 15 2010 early adoption permitted adoption standard expected impact company’s consolidated financial position results operations december 2009 fasb published asu 200916 “transfers servicing topic 860 accounting transfers financial assets” asu 200916 revision asc 860 “transfers servicing” amends guidance accounting transfers financial assets including securitization transactions entities continued exposure risks related transferred financial assets asu 200916 also expands disclosure requirements transactions asu become effective us april 1 2010 adoption standard expected impact company’s consolidated financial position results operations december 2009 fasb published asu 200917 “consolidations topic 810 improvements financial reporting enterprises involved variable interest entities” asu 200917 amends guidance consolidation vies primarily related determination primary beneficiary vie adoption standard expected impact company’s consolidated financial position results operations january 2010 fasb published asu 201001 “equity topic 505 accounting distributions shareholders components stock casha consensus fasb emerging issues task force” codified asc 505 asu 201001 clarifies treatment certain distributions shareholders stock cash components stock portion distributions considered share issuance reflected earnings per share prospectively stock dividend amendments update effective interim annual periods ending december 15 2009 applied retrospective basis early adoption permitted adoption standard diddid impact company’s consolidated financial position results operations divine skin inc dba ds laboratories notes consolidated financial statements note 3 recent accounting updates continued january 2010 fasb published asu 201002 “consolidation topic 810 accounting reporting decreases ownership subsidiarya scope clarification” codified asc 810 “consolidation” asu 201002 applies retrospectively april 1 2009 adoption date asc 81010651 previously discussed financial note asu clarifies applicable scope asc 810 decrease ownership subsidiary exchange group assets business nonprofit activity asu also requires expanded disclosures amendments update effective interim annual periods ending december 15 2009 applied retrospective basis adoption standard expected impact company’s consolidated financial position results operations january 2010 fasb published asu 201006 “fair value measurements disclosures topic 820 improving disclosures fair value measurements” asu 201006 clarifies improve disclosure requirement related fair value measurements disclosures overall subtopic 82010 fasb accounting standards codification new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure purchase sales issuances settlement roll forward activity level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within fiscal years amendments update effective interim annual periods ending december 15 2009 applied retrospective basis adoption standard expected material impact company’s consolidated financial position results operations asus effective december 31 2009 expected significant effect company’s consolidated financial position results operations note 4 inventory significant components inventory december 31 2009 2008 consist primarily bulk product raw materials bulk product consists completed product formulations yet packaged market ready packaging raw materials consist bulk quantities various chemical components product formulations merchandise inventory merchandise inventory consists completed formulations market ready packaging formulations batch controlled subject various government regulations among things govern purity safety product cases limit concentration certain ingredients would restrict distribution products medical professionals inventory transit inventory consists primarily bulk product raw materials title transferred company inventory yet arrive designated warehouse facility either company owned contract management evaluated inventory december 31 2009 2008 obsolete inventory excluded reported inventory value accordingly allowance obsolescence necessary divine skin inc dba ds laboratories notes consolidated financial statements note 5 assets significant components assets december 31 2009 2008 consist primarily advances related parties 2008 company advanced funds related companies assist development new product lines distribution channels first quarter 2009 related parties became wholly owned subsidiaries accordingly advances eliminated consolidation since company effectively recovered advances acquisition subsidiaries effect recovery 29587 reported consolidated statement cash flows investing activity · sigma development holding co inc founded january 2007 upscale brand addition product portfolio sigma operated separate entity january 2009 company acquired 100 ownership sigma’s outstanding common stock negligible amount · polaris labs inc founded march 2009 wholly owned subsidiary distribute enhanced versions products due government regulations sold physicians foreign distributors local regulations permit consumer distribution rights company issued 3000000 shares common stock exchange 10 year exclusive distribution agreement brazil transaction valued private placement price 025 per share company currently developing generic minoxodil product along appropriate packaging brazilian market planned introduction q2 2010 company amortize distribution rights next 10 year follows security deposits security deposits represent funds advanced office facilities divine skin inc dba ds laboratories notes consolidated financial statements note 6 accounts payable accrued expenses significant components accounts payable accrued expenses december 31 2009 2008 consist primarily warrant expense discussed fully note 8 company issued warrants selling agent purchase one share common stock company every ten shares sold ppm offering company accrued intrinsic value warrants granted date warrants exercised accrued expenses claims discussed fully note 7 company responded several claims suppliers primarily advertisers media suppliers alleging unpaid balances services materials provided company responded many cases services materials fully comply required specifications supplier commitments cases company shifted purchasing compatible suppliers company accrued estimated settlement value claim based evaluation individual circumstances matter note 7 commitments contingencies 2009 company operated several material agreements listed lease office facilities · company previously leased corporate headquarters office space located miami beach florida 5 year lease third party annualized rental expense approximately 102900 year expiration december 2011 lease guaranteed executive officers march 2009 company relocated corporate headquarters new facilities bal harbour florida idled miami beach facilities july 2009 company amended lease reduce lease expiration december 2011 december 2009 lease payment also reduced 6500 per month 78000 annual basis result amendment company reactivated miami beach facilities also resumes service corporate headquarters company currently negotiation current landlord extend lease pending completion negotiation company leases miami beach facilities month basis existing rates · march 2009 concurrent idling miami beach florida facilities company relocated corporate headquarters new facilities located 1135 kane concourse 6th floor bay harbor islands fl 331542025 july 2009 current reactivation miami beach facilities company entered lease termination agreement landlord bay harbor islands facilities resulted onetime 16000 charge operations divine skin inc dba ds laboratories notes consolidated financial statements note 7 commitments contingencies continued · march 2009 company leased 3500 square foot facility pompano beach florida assemble small production runs products lease provides monthly rent 2600 terminates march 2011 company committed lease payments next five years follows pending threatened litigation · divine skin inc received several threatened litigations various suppliers typically nonpayment goods services threatened litigations generally directed ds laboratories inc one operating trade names divine skin vendor disputes typical normal course business divine skin vigorously challenging claims grounds substandard materials services provided however established accrual certain media materials freight supplier claims 440059 december 31 2009 company working resolve claims negotiated settlements several suppliers resulting reduction supplier claim recorded repayment structured payout company recorded settlement gains approximately 180000 2009 discussed accruals provided facts claim warrants · divine skin inc named lawsuit brought former employee 301 model entity also related divine skin inc common ownership divine skin named originally hired employee rather 301 model latter yet established entity management vigorously defending position employee terminated two weeks cause employee subsequently violated noncompete agreement accordingly anticipate material assessment settlement result lawsuit note 8 common stock initial capitalization january 2007 company capitalized issuance 10000 shares common stock initial capitalization also included cash along certain assets liabilities predecessor divine skin inc new york corporation totaled 387259 divine skin inc owned stockholders currently company recapitalization january 2009 divine skin authorized amendment restatement articles incorporation provide among things authorized common stock increased 300000000 shares b 30000000 shares “blank check” preferred stock authorized immediately thereafter company declared stock dividend 10000 shares one share subsequent stock dividend 100000000 shares common stock outstanding divine skin inc dba ds laboratories notes consolidated financial statements note 8 common stock continued private placement memorandum first quarter 2009 company sold 767548 shares common stock purchase price 050 per share qualified investors offering conducted “best efforts” basis respect shares offering also provides company shall pay selling agents following fees commissions 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds offering made solely “non us persons” within meaning rule 902 regulation securities act 1933 securities registered approved sec state securities commission state authority passed accuracy adequacy memorandum third quarter 2009 offering retroactively repriced 025 per share total 767548 additional shares issued additional cost investors previously paid 050 per share achieve repricing following table summarizes transactions private placement offering follows date company received accepted funded subscriptions purchase 4883096 common shares offering referred company received 856642 net proceeds issuance costs 364132 accepted funded subscriptions recorded component company’s equity pending issuance common shares common shares issued amounts previously recorded funded subscriptions transferred common stock par value additional paid capital accordingly december 31 2009 share certificates 4883096 subscribed common shares issued warrants company issued warrants selling agent purchase one share common stock company every ten shares sold ppm offering exercise price warrant 001 per share warrants exercisable period five years date issuance based ppm’s “repriced” sale price 025 per share warrants “in money” upon issuance december 31 2009 company accrued 116522 value warrants recognized expense twelve months ended december 31 2009 financial consulting services based value warrants date warrants exercised option selling agent engaged company also entered consulting agreement assist company filing registration statement form 10 quotation shares counter bulletin board otcbb company issued option selling agent purchase 2000000 share common stock exercise price 001 per share based current offering price ppm 025 per share current value option grant 480000 option expires five years option vests exercisable upon effective date company obtaining otcbb listing first quarter 2010 company obtained trading symbol accordingly recorded option expense divine skin inc dba ds laboratories notes consolidated financial statements note 8 common stock continued common stock third quarter 2009 company issued 74000 common shares consultants professional advisors services shares valued 025 per share consistent revised offering price ppm company also issued 13000 shares certain “friends family” company acknowledgement assistance starting company shares offered cost company assigned value transactions fourth quarter 2009 company issued 3000000 shares exclusive distribution rights brazil shares valued 025 per share consistent revised offering price ppm addition company issued 28000 certain investors also valued 025 per share consistent revised offering price ppm also fourth quarter 2009 company repurchased 5000000 shares founder company 0015 75000 part effort restructure company’s equity ownership part restructuring effort founders company also surrendered 2982095 shares nominal value preferred stock following stock dividend three shareholders divine skin time constituted shareholders divine skin exchanged aggregate 10000000 shares common stock 10000000 shares series preferred stock provided certificate designation series preferred stock dated january 14 2009 filed april 2009 amended september 2009 share series preferred stock entitled 2 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law note 9 income taxes january 2007 company elected taxed subchapter chapter 1 internal revenue code sections 1361 1379 wherein earnings losses company passed shareholders become taxable income loss individuals january 2009 company accepted subscription common shares foreign investor company longer qualified subchapter election accordance asc topic 740 specifically asc topic 205 stated registrants historical financial statements indicative ongoing entity registration statement include pro forma financial information reflects impact significant changes accordingly due change tax status january 2009 included pro forma deferred tax information company subject us federal state florida income taxation divine skin inc dba ds laboratories notes consolidated financial statements note 9 income taxes continued provision income taxes year ended december 31 2009 pro forma provision income taxes year ended december 31 2008 summarized follows provision income taxes twelve months ended december 31 2009 pro forma provision income taxes twelve months ended december 31 2008 differs amount computed applying federal statutory rate income loss provision benefit income taxes follows pro forma deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes pro forma tax effect temporary differences representing deferred tax assets liabilities follows december 31 2009 2008 company pro forma valuation allowance deferred tax assets 120594 162661 relates net operating losses pro forma valuation allowance increased 120594 twelve months ended december 31 2009 increase 2009 attributable accumulated net operating losses offset net income reported twelve months ended december 31 2008 december 31 2009 2008 company pro forma net operating loss carryforwards 316220 425257 respectively unused net operating loss carryforwards expire various dates beginning 2027 divine skin inc dba ds laboratories notes consolidated financial statements note 9 income taxes continued december 31 2009 2008 company unrecognized tax benefit accordingly related accrued interest penalties company examination either us federal state florida tax authorities note 10 2009 equity incentive plan overview company initiated 2009 equity incentive plan 1 attract retain best available personnel positions substantial responsibility 2 provide additional incentives employees directors consultants 3 promote success company companys affiliates options granted plan may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 5000000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable note 11 significant customers year ended december 31 2009 two customers generated 422 company’s sales substantial portion outstanding accounts receivable balance december 31 2009 customers distributors company sales customers 2009 accounts receivable december 31 2009 customer sales amount percent accounts receivable percent 811125 230 203569 295 b 674330 192 33299 48 divine skin inc dba ds laboratories notes consolidated financial statements note 12 subsequent events accordance guidance offered asc topic 855 formerly sfas 165 “subsequent events” company evaluated activities december 31 2009 march 15 2010 date financial statements issued determined reportable subsequent events q1 2010 company filed s1 selling shareholder registration statement sec declared effective sec obtained trading symbol dskx permitting quotation shares common stock counter bulletin board otcbb result option granted selling agent purchase 2000000 share common stock exercise price 001 per share became fully vested grant date option valued intrinsic value based ppm offering price 025 per share however company record value associated grant due uncertainty obtaining trading symbol accordingly since trading symbol obtained company record expense 480000 option grant q1 2010 march 2010 company entered lease 7500 square feet new production facilities pompano beach florida new facility replace existing production facilities begin operations april 2010 lease provides monthly rentals 3437 monthly rent first year increasing scale years 2 5 lease matures 5 years provides 5 year renewal option item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits 1 incorporated reference registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference form 10q period ended september 30 2009 3 incorporated reference form 10k annual report year ended december 31 2009 4 incorporated reference form 8k filed october 11 2011 5 incorporated reference form 8k filed april 5 2012 6 incorporated reference form 8k filed november 1 2012 7 incorporated reference form 8k filed january 15 2013 8 incorporated reference registration statement form s1 amended filed august 27 2012 file number 333183558 9 incorporated reference form 10k annual report year ended december 31 2012 10 incorporated reference form 8k filed december 17 2013 11 incorporated reference form 8k filed december 26 2013 12 incorporated reference form 8k filed january 6 2014 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date april 15 2015 ds healthcare group inc daniel khesin daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer chairman april 15 2015 daniel khesin keith markey director april 15 2015 keith markey mark wolfson director april 15 2015 mark wolfson matthew pfeffer director april 15 2015 matthew pfeffer ds healthcare group inc dba ds laboratories subsidiaries consolidated financial statements report independent registered public accounting firm audit committee board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheets ds healthcare group inc subsidiaries “company” december 31 2014 2013 related consolidated statements operations changes equity cash flows years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position ds healthcare group inc subsidiaries december 31 2014 2013 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern discussed note 3 consolidated financial statements company suffered recurring losses operations raise substantial doubt ability continue going concern managements plans regard matters also described note 3 consolidated financial statements include adjustments respect possible future effects recoverability classification assets amounts classification liabilities might result outcome uncertainty marcum llp marcum llp new york ny april 15 2015 ds healthcare group inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements operations comprehensive loss see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows continued see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows continued see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity period january 1 2013 december 31 2014 continued see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity continued period january 1 2013 december 31 2014 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 1 organization nature business terms definitions asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout us gaap accounting principles generally accepted united states america sec securities exchange commission 2013ytd year ended december 31 2013 2014ytd year ended december 31 2014 vie variable interest entity organization nature business ds healthcare group inc dba ds laboratories “company” “ds laboratories” ”dskx” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing hair care skin care personal care products fifteen years network top specialty retailers distributors throughout north america europe asia south america company researches develops products management believes keeps company forefront innovation management believes company currently leading innovator 1 “liposome technology” acts carrier agent designed enhance action active ingredients products 2 “nanosome technology” acts delivery vehicle designed infuse active compounds targeted cells increased efficiency products currently offer products within following broad product categories hair care skin care personal care note 2 summary significant accounting policies principles consolidation presentation consolidated financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms us gaap consolidated financial statements include accounts company operating subsidiaries ds laboratories inc sigma development holding co inc polaris labs inc nutra origin inc divine skin laboratories sa de cv “ds mexico” also included consolidated financial statements operating activities velocity storage packaging llc “velocity” wally group llc inactive entity accounted vies significant intercompany balances transactions eliminated consolidation prior period reclassifications certain prior period amounts combined december 31 2013 consolidated financial statements reclassified comparability december 31 2014 presentation reclassifications effect previously reported net loss ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued use estimates preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results believe estimates assumptions reasonable however estimates assumptions subject number risks uncertainties may cause actual results differ materially estimates significant estimates assumptions underlying consolidated financial statements include · estimates allowances uncollectable accounts receivable · estimates inventory obsolescence overhead labor cost allocations · estimates assuming future earning capacity intangible assets · estimates value equity transactions services rendered · estimates returned damaged product · estimates made deferred income tax calculations full valuation allowance risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows cash company maintains cash financial institutions located united states mexico times company’s cash equivalent balances may uninsured deposit accounts exceed federal deposit insurance corporation “fdic” insurance limits company experienced losses accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible company also provides allowances accounts receivables product returns cooperative advertising allowances december 31 2014 2013 allowance uncollectable accounts 268329 305314 respectively 210000 dates defectives product returns 60000 dates advertising credits inventories inventory reported lower cost market fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued furniture equipment furniture equipment recorded cost depreciation provided using double declining balance depreciation method united states straight line depreciation method mexico estimated useful lives assets range 5 7 years difference methods deemed de minimus consolidated financial statements company recorded 93430 111919 depreciation expense 2014ytd 2013ytd respectively accumulated depreciation 292311 238051 december 31 2014 2013 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset assets disposed reported lower carrying amount fair value less costs sell intangible assets intangible assets acquired individually group assets business combination recorded fair value company’s identifiable intangible assets consist customer relationships acquired part merger fair value intangible assets acquired determined based discounted cash flow analysis identifiable intangible assets amortized period estimated benefit using straightline method approximates customer attrition rate reflecting pattern economic benefits associated assets estimated useful lives 6 10 years goodwill company records goodwill purchase price acquisition exceeds fair value net tangible intangible assets date acquisition company performs annual review goodwill indicators impairment determined goodwill may impaired company performs impairment assessment acquired reporting unit impairment tests using fair value approach december 31 2014 company identified pure guild brand rights fully impaired expensed 51736 impairment noncontrolling interest noncontrolling interest consists minority owned portion nutra origin inc fourth quarter 2012 company completed license nutra origin brand established new subsidiary operate brand part license agreement licensor granted 7 noncontrolling interest newly formed subsidiary 2013 due poor sales product line company defaulted license agreement fully impaired related brand rights 89705 2014 performance product line diminished reported additional operational losses 88630 noncontrolling portion 6204 management expects brand operations cease first quarter 2015 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued revenue recognition company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company currently maintains functional laboratory employing full time chemist part time chemistconsultant lab technician identify new technology test product alternatives improve existing formulations addition founder ceo devotes substantial portion time identifying new technologies formulations develop new products improve existing products newest technology available activities expensed year incurred costs include laboratory supplies salaries materials consultant fees costs classified product development salaries selling general administrative expenses consolidated statements operations amounted 291904 170451 2014ytd 2013ytd respectively sharebased payment company measures compensation cost employee stockbased awards fair values date grant stockbased awards issued nonemployees measured fair values date grant remeasured reporting period vesting dates nonemployee becomes employee continues vest award fair value individual’s award remeasured date becomes employee subsequently remeasured future reporting dates fair value stock based awards recognized expense service period net estimated forfeitures using straightline method stock options restricted stock company uses blackscholes optionpricing model estimate fair value stockbased awards income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized management believes significant uncertainty exists respect future realization deferred tax asset therefore recorded full valuation allowance years ended december 31 2014 2013 income tax expense year ended december 31 2013 mexico operations provision made us foreign taxes undistributed earnings ds mexico earnings considered permanently reinvested practicable determine amount additional tax may payable undistributed foreign earnings ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss attributable shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company vested warrants 253893 shares vested options 32633 shares excluded earnings per share calculation would antidilutive segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders management determined company operates one business segment commercialization development personal care products fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value subsequent events management evaluated subsequent events transactions occurring date financial statements issued management concluded additional subsequent events required disclosure consolidated financial statements except disclosed functional currency us dollar functional currency consolidated entities operating united states functional currency consolidated entity operating outside united states mexican peso translate financial statements us dollars follows · assets liabilities translated exchange rate effect financial statement date · income statement accounts translated using weighted average exchange rate period include translation adjustments currency exchange effect exchange rate changes intercompany transactions longterm investment nature separate component shareholders’ equity currently transactions longterm investment nature gains losses nonus currency transactions ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 3 liquidity going concern sustained operational losses since inception december 31 2014 accumulated deficit 9613375 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern december 31 2014 1128556 cash historically financed operations growth primarily successful issuance sale shares common stock line credit issuance promissory notes company started several new revenue initiatives creating additional revenue streams company initiatives include establishing online store shopdslaboratoriescom became operational third quarter 2014 generating 131107 net revenue establishing hair treatment clinic opened late november 2014 yet generated appreciable sales also renegotiating arrangements providing private label product fortune 500 healthcare company taken steps increase domestic international presence although cannot predict success products projects currently way various stages completion commenced implementing continue implement various measures address financial condition including limited · continuing seek debt equity financing however assurances company able raise additional capital favorable terms · completed operational budget 2015 sets changes processes focus profitability also implementing feedback process improved interdepartmental communication accordingly accompanying consolidated financial statements prepared conformity us gaap contemplates continuation company going concern consolidated financial statements include adjustments reflect possible future effects recoverability carrying amount classification assets amounts classification liabilities may result outcome uncertainty commenced implementing continue implement various measures address financial condition note 4 recent accounting pronouncements fasb issued asu 201415 presentation financial statements going concern subtopic 20540 disclosure uncertainties entity’s ability continue going concern asu requires management assess every reporting period whether substantial doubt entity’s ability continue going concern provide related footnote disclosures amendments define substantial doubt exists relevant conditions events considered aggregate indicate probable entity unable meet obligations become due within one year date financial statements issued available issued management identifies conditions events raise substantial doubt entity’s ability continue going concern management disclose 1 principal conditions events raised substantial doubt 2 management’s evaluation significance events management also consider whether plans intended mitigate conditions events alleviate substantial doubt management disclose information enables users understand plans alleviated substantial doubt amendments asu effective annual period ending december 15 2016 annual periods interim periods thereafter adoption standard expected material impact company’s consolidated financial position results operations ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 recent accounting pronouncements continued fasb issued asu 201412 compensation stock compensation topic 718 accounting sharebased payments terms award provide performance target could achieved requisite service period asu requires performance target affects vesting could achieved requisite service period treated performance condition performance target reflected estimating grant date fair value award update clarifies compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered amendments asu effective annual periods interim periods within annual periods beginning december 15 2015 earlier adoption permitted adoption standard expected material impact company’s consolidated financial position results operations fasb issued asu 201409 revenue contracts customers asu supersedes revenue recognition requirements accounting standards codification 605 revenue recognition industryspecific guidance throughout codification standard requires entity recognizes revenue depict transfer promised goods services customers amount reflects consideration company expects entitled exchange goods services asu effective january 1 2017 applied retrospectively prior reporting period presented retrospectively cumulative effect initially applying asu recognized date initial application entities nonpublic entities amendments asu effective annual reporting periods beginning december 15 2017 interim periods within annual periods beginning december 15 2018 nonpublic entity may elect apply guidance earlier however prescribed asu company yet determined effect adoption standard impact companys consolidated financial position results operations march 2013 fasb issued asu 201305 “foreign currency matters parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity” amendment allows entity release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity effective fiscal years interim reporting periods beginning december 15 2013 early adoption permitted adoption guidance material impact consolidated financial statements related disclosures july 2013 fasb issued asu 201311 “presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments update require unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except limited circumstances amendments update require new recurring disclosures new guidance applied prospectively interim annual periods beginning december 15 2013 adoption asu 201311 material impact company’s consolidated financial statements management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 5 inventories significant components inventory december 31 2014 2013 consist primarily management evaluated inventory december 31 2014 2013 reserved 387258 549720 respectively allowance slow moving obsolete inventory allowance applies primarily bulk product raw materials chemical components expired bottles pumps packaging materials longer used current production due packaging changes excess quantities needed based current production consumption generally merchandise inventory require reserve due rapid turnover note 6 prepaid expenses current assets prepaid expenses current assets december 31 2014 2013 consist primarily prepaid rent represents temporary timing rent payments prepaid insurance represents temporary advance deposits scheduled premium payments made excess premiums expensed policy period deferred issuance costs amounts made connection obtaining financing arrangements asset based lender discussed fully note 11 consisted loan origination fees legal due diligence fees deferred issuance costs advanced expensed 2014ytd 0 2013ytd totaled approximately 18750 47908 respectively lender charged renewal fee april 2013 facility renewed 2014 prepaid pending vat represents payments made process mexican subsidiary tax authorities value added tax imposed commercial transactions ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 intangible assets significant components intangible assets december 31 2014 2013 consist brazilian distribution rights company party 10 year exclusive distribution agreement brazil transaction valued 250 per share company exclusive distributor former joint venture partner current shareholder currently commercializing product lines products brazilian market introduced 4th quarter 2012 rights amortized 10 years 75000 amortized years ending december 31 2014 2013 respectively brazilian distributor completed regulatory approval process began shipping product 2014 pure guild brand rights company party agreement customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result obtained 100 interest pure guild brand exchange rights provided 106666 product representing approximately 70 initial stocking order rights amortized 6 years representing terms original supplier agreement 14780 amortized years ending december 31 2014 2013 respectively december 31 2014 remaining unamortized brand rights fully impaired due poor sales performance brand resulting charge operations 51736 nutra origin brand license distributing nutra origin brand products since october 2010 however brand performance eroded represented 0 sales leased nutra origin brand license 7500 per month however due poor brand sales performance forfeited license rights december 2013 impaired license rights recognized charge 89705 ds mexico customer list connection acquisition mexican distributor november 2012 acquired customer list recorded fair value determined independent appraiser asset amortized estimated useful life 9 years accordingly company recognized 103500 101670 amortization expense years ended december 31 2014 2013 respectively goodwill also connection acquisition mexican distributor ds mexico acquired goodwill represents excess fair value consideration given fair value assets acquired asset amortized however company access asset impairment annually december 31 2014 impairment considered necessary ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 intangible assets continued following table represents amortized cost various assets remaining years weighted average remaining period 615 years note 8 accrued expenses accrued expenses december 31 2014 2013 consist commissions reported amount related bonus earned achieving various quarterly sales targets dating back second quarter 2014 approximately 75 accrued amount may satisfied issuance common shares based market price common shares day conversion occurs payment either cash stock occurs collection customer complete note 9 current liabilities current liabilities december 31 2014 2013 consist ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 9 current liabilities continued advance employee president mexican operations advanced mexican operations unsecured noninterest bearing basis funds facilitate payments several vendors note 10 shareholder loans shareholder loans december 10 2012 received unsecured loan 314000 one consultants also shareholder loan noninterest bearing matured december 11 2013 first quarter 2013 received additional 240000 consultantshareholder terms initial advance bringing total advanced 554000 september 27 2013 lender accepted 456000 shares common stock full satisfaction outstanding liability common shares issued valued 843600 based trading values shares time issuance accordingly company recognized 289600 loss extinguishment debt 2012 also received loan daniel khesin chief executive officer 39000 loan unsecured noninterest bearing matured december 25 2013 installment payments totaling 39000 made year ending december 31 2013 december 31 2013 loan paid full january 20 2013 received unsecured loan 70000 gamma investors also shareholder affiliate brazilian distributor loan accrues interest 3 per month matured august 20 2013 loan called monthly installment payments along interest december 31 2013 loan paid full note 11 debt financing credit facility company party credit facility provided asset based lending collateralized assets company advances based 70 qualified accounts receivable 40 eligible finished goods inventory credit facility amended provided interest bank fees aggregated 8 prime plus 3 plus 175 asset monitoring fees per annum renewed reduced 200000 credit facility expired august 15 2014 fully repaid credit facility personally guaranteed chief executive officer loan fully repaid consequently december 31 2014 2013 company 0 582383 outstanding respectively long term debt december 10 2012 company entered loan agreement 53900 purchase certain warehouse equipment loan provides monthly payments 1041 60 months 595 interest payments began february 18 2013 principal payout life loan follows short term credit facility fourth quarter 2014 company replaced asset based lending facility 350000 short term credit facility funded private party short term financing originally matured march 28 2015 extended may 28 2015 provides interest 1 per month facility secured company’s finished goods inventory 2014 company accrued 7000 interest ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 commitments contingencies years ended december 31 2014 2013 company operated several material agreements listed lease office production facilities · company party lease total 1875 square feet sales facilities located ashville north carolina lease provides monthly rent 4725 throughout lease term expire december 31 2015 effective september 30 2014 company relocated office florida headquarters negotiations landlord formalize lease termination company believes settlement de minimus consolidated financial statements december 31 2014 · company party sublease 50000 square feet warehouse corporate office space located deerfield beach florida expired july 2014 june 25 2014 commencing august 1 2014 company completed negotiations property owner new lease deerfield beach location terms new lease provide 600 per square foot 24720 per month base rent plus 10918 monthly operating expenses terminates july 31 2019 lease provides annual increases monthly base rent 024 027 per square foot mexican subsidiary leases 246 square feet office space 1230 square feet warehouse mexico city mexico expires july 2015 leases provide monthly rent 1408 company accounts facility leases using straightline method incurred 489643 408491 total rent expense years ended december 31 2014 2013 respectively company committed lease payments next five years follows pending threatened litigation chief executive officer individually named lawsuit brought circuit court 11th judicial circuit miamidade county florida 2012 former contractor claiming wrongful termination plaintiff’s complaint alleges 85000 back salary performance bonus 40000 share grant claim settled april 2014 21513 shares common stock fair value 40000 date agreement june 13 2011 filed action circuit court eleventh judicial circuit miamidade county florida rescission investor relations consulting agreement entered october 15 2010 whereby paid third party approximately 20000 23000 shares restricted common stock consideration investor relations consulting services demanded return 23000 shares restricted stock recovery costs damages third party filed counter claim breach agreement intend continue vigorously defend claim ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 commitments contingencies continued 2011 filed action circuit court eleventh judicial circuit miamidade county florida rescission agreement entered may 18 2010 whereby paid third party approximately 500 20000 shares restricted common stock consideration consulting services demanded return 20000 shares restricted stock recovery costs damages claim dismissed lack jurisdiction refiled action supreme court new york county new york january 11 2012 seeking rescission said agreement return 500 20000 shares restricted common stock march 2014 matter settled party released claims related action settlement matter general release defendant agreed return company treasury 10000 shares common stock subject dispute remaining 10000 shares defendant agreed one year lock agreement covering 60 shares period one year settlement date december 31 2014 agreed shares returned treasury time company may involved various claims legal actions arising ordinary course business opinion management ultimate disposition matters material adverse effect company’s consolidated financial position results operations purchase commitments order secure adequate supply raw materials company executes purchase orders suppliers evidence intent purchase materials purchase orders outstanding december 31 2014 totaled 1126793 contract contingencies distribution agreement gamma investors shareholder company provides event terminate agreement without cause required repurchase products held gamma’s inventory pay gamma fee equal greater prior 12 month product purchased gamma 2 million transactions gamma de minimus date employment agreement daniel khesin effective december 16 2013 company entered executive employment agreement daniel khesin current chief executive officer serve chief executive officer initial term december 31 2018 “initial term” thereafter automatically renewed successive one year terms “renewal term” unless terminated upon six months prior written notice “non renewal notice” initial term base salary shall 250000 shall increase 20 one quarterly period following quarterly period company profitable increases accumulate carry subsequent periods base salary commencing year ending december 31 2014 subject nasdaq rules includes 50000 payable company common stock valued closing price end calendar year term agreement furthermore mr khesin shall entitled receive annual performance bonus payable stock andor cash based achieving annual targets set board directors agreement mr khesin shall entitled receive reimbursement reasonable travel entertainment miscellaneous expenses incurred connection performance duties mr khesin entitled paid vacation determined board initially four weeks per annum also entitled participate pension insurance employment benefit plan maintained company executives including programs life medical insurance company agreed maintain disability insurance directors officers’ liability coverage employment term event company fails maintain disability policy mr khesin mr khesin becomes disabled term agreement shall continue receive 25 base salary period 10 years disability removed company terminates mr khesin’s employment without cause company shall pay severance pay mr khesin within 30 days following termination date lump sum amount equal 42 months annual base salary options shall automatically vest become fully exercisable furthermore upon delivery non renewal notice company shall also pay mr khesin lump sum amount equal 42 months annual base salary term agreement 6 month period following termination agreement mr khesin shall subject non competition non solicitation restrictions unless employment terminated without cause company upon change control company following non renewal notice ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 commitments contingencies continued 2014 addition 250000 base compensation paid ceo company paid approximately 82000 third parties nonbusiness related goods services benefit goods services required prior approval compensation committee approval received subsequent year ended december 31 2014 payments however recorded compensation 2014 quarterly periods subsequently board compensation committee approved payments bringing ceo’s annual compensation 2014 approximately 332000 employment agreement dr fernando tamez dr tamez agreed oversee day operations ds mexico consideration base salary approximately 60000 per year consideration employment ds mexico dr tamez entered performance agreement dated december 11 2012 whereby dr tamez shall receive 12 month anniversary agreement year thereafter period five years number shares common stock shall cumulative value 50000 furthermore term dr tamez’s employment shall entitled calendar year basis 30 net profits ds mexico “profit participation” commencing third calendar anniversary performance agreement us shall option terminating profit participation consideration 500000 payment dr tamez furthermore event “change control” us term dr tamez’s employment us dr tamez shall right receive onetime payment 500000 “change control” us shall deemed occurred time 1 person term used section 13d 14d exchange act becomes “beneficial owner” defined rule 13d3 exchange act 1934 amended “exchange act” directly indirectly securities representing 80 combined voting power outstanding securities right vote elections directors 2 person becomes beneficial owner directly indirectly either 50 ds mexico’s outstanding shares ii 30 ds mexico´s shares within period one year 3 board directors ds mexico currently consisting daniel khesin fernando tamez changed majority 40 gross value ds mexico´s assets transferred unrelated party 2014 dr tamez mr daniel khesin ceo behalf company entered temporary informal agreement dr tamez receives 100 profits mexican operations amounted approximately 36000 initiative promote maximize growth exchange restoration normal wholesale pricing note 13 equity common stock shares issued lieu cash goods services goods services valued based upon shares issued multiplied closing price stock date immediately preceding issuance first quarter 2013 company issued 15300 shares distributor achieving sales goals valued 250 per share resulted sales allowance 38250 aggregate also issued 20000 shares investor relations “ir” firm services valued 220 per share 44000 total directors received 5000 shares services valued 320 per share 16000 second quarter 2013 company issued 11765 shares distributor achieving sales goals valued 211 per share resulted sales allowance 24824 aggregate also issued 80000 shares ir firm services valued 175 per share 140000 total directors received 7500 shares services valued 175 261 per share 16350 third quarter 2013 company sold aggregate 381192 shares four private investors prices ranging 100 115 per share total approximately 410000 fees paid third party three four transactions resulting issuance costs 31260 company also issued 28433 shares aggregate several distributors achieving sales goals valued 150 average per share resulted sales allowance 42649 aggregate also issued 52700 shares aggregate four investor relations “ir” firms services valued 176 average per share 92550 total also issued 31779 shares two associates services rendered valued 166 average per share 52721 total fourth quarter 2013 company sold aggregate 8943 shares private investor 112 per share total 10000 fees paid third party transaction ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued fourth quarter 2013 also issued 94679 shares aggregate five individuals perform services company valued prices ranging 191 231 per share 190336 total november 20 2013 also issued 15000 shares directors services rendered independent director agreements valued 202 per share 30300 total securities purchase agreement dated december 24 2013 amended “securities purchase agreement” company sold 1965000 shares private placement series investors securities purchase agreement 160 per share total 3144000 fees paid registered brokerdealer legal counsel resulting issuance costs 151051 securities purchase agreement company agreed restrict issuance shares common stock common stock equivalents period approximately nine months closing date subject certain exceptions addition subject certain exceptions period twelve months closing date securities purchase agreement company issues additional shares common stock common stock equivalents “additional shares” purchase exercise conversion price less 160 price subject adjustment splits recapitalizations reorganizations company shall issue additional shares common stock purchasers effective purchase price per share paid common stock shall per share purchase exercise conversion price additional shares provided however additional shares aggregated issuances securities purchase agreement shall exceed 1999 issued outstanding common stock company immediately prior closing date securities purchase agreement first quarter 2014 company issued 8000 shares common stock distributors achieving sales goals valued 244 per share resulted sales allowance 19520 also issued 48000 shares common stock investor relations “ir” firm services 160000 shares common stock consultant aggregate valued 224 average per share 464960 total also issued 5000 shares common stock investor also issued aggregate 3750 shares common stock three directors services rendered valued 222 average per share 8325 total second quarter 2014 company issued 20513 shares common stock settlement lawsuit originated former employee valued 40000 third quarter 2014 company issued aggregate 54000 shares common stock consultant employee services rendered value 85654 fourth quarter 2014 company issued 60000 shares common stock ir firm satisfaction obligation recognized third quarter 2014 services rendered value 63000 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued warrants following tables present status warrants outstanding december 31 2014 december 31 2013 respectively options december 31 2014 company equity incentive plan see note 16 options granted december 31 2014 granted outside plan following tables present status options outstanding december 31 2014 2013 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued preferred stock provided certificate designation series preferred stock dated january 14 2009 amended september 2009 share series preferred stock entitled 02 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law preferred stock automatically converts common stock tentoone basis september 2013 two founders converted 4500000 preferred shares 450000 common shares 2012 remaining 5500000 shares held remaining founder ceo company converted 550000 common shares september 15 2013 note 14 income taxes provision income taxes 2014ytd 2013ytd summarized follows provision income taxes 2014ytd 2013ytd differs amount computed applying us federal statutory rate loss provision benefit income taxes follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 14 income taxes continued deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2014 december 31 2013 follows december 31 2014 2013 company us federal state net operating loss carryovers 7182363 6015113 respectively unused net operating loss carryforwards expire various dates beginning 2030 ending 2032 accordance section 382 internal revenue code usage companys net operating loss carryforward could limited event change ownership united states foreign components loss income taxes follows company evaluated provisions asc 740 related accounting uncertainty income taxes recognized company’s financial statements december 31 2014 2013 based management’s evaluation concluded significant uncertain tax positions requiring recognition consolidated financial statements years ended december 31 2014 2013 company incurred interest penalties evaluation performed tax years ended december 31 2014 2013 company files income tax returns us federal jurisdiction states florida north carolina companys federal state income tax returns since 2011 subject examination internal revenue service state income tax returns since 2010 subject examination respective state jurisdiction returns generally subject examination period three years returns filed company filed state tax returns 2013 state net operating loss carryovers available offset future taxable income returns filed ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 15 2009 equity incentive plan overview options granted company’s 2009 equity incentive plan “plan” may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 500000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury shares issued eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable note 16 significant customers product revenues represent primarily sales revita cor individually exceed 10 total sales collectively represent 38 net revenue spectral dncn represents 7 net revenue polaris nr09 spectral dnc 5 represent 5 net revenue company sells products several types customer primarily include distributors salons several represent individually excess 10 total net revenue 2014ytd 2013ytd 2014ytd 2013ytd top ten customers generated 49 34 net revenue respectively sales customers individually excess 10 total sales 2013ytd sales customers individually excess 10 net revenue 2014ytd accounts receivable december 31 2014 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 17 significant vendors company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change purchases significant vendors 2014ytd accounts payable december 31 2014 purchases significant venders 2013ytd accounts payable december 31 2013 note 18 geographic revenue reporting company organized based fundamentally one business segment although distribute products worldwide basis several largest distributors based north america turn sell products europe asia consider customers based north america however sales international distributors distribute product outside north america increasing information company’s geographic operations 2014ytd 2013ytd follows note 19 consolidation variable interest entity company holds variable interest velocity entity company primary beneficiary velocity performs packaging shipping services exclusively company’s variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure accordingly company determined velocity vie company primary beneficiary guidance offered asc 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 20 related party transactions year ended december 31 2014 company party following related party transactions disclosed elsewhere financial statements · company paid 103233 2014 103233 2013 compensation father chief executive officer consulting various projects · company paid consultant shareholder performs outsourced coo services reimbursed following 63336 2014 0 2013 outsourced coo services 89954 2014 0 2013 purchase materials needed assembly manufacture products export 261752 2014 93947 2013 cash stock ir related expenses services december 31 2014 2013 company recorded accounts payable accrued expenses 198164 280443 respectively note 21 subsequent events equity first quarter 2015 company sold aggregate 440000 shares private investor 220000 also first quarter 2015 company issued aggregate 125790 shares certain employees distributors consultants various duties preformed period item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits 1 incorporated reference form 8k filed february 22 2016 2 incorporated reference form 8k filed december 17 2013 3 incorporated reference form 8k filed december 26 2013 4 incorporated reference form 10k annual report year ended december 31 2012 signatures accordance requirements exchange act registrant caused report signed behalf undersigned thereunto duly authorized date october 7 2016 ds healthcare group inc daniel khesin daniel khesin presidentchief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date myron lewis director october 7 2016 myron lewis yasuhiro fujiwara director october 7 2016 yasuhiro fujiwara elina yuabov director october 7 2016 elina yuabov estella ng director october 7 2016 estella ng ds healthcare group inc dba ds laboratories subsidiaries consolidated financial statements report independent registered public accounting firm audit committee board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheets ds healthcare group inc subsidiaries “company” december 31 2015 2014 related consolidated statements operations changes equity cash flows years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position ds healthcare group inc subsidiaries december 31 2015 2014 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern discussed note 3 consolidated financial statements company suffered recurring losses operations raise substantial doubt ability continue going concern managements plans regard matters also described note 3 consolidated financial statements include adjustments respect possible future effects recoverability classification assets amounts classification liabilities might result outcome uncertainty bf borgers cpa pc bf borgers cpa pc lakewood co october 7 2016 ds healthcare group inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements operations comprehensive loss see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity period january 1 2014 december 31 2015 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity continued period january 1 2014 december 31 2015 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 1 organization nature business organization nature business ds healthcare group inc dba ds laboratories “company” “ds laboratories”” dskx” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing hair care skin care personal care products fifteen years network top specialty retailers distributors throughout north america europe asia south america company researches develops products management believes keeps company forefront innovation management believes company currently leading innovator 1 “liposome technology” acts carrier agent designed enhance action active ingredients products 2 “nanosome technology” acts delivery vehicle designed infuse active compounds targeted cells increased efficiency products currently offer products within following broad product categories hair care skin care personal care note 2 summary significant accounting policies principles consolidation presentation consolidated financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america “us gaap” consolidated financial statements include accounts company operating subsidiaries ds laboratories inc sigma development holding co inc polaris labs inc nutra origin inc polymer inc divine skin laboratories sa de cv “ds mexico” also included consolidated financial statements operating activities velocity storage packaging llc “velocity” accounted variable interest entity “vie” significant intercompany balances transactions eliminated consolidation velocity performs packaging shipping services exclusively company’s variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure accordingly company determined velocity vie company primary beneficiary guidance offered accounting standards codification “asc” 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur prior period reclassifications certain prior period amounts combined 2015 consolidated financial statements reclassified comparability 2014 presentation reclassifications effect previously reported net loss risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued use estimates preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results believe estimates assumptions reasonable however estimates assumptions subject number risks uncertainties may cause actual results differ materially estimates significant estimates assumptions underlying consolidated financial statements include · estimates allowances uncollectable accounts receivable · estimates inventory obsolescence overhead labor cost allocations · estimates assuming future earning capacity intangible assets · estimates value equity transactions services rendered · estimates returned damaged product · estimates made deferred income tax calculations full valuation allowance cash company maintains cash financial institutions located united states mexico times company’s cash equivalent balances may uninsured deposit accounts exceed federal deposit insurance corporation “fdic” insurance limits company experienced losses accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible company also provides allowances accounts receivables product returns cooperative advertising allowances december 31 2015 2014 allowance uncollectable accounts including reserves product returns advertising credits 663151 624931 respectively inventories inventory reported lower cost market firstin firstout method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using double declining balance depreciation method united states straightline depreciation method mexico estimated useful lives assets range 5 7 years difference methods deemed de minimums consolidated financial statements company recorded 71208 93430 depreciation expense 2015 2014 respectively accumulated depreciation 340200 291311 december 31 2015 2014 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset assets disposed reported lower carrying amount fair value less costs sell intangible assets intangible assets acquired individually group assets business combination recorded fair value company’s identifiable intangible assets consist customer relationships acquired part merger fair value intangible assets acquired determined based discounted cash flow analysis identifiable intangible assets amortized period estimated benefit using straightline method approximates customer attrition rate reflecting pattern economic benefits associated assets estimated useful lives 6 10 years goodwill company records goodwill purchase price acquisition exceeds fair value net tangible intangible assets date acquisition company performs annual review goodwill indicators impairment determined goodwill may impaired company performs impairment assessment acquired reporting unit impairment tests using fair value approach noncontrolling interest noncontrolling interest consists minority owned portion nutra origin inc fourth quarter 2012 company completed license nutra origin brand established new subsidiary operate brand part license agreement licensor granted 7 noncontrolling interest newly formed subsidiary 2013 due poor sales product line company defaulted license agreement fully impaired related brand rights 89705 2014 performance product line diminished reported additional operational losses 88630 noncontrolling portion 6204 december 31 2014 company recorded noncontrolling interest receivable 38430 since brand operations already ceased company believe able collect noncontrolling interest receivable 38430 company wroteoff amount 2015 revenue recognition company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · product shipped facilities accordance freight board “fob” standards · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued research development company currently maintains functional laboratory employing full time chemist part time chemistconsultant lab technician identify new technology test product alternatives improve existing formulations addition cofounder president devotes substantial portion time identifying new technologies formulations develop new products improve existing products newest technology available activities expensed year incurred costs include laboratory supplies salaries materials consultant fees costs classified product development salaries selling general administrative expenses consolidated statements operations amounted 285157 315 097for 2015 2014 respectively sharebased payment company measures compensation cost employee stockbased awards fair values date grant stockbased awards issued nonemployees measured fair values date grant remeasured reporting period vesting dates nonemployee becomes employee continues vest award fair value individual’s award remeasured date becomes employee subsequently remeasured future reporting dates fair value stock based awards recognized expense service period net estimated forfeitures using straightline method stock options restricted stock company uses blackscholes optionpricing model estimate fair value stockbased awards income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized management believes significant uncertainty exists respect future realization deferred tax asset therefore recorded full valuation allowance 2015 2014 income tax expense year ended december 31 2015 mexican subsidiary provision made us foreign taxes undistributed earnings ds mexico earnings considered permanently reinvested practicable determine amount additional tax may payable undistributed foreign earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss attributable shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company weighted average securities included calculation diluted earnings per common share impact antidilutive 444213 286526 2015 2014 respectively segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders management determined company operates one business segment commercialization development personal care products ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value functional currency us dollar functional currency consolidated entities operating united states functional currency consolidated mexican subsidiary mexican peso translate financial statements us dollars follows · assets liabilities translated exchange rate effect financial statement date · income statement accounts translated using weighted average exchange rate period include translation adjustments currency exchange effect exchange rate changes intercompany transactions longterm investment nature separate component shareholders’ equity currently transactions longterm investment nature gains losses nonus currency transactions note 3 liquidity going concern sustained operational losses since inception december 31 2015 accumulated deficit 20978751 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern december 31 2015 4517604 cash equivalents historically financed operations growth primarily successful issuance sale shares common stock issuance promissory notes company started several new revenue initiatives creating additional revenue streams company initiatives include establishing online store shopdslaboratoriescom became operational third quarter 2014 year ended december 31 2015 generated 611937 net revenue although cannot predict success products projects currently way various stages completion ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 3 liquidity going concern continued commenced implementing continue implement various measures address financial condition including limited · continuing seek debt equity financing however assurances company able raise additional capital favorable terms accordingly accompanying consolidated financial statements prepared conformity us gaap contemplates continuation company going concern consolidated financial statements include adjustments reflect possible future effects recoverability carrying amount classification assets amounts classification liabilities may result outcome uncertainty commenced implementing continue implement various measures address financial condition ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 restatement financial statements financial statements year ended december 31 2014 previously filed sec april 15 2015 restated previously filed financial statements reflect proper matching revenues costs impact restatement company’s financial statements year ended december 31 2014 reflected tables consolidated balance sheets ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 restatement financial statements continued consolidated statements operations comprehensive loss ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 restatement financial statements continued consolidated statements cash flows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 5 inventories significant components inventory december 31 2015 2014 consist primarily evaluated inventory december 31 2015 2014 reserved 379615 387258 respectively allowance slow moving obsolete inventory allowance applies primarily bulk product raw materials chemical components expired bottles pumps packaging materials longer used current production due packaging changes excess quantities needed based current production consumption generally merchandise inventory require reserve due rapid turnover note 6 prepaid expenses current assets prepaid expenses current assets december 31 2015 2014 consist primarily prepaid vendor trade credits represents trade credits received third party vendor company may use purchase goods andor services future periods prepaid marketing represents payments made vendor marketing related services received future periods prepaid vat represents payments made mexican subsidiary tax authorities value added tax imposed commercial transactions ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 intangible assets significant components intangible assets december 31 2015 2014 consist brazilian distribution rights company signed 10year exclusive distribution agreement brazil transaction valued 250 per share company exclusive distributor former joint venture partner current shareholder currently commercializing product lines products brazilian market introduced 4th quarter 2012 rights amortized 10 years recorded 0 75000 amortization 2015 2014 2015 remaining unamortized distribution rights fully impaired due delayed sales attributable brazilian distributor rights resulting charge operations 356250 pure guild brand rights company signed agreement customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result obtained 100 interest pure guild brand exchange rights provided 106666 product representing approximately 70 initial stocking order rights amortized 6 years representing terms original supplier agreement recorded amortization 14780 2014 december 31 2014 remaining unamortized brand rights fully impaired due poor sales performance brand resulting charge operations 51736 ds mexico customer list connection acquisition mexican distributor november 2012 acquired customer list recorded fair value determined independent appraiser asset amortized estimated useful life 9 years recorded amortization 24572 103500 amortization expense 2015 2014 respectively remaining unamortized amount december 31 2015 456353 amortized follows 78232 2016 2017 2018 2019 2020 65193 thereafter ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 intangible assets continued goodwill also connection acquisition mexican distributor ds mexico acquired goodwill represents excess fair value consideration given fair value assets acquired 8873 change goodwill december 31 2014 27412 december 31 2015 represents foreign currency translation mxn functional currency subsidiary goodwill asset amortized however company access asset impairment annually december 31 2014 impairment considered necessary note 8 accrued expenses accrued expenses december 31 2015 2014 consist note 9 current liabilities current liabilities december 31 2015 2014 consist note 10 debt equipment loan december 10 2012 company entered loan agreement 53900 purchase certain warehouse equipment loan provides monthly payment 60 months bears interest 595 payments began february 18 2013 december 31 2015 outstanding equipment loan balance 24996 bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 december 31 2015 remaining outstanding amount bank loan mxn 479461 27651 bears interest 1228 july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2015 remaining outstanding amount bank loan mxn 2764743 159445 bears interest 93 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 10 debt continued promissory notes fourth quarter 2014 company entered 350000 promissory note private party promissory note due may 28 2015 june 1 2015 parties agreed convert note plus accrued interest common shares company issued 191202 common shares valued 387100 september 15 2015 lender 2015 company entered 450000 promissory note amended september 1 2015 note secured inventory provided interest 1 per month maturity date december 31 2015 note paid full december 23 2015 excluding accrued interest 22933 connection issuing note company also issued warrants purchase 30000 common shares 085 per share expiration date april 20 2017 10000 common shares 250 per share expiration date september 1 2017 warrants aggregate estimated fair value 26048 september 15 2015 warrant 30000 common shares exercised december 31 2015 aggregate annual maturities debt follows note 11 commitments contingencies 2015 2014 company operated several material agreements listed lease office production facilities · june 25 2014 commencing august 1 2014 company entered lease 50000 square feet warehouse corporate office space located pompano beach florida terms new lease provide 600 per square foot 24720 per month base rent plus 10918 monthly operating expenses terminates july 31 2019 lease provides annual increases monthly base rent 024 027 per square foot lease also personally guaranteed chief executive officer daniel khesin · mexican subsidiary leases 246 square feet office space 1230 square feet warehouse mexico city mexico expires april 30 2018 leases provide monthly rent 1408 · company party lease sales facilities located ashville north carolina lease provided monthly rent 4725 expired december 31 2015 september 2014 company relocated office florida location negotiations landlord settle lease abandonment december 31 2015 company recorded liability 85042 represented aggregate monthly rent date abandonment lease expiration date company accounts facility leases using straightline method incurred 535012 489643 total rent expense 2015 2014 respectively 2015 company served suit connection asheville nc “asheville” abandoned office lease suit calls payments 73000 september 21 2016 company notified received default judgement amount 73000 company plans appealing default judgment december 31 2015 company sufficiently accrued asheville suit ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 commitments contingencies continued company committed lease payments next five years follows pending threatened litigation company party otherwise involved legal proceedings arising normal ordinary course business date report except otherwise disclosed aware proceeding threatened pending us determined adversely would material effect business results operations cash flows financial position march 29 2016 ds healthcare mr khesin certain former members board directors sued class action styled prasant shah v ds healthcare group inc et al case 1660661 pending united states district court southern district florida laterfiled class action consolidated class action arises company’s march 23 2016 march 28 2016 8k filings stated pertinent part audit committee concluded unaudited condensed consolidated financial statements company two fiscal quarters ended june 30 2015 september 30 2015 “june september 2015 quarters” longer relied upon certain errors financial statements daniel khesin terminated cause removed chairman member board directors plaintiffs november 2 2016 file amended complaint ds healthcare must respond later december 19 2016 company also received first three related shareholder derivative demands march 29 2016 mediation concerning class action derivative demands scheduled october 17 2016 miami florida may 27 2016 photomedex inc radiancy inc photomedex technology inc collectively “photomedex” filed civil action damages declaratory relief ds healthcare united states district court southern district new york lawsuit styled photomedex inc v ds healthcare group inc case 116cv03981 lawsuit arises two merger agreements agreement plan merger reorganization among ds healthcare group inc phmd p acquisition corp photomedex inc radiancy inc dated february 19 2016 ii agreement plan merger reorganization among ds healthcare group inc phmd professional acquisition corp photomedex technology inc photomedex inc dated february 19 2016 photomedex alleges ds healthcare breached agreements failing meet preclosing obligations completing transactions contemplated agreements photomedex seeks declaratory judgment terminations two agreements proper requests award damages specified agreements including “breakup fee” usd 3 million ds healthcare disputes claims asserted photomedex including photomedex entitled “breakup fee” agreements ds healthcare also asserted counterclaims damages photomedex breaches two agreements initial case management conference scheduled october 13 2016 december 28 2015 company chief executive officer daniel khesin individually abner silva former consultant employee named lawsuit brought circuit court 11th judicial circuit miamidade county florida former investor relations contractor claiming monetary damages allegations using material false misrepresentations plaintiff’s complaint alleges owed compensation stock cash management intends vigorously defend action contends suit primarily without merit contractor dismissed writing accordingly management provided contingency reserve matter ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 commitments contingencies continued company accounts facility leases using straightline method incurred 535012 489643 total rent expense 2015 2014 respectively 2015 company served suit connection asheville nc “asheville” abandoned office lease suit calls payments 73000 september 21 2016 company notified received default judgement amount 73000 company plans appealing default judgment december 31 2015 company sufficiently accrued asheville suit company received several prelitigation demand letters various former employees including limited demand alleged past wages shares commissions various sales qualify revenue gaap guidance former chief executive officer renee barch niles cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes time amount loss range loss cannot reasonably estimated case initiated discovery conducted determine validity claim claims made plaintiffs therefore company recorded reserves contingent liabilities related particular legal matters however future cases progress company may required increase contingent liability reserve matters impossible us predict certainty outcome pending disputes unless otherwise stated cannot predict whether liability arising pending claims litigation material relation consolidated financial position results operations purchase commitments order secure adequate supply raw materials company executes purchase orders suppliers evidence intent purchase materials purchase orders outstanding december 31 2015 totaled 260503 contract contingencies distribution agreement gamma investors shareholder company provides event terminate agreement without cause required repurchase products held gamma’s inventory pay gamma fee equal greater prior 12month product purchased gamma 2 million transactions gamma de minimums date ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 commitments contingencies continued employment agreements daniel khesin effective december 16 2013 company entered executive employment agreement daniel khesin current chief executive officer serve chief executive officer initial term december 31 2018 “initial term” thereafter automatically renewed successive one year terms “renewal term” unless terminated upon six months’ prior written notice “nonrenewal notice” initial term base salary shall 250000 shall increase 20 one quarterly period following quarterly period company profitable increases accumulate carry subsequent periods base salary commencing year ending december 31 2014 subject nasdaq rules includes 50000 payable company common stock valued closing price end calendar year term agreement furthermore mr khesin shall entitled receive annual performance bonus payable stock andor cash based achieving annual targets set board directors agreement mr khesin shall entitled receive reimbursement reasonable travel entertainment miscellaneous expenses incurred connection performance duties mr khesin entitled paid vacation determined board initially four weeks per annum also entitled participate pension insurance employment benefit plan maintained company executives including programs life medical insurance company agreed maintain disability insurance directors’ officers’ liability coverage employment term event company fails maintain disability policy mr khesin mr khesin becomes disabled term agreement shall continue receive 25 base salary period 10 years disability removed company terminates mr khesin’s employment without cause company shall pay severance pay mr khesin within 30 days following termination date lump sum amount equal 42 months annual base salary options shall automatically vest become fully exercisable furthermore upon delivery nonrenewal notice company shall also pay mr khesin lump sum amount equal 42 months annual base salary term agreement 6month period following termination agreement mr khesin shall subject noncompetition nonsolicitation restrictions unless employment terminated without cause company upon change control company following nonrenewal notice throughout year ended 2014 2015 daniel khesin companys chief executive officer former chief financial officer received addition base compensation reimbursement payroll advances expenses approximately 76000 40000 respectively nonbusiness related goods services pursuant executive employment agreement 50000 payable shares companys common stock fiscal yearend mr khesin believed payments received satisfaction certain bonus perquisites earned monthly basis employment agreement payments required approval compensation committee approval received 2016 section 402 sarbanes oxley act 2002 prohibits advances loans director executive officer public company audit committee concluded payments made mr khesin prior board compensation committee approval may violation section 402 sarbanes oxley act 2002 event determined payments violation sarbanes oxley act violation could material adverse effect company including limited criminal civil administrative sanctions penalties investigations addition potential securities litigation consequence activities company received notice independent auditor september 29 2016 potential illegal acts concerning payments personal expenses company’s audit committee agreed findings september 29th 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29th 2016 see controls procedures executive compensation 2013 addition base compensation paid abner silva consultant deemed officer independent auditor accounting purposes company advanced approximately 11500 mr silva mr silva believed payments received satisfaction certain moneys owed affiliate companies payments required prior approval compensation committee approval received consequence activities company received notice independent auditor potential illegal acts concerning payments personal expenses company september 29 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29 2016 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 commitments contingencies continued dr fernando tamez dr tamez agreed oversee day operations ds mexico consideration base salary approximately 60000 per year consideration employment ds mexico dr tamez entered performance agreement dated december 11 2012 whereby dr tamez shall receive 12month anniversary agreement year thereafter period five years number shares common stock shall cumulative value 50000 furthermore term dr tamez’s employment shall entitled calendar year basis 30 net profits ds mexico “profit participation” commencing third calendar anniversary performance agreement us shall option terminating profit participation consideration 500000 payment dr tamez furthermore event “change control” us term dr tamez’s employment us dr tamez shall right receive onetime payment 500000 “change control” us shall deemed occurred time 1 person term used section 13d 14d exchange act becomes “beneficial owner” defined rule 13d3 exchange act 1934 amended “exchange act” directly indirectly securities representing 80 combined voting power outstanding securities right vote elections directors 2 person becomes beneficial owner directly indirectly either 50 ds mexico’s outstanding shares ii 30 ds mexico´s shares within period one year 3 board directors ds mexico currently consisting daniel khesin fernando tamez changed majority 40 gross value ds mexico´s assets transferred unrelated party 2014 dr tamez mr daniel khesin ceo behalf company entered temporary informal agreement dr tamez receives 100 profits mexican operations amounted approximately 36000 initiative promote maximize growth exchange restoration normal wholesale pricing september 27 2016 company’s board directors determined total 350000 shares issued investor relation services returned due lack economic future value company committed recovering shares company recorded expense shares 2015 march 4 2016 company received prelitigation dispute former consultant employee services rendered 20092016 company currently settlement discussions return 625000 shares believes resolve disputes without litigation company expensed issuances shares financials continue try obtain shares back since issued without proper approval august 14 2015 company entered employment agreement manuel gonzalez serve chief commercial officer terms employment agreement company pay mr gonzalez shall paid annual base salary 150000 shall entitled 15000 cashless warrants per month 48 months expires 15 years month granted april 2016 mr gonzalez terminated due circumstances surrounding termination company’s position termination cause would cause mr gonzález forfeit compensation employment agreement accordingly company accounted future compensation expensed compensation date termination cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes pursuant employment ms barchniles former chief executive officer october 2015 company granted equity award 450000 restricted stock units vest monthly 48 months additionally ms barchniles also granted signing bonus 15924 restricted stock units vest monthly 12 months equity award signing bonus subject makewhole event shares worth less 2500000 50000 respectively company issue additional shares barchniles bring value shares 2500000 50000 respectively subject minimum price per share 350 ms barchniles terminated chief executive officer april 14 2016 company accrued stock based compensation date termination amount represents original agreement’s signing bonus terms due circumstances breach contract surrounding ms barchniles’ termination company’s determination honor original terms agreement accrued compensation termination date company received prelitigation demand alleged past wages shares commissions various sales qualify revenue gaap guidance former chief executive officer renee barch niles cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 commitments contingencies continued january 5 2016 company entered employment letter mr brockelman terms agreement mr brockelman serve company’s chief financial officer reporting company’s chief executive officer mr brockelman receive annual base salary 185000 annual bonus target level 50 annual base salary based upon achievement certain bonus targets set agreed company’s chief executive officer mr brockelman employment letter company agreed grant mr brockelman 300000 shares restricted stock “restricted shares” vest equal installments 6250 shares per month period 48 months event value restricted shares 1000000 twelve month period following mr brockelman’s start date company issue mr brockelman additional shares value restricted shares shall equal 1000000 floor price per share makewhole provision 330 per share event company acquired prior expiration 48month period unvested restricted shares become fully vested mr brockelman resigned april 2 2016 accordingly company accounted future compensation expensed compensation date resignation result mr brockelman’s resignation company accounted options floorprice guarantees september 27 2016 pursuant company’s bylaws current board directors approved ratified shares former management date termination company’s position due circumstances surrounding terminations shares compensation owned vehemently defend position board also determined pursuant company’s bylaws board directors reject share grants attempts grant shares claim shares former board director members management furthermore company take actions required defend position result expense taken company vehemently defend position daniel khesin ceo also promised additional shares fiscal year 2015 never issued accounted also agreed rescind never formally reviewed approved compensation committee never issued never properly approved agreed rescinded accrual expense liability results note 12 equity common stock shares issued lieu cash goods services goods services valued based upon shares issued multiplied prevailing closing price stock date issuance private investment public equity offering also issued 2000000 shares common stock 250 per share warrants purchase 1500000 common shares exercise price 285 gross proceeds private investment public equity offering 5000000 company incurred issuance costs 486000 netted gross proceeds received recorded additional paid capital accompanying consolidated balance sheets company fair valued warrant issued amounted approximately 1848000 also 2015 issued aggregate 3088295 shares common stock average value 242 per share 7502208 aggregate services company received investor relation firms employeeboard director fees distributors consulting services included shares common stock related aggregate value issued services 1111905 shares common stock issued ir firms 1905462 ii 832500 shares common stock issued distributors 2270000 200000 shares common stock issued one investor relations “ir” firm second quarter 2015 company recorded value 200000 shares common stock expense 328000 ir expense 2015 800000 shares common stock issued one distributor third quarter 2015 company recorded expense 2269200 company recorded value 800000 shares common stock distributor marketing promotion expense 2015 issued 1111784 shares various employees consultants certain milestones services rendered company accordingly expensed 2973691 related issuance ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 equity continued 2014 issued aggregate 354263 shares common stock average value 192 per share 681459 aggregate services company received investor relation firms employeeboard director fees distributors consulting services included shares common stock related aggregate value issued services 60000 shares common stock issued ir firm satisfaction obligation recognized 2014 services rendered value 63000 also issued 5000 shares common stock investor 100 per share 5000 connection company’s sale 605000 shares common stock 330 per share 1996500 investor third quarter 2015 recorded stock subscription receivable 1496500 september 30 2015 fourth quarter 2015 company able receive 300000 stock subscription receivable total 800000 stock purchase agreement due current market conditions company written subscription receivable balance warrants following table summarizes status warrants related transactions following years ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 equity continued options following table summarizes status options related transactions following years preferred stock provided certificate designation series preferred stock dated january 14 2009 amended september 2009 share series preferred stock entitled 02 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law company 30 million shares preferred stock authorized issuance shares issued outstanding december 31 2015 2014 2009 equity incentive plan overview options granted company’s 2009 equity incentive plan “plan” may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 500000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury shares issued restricted stock units “rsus” warrants options granted employees december 31 2015 granted outside 2009 equity incentive plan eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 equity continued limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable note 13 income taxes provision income taxes 2015 2014 summarized follows provision income taxes 2015 2014 differs amount computed applying us federal statutory rate loss provision benefit income taxes follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 income taxes continued deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2015 2014 follows december 31 2015 2014 company us federal state net operating loss carryovers 7182363 6015113 respectively unused net operating loss carryforwards expire various dates beginning 2030 ending 2032 accordance section 382 internal revenue code usage companys net operating loss carryforward could limited event change ownership company may need file amended tax return year ending 2014 2015 company’s management evaluating amendment tax returns united states foreign components loss income taxes follows company evaluated provisions asc 740 related accounting uncertainty income taxes recognized company’s financial statements december 31 2015 2014 evaluation performed tax years ended december 31 2015 2014 based management’s evaluation concluded significant uncertain tax positions requiring recognition consolidated financial statements 2015 2014 company incurred interest penalties company files income tax returns us federal jurisdiction states florida north carolina companys federal state income tax returns since 2012 subject examination internal revenue service state income tax returns since 2010 subject examination respective state jurisdiction returns generally subject examination period three years returns filed company filed state tax returns 2013 state net operating loss carryovers available offset future taxable income returns filed ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 15 barter credits december 2015 company former management entered agreement barter trading company sell slow moving finished goods exchange prepaid credits 2015 april 2016 company sold merchandise worth 956176 4566717 barter trading company however credits proved economic value accordingly revenue meet criteria defined accounting standards codification 605 “asc” company reversed sales barter trading company meet revenue standards note 16 significant customers company sells products several types customer primarily include distributors salons sales customers individually excess 10 net revenue 2015 sales customers individually excess 10 net revenue 2014 accounts receivable december 31 2014 2015 2014 top ten customers generated 46 49 net revenue respectively note 17 significant suppliers company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change purchases significant suppliers 2015 accounts payable december 31 2015 purchases significant suppliers 2014 accounts payable december 31 2014 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 18 geographic revenue reporting company organized based fundamentally one business segment although distribute products worldwide basis several largest distributors based north america turn sell products europe asia consider customers based north america however sales international distributors distribute product outside north america increasing information company’s geographic operations 2015 2014 follows note 19 related party transactions year ended december 31 2014 company party following related party transactions disclosed elsewhere financial statements · company paid 103233 2015 103233 2014 compensation alexander khesin father chief executive officer consulting various projects · company paid 52036 2015 compensation anna khesin sister chief executive officer consulting various consulting projects · company paid 60000 2015 40000 2014 compensation dr fernando tamez dr tamez president divine skin laboratories sa de cv “ds mexico” since 2009 mexican subsidiary acquired november 2012 dr tamez oversees daytoday operations ds mexico · company sales karl sweis former director april 2016 390622 502267 2015 2014 respectively · 2014 2015 company paid 103233 170000 consulting fees whitestone group inc greystone group inc entities controlled abner silva 20000 2015 abner silva individually shareholder former consultant employee outsourced coo services addition company following transactions entities controlled abner silva 94911 2015 88625 2014 purchase materials needed assembly manufacture products export offset sales products amounting 69858 2015 89954 2014 december 31 2015 company recorded accounts payable accrued expenses 0 198164 respectively · company also paid 20513 shares 35500 expense julieta jackson former employee sister abner silva settlement dispute resolution 2013 mrs jackson proprietor sole shareholder velocity storage packaging inc company’s vie incorporated 2009 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 20 subsequent events management evaluated subsequent events transactions occurring date financial statements issued following items summary events transactions occurring subsequent balancesheet date prior issuance financial statements material effect financial statements therefore require adjustment disclosure statements october 7 company issued 8k inform investors previously submitted filings relied upon investing decisions company filing amended 10q’s periods ending march 31 2015 june 30 2015 september 30 2015 amended financial statements include adjustments comparable financial statements 2014 company became aware need issue amended financial reports september 25 2016 part audit financials independent auditor bf borges cpa pc total impact adjustments nine months ending september 30 2015 amount increased net loss 1125792 primary adjustments periods within 2015 company deemed adjustments required filing adjusted quarterly financial reports throughout year ended 2014 2015 daniel khesin companys chief executive officer former chief financial officer received addition base compensation reimbursement payroll advances expenses approximately 76000 40000 respectively nonbusiness related goods services pursuant executive employment agreement 50000 payable shares companys common stock fiscal yearend mr khesin believed payments received satisfaction certain bonus perquisites earned monthly basis employment agreement payments required approval compensation committee approval received 2016 section 402 sarbanes oxley act 2002 prohibits advances loans director executive officer public company audit committee concluded payments made mr khesin prior board compensation committee approval may violation section 402 sarbanes oxley act 2002 event determined payments violation sarbanes oxley act violation could material adverse effect company including limited criminal civil administrative sanctions penalties investigations addition potential securities litigation consequence activities company received notice independent auditor september 29 2016 potential illegal acts concerning payments personal expenses company’s audit committee agreed findings september 29th 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29th 2016 see controls procedures executive compensation 2013 addition base compensation paid abner silva consultant deemed officer independent auditor accounting purposes company advanced approximately 11500 mr silva mr silva believed payments received satisfaction certain moneys owed affiliate companies payments required prior approval compensation committee approval received consequence activities company received notice independent auditor potential illegal acts concerning payments personal expenses company september 29 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29 2016 december 2015 company former management entered agreement barter trading company sell slow moving finished goods exchange prepaid credits 2015 april 2016 company sold merchandise worth 956176 4566717 barter trading company however credits proved economic value accordingly revenue meet criteria defined accounting standards codification 605 “asc” company reversed sales barter trading company meet revenue standards january 2016 company entered stock purchase agreement private party amount 1996500 605000 shares company’s stock date purchase agreement partially settled company’s offset subscription receivable additional paid capital 1196500 board directors decided negotiate revision original stock purchase agreement reach appropriate resolution matter company way knowing financial impact ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 20 subsequent events continued may 2 2016 company received letter attorney representing former ceo renee barchniles requesting certain payments believes due arising employment contract includes salary demands equity demands commission demands barter transaction total claims made ms barchniles 2500000 worth shares company’s stock 123000 commissions barter trading arrangement 300000 severance payments company maintains ms barchniles due payments subsequent separation company take appropriate action defend claims september 27 2016 pursuant company’s bylaws current board directors approved ratified shares former management date termination company’s position due circumstances surrounding terminations shares compensation owned vehemently defend position april 20 2016 company notified nasdaq company comply nasdaq’s filing requirements set forth listing rule 5250c1 filed form 10k period ended december 31 2015 june 7 2016 august 19 2016 company notified nasdaq company comply nasdaq’s filing requirements set forth listing rule 5250c1 filed forms 10q periods ended march 31 2016 june 30 2016 respectively september 26 2016 company received nasdaq’s staff determination letter informing company nasdaq’s intention deny company’s request continued listing due delinquent reports separately nasdaq informed company determination additional basis delisting due public interest concerns listing rule 5101 raised 1 company’s failure promptly initiate conduct independent investigation recommended previous independent auditors concerns identified former board directors including concerns regarding revenue recognition stock issuances among matters 2 company’s inability produce minutes evidencing meetings company’s board directors calendar year 2015 first four months calendar year 2016 also separate basis delisting nasdaq informed company belief company made misleading statements andor omitted material facts communications staff violation listing rule 5250a1 pursuant nasdaq listing rule 5800 series company appealed staff’s determination hearings panel requested oral hearing appeal staff determination addition company requested stay suspension delisting action pending issuance written decision hearings panel request company stated delinquent reports would filed prior october 11 2016 due date informed nasdaq independent investigation initiated company expected completion date approximately october 11 2016 informed nasdaq efforts retrieve missing minutes via diligent search email archives attempts contact prior board members records disagreement staff’s belief misleading statement made company received nasdaq september 26 2016 letter informing requested hearing take place november 10 2016 march 29 2016 ds healthcare mr khesin certain former members board directors sued class action styled prasant shah v ds healthcare group inc et al case 1660661 pending united states district court southern district florida laterfiled class action consolidated class action arises company’s march 23 2016 march 28 2016 8k filings stated pertinent part audit committee concluded unaudited condensed consolidated financial statements company two fiscal quarters ended june 30 2015 september 30 2015 “june september 2015 quarters” longer relied upon certain errors financial statements daniel khesin terminated cause removed chairman member board directors plaintiffs november 2 2016 file amended complaint ds healthcare must respond later december 19 2016 company also received first three related shareholder derivative demands march 29 2016 mediation concerning class action derivative demands scheduled october 17 2016 miami florida ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 20 subsequent events continued may 27 2016 photomedex inc radiancy inc photomedex technology inc collectively “photomedex” filed civil action damages declaratory relief ds healthcare united states district court southern district new york lawsuit styled photomedex inc v ds healthcare group inc case 116cv03981 lawsuit arises two merger agreements agreement plan merger reorganization among ds healthcare group inc phmd p acquisition corp photomedex inc radiancy inc dated february 19 2016 ii agreement plan merger reorganization among ds healthcare group inc phmd professional acquisition corp photomedex technology inc photomedex inc dated february 19 2016 photomedex alleges ds healthcare breached agreements failing meet preclosing obligations completing transactions contemplated agreements photomedex seeks declaratory judgment terminations two agreements proper requests award damages specified agreements including “breakup fee” usd 3 million ds healthcare disputes claims asserted photomedex including photomedex entitled “breakup fee” agreements ds healthcare also asserted counterclaims damages photomedex breaches two agreements initial case management conference scheduled october 13 2016 december 28 2015 microcap headlines inc “microcap” investor awareness business located north babylon new york filed civil action ds healthcare daniel khesin former ds healthcare employee abner silva circuit court 11th judicial circuit miamidade county florida lawsuit styled microcap headlines inc v ds healthcare group inc et al case 2015030046ca01 plaintiff microcap asserts claims breach contract negligent misrepresentation fraud solely defendant silva violation florida securities investor protection act quantum meruit arise october 15 2014 contract microcap ds healthcare pursuant microcap promised provide certain investor awareness services exchange compensation form cash warrants purchase ds healthcare stock microcap seeks damages unspecified amount ds healthcare disputes claims asserted microcap lawsuit courtordered mediation scheduled november 22 2016 case scheduled trial commence sometime threeweek trial period beginning january 17 2017 april 12 2016 sec issued “formal order” directing private nonpublic formal investigation determine whether violations federal securities law may committed directly indirectly company officers directors employees partners subsidiaries andor affiliates andor persons entities possible violations set forth formal order include section 17a securities act 1933 “securities act” sections 10b 13a 13b2a 13b2b 13b5 13k 14a 14f securities exchange act 1934 “exchange act” rules 10b5 12b20 13a1 13a11 13a13 13a14 13b21 13b22a 14a3 14a9 14f1 relevant time period specified formal order january 1 2010 present date april 15 2016 sec issued subpoena duces tecum mr khesin may 4 2016 sec issued subpoena duces tecum company complying requests sec review production process ongoing nature july 27 2016 sec issued second subpoena duces tecum company seeking current copy quickbooks file user name password company complied second subpoena duces tecum company way determining outcome investigation cannot predict financial impact significant changes board directors executive management april 2 2016 michael pope diane rosenfeld renee barchniles carl sweis terminated directors company additionally renee barchniles removed chief executive officer daniel khesin appointed sole director chief executive officer chief financial officer mr myron lewis joined board directors april 22 2016his role includes chairing compensation committee subsequently september 12 2016 mr lewis appointed executive director tasked supervising company’s operations goal facilitating profitability compliance mr yasuhiro fujiwara joined board directors april 22 2016 subsequently september 12 2016 mr fujiwara appointed chairman board directors ms elina yuabov joined board directors april 22 2016 ms estella ng joined board directors may 6 2016 role includes chairing audit committee mr john power joined company september 12 2016 chief financial officer chief administrative officer item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability section exhibits deemed incorporated reference filing securities act 1933 securities exchange act 1934 except extent incorporate reference 1 incorporated reference registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference form 10q period ended september 30 2009 3 incorporated reference registration statement form s1 securities exchange commission amended filed december 12 2009 file number 333163449 4 incorporated reference form 10k annual report year ended december 31 2009 5 incorporated reference form 8k filed february 25 2011 6 incorporated reference form 8k filed october 11 2011 7 incorporated reference amendment 1 form 8k filed july 11 2011 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date april 4 2012 divine skin inc daniel khesin daniel khesin chief executive officer principal executive officer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin director april 4 2012 daniel khesin report independent registered public accounting firm board directors shareholders divine skin inc dba ds laboratories audited accompanying consolidated balance sheet divine skin inc dba ds laboratories december 31 2011 related consolidated statements operations changes equity cash flows year ended divine skin inc’s management responsible consolidated financial statements responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position divine skin inc dba ds laboratories december 31 2011 results operations cash flows year ended conformity accounting principles generally accepted united states america cherry bekaert holland llp fort lauderdale florida april 4 2012 report independent registered public accounting firm board directors shareholders divine skin inc dba ds laboratories audited accompanying consolidated balance sheet divine skin inc dba ds laboratories subsidiaries december 31 2010 related consolidated statements operations changes equity cash flows year ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position company december 31 2010 results operations cash flows year ended conformity accounting principles generally accepted united states america rbsm llp new york new york april 15 2011 divine skin inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements operations years ended december 31 2011 2010 see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements changes equity years ended december 31 2011 2010 see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements cash flows years ended december 31 2011 2010 see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business terms definitions aicpa american institute certified public accountants asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout gaap us generally accepted accounting principles applied united states ifrs international financial reporting standards ppm private placement memorandum sec securities exchange commission sfas fas statement financial accounting standards spa security purchase agreement q411qtr three months ended december 31 2011 q410qtr three months ended december 31 2010 q411ytd year ended december 31 2011 q410ytd year ended december 31 2010 vie variable interest entity organization nature business divine skin inc “company” “divine skin” “ds laboratories” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing skin care personal care products fifteen years company grown steadily last years network top specialty retailers distributors throughout north america europe asia south america divine skin researches develops products management believes keeps company forefront innovation management believes company currently leading innovator “liposome technology” acts carrier agent designed enhance action active ingredients contained pharmaceutical cosmeceutical products currently offer skin care aging cellulite hair loss personal care products majority products within following product lines · skin care · hair loss hair care · health care history company january 2007 operations divine skin inc new york company terminated assets used capitalize divine skin inc florida corporation december 2006 ds laboratories inc new york corporation closed assets used capitalize ds laboratories inc florida corporation formed january 2007 idle since inception divine skin inc florida corporation ds laboratories inc florida corporation related common shareholders q1 2009 company acquired 100 outstanding shares ds laboratories inc florida corporation sigma development holding co nominal amount ds laboratories idle since inception 2007 sigma founded upscale brand addition company’s product portfolio march 2009 polaris labs inc founded wholly owned subsidiary company distribute polaris branded versions company’s products marketing purposes sold physicians foreign distributors primary operating entity divine skin inc florida corporation company currently conducts business “divine skin” “ds laboratories” trade names divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business continued q4 2009 company completed agreement covering exclusive distribution product additional future products specifically tailored brazilian market costs associated procuring agreement capitalized amortized life agreement q1 2010 company filed s1 selling shareholder registration statement sec declared effective sec obtained trading symbol dskx permitting quotation shares common stock counter bulletin board otcbb q1 2011 company began distribution nutraceutical products produced nutraorigin exclusive distribution agreement december 31 2011 company made required make investment venture nutraorigin owned chairman’s father q3 2011 company finalized discussions ds laboratories brazil ltda modify joint venture distribution agreement exchange 100 ownership joint venture brazilian distributor committed fully fund product development licensing products brazil company retains exclusivity brazilian distribution expects complete licensure process commence sales q2 2012 december 31 2011 company invested 26000 venture q4 2011 company completed spa raising approximately 16 million net issuance costs note 2 summary significant accounting policies basis accounting financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america principles consolidation presentation consolidated financial statements include accounts divine skin inc wholly owned operating subsidiaries ds laboratories inc florida corporation sigma development holding co inc polaris labs inc also included consolidated financial statements activities velocity storage packing llc accounted vie significant intercompany balances transactions eliminated consolidation use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued cash equivalents include highly liquid debt instruments original maturities three months less securing corporate obligations substantially company’s cash deposits held one commercial banking institution accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible december 31 2011 2010 provision doubtful accounts 114791 73759 respectively addition 2011 company provided 100252 product returns 12400 advertising credits inventory reported lower end cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using straight line depreciation method estimated useful lives assets range 5 7 years company expensed 16788 11178 depreciation year ended december 31 2011 2010 respectively accumulated depreciation 59 616 42828 december 31 2011 2010 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets furniture equipment reviewed whenever events changes circumstances occur indicate possible impairment accordance asc 36010 “accounting impairment disposal longlived assets” longlived assets company adopted asc 36010 “furniture equipment” requires longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset asc 36010 also requires assets disposed reported lower carrying amount fair value less costs sell noncontrolling interest noncontrolling interest consists minority owned portion company’s 51 owned subsidiary ds laboratories brazil ltda time owned variable interest held velocity storage packaging llc divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued asc 8101065 establishes new standards effective january 1 2009 govern accounting reporting 1 noncontrolling interest partially owned consolidated subsidiaries 2 loss control subsidiaries significant changes accounting noncontrolling interests include inclusion noncontrolling interests equity section controlling entity’s consolidated balance sheet rather mezzanine section b requirement changes controlling entity’s interest noncontrolling interest without change control recognized controlling entity’s equity rather accounted purchase method accounting purchase method would given rise goodwill additionally adoption asc 8101065 requires net income previously reported prior adoption asc 8101065 adjusted include net income attributable noncontrolling interest new separate caption net income attributable common shareholders company presented consolidated statements operations asc 8101065 also requires similar disclosure regarding comprehensive income revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange date product returns occurred considered significant company established product return reserve 100252 research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses statements operations amounted 152726 95942 year ended december 31 2011 2010 respectively income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company certain options warrants included earnings per share calculation effect would antidilutive warrants 2538130 shares options 1233333 shares excluded earnings per share calculation segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders company operates one segment management reporting purposes fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value reclassification certain reclassifications made conform prior periods’ data current presentation reclassifications effect reported losses note 3 recent accounting pronouncements recent accounting pronouncements company adopted required adopt future summarized revenue recognition january 1 2011 company adopted fasb asu 200913 “revenue recognition topic 605 multipledeliverable revenue arrangements consensus fasb emerging issues task force” asu amended criteria evaluate individual delivered items multiple deliverable arrangement allocate consideration received adoption guidance material impact company’s consolidated financial statements divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 3 recent accounting pronouncements continued fair value measurement may 2011 fasb issued asu 201104 fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap international financial reporting standards ifrs asu issued provide largely identical guidance fair value measurement disclosure requirements entities disclose fair value asset liability instrument classified shareholders equity consolidated financial statements provided international accounting standards boards new ifrs 13 fair value measurement asu extend use fair value rather provides guidance fair value applied already required permitted gaap guidance applied prospectively interim annual periods beginning december 15 2011 early adoption permitted period adoption reporting entity required disclose change valuation technique related inputs results applying asu quantify total effect practicable company believes adoption guidance material impact financial statement disclosures fair value financial instruments company records financial assets liabilities fair value defined applicable accounting standards exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measure date company uses valuation techniques measure fair value maximizing use observable outputs minimizing use unobservable inputs standard describes fair value hierarchy based three levels inputs first two considered observable last unobservable may used measure fair value following level 1 quoted prices active markets identical assets liabilities level 2 inputs level 1 observable either directly indirectly quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 inputs include management’s best estimate market participants would use pricing asset liability measurement date inputs unobservable market significant instrument’s valuation comprehensive income june 2011 fasb issued new guidance gives entity option present total comprehensive income components net income components comprehensive income either single continuous statement comprehensive income two separate consecutive statements choices entity required present component net income along total net income component comprehensive income along total comprehensive income total comprehensive income entity also required present face financial statements reclassification adjustments items reclassified comprehensive income net income statementss components net income components comprehensive income presented guidance applied retrospectively fiscal periods interim periods within years beginning december 15 2011 early adoption permitted december 2011 fasb issued new guidance deferring changes june 2011 relating presentation classification adjustments company’s adoption new guidance related presentation reclassification adjustments january 1 2012 expected material impact consolidated financial position results operations cash flows intangibles goodwill september 2011 fasb issued asu 201108 intangibles goodwill topic 350 testing goodwill impairment gives entities testing goodwill impairment option performing qualitative assessment calculating fair value reporting unit step 1 goodwill impairment test entities determine basis qualitative factors fair value reporting unit likely less carrying amount twostep impairment test would required otherwise testing would needed amended guidance effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted company believes adoption guidance material impact consolidated financial statements asus effective december 31 2011 expected significant effect company’s consolidated financial position results operations divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 4 inventory significant components inventory december 31 2011 2010 consist primarily bulk product raw materials bulk product consists completed product formulations yet packaged market ready packaging raw materials consist bulk quantities various chemical components product formulations merchandise inventory merchandise inventory consists completed formulations market ready packaging formulations batch controlled subject various government regulations among things govern purity safety product cases limit concentration certain ingredients would restrict distribution products medical professionals inventory transit inventory consists primarily bulk product raw materials title transferred company inventory yet arrive designated warehouse facility either company owned contract management evaluated inventory december 31 2011 2010 obsolete inventory excluded reported inventory value accordingly allowance obsolescence necessary note 5 prepaid expenses current assets prepaid expenses current assets december 31 2011 2010 consist primarily deferred advertising costs 1st quarter 2010 entered advertising campaign customer involved inclusion trial sachet packs product mailer customer process mailer incur associated media communication costs supply sachet packets inclusion produced delivered sachets customer however 2010 customer decided delay promotion accordingly deferred value sachets pending customer commencing campaign customer’s campaign commenced q1 2011 accordingly expensed deferred advertising divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 5 prepaid expenses current assets continued prepaid consulting services 2 nd 3 rd quarters 2010 advanced funds consultant ceo’s father provide operational guidance connection health care product line launched 2011 agreement fully advanced amortized term 83333 amortized 2011 note 6 intangible assets significant components intangible assets december 31 2011 2010 consist primarily distribution rights 2009 company issued 3000000 shares common stock brazilian distributor exchange 10 year exclusive distribution agreement brazil transaction valued 025 per share company though joint venture exclusive distributor currently developing generic minoxidil product along appropriate packaging brazilian market planned introduction 2nd quarter 2012 75000 amortized 2011 3 rd quarter 2011 due costs involved company entered agreement joint venture partner whereby joint venture partner agreed provide required financing exchange 100 ownership joint venture company retains distribution rights pure guild brand rights supplier agreement 3rd quarter 2009 approached customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result part project obtained 50 interest pure guild brand permanent exclusive rights manufacture pure guild products exchange rights provided 106667 product representing approximately 70 initial stocking order value rights amortized 5 years basic term agreement 25600 amortized 2011 company continue amortize brand distribution rights remaining life agreements follows divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 7 accounts payable accrued expenses significant components accounts payable accrued expenses december 31 2011 2010 consist primarily trade payables consist liabilities arising normal course business evidenced invoices generally incurred connection acquisition materials inventory outside services accrued expenses claims discussed fully note 8 company responded several claims suppliers primarily advertisers media suppliers alleging unpaid balances services materials provided company responded many cases services materials fully comply required specifications supplier commitments cases company shifted purchasing compatible suppliers company accrued estimated settlement value claim based evaluation individual circumstances matter note 8 commitments contingencies 2011 2010 company operated several material agreements listed lease office facilities · company leases corporate headquarters office space located miami beach florida company negotiated cancellation original lease entered december 2007 continues operate miami beach facility month basis 5700 per month 68400 annual basis · march 2009 company leased 3500 square foot facility pompano beach florida production facility assemble small production runs products lease provides monthly rent 2600 expired march 2011 · march 2010 company entered lease 7500 square feet production facilities deerfield beach florida new facility replaced pompano beach production facilities began operations april 2010 lease provides monthly rent 3437 first year increasing scale years 2 5 lease matures 5 years provides 5 year renewal option company relocated larger facilities october 2011 currently negotiation terminate lease divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 8 commitments contingencies continued · december 2010 company entered lease 570 square feet sales facilities ashville north carolina lease provides monthly rent 1600 first year small increase second year lease matures 2 years provides 2 year renewal option · october 2011 company entered lease 13137 square feet warehouse production space pompano beach fl lease provides monthly rent 6350 matures 12 months company committed lease payments next five years follows pending threatened litigation · divine skin inc received several pending threatened litigations various suppliers typically nonpayment goods services vendor disputes typical normal course business divine skin vigorously disputed claims grounds substandard materials services provided claims received 2010 prior periods resolved primarily negotiated settlements resulting reduction claim repayment structured payout 2011 received 2 additional supplier claims certain packaging materials disputing filing counter claims established accrual claims structured payouts representing estimate amount due 143052 229042 december 31 2011 2010 respectively · divine skin inc named lawsuit brought former employee 301 model entity also related divine skin inc common ownership divine skin named originally hired employee rather 301 model latter yet established entity management vigorously defending position employee terminated two weeks cause employee subsequently violated noncompete agreement accordingly anticipate material assessment settlement result lawsuit · june 13 2011 company filed action circuit court eleventh judicial circuit miamidade county florida rescission investor relations consulting agreement entered october 15 2010 whereby company paid third party approximately 20000 230000 shares restricted common stock consideration investor relations consulting services company demanded return 230000 shares restricted stock recovery costs damages third party counterclaimed matters currently pending company vigorously defending counter claim · june 13 2011 company filed action circuit court eleventh judicial circuit miamidade county florida rescission agreement entered may 18 2010 whereby company paid third party approximately 500 200000 shares restricted common stock consideration consulting services company demanded return 200000 shares restricted stock recovery costs damages shares recorded unpaid subscription pending meeting certain performance criteria stipulated agreement november 2011 claim dismissed lack jurisdiction company refiled claim new york divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 equity common stock sold privately first quarter 2010 company began selling common stock qualified investors purchase price 015025 per share offering conducted “best efforts” basis respect shares offering also provides company shall pay selling agents following fees commissions 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds following table summarizes transactions private offering follows common stock sold securities purchase agreement spa october 4 2011 “closing date” company certain accredited investors entered spa completed closing private offering 6178572 shares company’s common stock par value 00001 per share warrants purchase aggregate 1554645 shares common stock aggregate gross proceeds 1730000 warrants exercisable five years issuance 050 per share may exercisable cashless basis certain instances underlying shares registered registration statement number shares common stock received upon exercise warrants exercise price warrants subject adjustment reverse forward stock splits stock dividends stock combinations similar transactions common stock occur closing date wilmington capital securities llc acted placement agent connection offering placement agent received selling commission cash 7 per cent gross proceeds 121100 additional 10000 expense allowance addition company issued placement agent warrant purchase 449805 shares common stock company incurred issuance costs expenses associated spa paid form cash warrants additional 33674 accordance terms spa company filed registration statement “registration statement” covering 8183021 common shares common stock “registrable shares” included shares issued spa shares underlying warrants issued spa held investors “holders” registration statement went effective january 26 2012 event registration statement fails remain effective “event date” period one year closing date “effectiveness period” divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 equity continued company shall pay holder amount cash liquidated damages penalty equal 10 aggregate purchase price paid holder pursuant spa registrable shares excluding registrable shares eligible resale rule 144 held holder addition 30day anniversary pro rata portion thereof effectiveness period company shall pay holder amount cash liquidated damages penalty equal 10 aggregate purchase price paid holder pursuant spa unregistered registrable shares excluding registrable shares eligible resale rule 144 held holder furthermore damages payable holder shall limited purchase price paid holder pursuant spa registrable shares held holder event date following table summarizes transactions spa follows issues common stock first quarter 2010 company issued 25000 shares services valued 018 per share resulted expense 4500 second quarter 2010 entered consulting agreement investor relations group provide certain corporate promotional material strategic advice third quarter 2010 200000 shares common stock advanced consultant future services transaction valued 70000 fair value date issuance date consultant completed agreed upon services accordingly terminated agreement demanded return stock since agreed services provided shares considered fully paid accordingly recorded stock receivable contra equity account fourth quarter 2010 company issued 244000 shares investor relations services valued 036 per share resulted expense 87840 first quarter 2011 company issued 78000 shares services provided employee consultants valued 042 per share resulted expense 33180 second quarter 2011 company issued 112641 shares services provided employee consultants valued 037 042 per share resulted expense 45661 third quarter 2011 company issued 155790 shares services provided employee consultants valued 038 040 per share resulted expense 60598 fourth quarter 2011 company issued 19256 shares services provided consultants valued 038 per share resulted expense 7408 addition consultant exercised warrants 1236210 common shares vested options 1266667 common shares totaling 2502877 common shares 25029 surrender common stock third quarter 2011 3 principal founding shareholders voluntarily surrendered 7017805 common shares collectively divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 equity continued warrants 2010 company sold shares common stock ppm governed regulation discussed ppm offering selling agent right receive warrants purchase one share common stock company every ten shares sold exercise price warrant 001 per share warrants exercisable period five years date issuance warrants “in money” upon issuance value charged financing consulting services accordingly company issued warrants based private sale common shares follows also first quarter 2010 company issued warrants investor relations consultant aggregate purchase 500000 shares common stock prices ranging 025 035 per share depending tranche warrants recorded fair value 2071 resulted charge operations 2011 company continued sell shares common stock ppm governed regulation sales common shares also provided grant warrants selling agent terms disclosed accordingly company issued warrants based private sale common shares follows effective q2 q3 2011 selling agent waived rights receive warrants accordingly company issued warrants related private sale shares accrued expense financial consulting services q4 2011 shares sold privately since terms spa preclude activities q4 2011 company completed closing private offering 6178572 shares company’s common stock spa see common stock sold securities purchase agreement spa provides investors warrants purchase aggregate 1554645 shares common stock addition spa also grants warrants purchase 493485 shares common stock fees assisting spa closing divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 equity continued following tables present status warrants outstanding december 31 2010 2011 respectively value warrants issued 2011 2010 determined using blackscholesmerton option pricing model based following assumptions option selling agent engaged company also entered consulting agreement assisted company filing registration statement form 10 quotation shares counter bulletin board otcbb company issued option selling agent purchase 2000000 share common stock exercise price 001 per share grant date option valued based offering price ppm 025 per share 480000 option expires five years option vests exercisable subject certain lock leak provisions commence upon effective date company obtaining otcbb listing leak provisions limit exercisability option number 200000 shares per quarter first quarter 2010 company obtained trading symbol accordingly recorded expense consulting services 160000 2010 reflecting structured vesting divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 equity continued following tables present status options outstanding december 31 2010 2011 respectively value options issued 2010 determined using blackscholesmerton option pricing model based following assumptions preferred stock first quarter 2009 three shareholders company time constituted shareholders company exchanged aggregate 10000000 shares common stock 10000000 shares series preferred stock provided certificate designation series preferred stock dated january 14 2009 filed april 2009 amended september 2009 share series preferred stock entitled 2 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 income taxes provision income taxes year ended december 31 2011 2010 summarized follows income tax benefit year ended december 31 2011 2010 booked due uncertainty future profitable operations necessary realize benefit provision income taxes year ended december 31 2011 2010 differs amount computed applying federal statutory rate income loss provision benefit income taxes follows deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2011 december 31 2010 follows december 31 2011 december 31 2010 company valuation allowance deferred tax assets 533599 159284 relates net operating losses valuation allowance increased 374315 2011 increase 2011 attributable accumulated net operating loss december 31 2011 december 31 2010 company net operating loss carryforwards 1446928 466035 respectively unused net operating loss carryforwards expire various dates beginning 2029 ending 2031 december 31 2011 2010 company unrecognized tax benefit accordingly related accrued interest penalties divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 2009 equity incentive plan overview company initiated 2009 equity incentive plan 1 attract retain best available personnel positions substantial responsibility 2 provide additional incentives employees directors consultants 3 promote success company companys affiliates options granted plan may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 5000000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable note 12 significant customers company’s product revenues represent primarily sales revita spectral dnc nr08 individually exceeds 10 total sales collectively represent 38 total sales intro packs revitacor spectral dncl collectively account another 26 total sales q411ytd two customers generated 29 company’s sales 13 outstanding accounts receivable balance december 31 2011 customers distributors company sales customers q411ytd accounts receivable december 31 2011 divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 significant customers continued sales customers q410ytd accounts receivable december 31 2010 note 13 significant vendors company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change company 412284 outstanding purchase orders december 31 2011 purchases significant vendors q411ytd accounts payable december 31 2011 purchases significant venders q410ytd accounts payable december 31 2010 note 14 consolidation variable interest entity company holds variable interest velocity storage packaging llc “velocity” entity company primary beneficiary velocity performs packaging shipping services exclusively company companies variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure velocity financially supported company form reimbursement 100 operational costs accordingly company determined velocity variable interest entity vie company primary beneficiary guidance offered asc 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 15 subsequent events march 20 2012 company issued non binding letter intent acquire 100 percent divine skin laboratories sa de cv “dsl mexico” consideration shares common stock company dsl mexico formed 2008 mexico city sells distributes ds laboratories products exclusively network physicians throughout mexico mexican company distributor divine skin product three years representing nearly 10 percent company’s revenue 2011 company anticipates completing transaction second quarter 2012 closing transaction subject negotiation definitive terms certain conditions closing including limited due diligence parties independent audit dsl mexico accordingly assurance acquisition completed march 30 2012 company closed 15 million credit facility provided financial institution credit facility provides asset based lending collateralized assets company advances based 80 qualified accounts receivable 40 finished goods inventory credit facility provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum expires march 24 2014 may renewed certain conditions credit facility personally guaranteed chief executive officer certain conditions may called upon demand credit facility also provides referral fee 4 per annum 3 years item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits deemed “filed” purposes section 18 securities exchange act 1934 otherwise subject liability section exhibits deemed incorporated reference filing securities act 1933 securities exchange act 1934 except extent incorporate reference 1 incorporated reference registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference form 10q period ended september 30 2009 3 incorporated reference form 10k annual report year ended december 31 2009 4 incorporated reference form 8k filed october 11 2011 5 incorporated reference form 8k filed april 5 2012 6 incorporated reference form 8k filed november 1 2012 7 incorporated reference form 8k filed january 15 2013 8 incorporated reference registration statement form s1 amended filed august 27 2012 file number 333183558 9 incorporated reference form 10k annual report year ended december 31 2012 10 incorporated reference form 8k filed december 17 2013 11 incorporated reference form 8k filed december 26 2013 12 incorporated reference form 8k filed january 6 2014 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date april 3 2014 ds healthcare group inc daniel khesin daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer chairman april 3 2014 daniel khesin keith markey director april 3 2014 keith markey bernhard opitz director april 3 2014 bernhard opitz matthew pfeffer director april 3 2014 matthew pfeffer report independent registered public accounting firm board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheet ds healthcare group inc formerly divine skin inc dba ds laboratories “company” december 31 2012 related consolidated statements operations changes equity cash flows year ended company’s management responsible consolidated financial statements responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position ds healthcare group inc december 31 2012 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern discussed note 3 consolidated financial statements company suffered recurring losses operations raise substantial doubt ability continue going concern managements plans regard matters also described note 3 consolidated financial statements include adjustments respect possible future effects recoverability classification assets amounts classification liabilities might result outcome uncertainty cherry bekaert llp fort lauderdale florida april 24 2013 report independent registered public accounting firm audit committee board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheets ds healthcare group inc subsidiaries “company” december 31 2013 related consolidated statements operations changes equity cash flows year ended financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements referred present fairly material respects consolidated financial position ds healthcare group inc subsidiaries december 31 2013 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern fully discussed note 3 company incurred net losses since inception needs raise additional funds meet obligations sustain operations conditions raise substantial doubt company’s ability continue going concern management’s plans regard matters described note 3 consolidated financial statements include adjustments might result outcome uncertainty marcum llp marcum llp new york ny april 3 2014 ds healthcare group inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements operations comprehensive income see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows continued see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity period january 1 2012 december 31 2013 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity continued period january 1 2012 december 31 2013 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business terms definitions aicpa american institute certified public accountants asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout us gaap accounting principles generally accepted united states america ifrs international financial reporting standards sec securities exchange commission sfas fas statement financial accounting standards 2013ytd year ended december 31 2013 2012ytd year ended december 31 2012 vie variable interest entity organization nature business ds healthcare group inc dba ds laboratories “company” “ds laboratories” ”dskx” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing hair care skin care personal care products fifteen years company grown steadily last years network top specialty retailers distributors throughout north america europe asia south america company researches develops products management believes keeps company forefront innovation management believes company currently leading innovator 1 “liposome technology” acts carrier agent designed enhance action active ingredients products 2 “nanosome technology” acts delivery vehicle designed infuse active compounds targeted cells increased efficiency products currently offer products within following broad product categories hair care skin care personal care history company incorporated january 2007 capitalized assets recovered terminated predecessor new york corporation ds laboratories inc florida corporation also incorporated january 2007 companies founded common shareholders preliminary operating entity ds healthcare group inc currently conducts business “ds laboratories” “divine skin” trade names 2009 company acquired subsidiaries polaris labs inc “polaris” sigma development holding inc “sigma” ds laboratories inc “ds labs” nominal amount also 2009 completed agreement ds laboratories brazil ltda distribute products additional future products specifically tailored brazilian market term 10 years costs associated procuring agreement capitalized amortized life agreement 2011 began distribution nutra origin brand nutraceutical products exclusive distribution agreement manufacturer also modified joint venture distribution agreement exchange 100 ownership joint venture brazilian distributor fully funded product development licensing products brazil remain license holder license granted retain exclusivity brazilian distribution ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 1 organization nature business continued second quarter 2012 engaged negotiations license acquire nutra origin brand negotiations completed closed fourth quarter 2012 whereby pay 7500 per month exclusive 10 year license use nutra origin brand part closing issued 50000 dskx stock granted 7 equity interest newly formed subsidiary nutra origin inc separate transaction also acquired 100 pure guild brand license see note 7 fourth quarter 2012 closed acquisition divine skin laboratories sa de cv mexican distributor “ds mexico” see note 20 also fourth quarter 2012 completed 101 reverse split effected name change ds healthcare group inc share equivalent per share information contained report gives retroactive effect 101 reverse split note 2 summary significant accounting policies principles consolidation presentation consolidated financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america consolidated financial statements include accounts company operating subsidiaries ds laboratories inc sigma development holding co inc polaris labs inc nutra origin inc divine skin laboratories sa de cv also included consolidated financial statements operating activities velocity storage packaging llc wally group llc inactive entity accounted vies significant intercompany balances transactions eliminated consolidation prior period reclassifications certain prior period amounts combined december 31 2012 consolidated financial statements reclassified comparability december 31 2013 presentation reclassifications effect previously reported net loss use estimates preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results believe estimates assumptions reasonable however estimates assumptions subject number risks uncertainties may cause actual results differ materially estimates significant estimates assumptions underlying consolidated financial statements include · estimates allowances uncollectable accounts receivable · estimates inventory obsolescence overhead labor cost allocations · estimates assuming future earning capacity intangible assets · estimates value equity transactions services rendered · estimates returned damaged product · estimates made deferred income tax calculations risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued business acquisitions acquired businesses accounted using acquisition method accounting acquisition method accounting acquired businesses requires among things assets acquired liabilities assumed recognized estimated fair values acquisition date excess purchase price assigned values net assets acquired recorded goodwill transaction costs expensed incurred cash company maintains cash equivalents financial institutions located united states times company’s cash equivalent balances may uninsured deposit accounts exceed federal deposit insurance corporation “fdic” insurance limits company experienced losses accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible company also provides allowances accounts receivables product returns cooperative advertising allowances december 31 2013 2012 allowance uncollectable accounts 305314 373981 respectively 210000 110000 respectively defectives product returns 60000 dates advertising credits inventory reported lower cost market fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using double declining balance depreciation method united states straight line depreciation method mexico estimated useful lives assets range 5 7 years company recorded 111919 46678 depreciation expense 2013ytd 2012ytd respectively accumulated depreciation 238051 101972 december 31 2013 2012 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset assets disposed reported lower carrying amount fair value less costs sell ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued intangible assets intangible assets acquired individually group assets business combination recorded fair value company’s identifiable intangible assets consist customer relationships acquired part merger fair value intangible assets acquired determined based discounted cash flow analysis identifiable intangible assets amortized period estimated benefit using straightline method approximates customer attrition rate reflecting pattern economic benefits associated assets estimated useful lives 6 10 years goodwill company records goodwill purchase price acquisition exceeds fair value net tangible intangible assets date acquisition company performs annual review goodwill indicators impairment determined goodwill may impaired company performs impairment assessment acquired reporting unit impairment tests using fair value approach december 31 2013 company identified impairment noncontrolling interest noncontrolling interest consists minority owned portion nutra origin inc fourth quarter 2012 company completed license nutra origin brand addition company established new subsidiary operate nutra origin brand part license agreement licensor granted 7 noncontrolling interest newly formed subsidiary company currently default license agreement nonpayment fully impaired related brand rights 89705 revenue recognition revenue recognized product shipped risk loss transferred company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold research development company currently maintains functional laboratory employing two full time chemists part time chemistconsultant lab technician identify new technology test product alternatives improve existing formulations addition founder ceo devotes substantial portion time identifying new technologies formulations develop new products improve existing products newest technology available activities expensed year incurred costs include laboratory supplies salaries materials consultant fees costs classified product development salaries selling general administrative expenses consolidated statements operations amounted 170451 196108 2013ytd 2012ytd respectively ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued sharebased payment company measures compensation cost employee stockbased awards fair values date grant stockbased awards issued nonemployees measured fair values date grant remeasured reporting period vesting dates nonemployee becomes employee continues vest award fair value individual’s award remeasured date becomes employee subsequently remeasured future reporting dates fair value stock based awards recognized expense service period net estimated forfeitures using straightline method stock options restricted stock company uses blackscholes optionpricing model estimate fair value stockbased awards income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized december 31 2013 2012 full valuation allowance provided deferred tax assets income tax expense result mexican operations earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss attributable shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company vested warrants 253893 shares vested options 32633 shares excluded earnings per share calculation would antidilutive segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders management determined company operates one business segment commercialization development personal care products fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued subsequent events management evaluated subsequent events transactions occurring date financial statements issued management concluded additional subsequent events required disclosure financial statements disclosed notes financial statements functional currency us dollar functional currency consolidated entities operating united states functional currency consolidated entity operating outside united states mexican peso translate financial statements us dollars follows · assets liabilities translated exchange rate effect financial statement date · income statement accounts translated using weighted average exchange rate period include translation adjustments currency exchange effect exchange rate changes intercompany transactions longterm investment nature separate component shareholders’ equity currently transactions longterm investment nature gains losses nonus currency transactions note 3 liquidity sustained operational losses since inception operational losses continued december 31 2013 december 31 2013 accumulated deficit approximately 8307420 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue conditions raise substantial doubt entity’s ability continue going concern however december 31 2013 2872946 cash historically financed operations growth primarily successful issuance sale shares common stock line credit issuance promissory notes company started several new revenue initiatives creating additional revenue streams company initiatives include establish online store establish physical retail store establish hair treatment clinic complete private label product fortune 500 healthcare company increase domestic international presence although cannot predict success products projects currently way various stages completion commenced implementing continue implement various measures address financial condition including limited · continuing seek debt equity financing however assurances company able raise additional capital favorable terms · completed operational budget 2014 sets changes processes focus profitability 2014 also implementing feedback process improved interdepartmental communication accordingly accompanying consolidated financial statements prepared conformity us gaap contemplates continuation company going concern consolidated financial statements include adjustments reflect possible future effects recoverability carrying amount classification assets amounts classification liabilities may result outcome uncertainty commenced implementing continue implement various measures address financial condition ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 recent accounting pronouncements february 2013 fasb issued asu 201302 “reporting amounts reclassified accumulated comprehensive income” amendments update require entity provide information amounts reclassified accumulated comprehensive income component addition entity required present either face income statement notes thereto significant amounts reclassified accumulated comprehensive income respective net income line item new guidance applied prospectively interim annual periods beginning december 15 2012 adoption asu 201302 material impact company’s consolidated financial statements march 2013 fasb issued asu 201305 “foreign currency matters parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity” amendment allows entity release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest subsidiary group assets nonprofit activity business within foreign entity effective fiscal years interim reporting periods beginning december 15 2013 early adoption permitted adoption guidance material impact consolidated financial statements related disclosures july 2013 fasb issued asu 201311 “presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” amendments update require unrecognized tax benefit portion unrecognized tax benefit presented financial statements reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except limited circumstances amendments update require new recurring disclosures new guidance applied prospectively interim annual periods beginning december 15 2013 adoption asu 201311 material impact company’s consolidated financial statements management continually evaluates potential impact recent accounting pronouncements consolidated financial statements related disclosures significant makes appropriate disclosures required new accounting pronouncements note 5 inventory significant components inventory december 31 2013 december 31 2012 consist primarily bulk product raw materials bulk product consists completed product formulations yet packaged market ready packaging raw materials consist bulk quantities various chemical components product along bottles pumps labels packaging materials work process work process inventory consists merchandise inventory currently interim production stage partially completed yet market ready merchandise inventory merchandise inventory consists completed formulations market ready packaging formulations batch controlled subject various government regulations among things govern purity safety product inventory transit inventory consists primarily bulk product raw materials title transferred company inventory yet arrive designated warehouse facility either company owned contract ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 5 inventory continued management evaluated inventory december 31 2013 2012 reserved 549720 500000 respectively allowance slow moving obsolete inventory allowance applies primarily bulk product raw materials chemical components expired bottles pumps packaging materials longer used current production due packaging changes excess quantities needed based current production consumption generally merchandise inventory require reserve note 6 prepaid expenses current assets prepaid expenses current assets december 31 2013 december 31 2012 consist primarily prepaid rent represents temporary timing rent payments prepaid insurance represents temporary advance deposits scheduled premium payments made excess premiums expensed policy period premiums advanced expensed 2013ytd totaled approximately 111960 77264 respectively insurance coverage renewed june 2013 deferred issuance costs amounts made connection obtaining financing arrangements asset based lender discussed fully note 11 consisted loan origination fees legal due diligence fees deferred issuance costs advanced expensed 2013ytd totaled approximately 18750 47908 respectively lender charged renewal fee april 2013 prepaid pending vat represents payments made process mexican subsidiary tax authorities value added tax imposed commercial transactions note 7 intangible assets significant components intangible assets december 31 2013 december 31 2012 consist ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 intangible assets continued brazilian distribution rights 2009 company issued 300000 shares common stock brazilian distributor exchange 10 year exclusive distribution agreement brazil transaction valued 250 per share company exclusive distributor former joint venture partner shareholder currently commercializing product line along generic minoxidil product brazilian market introduced 4th quarter 2012 rights amortized 10 years 75000 amortized years ended december 31 2013 2012 pure guild brand rights 3rd quarter 2009 entered agreement customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result part project obtained 50 interest pure guild brand permanent exclusive rights manufacture pure guild products exchange rights provided 106666 product representing approximately 70 initial stocking order rights amortized 5 years representing basic term supplier agreement second quarter 2012 acquired remaining 50 ownership pure guild brand customerdistributor exchange release exclusive supplier agreement may pursue promotion brand existing distributor network convenience also accepted return remaining pure guild inventory amounted 50000 based original sales price begun revitalize brands position market modify amortization term appropriately reflect remaining unamortized brand rights combined additional brand rights acquired 6 years 14780 20190 amortized years ended december 31 2013 2012 respectively nutra origin brand license distributing nutra origin brand products since october 2010 although brand currently represents relatively modest portion sales intend brand expand health personal care product offerings nutraceutical market ceo’s father part owner coo company owns nutra origin brand nutra origin product manager license agreement requires us pay 7500 per month exclusive 10 year license use nutra origin brand plus 50000 common shares company agreement contains certain performance clauses parties permit cancellation us 3 years permit cancellation seller fail maintain stipulated minimum sales currently delinquent payment license fees 48102 amortized year ended december 31 2013 addition impaired license rights recognized charge 89705 december 31 2013 ds mexico customer list connection acquisition mexican distributor discussed fully note 20 acquired customer list recorded fair value determined independent appraiser asset amortized estimated useful life 9 years accordingly company recognized 101670 16945 amortization expense year ended december 31 2013 december 31 2012 respectively change gross value ds mexico customer list result foreign currency translation adjustment december 31 2013 goodwill also connection acquisition mexican distributor discussed fully note 20 acquired goodwill represents excess fair value consideration given fair value assets acquired fair value determined independent appraiser asset amortized however company access asset impairment annually change gross value goodwill result foreign currency translation adjustment december 31 2013 december 31 2013 impairment considered necessary following table represents amortized cost various assets remaining years weighted average remaining period 699 years ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 8 accrued expenses accrued expenses december 31 2013 december 31 2012 consist accrued expenses represents commitments made goods services provided activity normally generate invoice recorded trade payable accrued commissions invoices received subsequent end reporting period goods services provided prior end reporting period note 9 current liabilities current liabilities december 31 2013 december 31 2012 consist customer deposits represent monies advanced us orders future shipments insurance premium financing represent short term borrowings specifically finance acquisition certain insurance coverage insurance coverage financed included general liability ocean marine coverage vendor financing represent financing offered vendors fund purchases product note 10 shareholder loans shareholder loans december 10 2012 received unsecured loan 314000 one consultants also shareholder loan noninterest bearing matured december 11 2013 first quarter 2013 received additional 240000 consultantshareholder terms initial advance bringing total advanced 554000 september 27 2013 lender accepted 456000 shares common stock full satisfaction outstanding liability common shares issued valued 843600 based trading values shares time issuance accordingly company recognized 289600 loss extinguishment debt 2012 also received loan daniel khesin chief executive officer 39000 loan unsecured noninterest bearing matured december 25 2013 installment payments totaling 39000 made year ending december 31 2013 december 31 2013 loan paid full january 20 2013 received unsecured loan 70000 gamma investors also shareholder affiliate brazilian distributor loan accrues interest 3 per month matured august 20 2013 loan called monthly installment payments along interest december 31 2013 loan paid full ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 debt financing credit facility april 6 2012 midcap finacial provided company 15 million credit facility initial draw 580000 credit facility provides asset based lending collateralized assets company advances based 70 qualified accounts receivable 40 eligible finished goods inventory credit facility amended provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum renewed reduced 10 million credit facility expires june 30 2014 see note 21 credit facility personally guaranteed chief executive officer certain conditions may called upon demand credit facility also provides referral fee 4 per annum 3 years loan agreement contains customary representations warranties affirmative negative covenants events default negative covenants include among things restrictions transferring assets incurring additional indebtedness engaging mergers acquisitions paying dividends making distributions creating liens assets case subject customary exceptions december 31 2013 2012 company 582383 448658 outstanding respectively 175115 available borrow december 31 2013 based advance formulas qualified accounts receivable eligible finished goods inventory long term debt december 10 2012 company entered loan agreement 53900 purchase certain warehouse equipment loan provides monthly payments 1041 60 months 595 interest payments began february 18 2013 interest expense loan years ended december 31 2013 2012 3138 0 respectively principal payout life loan follows note 12 commitments contingencies years ended december 31 2013 2012 company operated several material agreements listed lease office production facilities · company leased corporate headquarters office space located miami beach florida month basis 5700 per month 68400 annual basis terminated fourth quarter 2012 · october 2012 company entered lease added 1525 square feet additional space renewed existing lease total 1875 square feet sales facilities located ashville north carolina leases provide monthly rent 4725 throughout lease term expire december 31 2015 · company leased 13137 square feet warehouse production space pompano beach florida lease provided monthly rent 6350 expired october 15 2012 · fourth quarter 2012 company entered lease 50000 square feet warehouse corporate office space located deerfield beach florida lease provides monthly rent 20000 first six months 27000 per month thereafter lease term 22 months company accounts facility leases using straightline method incurred 408491 299406 total rent expense 2013 2012 respectively company committed lease payments next five years follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 commitments contingencies continued pending threatened litigation · company received several pending threatened litigations various suppliers typically nonpayment goods services vendor disputes typical normal course business company vigorously disputed claims grounds substandard materials services provided 2011 received 5 supplier claims certain advertising human resource consulting matters disputing filing counter claims settled four claims 2012 structured payouts representing estimate amount due 22264 162764 december 31 2013 december 31 2012 respectively intend vigorously defend remaining claim · chief executive officer individually named lawsuit brought circuit court 11th judicial circuit miamidade county florida former employee evolution model management inc claiming wrongful termination named originally hired employee rather evolution model management latter yet established entity december 2 2012 entered settlement agreement release claims whereby agreed pay plaintiff aggregate 77500 payable three equal installments final payment made april 2013 · chief executive officer individually named lawsuit brought circuit court 11th judicial circuit miamidade county florida 2012 former contractor claiming wrongful termination plaintiff’s complaint alleges 85000 back salary performance bonus 40000 share grant management intends vigorously defend action contends suit without merit contractor dismissed cause accordingly management provided contingency reserve matter · june 13 2011 filed action circuit court eleventh judicial circuit miamidade county florida rescission investor relations consulting agreement entered october 15 2010 whereby paid third party approximately 20000 23000 shares restricted common stock consideration investor relations consulting services demanded return 23000 shares restricted stock recovery costs damages third party filed counter claim breach agreement intend continue vigorously defend claim · 2011 also filed action circuit court eleventh judicial circuit miamidade county florida rescission agreement entered may 18 2010 whereby paid third party approximately 500 20000 shares restricted common stock consideration consulting services demanded return 20000 shares restricted stock recovery costs damages claim dismissed lack jurisdiction refiled action supreme court new york county new york january 11 2012 seeking rescission said agreement return 500 20000 shares restricted common stock see note 21 time company may involved various claims legal actions arising ordinary course business opinion management ultimate disposition matters material adverse effect company’s consolidated financial position results operations purchase commitments order secure adequate supply raw materials company executes purchase orders suppliers evidence intent purchase materials purchase orders outstanding december 31 2013 totaled 685137 contract contingencies distribution agreement gamma investors shareholder company provides event terminate agreement without cause required repurchase products held gamma’s inventory pay gamma fee equal greater prior 12 month product purchased gamma 2 million transactions gamma de minimus date ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 commitments contingencies continued employment agreement effective december 16 2013 company entered executive employment agreement daniel khesin current chief executive officer serve chief executive officer initial term december 31 2018 “initial term” thereafter automatically renewed successive one year terms “renewal term” unless terminated upon six months prior written notice “non renewal notice” initial term base salary shall 250000 shall increase 20 one quarterly period following quarterly period company profitable increases accumulate carry subsequent periods base salary commencing year ending december 31 2014 subject nasdaq rules includes 50000 payable company common stock valued closing price end calendar year term agreement furthermore mr khesin shall entitled receive annual performance bonus payable stock andor cash based achieving annual targets set board directors agreement mr khesin shall entitled receive reimbursement reasonable travel entertainment miscellaneous expenses incurred connection performance duties mr khesin entitled paid vacation determined board initially four weeks per annum also entitled participate pension insurance employment benefit plan maintained company executives including programs life medical insurance company agreed maintain disability insurance directors officers’ liability coverage employment term event company fails maintain disability policy mr khesin mr khesin becomes disabled term agreement shall continue receive 25 base salary period 10 years disability removed company terminates mr khesin’s employment without cause company shall pay severance pay mr khesin within 30 days following termination date lump sum amount equal 42 months annual base salary options shall automatically vest become fully exercisable furthermore upon delivery non renewal notice company shall also pay mr khesin lump sum amount equal 42 months annual base salary term agreement 6 month period following termination agreement mr khesin shall subject non competition non solicitation restrictions unless employment terminated without cause company upon change control company following non renewal notice note 13 equity common stock shares issued lieu cash goods services goods services valued based upon shares issued multiplied closing price stock date immediately preceding issuance first quarter 2012 company issued 28182 shares services provided two employees valued 310 320 per share resulted expense 89182 aggregate company also issued 8824 shares award achieving business goals shares valued 340 resulted allowance offsetting revenues 30000 second quarter 2012 company issued 108764 shares services provided six associates valued 200 280 per share resulted expense 241528 aggregate company also issued 38514 shares award achieving business goals 260 resulted allowance offsetting revenues 100000 addition consultant exercised vested options 40700 common shares 4070 third quarter 2012 company issued 28000 shares services provided ir firm former associate valued 220 320 per share resulted expense 69600 aggregate also quarter two founders converted 450000 shares preferred stock 450000 common shares company also issued 292000 shares existing shareholder investors 250 per share 732000 146400 fees paid selling agent resulting net proceeds 585600 company fourth quarter 2012 company issued 31367 shares distributor achieving sales goals valued 332 per share resulted sales allowance 104138 aggregate connection license nutra origin brand issued 15385 shares valued 325 per share resulted increase brand rights intangible asset 50000 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued first quarter 2013 company issued 15300 shares distributor achieving sales goals valued 250 per share resulted sales allowance 38250 aggregate also issued 20000 shares investor relations “ir” firm services valued 220 per share 44000 total directors received 5000 shares services valued 320 per share 16000 second quarter 2013 company issued 11765 shares distributor achieving sales goals valued 211 per share resulted sales allowance 24824 aggregate also issued 80000 shares ir firm services valued 175 per share 140000 total directors received 7500 shares services valued 175 261 per share 16350 third quarter 2013 company sold aggregate 381192 shares four private investors prices ranging 100 115 per share total approximately 410000 fees paid third party three four transactions resulting issuance costs 31260 company also issued 28433 shares aggregate several distributors achieving sales goals valued 150 average per share resulted sales allowance 42649 aggregate also issued 52700 shares aggregate four investor relations “ir” firms services valued 176 average per share 92550 total also issued 31779 shares two associates services rendered valued 166 average per share 52721 total fourth quarter 2013 company sold aggregate 8943 shares private investor 112 per share total 10000 fees paid third party transaction securities purchase agreement dated december 24 2013 amended “securities purchase agreement” company also sold 1965000 shares private placement series investors securities purchase agreement 160 per share total 3144000 fees paid registered brokerdealer legal counsel resulting issuance costs 151051 securities purchase agreement company agreed restrict issuance shares common stock common stock equivalents period approximately nine months closing date subject certain exceptions addition subject certain exceptions period twelve months closing date securities purchase agreement company issues additional shares common stock common stock equivalents “additional shares” purchase exercise conversion price less 160 price subject adjustment splits recapitalizations reorganizations company shall issue additional shares common stock purchasers effective purchase price per share paid common stock shall per share purchase exercise conversion price additional shares provided however additional shares aggregated issuances securities purchase agreement shall exceed 1999 issued outstanding common stock company immediately prior closing date securities purchase agreement also issued 94679 shares aggregate five individuals perform services company valued prices ranging 191 231 per share 190336 total november 20 2013 also issued 15000 shares directors services rendered independent director agreements valued 202 per share 30300 total summary company issued stock various services valued 687980 478448 2013 2012 respectively surrender common stock third quarter 2012 ir firm surrendered 20000 shares previously issued services fully earned previously valued 280 per share resulted return equity 56000 aggregate fourth quarter 2012 ir firm returned 5000 shares valued 336 per share resulted recovery 16800 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued warrants following tables present status warrants outstanding december 31 2013 december 31 2012 respectively options 2009 company granted selling agent option purchase 200000 shares common stock exercise price 010 per share exchange assistance filing registration statement form 10 obtaining trading symbol counter bulletin board otcbb option valued grant date based offering price 250 per share 480000 expires five years option vests exercisable subject certain lock leak provisions limit exercisability option number 20000 shares per quarter company obtained trading symbol recorded expense consulting services 160000 2010 192000 2011 128000 2012 result structured vesting december 31 2012 options fully expensed december 31 2013 company equity incentive plan see note 15 options granted december 31 2013 granted outside plan following tables present status options outstanding december 31 2013 2012 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 13 equity continued preferred stock provided certificate designation series preferred stock dated january 14 2009 amended september 2009 share series preferred stock entitled 02 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law preferred stock automatically converts common stock tentoone basis september 2013 two founders converted 4500000 preferred shares 450000 common shares 2012 remaining 5500000 shares held remaining founder ceo company converted 550000 common shares september 15 2013 note 14 income taxes provision income taxes 2013ytd 2012ytd summarized follows income tax benefit 2013ytd 2012ytd booked due uncertainty future profitable operations necessary realize benefit provision income taxes 2013ytd 2012ytd differs amount computed applying federal statutory rate loss provision benefit income taxes follows deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2013 december 31 2012 follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 14 income taxes continued valuation allowance increased 1014873 2013 december 31 2013 december 31 2012 company net operating loss carryforwards 5165561 4329251 respectively unused net operating loss carryforwards expire various dates beginning 2030 ending 2032 accordance section 382 internal revenue code usage companys net operating loss carryforward could limited event change ownership december 31 2013 december 31 2012 company unrecognized tax benefits accordingly related accrued interest penalties company follows provisions asc topic 74010 accounting uncertainty income taxes clarifies accounting uncertainty income taxes recognized enterprises financial statements accordance asc topic 740 prescribes recognition threshold measurement process financial statement recognition measurement tax position taken expected taken tax return topic also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition based evaluation concluded significant uncertain tax positions requiring recognition consolidated financial statements evaluation performed tax years ended december 31 2013 2012 companys federal state income tax returns since 2010 subject examination internal revenue service generally period three years returns filed note 15 2009 equity incentive plan overview options granted company’s 2009 equity incentive plan “plan” may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 500000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 16 significant customers product revenues represent primarily sales revita cor individually exceed 10 total sales collectively represent 40 total sales spectral dncn represents 9 total sales company sells products several types customer primarily include distributors salons several represent individually excess 10 total sales 2013ytd 2012ytd 2013ytd top ten customers generated 41 sales customers individually excess 10 total sales 2013ytd sales customers individually excess 10 total sales 2012ytd accounts receivable december 31 2012 note 17 significant vendors company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change purchases significant vendors 2013ytd accounts payable december 31 2013 purchases significant venders 2012ytd accounts payable december 31 2012 note 18 geographic revenue reporting company organized based fundamentally one business segment although distribute products worldwide basis several largest distributors based north america turn sell products europe asia consider customers based north america however sales international distributors distribute product outside north america increasing 2012 acquired distributor mexico results fully discussed note 20 information company’s geographic operations 2013ytd 2012ytd follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 19 consolidation variable interest entity company holds variable interest velocity storage packaging llc “velocity” entity company primary beneficiary velocity performs packaging shipping services exclusively company’s variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure accordingly company determined velocity vie company primary beneficiary guidance offered asc 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur note 20 acquisition mexican distributor effective november 1 2012 company purchased essentially 100 outstanding common stock divine skin laboratories sa de cv “ds mexico” sole shareholder pursuant share exchange agreement accordance mexican law mexican companies must two shareholders therefore principal seller retain one share common stock ds mexico ds mexico business selling distributing marketing company’s products throughout mexico company acquired ds mexico order obtain customers vertically integrate operations directly mexican market consideration nearly 100 interest ds mexico company issued 450000 shares company’s common stock valued 260 per share based independent third party valuation company also forgave 38415 invoices due ds mexico april 1 2012 september 30 2012 following closing date sole shareholder ds mexico shall receive aggregate additional 150000 shares dskx common stock adjusted stock split recapitalization similar transaction follows 50000 shares dskx common stock event annual net revenues ds mexico equal greater 4000000 calendar year period ii 50000 shares dskx common stock event annual net revenues ds mexico equal greater 5000000 calendar year period following satisfaction iii 50000 shares dskx common stock event annual net revenues ds mexico equal greater 6000000 calendar year period following satisfaction ii connection share exchange agreement company issued 600000 shares stock 450000 shares delivered december 31 2012 remaining 150000 shares held escrow company delivered upon completion performance measures stipulated share exchange agreement december 31 2013 shares remain escrow present value consideration expected paid part agreement 1341015 calculated · 450000 shares issued valued 260 per share total 1170000 · 150000 contingent shares valued 260 per share total 132600 · forgiveness 38415 invoices due ds mexico price per share estimated contingent shares issued connection agreement based upon third party valuation company incurred approximately 5000 professional fees connection acquisition ds mexico 2012 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 20 acquisition mexican distributor continued following summarizes fair value assets liabilities acquired dr tamez former principal shareholder ds mexico agreed oversee day operations ds mexico consideration base salary approximately 60000 per year consideration employment ds mexico dr tamez entered performance agreement dated december 11 2012 whereby dr tamez shall receive 12 month anniversary agreement year thereafter period five years number shares common stock shall cumulative value 50000 furthermore term dr tamez’s employment shall entitled calendar year basis 30 net profits ds mexico “profit participation” commencing third calendar anniversary performance agreement us shall option terminating profit participation consideration 500000 payment dr tamez furthermore event “change control” us term dr tamez’s employment us dr tamez shall right receive onetime payment 500000 “change control” us shall deemed occurred time 1 person term used section 13d 14d exchange act becomes “beneficial owner” defined rule 13d3 exchange act directly indirectly securities representing 80 combined voting power outstanding securities right vote elections directors 2 person becomes beneficial owner directly indirectly either 50 ds mexico’s outstanding shares ii 30 ds mexico´s shares within period one year 3 board directors ds mexico currently consisting daniel khesin michael strong fernando tamez changed majority 40 gross value ds mexico´s assets transferred unrelated party following unaudited pro forma financial information presents combined results operations year ended december 31 2012 acquisition completed january 1 2012 pro forma financial information includes adjustments eliminate one time charges appropriate pro forma periods though acquisition completed beginning respective periods indicative purport project future financial position operating results company unaudited pro forma results reflect operating efficiencies potential cost savings may implemented acquisition ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 21 subsequent events debt financing effective march 24 2014 company’s asset based lending facility midcap financial renewed three months matures june 30 2014 terms renewal provides asset based lending collateralized assets company advances based 70 qualified accounts receivable 40 eligible finished goods inventory credit facility provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum overall facility reduced 10 million credit facility personally guaranteed chief executive officer see note 11 pending threatened litigation disclosed note 12 2011 filed action circuit court eleventh judicial circuit miamidade county florida rescission agreement entered may 18 2010 whereby paid third party approximately 500 20000 shares restricted common stock consideration consulting services demanded return 20000 shares restricted stock recovery costs damages claim dismissed lack jurisdiction refiled action supreme court new york county new york january 11 2012 seeking rescission said agreement return 500 20000 shares restricted common stock march 2014 matter settled party released claims related action settlement matter general release defendant agreed return company treasury 10000 shares common stock subject dispute remaining 10000 shares defendant agreed one year lock agreement covering 60 shares period one year settlement date equity subsequent december 31 2013 company issued 221000 shares aggregate four individuals perform services company valued prices ranging 220 244 per share 494595 total also issued 3750 shares directors services rendered independent director agreements valued 222 per share 8325 total item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits 1 incorporated reference form 8k filed february 22 2016 2 incorporated reference form 8k filed december 17 2013 3 incorporated reference form 8k filed december 26 2013 4 incorporated reference form 10k annual report year ended december 31 2012 signatures accordance requirements exchange act registrant caused report signed behalf undersigned thereunto duly authorized date march 31 2017 john power john power chief financial officer principal accounting officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date myron lewis director march 31 2017 myron lewis yasuhiro fujiwara director march 31 2017 yasuhiro fujiwara elina yuabov director march 31 2017 elina yuabov estella ng director march 31 2017 estella ng ds healthcare group inc dba ds laboratories subsidiaries consolidated financial statements report independent registered public accounting firm audit committee board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheets ds healthcare group inc subsidiaries “company” december 31 2016 2015 related consolidated statements operations changes equity cash flows years ended financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects consolidated financial position ds healthcare group inc subsidiaries december 31 2016 2015 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern discussed note 3 consolidated financial statements company suffered recurring losses operations raise substantial doubt ability continue going concern managements plans regard matters also described note 3 consolidated financial statements include adjustments respect possible future effects recoverability classification assets amounts classification liabilities might result outcome uncertainty bf borgers cpa pc bf borgers cpa pc lakewood co march 31 2017 ds healthcare group inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements operations comprehensive loss see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity period january 1 2015 december 31 2016 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements changes equity continued period january 1 2015 december 31 2016 see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business organization nature business ds healthcare group inc dba ds laboratories “company” “ds laboratories”” dskx” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing hair care skin care personal care products fifteen years network top specialty retailers distributors throughout north america europe asia south america company researches develops products management believes keeps company forefront innovation management believes company currently leading innovator 1 “liposome technology” acts carrier agent designed enhance action active ingredients products 2 “nanosome technology” acts delivery vehicle designed infuse active compounds targeted cells increased efficiency products currently offer products within following broad product categories hair care skin care personal care note 2 summary significant accounting policies principles consolidation presentation consolidated financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america “us gaap” consolidated financial statements include accounts company operating subsidiaries ds laboratories inc sigma development holding co inc polaris labs inc polymer inc divine skin laboratories sa de cv “ds mexico” also included consolidated financial statements operating activities velocity storage packaging llc “velocity” accounted variable interest entity “vie” october 31 2016 significant intercompany balances transactions eliminated consolidation november 1 2016 velocity employees hired directly ds healthcare vie longer used velocity performs packaging shipping services exclusively company’s variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure accordingly company determined velocity vie company primary beneficiary guidance offered accounting standards codification “asc” 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur prior period reclassifications prior period financial statement amounts reclassified conform current period presentation reclassifications effect previously reported net loss risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued use estimates preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results believe estimates assumptions reasonable however estimates assumptions subject number risks uncertainties may cause actual results differ materially estimates significant estimates assumptions underlying consolidated financial statements include · estimates allowances uncollectable accounts receivable · estimates inventory obsolescence overhead labor cost allocations · estimates assuming future earning capacity intangible assets · estimates value equity transactions services rendered · estimates returned damaged product · estimates made connection acquisition loss reserve · estimates made deferred income tax calculations full valuation allowance cash company maintains cash financial institutions located united states mexico times company’s cash equivalent balances may uninsured deposit accounts exceed federal deposit insurance corporation “fdic” insurance limits company experienced losses accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible company also provides allowances accounts receivables product returns cooperative advertising allowances december 31 2016 2015 allowance uncollectable accounts including reserves product returns advertising credits 725929 663151 respectively inventories inventory reported lower cost market firstin firstout method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence december 31 2016 2015 reserve inventory obsolescence 651641 379615 respectively furniture equipment furniture equipment recorded cost depreciation provided using double declining balance depreciation method united states straightline depreciation method mexico estimated useful lives assets range 5 7 years difference methods deemed de minimums consolidated financial statements company recorded 52258 71208 depreciation expense 2016 2015 respectively accumulated depreciation 273916 340200 december 31 2016 2015 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued longlived assets longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset assets disposed reported lower carrying amount fair value less costs sell intangible assets intangible assets acquired individually group assets business combination recorded fair value company’s identifiable intangible assets consist customer relationships acquired part merger fair value intangible assets acquired determined based discounted cash flow analysis identifiable intangible assets amortized period estimated benefit using straightline method approximates customer attrition rate reflecting pattern economic benefits associated assets estimated useful lives 6 10 years goodwill company records goodwill purchase price acquisition exceeds fair value net tangible intangible assets date acquisition company performs annual review goodwill indicators impairment determined goodwill may impaired company performs impairment assessment acquired reporting unit impairment tests using fair value approach noncontrolling interest noncontrolling interest consists minority owned portion nutra origin inc fourth quarter 2012 company completed license nutra origin brand established new subsidiary operate brand part license agreement licensor granted 7 noncontrolling interest newly formed subsidiary 2013 due poor sales product line company defaulted license agreement fully impaired related brand rights 89705 2014 performance product line diminished reported additional operational losses 88630 noncontrolling portion 6204 december 31 2014 company recorded noncontrolling interest receivable 38430 since brand operations already ceased company believe able collect noncontrolling interest receivable 38430 company wroteoff amount 2015 revenue recognition company’s revenue recognition policies compliance asu 201409 “revenue contracts customers” establishes core principle revenue recognition entity recognize revenue depict transfer goods services customers amount reflects consideration entity expects entitled exchange good services company recognizes revenue following four criteria met · identify contracts customer · identify separate performance obligations contract · determine transaction price · allocate transaction price separate performance obligations shipping handling charges related sales transactions recorded sales revenues billed customers included sales price shipping handling costs included cost goods sold ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued research development company currently maintains functional laboratory employing full time chemist lab technician identify new technology test product alternatives improve existing formulations addition mr khesin devotes portion time identifying new technologies formulations develop new products improve existing products newest technology available activities expensed year incurred costs include laboratory supplies salaries materials consultant fees costs classified product development salaries selling general administrative expenses consolidated statements operations amounted 178034 154308 2016 2015 respectively sharebased payment company measures compensation cost employee stockbased awards fair values date grant stockbased awards issued nonemployees measured fair values date grant remeasured reporting period vesting dates nonemployee becomes employee continues vest award fair value individual’s award remeasured date becomes employee subsequently remeasured future reporting dates fair value stock based awards recognized expense service period net estimated forfeitures using straightline method stock options restricted stock company uses blackscholes optionpricing model estimate fair value stockbased awards income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized management believes significant uncertainty exists respect future realization deferred tax asset therefore recorded full valuation allowance 2016 2015 income tax expense year ended december 31 2016 2015 mexican subsidiary provision made us foreign taxes undistributed earnings ds mexico earnings considered permanently reinvested practicable determine amount additional tax may payable undistributed foreign earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss attributable shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company weighted average securities included calculation diluted earnings per common share impact antidilutive 0 444213 2016 2015 respectively segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders management determined company operates one business segment commercialization development personal care products ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value functional currency us dollar functional currency consolidated entities operating united states functional currency consolidated mexican subsidiary mexican peso translate financial statements us dollars follows · assets liabilities translated exchange rate effect financial statement date · income statement accounts translated using weighted average exchange rate period include translation adjustments currency exchange effect exchange rate changes intercompany transactions longterm investment nature separate component shareholders’ equity currently transactions longterm investment nature gains losses nonus currency transactions note 3 liquidity going concern sustained operational losses since inception december 31 2016 accumulated deficit 27918109 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products increase overall revenue among things conditions raise substantial doubt entity’s ability continue going concern december 31 2016 322319 cash equivalents historically financed operations growth primarily successful issuance sale shares common stock issuance promissory notes company started several new revenue initiatives creating additional products cost cutting measures cannot predict success products projects since currently way various stages completion commenced implementing continue implement various measures address financial condition including limited · continuing seek debt equity financing however assurances company able raise additional capital favorable terms accordingly accompanying consolidated financial statements prepared conformity us gaap contemplates continuation company going concern consolidated financial statements include adjustments reflect possible future effects recoverability carrying amount classification assets amounts classification liabilities may result outcome uncertainty commenced implementing continue implement various measures address financial condition ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 4 inventories significant components inventory december 31 2016 2015 consist primarily evaluated inventory december 31 2016 2015 reserved 651642 379615 respectively allowance slow moving obsolete inventory allowance applies primarily bulk product raw materials chemical components expired bottles pumps packaging materials longer used current production due packaging changes excess quantities needed based current production consumption generally merchandise inventory require reserve due rapid turnover note 5 prepaid expenses current assets prepaid expenses current assets december 31 2016 2015 consist primarily prepaid vendor trade credits represents trade credits received thirdparty vendor company may use purchase goods andor services future periods prepaid marketing represents payments made vendor marketing related services received future periods prepaid vat represents payments made mexican subsidiary tax authorities valueadded tax imposed commercial transactions note 6 intangible assets significant components intangible assets december 31 2016 2015 consist ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 6 intangible assets continued brazilian distribution rights company signed 10year exclusive distribution agreement brazil transaction valued 250 per share company exclusive distributor former joint venture partner current shareholder currently commercializing product lines products brazilian market introduced 4th quarter 2012 rights amortized 10 years recorded 0 18750 amortization 2016 2015 respectively 2015 remaining unamortized distribution rights fully impaired due delayed sales attributable brazilian distributor rights resulting impairment charge 337500 accompanying statement operations ds mexico customer list connection acquisition mexican distributor november 2012 acquired customer list recorded fair value determined independent appraiser asset amortized estimated useful life 9 years recorded amortization 72537 85309 amortization expense 2016 2015 respectively remaining unamortized amount december 31 2016 317293 amortized follows 72537 2017 2018 2019 2020 27145 thereafter goodwill connection acquisition mexican distributor ds mexico acquired goodwill represents excess fair value consideration given fair value assets acquired change goodwill 27412 december 31 2015 23002 december 31 2016 represents foreign currency translation mxn functional currency subsidiary goodwill asset amortized however company access asset impairment annually december 31 2016 impairment considered necessary note 7 accrued expenses accrued expenses december 31 2016 2015 consist note 8 current liabilities current liabilities december 31 2016 2015 consist ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 9 debt equipment loan december 10 2012 company entered loan agreement 53900 purchase certain warehouse equipment loan provides monthly payment 60 months bears interest 595 payments began february 18 2013 december 31 2016 outstanding equipment loan balance 12869 august december 2016 company’s mexican subsidiary obtained equipment loans totaling mxn 848500 41050 payable monthly installments 30 months payments beginning september 2016 december 31 2016 remaining outstanding amount equipment loan mxn 514657 24906 bears annual interest 0 bank loans june 25 2015 company’s mexican subsidiary obtained bank loan mxn 2000000 127715 payable monthly installments 36 months payment began july 2015 december 31 2016 bank loan repaid july 6 2015 company’s mexican subsidiary obtained another bank loan mxn 3150000 201151 payable monthly installments 36 months payment began august 2015 december 31 2016 remaining outstanding amount bank loan mxn 1771802 85744 bears annual interest 93 promissory notes fourth quarter 2014 company entered 350000 promissory note private party promissory note due may 28 2015 june 1 2015 parties agreed convert note plus accrued interest common shares company issued 191202 common shares valued 387100 september 15 2015 lender 2015 company entered 450000 promissory note amended september 1 2015 note secured inventory provided interest 1 per month maturity date december 31 2015 note paid full december 23 2015 excluding accrued interest 22933 connection issuing note company also issued warrants purchase 30000 common shares 085 per share expiration date april 20 2017 10000 common shares 250 per share expiration date september 1 2017 warrants aggregate estimated fair value 26048 september 15 2015 warrant 30000 common shares exercised december 31 2016 aggregate annual maturities debt follows note 10 commitments contingencies 2016 2015 company operated several material agreements listed lease office production facilities · june 25 2014 commencing august 1 2014 company entered lease 50000 square feet warehouse corporate office space located pompano beach florida terms new lease provide 600 per square foot 24720 per month base rent plus 10918 monthly operating expenses terminates july 31 2019 lease provides annual increases monthly base rent 024 027 per square foot lease also personally guaranteed chief executive officer daniel khesin · mexican subsidiary leases 246 square feet office space 1230 square feet warehouse mexico city mexico expires april 30 2018 leases provide monthly rent 1408 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 commitments contingencies continued · company party lease sales facilities located ashville north carolina lease provided monthly rent 4725 expired december 31 2015 september 2014 company relocated office florida location 2015 negotiations landlord settle lease abandonment suit calls payment 73000 december 31 2015 company recorded liability 85042 represented aggregate monthly rent date abandonment lease expiration date asheville suit september 21 2016 company notified received default judgement amount 73000 december 19 2016 company settled lawsuit 25000 company accounts facility leases using straightline method incurred 464865 535012 total rent expense 2016 2015 respectively company committed lease payments next five years follows pending threatened litigation company party otherwise involved legal proceedings arising normal ordinary course business date report except otherwise disclosed aware proceeding threatened pending us determined adversely would material effect business results operations cash flows financial position march 29 2016 ds healthcare mr khesin certain former members board directors sued class action styled prasant shah v ds healthcare group inc et al case 1660661 pending united states district court southern district florida laterfiled class action consolidated class action arises company’s march 23 2016 march 28 2016 8k filings stated pertinent part audit committee concluded unaudited condensed consolidated financial statements company two fiscal quarters ended june 30 2015 september 30 2015 “june september 2015 quarters” longer relied upon certain errors financial statements daniel khesin terminated cause removed chairman member board directors plaintiffs november 2 2016 file amended complaint ds healthcare must respond later december 19 2016 company also received first three related shareholder derivative demands march 29 2016 mediation concerning class action derivative demands scheduled october 17 2016 miami florida result mediation hearing subsequent negotiations agreement plaintiffs securities case derivative demands amount settlement key terms parties negotiating precise terms court stipulations need filed agreements terms interdefendant releases pending approval sides final settlements also need approved court may 27 2016 photomedex inc radiancy inc photomedex technology inc collectively “photomedex” filed civil action damages declaratory relief ds healthcare united states district court southern district new york lawsuit styled photomedex inc v ds healthcare group inc case 116cv03981 lawsuit arises two merger agreements agreement plan merger reorganization among ds healthcare group inc phmd p acquisition corp photomedex inc radiancy inc dated february 19 2016 ii agreement plan merger reorganization among ds healthcare group inc phmd professional acquisition corp photomedex technology inc photomedex inc dated february 19 2016 photomedex alleges ds healthcare breached agreements failing meet preclosing obligations completing transactions contemplated agreements photomedex seeks declaratory judgment terminations two agreements proper requests award damages specified agreements including “breakup fee” usd 3 million initial case management conference occurred october 13 2016 however resolution reached settlement conference occurred january 31 2017 settlement achieved although parties continue work reach agreement court case scheduled september 15 2017 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 commitments contingencies continued ds healthcare disputes claims asserted photomedex including photomedex entitled “breakup fee” agreements ds healthcare also asserted counterclaims damages photomedex breaches two agreements initial case management conference scheduled october 13 2016 however resolution reached settlement conference occurred january 31 2017 settlement achieved although parties continue work reach agreement court case scheduled september 15 2017 december 28 2015 company chief executive officer daniel khesin individually abner silva former consultant employee named lawsuit brought circuit court 11th judicial circuit miamidade county florida former investor relations contractor claiming monetary damages allegations using material false misrepresentations plaintiff’s complaint alleges owed compensation stock cash management vigorously defended action order dismissal prejudice achieved january 5 2017 company accounts facility leases using straightline method incurred 0 53012 total rent expense 2016 2015 respectively facility located asheville north carolina “asheville” 2015 company served suit connection asheville abandoned office lease suit calls payments 73000 september 21 2016 company notified received default judgement amount 73000 company reached settlement matter complaint amount 25000 september 2016 company received several prelitigation demand letters various former employees including limited demand alleged past wages shares commissions various sales qualify revenue gaap guidance former chief executive officer renee barchniles cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes time amount loss range loss cannot reasonably estimated case initiated discovery conducted determine validity claim claims made plaintiffs therefore company recorded reserves contingent liabilities related particular legal matters however future cases progress company may required increase contingent liability reserve matters impossible us predict certainty outcome pending disputes unless otherwise stated cannot predict whether liability arising pending claims litigation material relation consolidated financial position results operations purchase commitments order secure adequate supply raw materials company executes purchase orders suppliers evidence intent purchase materials purchase orders outstanding december 31 2016 totaled 532057 contract contingencies distribution agreement gamma investors shareholder company provides event terminate agreement without cause required repurchase products held gamma’s inventory pay gamma fee equal greater prior 12month product purchased gamma 2 million transactions gamma minimums date ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 commitments contingencies continued employment agreements daniel khesin effective december 16 2013 company entered executive employment agreement daniel khesin current chief executive officer serve chief executive officer initial term december 31 2018 “initial term” thereafter automatically renewed successive one year terms “renewal term” unless terminated upon six months’ prior written notice “nonrenewal notice” initial term base salary shall 250000 shall increase 20 one quarterly period following quarterly period company profitable increases accumulate carry subsequent periods base salary commencing year ending december 31 2014 subject nasdaq rules includes 50000 payable company common stock valued closing price end calendar year term agreement furthermore mr khesin shall entitled receive annual performance bonus payable stock andor cash based achieving annual targets set board directors agreement mr khesin shall entitled receive reimbursement reasonable travel entertainment miscellaneous expenses incurred connection performance duties mr khesin entitled paid vacation determined board initially four weeks per annum also entitled participate pension insurance employment benefit plan maintained company executives including programs life medical insurance company agreed maintain disability insurance directors’ officers’ liability coverage employment term event company fails maintain disability policy mr khesin mr khesin becomes disabled term agreement shall continue receive 25 base salary period 10 years disability removed company terminates mr khesin’s employment without cause company shall pay severance pay mr khesin within 30 days following termination date lump sum amount equal 42 months annual base salary options shall automatically vest become fully exercisable furthermore upon delivery nonrenewal notice company shall also pay mr khesin lump sum amount equal 42 months annual base salary term agreement 6month period following termination agreement mr khesin shall subject noncompetition nonsolicitation restrictions unless employment terminated without cause company upon change control company following nonrenewal notice throughout year ended 2014 2015 2016 daniel khesin companys former chief executive officer former chief financial officer received addition base compensation reimbursement payroll advances expenses approximately 76000 40000 48000 august 2016 respectively nonbusiness related goods services year ended 2016 amount includes 27000 use leased vehicle related car insurance approved board directors 10000 owed us mr khesin certain legal fees paid behalf company owes mr khesin 44100 related medical contributions incorrectly deducted salary 2013 2015 pursuant executive employment agreement 50000 shares payable shares companys common stock fiscal yearend mr khesin believed payments received satisfaction certain bonus perquisites earned monthly basis employment agreement payments required approval compensation committee approval received subsequent 2014 2015 2016 section 402 sarbanes oxley act 2002 prohibits advances loans director executive officer public company audit committee concluded payments made mr khesin prior board approval may violation section 402 sarbanes oxley act 2002 event determined payments violation sarbanes oxley act violation could material adverse effect company including limited criminal civil administrative sanctions penalties investigations addition potential securities litigation consequence activities company received notice independent auditor potential illegal acts concerning payments personal expenses company 2014 2015 company’s audit committee agreed findings 2014 2015 september 29 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29 2016 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 commitments contingencies continued 2013 addition base compensation paid abner silva consultant deemed officer independent auditor accounting purposes company advanced approximately 11500 mr silva mr silva believed payments received satisfaction certain moneys owed affiliate companies payments required prior approval compensation committee approval received consequence activities company received notice independent auditor potential illegal acts concerning payments personal expenses company september 29 2016 company accordance section 10a securities exchange act 1934 informed commission letter also dated september 29 2016 john power effective september 12 2016 company entered executive employment agreement john power current chief financial officer serve chief financial officer initial term september 11 2018 “initial term” thereafter automatically renewed successive one year terms “renewal term” unless terminated upon six months’ prior written notice “nonrenewal notice” initial term base salary shall 200000 furthermore mr power shall entitled receive annual performance bonus payable stock andor cash based achieving annual targets set board directors agreement mr power shall entitled receive reimbursement reasonable travel entertainment miscellaneous expenses incurred connection performance duties mr power entitled paid vacation determined board initially four weeks per annum also entitled participate pension insurance employment benefit plan maintained company executives including programs life medical insurance company agreed maintain disability insurance directors’ officers’ liability coverage employment term event company fails maintain disability policy mr power mr power becomes disabled term agreement shall continue receive 25 base salary period 10 years disability removed company terminates mr power’s employment without cause company shall pay severance pay mr power within 30 days following termination date lump sum amount equal 12 months annual base salary options shall automatically vest become fully exercisable furthermore upon delivery nonrenewal notice company shall also pay mr power lump sum amount equal 12 months annual base salary term agreement 6month period following termination agreement mr power shall subject noncompetition nonsolicitation restrictions unless employment terminated without cause company upon change control company following nonrenewal notice dr fernando tamez dr tamez agreed oversee day operations ds mexico consideration base salary approximately 60000 per year consideration employment ds mexico dr tamez entered performance agreement dated december 11 2012 whereby dr tamez shall receive 12month anniversary agreement year thereafter period five years number shares common stock shall cumulative value 50000 furthermore term dr tamez’s employment shall entitled calendar year basis 30 net profits ds mexico “profit participation” commencing third calendar anniversary performance agreement us shall option terminating profit participation consideration 500000 payment dr tamez furthermore event “change control” us term dr tamez’s employment us dr tamez shall right receive onetime payment 500000 “change control” us shall deemed occurred time 1 person term used section 13d 14d exchange act becomes “beneficial owner” defined rule 13d3 exchange act 1934 amended “exchange act” directly indirectly securities representing 80 combined voting power outstanding securities right vote elections directors 2 person becomes beneficial owner directly indirectly either 50 ds mexico’s outstanding shares ii 30 ds mexico´s shares within period one year 3 board directors ds mexico currently consisting daniel khesin fernando tamez changed majority 40 gross value ds mexico´s assets transferred unrelated party result company recorded liability due mr tamez approximately 102500 relating profit sharing agreement december 31 2016 balance remaining due mr tamez approximately 73000 included current liabilities ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 commitments contingencies continued march 4 2016 company received prelitigation dispute former consultant employee services rendered 20092016 company currently settlement discussions return 625000 shares believes resolve disputes without litigation company expensed issuances shares financials continue try obtain shares back since issued without proper approval august 14 2015 company entered employment agreement manuel gonzalez serve chief commercial officer terms employment agreement company pay mr gonzalez annual base salary 150000 shall entitled 15000 cashless warrants per month 48 months expires 15 years month granted april 2016 mr gonzalez terminated due circumstances surrounding termination company’s position termination cause would cause mr gonzález forfeit compensation employment agreement accordingly company accounted future compensation expensed compensation date termination cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes pursuant employment ms barchniles former chief executive officer october 2015 company granted equity award 450000 restricted stock units vest monthly 48 months additionally ms barchniles also granted signing bonus 15924 restricted stock units vest monthly 12 months equity award signing bonus subject makewhole event shares worth less 2500000 50000 respectively company issue additional shares barchniles bring value shares 2500000 50000 respectively subject minimum price per share 350 ms barchniles terminated chief executive officer april 14 2016 company accrued stock based compensation date termination amount represents original agreement’s signing bonus terms due circumstances breach contract surrounding ms barchniles’ termination company’s determination honor original terms agreement accrued compensation termination date company received prelitigation demand alleged past wages shares commissions various sales qualify revenue gaap guidance former chief executive officer renee barch niles cannot determine outcome disputes company intends vehemently defend position fullest extent possible accordingly company reserved disputes january 5 2016 company entered employment letter mr brockelman terms agreement mr brockelman serve company’s chief financial officer reporting company’s chief executive officer mr brockelman receive annual base salary 185000 annual bonus target level 50 annual base salary based upon achievement certain bonus targets set agreed company’s chief executive officer mr brockelman employment letter company agreed grant mr brockelman 300000 shares restricted stock “restricted shares” vest equal installments 6250 shares per month period 48 months event value restricted shares 1000000 twelvemonth period following mr brockelman’s start date company issue mr brockelman additional shares value restricted shares shall equal 1000000 floor price per share makewhole provision 330 per share event company acquired prior expiration 48month period unvested restricted shares become fully vested mr brockelman resigned april 2 2016 accordingly company accounted future compensation expensed compensation date resignation result mr brockelman’s resignation company accounted options floorprice guarantees september 27 2016 pursuant company’s bylaws current board directors approved ratified shares former management date termination company’s position due circumstances surrounding terminations shares compensation owed vehemently defend position board also determined pursuant company’s bylaws board directors reject share grants attempts grant shares claim shares former board director members management furthermore company take actions required defend position result expense taken company vehemently defend position daniel khesin ceo also promised additional shares fiscal year 2015 never issued accounted also agreed rescind never formally reviewed approved compensation committee never issued never properly approved agreed rescinded accrual expense liability results ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 equity common stock shares issued lieu cash goods services goods services valued based upon shares issued multiplied prevailing closing price stock date issuance 2016 issued aggregate 980565 shares common stock average value 067 per share 657039 aggregate services company received investor relation firms employeesboard director fees consulting services included shares common stock related aggregate value issued services 125000 shares common stock issued investor relations firm satisfaction obligation recognized 2015 services rendered value 83750 2015 issued aggregate 3088295 shares common stock average value 242 per share 7502208 aggregate services company received investor relation firms employeeboard director fees distributors consulting services included shares common stock related aggregate value issued services 1111905 shares common stock issued ir firms 1905462 ii 832500 shares common stock issued distributors 2270000 200000 shares common stock issued one investor relations “ir” firm second quarter 2015 company recorded value 200000 shares common stock expense 328000 ir expense 2015 800000 shares common stock issued one distributor third quarter 2015 company recorded expense 2269200 recorded value 800000 shares common stock distributor marketing promotion expense 2015 issued 1111784 shares various employees consultants certain milestones services rendered company accordingly expensed 2973691 related issuance private investment public equity offering 2015 company issued 2000000 shares common stock 250 per share warrants purchase 1500000 common shares exercise price 285 gross proceeds private investment public equity offering 5000000 company incurred issuance costs 486000 netted gross proceeds received recorded additional paid capital accompanying consolidated balance sheets company fair valued warrant issued amounted approximately 1848000 connection company’s sale 605000 shares common stock 330 per share 1996500 investor third quarter 2015 recorded stock subscription receivable 1496500 september 30 2015 fourth quarter 2015 company able receive 300000 stock subscription receivable total 800000 stock purchase agreement due current market conditions company written subscription receivable balance 2015 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 equity continued warrants following table summarizes status warrants related transactions following years options following table summarizes status options related transactions following years ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 equity continued preferred stock provided certificate designation series preferred stock dated january 14 2009 amended september 2009 share series preferred stock entitled 02 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law company 30 million shares preferred stock authorized issuance shares issued outstanding december 31 2016 2015 2009 equity incentive plan overview options granted company’s 2009 equity incentive plan “plan” may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 500000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury shares issued restricted stock units “rsus” 2009 equity incentive plan december 31 2016 eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable note 12 income taxes provision income taxes 2016 2015 summarized follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 income taxes continued provision income taxes 2016 2015 differs amount computed applying us federal statutory rate loss provision benefit income taxes follows deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2016 2015 follows december 31 2016 2015 company us federal state net operating loss carryovers 11393349 respectively unused net operating loss carryforwards expire various dates beginning 2030 ending 2032 accordance section 382 internal revenue code usage companys net operating loss carryforward could limited event change ownership united states foreign components loss income taxes follows ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 income taxes continued company evaluated provisions asc 740 related accounting uncertainty income taxes recognized company’s financial statements december 31 2016 2015 evaluation performed tax years ended december 31 2016 2015 based management’s evaluation concluded significant uncertain tax positions requiring recognition consolidated financial statements 20165 2015 company incurred interest penalties company files income tax returns us federal jurisdiction states florida north carolina companys federal state income tax returns since 2013 subject examination internal revenue service state income tax returns since 2012 subject examination respective state jurisdiction returns generally subject examination period three years returns filed company filed federal state tax returns 2014 state net operating loss carryovers available offset future taxable income returns filed note 13 barter credits december 2015 company former management entered agreement barter trading company sell slow moving finished goods exchange prepaid credits 2015 2016 company sold merchandise worth 956176 4566717 respectively barter trading company however credits proved economic value accordingly revenue meet criteria defined accounting standards codification 605 “asc” company reserved sales barter trading company meet revenue standards 2015 2016 respectively note 14 significant customers company sells products several types customer primarily include distributors salons sales customers individually excess 10 net revenue 2015 sales customers individually excess 10 net revenue 2016 accounts receivable december 31 2016 2015 top ten customers generated 46 49 net revenue respectively note 15 significant suppliers company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change purchases significant suppliers 2016 accounts payable december 31 2016 purchases significant suppliers 2015 accounts payable december 31 2015 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 16 geographic revenue reporting company organized based fundamentally one business segment although distribute products worldwide basis several largest distributors based north america turn sell products europe asia consider customers based north america however sales international distributors distribute product outside north america increasing information company’s geographic operations 2015 2014 follows note 17 related party transactions year ended december 31 2016 2015 company party following related party transactions disclosed elsewhere financial statements · company paid 103233 2016 2015 respectively compensation alexander khesin father chief executive officer consulting various projects · company paid 48485 52036 2016 2015 respectively compensation anna khesin sister chief executive officer consulting various consulting projects · company paid 60000 2016 2015 respectively compensation dr fernando tamez dr tamez president divine skin laboratories sa de cv “ds mexico” since 2009 mexican subsidiary acquired november 2012 dr tamez oversees daytoday operations ds mexico · company paid 34091 2016 compensation dr fernando tamez chief operating officer company · mr tamez owns interest entity brazil company sold product 2016 2015 company sold 38585 0 2016 2015 respectively outstanding accounts receivable balance december 31 2016 2015 9768 0 respectively · mr tamez owns interest entity spain company sold product 2016 2015 company sold 498479 0 2016 2015 respectively outstanding accounts receivable balance december 31 2016 2015 498479 0 respectively company informal agreement purchase company mr tamez upon reaching certain millstones however formal agreement completed date · company recorded liability due mr tamez approximately mxn 2118000 mexican pesos 129200 relating profit sharing agreement included current liabilities accompanying balance sheet december 31 2016 · company sales karl sweis former director april 2016 0 390622 2016 2015 respectively · 2016 2015 company paid 0 170000 consulting fees whitestone group inc greystone group inc entities controlled abner silva 20000 2015 abner silva individually shareholder former consultant employee outsourced coo services addition company following transactions entities controlled abner silva 0 88625 2016 2015 respectively purchase materials needed assembly manufacture products export offset ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 17 related party transactions continued sales products amounting 0 69858 2016 2015 respectively · company issued 20513 shares 35500 2015 payment expenses julieta jackson former employee sister abner silva settlement dispute resolution 2013 mrs jackson proprietor sole shareholder velocity storage packaging inc executed effective december 29 2016 company entered agreement acquire distribution rights brazilian distributor current chief operating officer fernando tamez former officer abner silva shareholders listed sellers agreement acquire 100 distributers shares exchange 47000 cash satisfy certain liabilities guaranteed employment contract employee valued approximately 28000 option receive 500 units per month cost 24 months agreement includes company assuming current operating cost distributor period time execution agreement alteration shareholder’s agreement subsequent year end company paid 33000 towards purchase price date filing brazilian distributor cooperative company’s attempts perform required due diligence refused provide grant access records required information preventing company properly consolidating entity therefore march 29 2017 company informed brazilian distributor way legal letter breach agreement subsequently rescinded agreement dated december 29 2016 demanded return monies paid date due uncertainty outcome legal action company deemed necessary accrue consideration pledged purchase agreement immediately expense full amount due uncertainty company’s ability obtain net assets distributor determined valued approximately 250000 note 18 acquisition executed effective december 29 2016 company entered agreement acquire distribution rights brazilian distributor current chief operating officer fernando tamez former officer abner silva shareholders listed sellers agreement acquire 100 distributers shares exchange 47000 cash satisfy certain liabilities guaranteed employment contract employee valued approximately 28000 option receive 500 units per month cost 24 months agreement includes company assuming current operating cost distributor period time execution agreement alteration shareholder’s agreement subsequent year end company paid 33000 towards purchase price date filing brazilian distributor cooperative company’s attempts perform required due diligence refused provide grant access records required information preventing company properly consolidating entity therefore march 29 2017 company informed brazilian distributor way legal letter breach agreement subsequently rescinded agreement dated december 29 2016 demanded return monies paid date due uncertainty outcome legal action company deemed necessary accrue consideration pledged purchase agreement immediately expense full amount due uncertainty company’s ability obtain net assets distributor determined valued approximately 250000 note 19 subsequent events management evaluated subsequent events transactions occurring date financial statements issued following items summary events transactions occurring subsequent balancesheet date prior issuance financial statements material effect financial statements therefore require adjustment disclosure statements january 2016 company entered stock purchase agreement private party amount 1996500 605000 shares company’s stock date purchase agreement partially settled company’s offset subscription receivable additional paid capital 1196500 board directors decided negotiate revision original stock purchase agreement reached february 8 2017 ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 19 subsequent events continued march 29 2016 ds healthcare mr khesin certain former members board directors sued class action styled prasant shah v ds healthcare group inc et al case 1660661 pending united states district court southern district florida laterfiled class action consolidated class action arises company’s march 23 2016 march 28 2016 8k filings stated pertinent part audit committee concluded unaudited condensed consolidated financial statements company two fiscal quarters ended june 30 2015 september 30 2015 “june september 2015 quarters” longer relied upon certain errors financial statements daniel khesin terminated cause removed chairman member board directors plaintiffs november 2 2016 file amended complaint ds healthcare must respond later december 19 2016 company also received first three related shareholder derivative demands march 29 2016 mediation concerning class action derivative demands scheduled october 17 2016 miami florida result mediation hearing subsequent negotiations agreement plaintiffs securities case derivative demands amount settlement key terms parties negotiating precise terms court stipulations need filed agreements terms interdefendant releases pending approval sides final settlements also need approved court may 27 2016 photomedex inc radiancy inc photomedex technology inc collectively “photomedex” filed civil action damages declaratory relief ds healthcare united states district court southern district new york lawsuit styled photomedex inc v ds healthcare group inc case 116cv03981 lawsuit arises two merger agreements agreement plan merger reorganization among ds healthcare group inc phmd p acquisition corp photomedex inc radiancy inc dated february 19 2016 ii agreement plan merger reorganization among ds healthcare group inc phmd professional acquisition corp photomedex technology inc photomedex inc dated february 19 2016 photomedex alleges ds healthcare breached agreements failing meet preclosing obligations completing transactions contemplated agreements photomedex seeks declaratory judgment terminations two agreements proper requests award damages specified agreements including “breakup fee” usd 3 million ds healthcare disputes claims asserted photomedex including photomedex entitled “breakup fee” agreements ds healthcare also asserted counterclaims damages photomedex breaches two agreements initial case management conference occurred october 13 2016 however resolution reached settlement conference occurred january 31 2017 settlement achieved although parties continue work reach agreement court case scheduled september 15 2017 april 12 2016 sec issued “formal order” directing private nonpublic formal investigation determine whether violations federal securities law may committed directly indirectly company officers directors employees partners subsidiaries andor affiliates andor persons entities possible violations set forth formal order include section 17a securities act 1933 “securities act” sections 10b 13a 13b2a 13b2b 13b5 13k 14a 14f securities exchange act 1934 “exchange act” rules 10b5 12b20 13a1 13a11 13a13 13a14 13b21 13b22a 14a3 14a9 14f1 relevant time period specified formal order january 1 2010 present date april 15 2016 sec issued subpoena duces tecum mr khesin may 4 2016 sec issued subpoena duces tecum company complying requests sec review production process ongoing nature july 27 2016 sec issued second subpoena duces tecum company seeking current copy quickbooks file user name password company complied second subpoena duces tecum date filing company unaware activity matter way determining outcome investigation cannot predict financial impact february 8 2017 company entered joint venture financing arrangement evercare prohealth technologies ltd “evercare” private hong kong company whereby evercare would provide 2 million dollars financing company enter joint venture arrangement development certain new products whereby operational costs would shared two companies included agreement granting exclusive distribution rights evercare asia australia africa additionally company pledged via transfer certain intellectual property held ds laboratories subsidiary evercare security financing pledge includes buyback provisions exercisable within 5 years closing date transaction additionally company received 3 million shares evercare part arrangement ds healthcare group inc dba ds laboratories subsidiaries notes consolidated financial statements note 19 subsequent events continued executed effective december 29 2016 company entered agreement acquire distribution rights brazilian distributor current chief operating officer fernando tamez former officer abner silva shareholders listed sellers agreement acquire 100 distributers shares exchange 47000 cash satisfy certain liabilities guaranteed employment contract employee valued approximately 28000 option receive 500 units per month cost 24 months agreement includes company assuming current operating cost distributor period time execution agreement alteration shareholder’s agreement subsequent year end company paid 33000 towards purchase price date filing brazilian distributor cooperative company’s attempts perform required due diligence refused provide grant access records required information preventing company properly consolidating entity therefore march 29 2017 company informed brazilian distributor way legal letter breach agreement subsequently rescinded agreement dated december 29 2016 demanded return monies paid date due uncertainty outcome legal action company deemed necessary accrue consideration pledged purchase agreement immediately expense full amount due uncertainty company’s ability obtain net assets distributor determined valued approximately 250000 item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits deemed “filed” purposes section 18 securities exchange act 1934 otherwise subject liability section exhibits deemed incorporated reference filing securities act 1933 securities exchange act 1934 except extent incorporate reference 1 incorporated reference registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference form 10q period ended september 30 2009 3 incorporated reference registration statement form s1 amended filed december 12 2009 file number 333163449 4 incorporated reference form 10k annual report year ended december 31 2009 5 incorporated reference form 8k filed february 25 2011 6 incorporated reference form 8k filed october 11 2011 7 incorporated reference amendment 1 form 8k filed july 11 2011 8 incorporated reference form 8k filed april 5 2012 9 incorporated reference form 8k filed november 1 2012 10 incorporated reference form 8k filed january 15 2013 11 incorporated reference registration statement form s1 amended filed august 27 2012 file number 333183558 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date april 24 2013 ds healthcare group inc daniel khesin daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin chief executive officer principal executive officer chief financial officer principal financial officer chairman april 24 2013 daniel khesin keith markey director april 24 2013 keith markey bernhard opitz director april 24 2013 bernhard opitz matthew pfeffer director april 24 2013 matthew pfeffer report independent registered public accounting firm board directors shareholders ds healthcare group inc audited accompanying consolidated balance sheets ds healthcare group inc formerly divine skin inc dba ds laboratories “company” december 31 2012 2011 related consolidated statements operations changes equity cash flows years ended company’s management responsible consolidated financial statements responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement company required engaged perform audit internal control financial reporting audits included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures consolidated financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position ds healthcare group inc december 31 2012 2011 consolidated results operations cash flows years ended conformity accounting principles generally accepted united states america accompanying consolidated financial statements prepared assuming company continue going concern discussed note 3 consolidated financial statements company suffered recurring losses operations raise substantial doubt ability continue going concern managements plans regard matters also described note 3 consolidated financial statements include adjustments respect possible future effects recoverability classification assets amounts classification liabilities might result outcome uncertainty cherry bekaert llp fort lauderdale florida april 24 2013 ds healthcare group inc formerly divine skin incdba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements ds healthcare group inc formerly divine skin incdba ds laboratories subsidiaries consolidated statements operations see accompanying notes consolidated financial statements ds healthcare group inc formerly divine skin incdba ds laboratories subsidiaries consolidated statements changes equity period january 1 2011 december 31 2012 continued see accompanying notes consolidated financial statements ds healthcare group inc formerly divine skin incdba ds laboratories subsidiaries consolidated statements changes equity continued period january 1 2011 december 31 2012 see accompanying notes consolidated financial statements ds healthcare group inc formerly divine skin incdba ds laboratories subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business terms definitions aicpa american institute certified public accountants asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout gaap us generally accepted accounting principles applied united states ifrs international financial reporting standards ppm private placement memorandum sec securities exchange commission sfas fas statement financial accounting standards spa securities purchase agreement 12ytd twelve months ended december 31 2012 11ytd twelve months ended december 31 2011 vie variable interest entity organization nature business ds healthcare group inc formerly divine skin inc dba ds laboratories “company” “ds laboratories” ”dskx” “we” “us” “our” organized laws state florida january 2007 predecessors company developing marketing hair care skin care personal care products fifteen years company grown steadily last years network top specialty retailers distributors throughout north america europe asia south america company researches develops products management believes keeps company forefront innovation management believes company currently leading innovator “liposome technology” acts carrier agent designed enhance action active ingredients products currently offer products within following broad product categories · hair care · skin care · health personal care history company incorporated january 2007 capitalized assets recovered terminated predecessor new york corporation ds laboratories inc florida corporation also incorporated january 2007 companies founded common shareholders first quarter 2009 · company acquired 100 outstanding shares ds laboratories inc florida corporation sigma development holding co inc florida corporation “sigma” nominal amount ds laboratories idle since inception 2007 · sigma founded upscale brand addition company’s product portfolio · polaris labs inc florida corporation founded distribute versions company’s products marketing purposes sold physicians foreign distributors polaris brand primary operating entity ds healthcare group inc formerly divine skin inc currently conducts business “ds laboratories” “divine skin” trade names ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business continued fourth quarter 2009 completed agreement ds laboratories brazil ltda distribute products additional future products specifically tailored brazilian market costs associated procuring agreement capitalized amortized life agreement first quarter 2011 began distribution nutra origin brand nutraceutical products exclusive distribution agreement manufacturer chief executive officer’s father part owner coo manufacturer nutra origin brand products third quarter 2011 company finalized discussions ds laboratories brazil ltda modify joint venture distribution agreement exchange 100 ownership joint venture brazilian distributor fully funded product development licensing products brazil remain license holder license granted retain exclusivity brazilian distribution commenced sales forth quarter 2012 december 31 2012 company invested 26000 venture repaid distributor second quarter 2012 engaged negotiations license acquire nutra origin brand negotiations completed closed fourth quarter 2012 whereby pay 7500 per month exclusive 10 year license use nutra origin brand part closing issued 50000 dskx stock granted 7 equity interest newly formed subsidiary nutra origin inc also acquired 100 pure guild brand license see note 6 fourth quarter 2012 closed acquisition divine skin laboratories sa de cv mexican distributor “ds mexico” see note 19 also completed 101 reverse split effected name change ds healthcare group inc fourth quarter 2012 share per share information contained report gives retroactive effect 101 reverse split note 2 summary significant accounting policies principles consolidation presentation consolidated financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america consolidated financial statements include accounts company wholly owned operating subsidiaries ds laboratories inc sigma development holding co inc polaris labs inc nutra origin inc divine skin laboratories sa de cv also included consolidated financial statements activities velocity storage packaging llc wally group llc accounted vies significant intercompany balances transactions eliminated consolidation use estimates preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results believe estimates assumptions reasonable however estimates assumptions subject number risks uncertainties may cause actual results differ materially estimates significant estimates assumptions underlying consolidated financial statements include · estimates allowances uncollectable accounts receivable · estimates inventory obsolescence overhead labor cost allocations · estimates assuming future earning capacity exclusive brazilian distribution agreement · estimates value equity transactions services rendered ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued · estimates returned damaged product · estimates made deferred income tax calculations · estimates made respect fair values assets acquired liabilities assumed acquisition ds mexico risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors company also experiencing significant growth puts serious strains cash availability requirements company unsuccessful securing adequate liquidity plans may curtailed adverse changes areas could negatively impact company’s financial position results operations cash flows cash equivalents include highly liquid debt instruments original maturities three months less securing corporate obligations accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible company also provides allowances accounts receivables product returns cooperative advertising allowances december 31 2012 december 31 2011 provision uncollectable accounts 373981 114791 respectively december 31 2012 december 31 2011 company provided 110000 100252 respectively defectives product returns 60000 12400 respectively advertising credits inventory reported lower cost market firstin firstout “fifo” method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using straight line depreciation method estimated useful lives assets range 5 7 years company recorded 46678 16788 depreciation expense years ended december 31 2012 2011 respectively accumulated depreciation 101972 59616 december 31 2012 december 31 2011 respectively expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets longlived assets company adopted asc 36010 “accounting impairment disposal longlived assets” requires longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset asc 36010 also requires assets disposed reported lower carrying amount fair value less costs sell ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued long term debt interest expense recognized outstanding loan obligation incurred recorded “interest expense” company entered loan agreement december 10 2012 see note 10 noncontrolling interest noncontrolling interest consists minority owned portion following ds laboratories brazil ltda part 2011 company owned 51 ds laboratories brazil ltda third quarter 2011 company finalized disposal interests ds laboratories brazil ltda consequently ceased subsidiary noncontrolling interest enterprise eliminated nutra origin inc q412 company completed license nutra origin brand addition company established new subsidiary operate nutra origin brand part license agreement licensor granted 7 noncontrolling interest newly formed subsidiary revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost goods sold research development company currently maintains functional laboratory employing two full time chemists part time chemistconsultant lab technician identify new technology test product alternatives improve existing formulations addition founder ceo devotes substantial portion time identifying new technologies formulations develop new products improve existing products newest technology available asc topic 730 “accounting research development costs” requires activities expensed year incurred costs include laboratory supplies salaries materials consultant fees costs classified product development salaries selling general administrative expenses consolidated statements operations amounted 196108 152726 years ended december 31 2012 2011 respectively income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled valuation allowance recorded likely portion deferred tax asset realized ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 2 summary significant accounting policies continued earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company vested warrants 253893 shares vested options 32633 shares excluded earnings per share calculation would antidilutive segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders company operates one segment management reporting purposes fair value financial instruments fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclose fair value functional currency us dollar functional currency consolidated entities operating united states functional currency consolidated entity operating outside united states mexican peso translate financial statements us dollars follows · assets liabilities translated exchange rate effect financial statement date · income statement accounts translated using weighted average exchange rate period include translation adjustments currency exchange effect exchange rate changes intercompany transactions longterm investment nature separate component shareholders’ equity currently transactions longterm investment nature gains losses nonus currency transactions note 3 liquidity december 31 2012 approximately 412488 cash equivalents accompany consolidated financial statements prepared conformity accounting principles generally accepted united states contemplate continuation going concern sustained substantial operation losses since inception operation losses continued december 31 2012 financed operations primarily issuance shares common stock issuance promissory notes december 31 2012 accumulated deficit approximately 5097990 company cannot predict long continue incur losses whether ever become profitable dependent upon reduction certain operating expenses success new existing products consolidated financial statements include adjustments reflect possible future effects recoverability ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 3 liquidity continued classification assets amounts classification liabilities may result outcome uncertainty commenced implementing continue implement various measures address financial condition including · continuing seek debt equity financing however assurances company able raise additional capital favorable terms · curtailing rate expansion cash flow improves recommence activities appropriate working capital funding · curtailing operations feasible conserve cash deferring certain marketing activities cash flow improves recommence activities appropriate working capital funding note 4 recent accounting pronouncements july 2012 fasb issued asu 201202 intangibles goodwill topic 350 testing indefinitelived intangible assets impairment permits entity make qualitative assessment whether likely reporting unit’s fair value less carrying amount entity support conclusion likely fair value reporting unit less carrying amount entity required take action amendments effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted adoption asu 201202 material impact company’s financial position results operations cash flows recently issued accounting standards expected material effect company’s financial condition results operations cash flows note 5 inventory significant components inventory december 31 2012 december 31 2011 consist primarily bulk product raw materials bulk product consists completed product formulations yet packaged market ready packaging raw materials consist bulk quantities various chemical components product formulations work process work process inventory consists merchandise inventory currently interim production stage partially completed yet market ready merchandise inventory merchandise inventory consists completed formulations market ready packaging formulations batch controlled subject various government regulations among things govern purity safety product cases limit concentration certain ingredients would restrict distribution products medical professionals inventory transit inventory consists primarily bulk product raw materials title transferred company inventory yet arrive designated warehouse facility either company owned contract management evaluated inventory december 31 2012 december 31 2011 obsolete inventory excluded reported inventory value accordingly allowance considered necessary december 31 2011 december 31 2012 500000 allowance slow moving obsolete inventory considered necessary recorded company ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 6 prepaid expenses current assets prepaid expenses current assets december 31 2012 december 31 2011 consist primarily advances employees associates advances made short term basis associates non executive employees repaid periodic deductions payments associates payroll deductions employees prepaid rent represents temporary timing rent payments prepaid insurance represents temporary advance deposits scheduled premium payments made excess premiums amortized policy period advances totaled approximately 69431 45127 amortized 2012 deferred issuance costs advances made connection obtaining financing arrangements asset based lender discussed fully note 9 consisted loan origination fees legal due diligence fees deferred issuance costs totaled approximately 98924 37096 amortized since origination financing second quarter 2012 prepaid consultant services 2nd 3rd quarters 2010 advanced funds consultant ceo’s father provide operational guidance connection health care products launched 2011 agreement fully advanced 16667 expensed first quarter 2012 completing contract expired note 7 intangible assets significant components intangible assets december 31 2012 december 31 2011 consist primarily ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 7 intangible assets continued brazilian distribution rights 2009 company issued 300000 shares common stock brazilian distributor exchange 10 year exclusive distribution agreement brazil transaction valued 250 per share company exclusive distributor former joint venture partner currently developing generic minoxidil product along appropriate packaging brazilian market planned introduction 4th quarter 2012 75000 amortized 12ytd 2011ytd 3rd quarter 2011 due costs involved company entered agreement former joint venture partner whereby former joint venture partner agreed provide required financing product exchange 100 ownership joint venture company retained distribution rights pure guild brand rights 3rd quarter 2009 approached customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result part project obtained 50 interest pure guild brand permanent exclusive rights manufacture pure guild products exchange rights provided 106666 product representing approximately 70 initial stocking order rights amortized 5 years representing basic term supplier agreement second quarter 2012 acquired remaining 50 ownership pure guild brand customerdistributor exchange release exclusive supplier agreement may pursue promotion brand existing distributor network convenience also accepted return remaining pure guild inventory amounted 52420 based original sales price begun revitalize brands position market modify amortization term appropriately reflect remaining unamortized brand rights combined additional brand rights acquired 6 years evaluated asset determined impairment considered necessary 20190 25600 amortized 2012 2011 respectively nutra origin brand license completed negotiations secure exclusive license use nutra origin brand supplier distributing nutra origin brand products nearly year although brand currently represents relatively modest portion sales intend brand expand health personal care product offerings nutraceutical market ceo’s father part owner coo company owns nutra origin brand nutra origin product manager agreement requires us pay 7500 per month exclusive 10 year license use nutra origin brand plus 50000 dskx common shares agreement contains certain performance clauses parties permit cancellation us 3 years permit cancellation seller fail maintain stipulated minimum sales mexican customer list connection acquisition mexican distributor discussed fully note 19 acquired customer list recorded fair value determined management utilizing services independent appraiser asset amortized estimated useful life 9 years accordingly company recognized 16945 amortization expense 2012 company assess asset impairment annually december 31 2012 impairment considered necessary goodwill also connection acquisition mexican distributor discussed fully note 19 acquired goodwill represents excess fair value consideration given fair value assets acquired fair value determined independent appraiser asset amortized however company access asset impairment annually december 31 2012 impairment considered necessary following table represents amortized cost various assets next years ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 8 accounts payable accrued expenses significant components accounts payable accrued expenses december 31 2012 december 31 2011 consist primarily trade payables consist liabilities arising normal course business evidenced invoices generally incurred connection acquisition materials inventory outside services company fueled expansion 2012 part securing significant support vendors suppliers accrued expenses represents commitments made goods services provided 12ytd activity normally generate invoice recorded trade payable accrued commissions invoices received subsequent end reporting period goods services provided prior end reporting period note 9 current liabilities significant components current liabilities december 31 2012 december 31 2011 consist primarily shareholder loan december 10 2012 received unsecured loan 314000 one consultants also shareholder loan noninterest bearing matures december 11 2013 also received loan daniel khesin chief executive officer 39000 loan unsecured noninterest bearing matures december 25 2013 ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 10 debt financing credit facility april 6 2012 financial institution provided company 15 million credit facility initial draw 580000 credit facility provides asset based lending collateralized assets company advances based 80 qualified accounts receivable 40 finished goods inventory credit facility provides interest bank fees currently aggregate 8 prime plus 3 plus 175 asset monitoring fees per annum expires march 24 2014 may renewed certain conditions credit facility personally guaranteed chief executive officer certain conditions may called upon demand credit facility also provides referral fee 4 per annum 3 years loan agreement contains customary representations warranties affirmative negative covenants events default negative covenants include among things restrictions transferring assets incurring additional indebtedness engaging mergers acquisitions paying dividends making distributions creating liens assets case subject customary exceptions december 31 2012 company 446658 outstanding 410251 available borrow based advance formulas qualified accounts receivable finished goods inventory currently compliance covenants credit facility following exceptions 1 terms credit facility required obtain life insurance policy company’s chief executive officer process obtaining life insurance policy requirement waived may 31 2013 2 required submit annual financial statements within 90 days year end current annual filing december 31 2012 process currently extension bank made aware status filing 3 file tax return within extended time period permitted internal revenue service since filed tax return 4 4th quarter 2012 certain invoices submitted financing improperly supported upon detection deficiency notified bank issuing waiver long term debt december 10 2012 company entered loan agreement 53900 purchase certain warehouse equipment loan provides monthly payments 1041 60 months 595 interest first payment required february 18 2013 interest expense loan recognized 2012 due immateriality principal payout life loan follows note 11 commitments contingencies 2012 2011 company operated several material agreements listed lease office production facilities · company leased corporate headquarters “hq” office space located miami beach florida month basis 5700 per month 68400 annual basis terminated fourth quarter 2012 · october 2012 company entered lease added 1525 square feet additional space renewed existing lease total 1875 square feet sales facilities located ashville north carolina leases provide monthly rent 4725 throughout lease term expire december 31 2015 · company leased 13137 square feet warehouse production space pompano beach florida lease provided monthly rent 6350 expired october 15 2012 · fourth quarter 2012 company entered lease 50000 square feet warehouse office space located deerfield beach florida lease provides monthly rent 20000 first six months 27000 per month thereafter lease term 22 months ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 commitments contingencies continued company committed lease payments next five years follows pending threatened litigation · company received several pending threatened litigations various suppliers typically nonpayment goods services vendor disputes typical normal course business company vigorously disputed claims grounds substandard materials services provided 2011 received 5 supplier claims certain advertising human resource consulting matters disputing filing counter claims settled four claims 2012 structured payouts representing estimate amount due 162764 143052 december 31 2012 december 31 2011 respectively · june 13 2011 filed action circuit court eleventh judicial circuit miamidade county florida rescission investor relations consulting agreement entered october 15 2010 whereby paid third party approximately 20000 23000 shares restricted common stock consideration investor relations consulting services demanded return 23000 shares restricted stock recovery costs damages third party filed counter claim breach agreement intend vigorously defend claim · 2011 also filed action circuit court eleventh judicial circuit miamidade county florida rescission agreement entered may 18 2010 whereby paid third party approximately 500 20000 shares restricted common stock consideration consulting services demanded return 20000 shares restricted stock recovery costs damages claim dismissed lack jurisdiction refiled action supreme court new york county new york january 11 2012 seeking rescission said agreement return 500 20000 shares restricted common stock · chief executive officer individually named lawsuit brought circuit court 11th judicial circuit miamidade county florida former employee evolution model management inc claiming wrongful termination named originally hired employee rather evolution model management latter yet established entity december 2 2012 entered settlement agreement release claims whereby agreed pay plaintiff aggregate 77500 payable three equal installments final payment made april 2013 · chief executive officer individually named lawsuit brought circuit court 11th judicial circuit miamidade county florida former contractor claiming wrongful termination plaintiff’s complaint alleges 85000 back salary performance bonus 40000 share grant management intends vigorously defend action contends suit without merit contractor dismissed cause accordingly management provided contingency reserve matter ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 11 commitments contingencies continued purchase commitments order secure adequate supply raw materials company executes purchase orders suppliers evidence intent purchase materials purchase orders outstanding december 31 2012 totaled 1404713 contract contingencies distribution agreement gamma investors provides event terminate agreement without cause required repurchase products held gamma’s inventory pay gamma fee equal greater prior 12 month product purchased gamma 2 million note 12 equity common stock sold privately first quarter 2010 company began selling common stock qualified investors purchase price 150250 per share “ppm” offering conducted “best efforts” basis respect shares offering also provides company shall pay selling agents following fees commissions 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds following table summarizes transactions private offering follows additional private sales 12ytd common stock sold securities purchase agreement spa october 4 2011 company certain accredited investors entered spa completed closing private offering 617857 shares company’s common stock par value 00001 per share warrants purchase aggregate 155465 shares common stock aggregate gross proceeds 1730000 warrants exercisable five years issuance 500 per share may exercisable cashless basis certain instances underlying shares registered registration statement number shares common stock received upon exercise warrants exercise price warrants subject adjustment reverse forward stock splits stock dividends stock combinations similar transactions wilmington capital securities llc “placement agent” received selling commission cash 7 gross proceeds 121100 additional 10000 expense allowance addition company issued placement agent warrant purchase 44980 shares common stock company incurred issuance costs expenses associated spa paid form cash warrants additional 33674 ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 equity continued accordance terms spa company registered 818302 common shares effective january 26 2012 following table summarizes transactions spa follows issues common stock shares issued lieu cash goods services goods services valued based upon shares issued multiplied closing price stock date immediately preceding first quarter 2011 company issued 7800 shares services provided employee consultants valued 420 per share resulted expense 33180 second quarter 2011 company issued 11264 shares services provided employee consultants valued 370 420 per share resulted expense 45661 third quarter 2011 company issued 15579 shares services provided employee consultants valued 380 400 per share resulted expense 60598 fourth quarter 2011 company issued 1926 shares services provided consultants valued 380 per share resulted expense 7408 addition consultant exercised warrants 123621 common shares vested options 126667 common shares totaling 250288 common shares 25029 first quarter 2012 company issued 28182 shares services provided two employees valued 310 320 per share resulted expense 89182 aggregate company also issued 8824 shares award achieving business goals shares valued 340 resulted allowance offsetting revenues 30000 second quarter 2012 company issued 108764 shares services provided six associates valued 200 280 per share resulted expense 241528 aggregate company also issued 38514 shares award achieving business goals 260 resulted allowance offsetting revenues 100000 addition consultant exercised vested options 40700 common shares 4070 third quarter 2012 company issued 28000 shares services provided ir firm former associate valued 220 320 per share resulted expense 69600 aggregate also quarter two founders converted 450000 shares preferred stock 450000 common shares company also issued 292000 shares existing shareholder investors 250 per share 732000 146400 fees paid selling agent resulting net proceeds 585600 company fourth quarter 2012 company issued 31367 shares distributor achieving sales goals valued 332 per share resulted sales allowance 104138 aggregate connection license nutra origin brand issued 15385 shares valued 325 per share resulted increase brand rights intangible asset 50000 surrender common stock third quarter 2011 3 principal founding shareholders voluntarily surrendered 701780 common shares collectively third quarter 2012 ir firm surrendered 20000 shares previously issued services fully earned previously valued 280 per share resulted return equity 56000 aggregate fourth quarter 2012 ir firm returned 5000 shares valued 336 per share resulted recovery 16800 ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 equity continued warrants first quarter 2011 company continued sell shares common stock ppm originated 2010 governed regulation sales common shares also provided grant warrants selling agent terms disclosed accordingly company issued warrants based private sale common shares follows effective second third quarter 2011 selling agent waived rights receive warrants accordingly company issued warrants related private sale shares accrued expense financial consulting services fourth quarter 2011 shares sold privately since terms spa preclude activities fourth quarter 2011 company completed closing private offering 617857 shares company’s common stock spa see common stock sold securities purchase agreement “spa” spa provides investors warrants purchase aggregate 155465 shares common stock addition spa also granted warrants purchase 49349 shares common stock fees assisting spa closing following tables present status warrants outstanding december 31 2012 december 31 2011 respectively warrants issued 2012 however value warrants issued 2011 determined using blackscholesmerton option pricing model based following assumptions ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 12 equity continued option selling agent engaged company also entered consulting agreement assisted company filing registration statement form 10 quotation shares counter bulletin board otcbb company issued option selling agent purchase 200000 shares common stock exercise price 010 per share grant date option valued based offering price ppm 250 per share 480000 option expires five years option vests exercisable subject certain lock leak provisions commence upon effective date company obtaining otcbb listing leak provisions limit exercisability option number 20000 shares per quarter first quarter 2010 company obtained trading symbol accordingly recorded expense consulting services 160000 2010 reflecting structured vesting result structured vesting company recognized 128000 12ytd 192000 11ytd december 31 2012 warrants fully expensed following tables present status options outstanding december 31 2012 december 31 2011 options issued 12ytd 11ytd preferred stock provided certificate designation series preferred stock dated january 14 2009 amended september 2009 share series preferred stock entitled 02 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law preferred stock automatically converts common stock tentoone basis september 2012 two founders converted 4500000 preferred shares 450000 common shares remaining 5500000 shares held remaining founder ceo company automatic conversion extended september 15 2013 ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 13 income taxes provision income taxes 12ytd 11ytd summarized follows income tax benefit 12ytd 11ytd booked due uncertainty future profitable operations necessary realize benefit provision income taxes 12ytd 11ytd differs amount computed applying federal statutory rate loss provision benefit income taxes follows deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december 31 2012 december 31 2011 follows december 31 2012 december 31 2011 company valuation allowance deferred tax assets 1888277 533599 relates primarily net operating losses valuation allowance increased 1354678 2012 december 31 2012 december 31 2011 company net operating loss carryforwards 4329251 1134528 respectively unused net operating loss carryforwards expire various dates beginning 2029 ending 2031 december 31 2012 december 31 2011 company unrecognized tax benefits accordingly related accrued interest penalties ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 13 income taxes continued company follows provisions asc topic 74010 accounting uncertainty income taxes clarifies accounting uncertainty income taxes recognized enterprises financial statements accordance asc topic 740 prescribes recognition threshold measurement process financial statement recognition measurement tax position taken expected taken tax return topic also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition based evaluation concluded significant uncertain tax positions requiring recognition consolidated financial statements evaluation performed tax years ended december 31 2012 2011 companys federal income tax returns since 2009 subject examination internal revenue service generally period three years returns filed note 14 2009 equity incentive plan overview company initiated 2009 equity incentive plan 1 attract retain best available personnel positions substantial responsibility 2 provide additional incentives employees directors consultants 3 promote success company companys affiliates options granted plan may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 500000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 15 significant customers product revenues represent primarily sales revita represent 20 total sales products individually exceed 5 total sales revita cor spectral dncn spectral dnc collectively account another 20 total sales also sell “intro deals” assortment primary products means introducing products new customers sales intro deals accounted 7 total sales company sells products several types customer primarily include distributors salons two represent individually excess 10 total sales 12ytd 11ytd 12ytd top six customers generated 42 sales 10 greater customers 12ytd accounts receivable december 31 2012 sales 10 greater customers 11ytd accounts receivable december 31 2011 note 16 significant vendors company purchases raw materials various foreign domestic suppliers several represent individually excess 10 total purchases raw materials consist primarily basic chemicals packaging materials company believes enjoys cordial relationships suppliers need arise company believes could transition alternate suppliers minimal adverse impact formal long term purchase agreements suppliers company issue purchase orders based production plan may modified cancelled production plan change purchases significant vendors 12ytd accounts payable december 31 2012 purchases significant venders 11ytd accounts payable december 31 2011 ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 17 geographic revenue reporting company organized based fundamentally one business segment although distribute products worldwide basis several largest distributors based north america turn sell products europe asia consider customers based north america however sales true international distributors distribute product outside north america increasing also recently acquired distributor mexico results fully discussed note 19 information company’s geographic operations year ended december 31 2012 2011 follows note 18 consolidation variable interest entity company holds variable interest velocity storage packaging llc “velocity” entity company primary beneficiary velocity performs packaging shipping services exclusively company’s variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure accordingly company determined velocity variable interest entity vie company primary beneficiary guidance offered asc 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur note 19 acquisition mexican distributor effective november 1 2012 company purchased essentially 100 outstanding common stock divine skin laboratories sa de cv “ds mexico” sole shareholder pursuant share exchange agreement accordance mexican law mexican companies must two shareholders therefore principal seller retain one share common stock ds mexico ds mexico business selling distributing marketing company’s products throughout mexico company acquired ds mexico order obtain customers vertically integrate operations directly mexican market consideration nearly 100 interest ds mexico company issued 450000 shares company’s common stock valued 260 per share based independent third party valuation company also forgave 38415 invoices due ds mexico april 1 2012 september 30 2012 following closing date sole shareholder shall receive aggregate additional 150000 shares dskx common stock adjusted stock split recapitalization similar transaction follows 50000 shares dskx common stock event annual net revenues ds mexico equal greater 4000000 calendar year period ii 50000 shares dskx common stock event annual net revenues ds mexico equal greater 5000000 calendar year period following satisfaction ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements iii 50000 shares dskx common stock event annual net revenues ds mexico equal greater 6000000 calendar year period following satisfaction ii connection share exchange agreement company issued 600000 shares stock 450000 shares delivered december 31 2012 remaining 150000 shares held escrow company delivered upon completion performance measures stipulated share exchange agreement present value consideration expected paid part agreement 1341015 calculated · 450000 shares issued valued 260 per share total 1170000 · 51000 contingent shares valued 260 per share total 132600 · forgiveness 38415 invoices due ds mexico price per share estimated contingent shares issued connection agreement based upon third party valuation company incurred approximately 5000 profession fees connection acquisition ds mexico 2012 following summarizes fair value assets liabilities acquired assets acquired recorded preliminary estimates fair values determined management based information currently available current assumptions future operations revised upon completion acquisition accounting finalization asset valuations following unaudited pro forma financial information presents combined results operations company ds mexico acquisition occurred january 1 2011 pro forma information necessarily indicative financial position results operations actually would acquisition completed january 1 2011 addition unaudited pro forma financial information indicative purport project future financial position operating results company unaudited pro forma financial information excludes acquisition integration costs give effect estimated potential cost savings operating efficiencies could result acquisition ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 19 acquisition mexican distributor continued ds healthcare group inc proforma consolidated statement operations year ended december 31 2012 record 12 months amortization customer list b record intercompany eliminations ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 19 acquisition mexican distributor continued ds healthcare group inc proforma consolidated statement operations year ended december 31 2011 eliminate intercompany sales purchases ds healthcare group inc formerly divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 20 subsequent events issuance common shares january 29 2013 company issued 5000 shares common stock directors services 2013 shares valued 330 per share 16500 april 15 2013 company issued additional 3750 shares common stock directors shares valued 275 per share 10312 february 13 2013 february 21 2013 company issued 15300 shares common stock distributors services shares valued 248 per share 38000 first quarter 2013 also received additional 240000 consultantshareholder discussed note 8 loan unsecured noninterest bearing matures december 11 2013 item 15 exhibits financial statement schedules documents filed part report 1 financial statements 2 financial statements schedule 3 exhibits exhibit number description 31 amended restated articles incorporation divine skin inc dated january 13 2007 1 32 amendment amended restated articles incorporation divine skin inc dated september 15 2009 2 33 bylaws divine skin inc 1 101 2009 divine skin inc equity incentive plan 1 102 kane concourse lease agreement 1 1021 kane concourse lease termination agreement 1 1022 meridian center lease agreement amended 1 103 consulting agreement dated january 2009 1 104 form exclusive distribution agreement 1 105 amendment gamma investors exclusive distribution agreement 3 106 form regulation subscription agreement 3 107 form section 42 subscription agreement 3 108 form services agreement 3 161 letter former auditor5 211 list subsidiaries company 1 991 code ethics4 1 incorporated reference company’s registration statement form 10 filed securities exchange commission filed may 22 2009 2 incorporated reference company’s form 10q period ended september 30 2009 3 incorporated reference company’s registration statement form s1 securities exchange commission amended filed december 12 2009 file number 333163449 4 incorporated reference company’s form 10k annual report year ended december 31 2009 5 incorporated reference company’s form 8k dated february 22 2011 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized date april 15 2011 divine skin inc daniel khesin daniel khesin chief executive officer principal executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date daniel khesin chief financial officer director april 15 2011 daniel khesin index consolidated financial statements report independent registered public accounting firm consolidated balance sheets consolidated statements operations consolidated statements changes equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors shareholders divine skin inc dba ds laboratories audited accompanying consolidated balance sheet divine skin inc dba ds laboratories subsidiaries december 31 2010 related consolidated statements operations changes equity cash flows year ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement company required engaged perform audit internal control financial reporting audit included consideration internal control financial reporting basis designing audit procedures appropriate circumstances purpose expressing opinion effectiveness company’s internal control financial reporting accordingly express opinion audit also includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position company december 31 2010 results operations cash flows year ended conformity accounting principles generally accepted united states america rbsm llp new york new york april 15 2011 report independent registered public accounting firm board directors shareholders divine skin inc dba ds laboratories audited accompanying consolidated balance sheet divine skin inc dba ds laboratories december 31 2009 related consolidated statements operations changes shareholders’ equity cash flows year ended consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provided reasonable basis opinion consolidated financial statements referred present fairly material respects financial position divine skin inc dba ds laboratories december 31 2009 consolidated results operations cash flows year ended conformity accounting principles generally accepted united states jewett schwartz wolfe associates jewett schwartz wolfe associates hollywood florida march 31 2010 200 south park road suite 150 ● hollywood florida 33021 ● telephone 954 9225885 ● fax 954 9225957 member american institute certified public accountants ● florida institute certified public accountants private companies practice section aicpa ●registered public company accounting oversight board sec divine skin inc dba ds laboratories subsidiaries consolidated balance sheets see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements operations see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements changes equity years ended december 31 2010 year ended december 31 2009 see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries consolidated statements cash flows see accompanying notes consolidated financial statements divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements note 1 organization nature business terms definitions aicpa american institute certified public accountants asc accounting standards codification asu accounting standards update fasb financial accounting standards board fifo firstin firstout gaap us generally accepted accounting principles applied united states ppm private placement memorandum sec securities exchange commission sfas fas statement financial accounting standards q409qtr three months ended december 31 2009 q410qtr three months ended december 31 2010 q409ytd year ended december 31 2009 q410ytd year ended december 31 2010 vie variable interest entity organization nature business divine skin inc “company” “divine skin” “ds laboratories” “we” “us” “our” organized laws state florida january 2007 predecessors including divine skin inc new york company developing marketing skin care personal care products ten years company grown steadily last years network top specialty retailers across north america distributors throughout europe asia south america divine skin researches develops products management believes keeps company forefront innovation management believes company currently leading innovator “liposome technology” acts carrier agent designed enhance action active ingredients contained pharmaceutical cosmeceutical products currently offer skin care aging cellulite hair loss personal care products majority products within following product lines · skin care · aging · cellulite · hair loss · personal care history company january 2007 operations divine skin inc new york company terminated assets used capitalize divine skin inc florida corporation december 2006 ds laboratories inc new york corporation closed assets used capitalize ds laboratories inc florida corporation formed january 2007 idle since inception divine skin inc florida corporation ds laboratories inc florida corporation related common shareholders primary operating entity divine skin inc florida corporation company currently conducts business “divine skin” trade name also “ds laboratories” trade name divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 1 organization nature business continued january 2008 company engaged two consultants assist developing production operations brazil means simplify regulatory requirements surrounding importation product production operations brazil yet fully commercialized costs associated exploring production alternative expensed accordance guidance offered asc 7201525 january 2009 company acquired 100 outstanding shares ds laboratories inc florida corporation nominal amount ds laboratories inc florida corporation established january 2007 purposes holding trade brand name company recorded transactions since inception 2007 ds laboratories inc florida corporation separate entity related us common shareholders acquisition subsequent acquisition ds laboratories inc florida corporation operates wholly owned subsidiary company january 2009 company acquired 100 outstanding shares sigma development holding co inc nominal amount sigma founded upscale brand addition company’s product portfolio sigma operated related separate entity acquisition subsequent acquisition sigma operates wholly owned subsidiary company march 2009 polaris labs inc founded wholly owned subsidiary company polaris founded distribute polaris branded versions company’s products marketing purposes sold physicians foreign distributors q4 2009 company completed agreement covering exclusive distribution product additional future products specifically tailored brazilian market costs associated procuring agreement capitalized amortized life agreement q1 2010 company filed s1 selling shareholder registration statement sec declared effective sec obtained trading symbol dskx permitting quotation shares common stock counter bulletin board otcbb q3 2010 company engaged establishing ds laboratories brazil ltda joint venture distribution company exclusive brazilian distributor company owns 51 ds laboratories brazil ltda purpose joint venture capitalize exclusive distribution rights brazil company completed formulation packaging initial minoxidil product joint venture operation brazil obtaining necessary permits licenses begin distribution sale products company expects complete licensure process commence sales q4 2011 december 31 2010 company invested 26000 venture note 2 summary significant accounting policies basis accounting financial statements prepared using accrual basis accounting revenues expenses recognized period incurred basis accounting conforms accounting principles generally accepted united states america principles consolidation presentation consolidated financial statements include accounts divine skin inc wholly owned operating subsidiaries ds laboratories inc florida corporation sigma development holding co inc polaris labs inc also included consolidated financial statements activities velocity storage packing llc accounted vie ds laboratories brazil ltda majority owned subsidiary significant intercompany balances transactions eliminated consolidation divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued use estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect amounts reported consolidated financial statements accompanying notes although estimates based management’s knowledge current events actions may undertake future may ultimately differ actual results risks uncertainties company’s business could impacted price pressure product manufacturing acceptance products market place new competitors changes federal andor state legislation factors adverse changes areas could negatively impact company’s financial position results operations cash flows cash equivalents include highly liquid debt instruments original maturities three months less securing corporate obligations accounts receivable accounts receivable reported net realizable value company establishes allowance doubtful accounts based upon factors pertaining credit risk specific customers historical trends information delinquent accounts writtenoff determined amounts uncollectible december 31 2010 2009 provision doubtful accounts 73759 25000 respectively inventory reported lower end cost market firstin firstout fifo method inventory subject expiration obsolescence accordingly quantities purchased sell rates periodically monitored potential overstocking pending expiration basis establishing appropriate reserve estimated expiration obsolescence furniture equipment furniture equipment recorded cost depreciation provided using straight line depreciation method estimated useful lives assets range 5 7 years expenditures repairs maintenance equipment charged expense incurred major replacements betterments capitalized depreciated remaining useful lives assets furniture equipment reviewed whenever events changes circumstances occur indicate possible impairment accordance asc 36010 “accounting impairment disposal longlived assets” longlived assets company adopted asc 36010 “furniture equipment” requires longlived assets certain identifiable intangibles held used company reviewed impairment whenever events changes circumstances indicate carrying amount asset may recoverable events relating recoverability may include significant unfavorable changes business conditions recurring losses forecasted inability achieve breakeven operating results extended period company evaluates recoverability longlived assets based upon forecasted undiscounted cash flows impairment value indicated carrying value intangible assets adjusted based estimates future discounted cash flows resulting use ultimate disposition asset asc 36010 also requires assets disposed reported lower carrying amount fair value less costs sell divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued noncontrolling interest noncontrolling interest consists minority owned portion company’s 51 owned subsidiary ds laboratories brazil ltda variable interest held velocity storage packaging llc asc 8101065 establishes new standards effective january 1 2009 govern accounting reporting 1 noncontrolling interest partially owned consolidated subsidiaries 2 loss control subsidiaries significant changes accounting noncontrolling interests include inclusion noncontrolling interests equity section controlling entity’s consolidated balance sheet rather mezzanine section b requirement changes controlling entity’s interest noncontrolling interest without change control recognized controlling entity’s equity rather accounted purchase method accounting purchase method would given rise goodwill additionally adoption asc 8101065 requires net income previously reported prior adoption asc 8101065 adjusted include net income attributable noncontrolling interest new separate caption net income attributable common shareholders company presented consolidated statements operations asc 8101065 also requires similar disclosure regarding comprehensive income revenue recognition revenue recognized product shipped company manages collection process transactions processed website outsources fulfillment delivery process third parties company’s revenue recognition policies compliance asc topic 605 “revenue recognition” establishes criteria must satisfied revenue realized realizable earned company recognizes revenue following four criteria met · persuasive evidence sales arrangement exists · delivery occurred · sales price fixed determinable · collectability probable shipping handling charges related sales transactions recorded sales revenues billed customers included sales price accordance asc topic 605 “accounting shipping handling fees costs” shipping handling costs included cost revenue company accepts product returns issue credit refund product exchange date product returns occurred considered material company established product return reserve research development company engage research development defined asc topic 730 “accounting research development costs” however company incur formulation costs include salaries materials consultant fees costs classified product development selling general administrative expenses statements operations income taxes company accounts income taxes liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases deferred tax assets liabilities measured using enacted tax rates effect year temporary differences expected recovered settled divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 2 summary significant accounting policies continued earnings per share company computes basic diluted earnings per share amounts accordance asc topic 260 “earnings per share” basic earnings per share computed dividing net income loss available common shareholders weighted average number common shares outstanding reporting period diluted earnings per share reflects potential dilution could occur stock options commitments issue common stock exercised equity awards vest resulting issuance common stock could share earnings company segment information asc topic 280 “disclosures segments enterprise related information” established standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders company operates one segment management reporting purposes fair value financial instruments january 2008 adopted provisions fasb fair value measurements define fair value accounting purposes establishes framework measuring fair value expands disclosure requirements regarding fair value measurements adoption provisions material impact consolidated financial statements fair value defined exit price would received upon sale asset paid upon transfer liability orderly transaction market participants measurement date degree judgment utilized measuring fair value assets liabilities generally correlates level pricing observability financial assets liabilities readily available actively quoted prices fair value measured actively quoted prices active markets generally pricing observability require less judgment measuring fair value conversely financial assets liabilities rarely traded quoted less price observability generally measured fair value using valuation models require judgment valuation techniques involve level management estimation judgment degree dependent price transparency asset liability market nature asset liability currently financial assets liabilities recurring would require us disclosure fair value reclassification certain reclassifications made conform prior periods’ data current presentation reclassifications effect reported losses divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 3 recent accounting pronouncements recent accounting pronouncements company adopted required adopt future summarized income taxes september 2009 fasb issued asu 200906 income taxes topic 740 ”implementation guidance accounting uncertainty income taxes disclosure amendments nonpublic entities” provides implementation guidance accounting uncertainty income taxes well eliminates certain disclosure requirements nonpublic entities currently applying standards accounting uncertainty income taxes update shall effective interim annual periods ending september 15 2009 entities deferred application accounting uncertainty income taxes accordance paragraph 74010651e update shall effective upon adoption standards adoption standard impact company’s consolidated financial position results operations since accounting standard update provides implementation disclosure amendments fair value measurements september 2009 fasb published asu 200912 “fair value measurements disclosures topic 820 investments certain entities calculate net asset value per share equivalent” asu amends subtopic 82010 “fair value measurements disclosures overall” permit reporting entity measure fair value certain investments basis net asset value per share investment equivalent asu also requires new disclosures major category investments including attributes investments within scope amendment codification guidance update effective interim annual periods ending december 15 2009 early application permitted adoption standard impact company’s consolidated financial position results operations transfers financial assets december 2009 fasb published asu 200916 “transfers servicing topic 860 accounting transfers financial assets” asu 200916 revision asc 860 “transfers servicing” amends guidance accounting transfers financial assets including securitization transactions entities continued exposure risks related transferred financial assets asu 200916 also expands disclosure requirements transactions asu become effective us april 1 2010 adoption standard impact company’s consolidated financial position results operations consolidations december 2009 fasb published asu 200917 “consolidations topic 810 improvements financial reporting enterprises involved variable interest entities” asu 200917 amends guidance consolidation vies primarily related determination primary beneficiary vie adoption standard impact company’s consolidated financial position results operations equity january 2010 fasb published asu 201001 “equity topic 505 accounting distributions shareholders components stock casha consensus fasb emerging issues task force” codified asc 505 asu 201001 clarifies treatment certain distributions shareholders stock cash components stock portion distributions considered share issuance reflected earnings per share prospectively stock dividend amendments update effective interim annual periods ending december 15 2009 applied retrospective basis early adoption permitted adoption standard impact company’s consolidated financial position results operations consolidation january 2010 fasb published asu 201002 “consolidation topic 810 accounting reporting decreases ownership subsidiarya scope clarification” codified asc 810 “consolidation” asu 201002 applies retrospectively april 1 2009 adoption date asc 81010651 previously discussed financial note asu clarifies applicable scope asc 810 decrease ownership subsidiary exchange group assets business nonprofit activity asu also requires expanded disclosures amendments update effective interim annual periods ending december 15 2009 applied retrospective basis adoption standard impact company’s consolidated financial position results operations divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 3 recent accounting pronouncements continued fair value measurements january 2010 fasb published asu 201006 “fair value measurements disclosures topic 820 improving disclosures fair value measurements asu 201006 clarifies improve disclosure requirement related fair value measurements disclosures overall subtopic 82010 fasb accounting standards codification new disclosures clarifications existing disclosures effective interim annual reporting periods beginning december 15 2009 except disclosure purchase sales issuances settlement roll forward activity level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within fiscal years amendments update effective interim annual periods ending december 15 2009 applied retrospective basis adoption standard material impact company’s consolidated financial position results operations income taxes april 2010 fasb issued asu 201012 “income taxes” topic 740 asu 201012 amends fasb accounting standard codification subtopic 74010 income taxes include paragraph 74010s994 march 30 2010 president signed health care education affordable care act reconciliation bill amends previous act signed march 23 2010 fasb codification topic 740 income taxes requires measurement current deferred tax liabilities assets based provisions enacted tax law effects future changes tax laws anticipated” therefore different enactment dates act reconciliation measure may affect registrants periodend falls march 23 2010 enactment date act march 30 2010 enactment date reconciliation measure however announcement states sec would object registrants account enactment act reconciliation measure period ending march 23 2010 notes sec staff “does believe would appropriate registrants analogize view fact patterns” adoption standard material impact company’s consolidated financial position results operations stock compensation april 2010 fasb issued asu 201013 “stock compensation” topic 718 asu 201013 provides amendments topic 718 clarify employee sharebased payment award exercise price denominated currency market substantial portion entity’s equity securities trades considered contain condition market performance service condition therefore entity would classify award liability otherwise qualifies equity amendments update effective fiscal years interim periods within fiscal years beginning december 15 2010 amendments update applied recording cumulativeeffect adjustment opening balance retained earnings cumulativeeffect adjustment calculated awards outstanding beginning fiscal year amendments initially applied amendments applied consistently since inception award cumulativeeffect adjustment presented separately earlier application permitted adoption standard impact company’s consolidated financial position results operations allowance credit losses july 2010 fasb issued asu 201020 “receivables” topic 310 asu 201020 provides financial statement users greater transparency entity’s allowance credit losses credit quality financing receivables update intended provide additional information assist financial statement users assessing entity’s credit risk exposures evaluating adequacy allowance credit losses amendments update apply public nonpublic entities financing receivables excluding shortterm trade accounts receivable receivables measured fair value lower cost fair value objective amendments asu 201020 entity provide disclosures facilitate financial statement users’ evaluation 1 nature credit risk inherent entity’s portfolio financing receivables 2 risk analyzed assessed arriving allowance credit losses 3 changes reasons changes allowance credit losses entity must provide disclosures financing receivables disaggregated basis public entities asu 201020 effective interim annual reporting periods ending december 15 2010 nonpublic entities asu 201020 become effective annual reporting periods ending december 15 2011 adoption asu 201020 material impact consolidated financial statements divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 3 recent accounting pronouncements continued technical amendments august 2010 fasb issued asu 201021 “accounting technical amendments various sec rules schedules” asu 201022 “accounting various topics technical corrections sec paragraphs” asu 201021 amends various sec paragraphs pursuant issuance release 339026 technical amendments rules forms schedules codification financial reporting policies asu 201022 amends various sec paragraphs based external comments received issuance sab 112 amends rescinds portions certain sab topics asu 201021 asu 201022 effective upon issuance amendments asu 201021 201022 material impact company’s financial statements expenses december 2010 fasb issued asu 201027 “other expenses topic 720” asu 201027 addresses questions concerning pharmaceutical manufacturers recognize classify income statements fees mandated patient protection affordable care act amended health care education reconciliation act “acts” amendments update specify liability fee estimated recorded full upon first qualifying sale corresponding deferred cost amortized expense using straightline method allocation unless another method better allocates fee calendar year payable amendments update effective calendar years beginning december 31 2010 fee initially becomes effective company evaluating impact asu 201027 consolidated financial statements intangibles goodwill december 2010 fasb issued asu 201028 “intangibles goodwill topic 350” asu 201028 addresses questions entities reporting units zero negative carrying amounts entities concluded step 1 goodwill impairment test stated topic 350 passed circumstances fair value reporting unit generally greater zero amendments update provide guidance determine carrying amount measure fair value reporting unit amendments update modify step 1 goodwill impairment test reporting units zero negative carrying amounts public entities amendments update effective fiscal years interim periods within years beginning december 15 2010 early adoption permitted nonpublic entities amendments effective fiscal years interim periods within years beginning december 15 2011 nonpublic entities may early adopt amendments using effective date public entities company evaluating impact asu 201028 consolidated financial statements business combinations december 2010 fasb issued asu 201029 “business combinations topic 805” asu 201029 addresses diversity practice interpretation pro forma revenue earnings disclosure requirements business combinations amendments update specify public entity presents comparative financial statements entity disclose revenue earnings combined entity though business combinations occurred current year occurred beginning comparable prior annual reporting period amendments update also expand supplemental pro forma disclosures topic 805 include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings amendments update effective prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2010 early adoption permitted company evaluating impact asu 201029 consolidated financial statements variety proposed otherwise potential accounting standards currently study standardsetting organizations various regulatory agencies tentative preliminary nature proposed standards management determined whether implementation proposed standards would material company’s consolidated financial statements asus effective december 31 2010 expected significant effect company’s consolidated financial position results operations divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 4 inventory significant components inventory december 31 2010 2009 consist primarily bulk product raw materials bulk product consists completed product formulations yet packaged market ready packaging raw materials consist bulk quantities various chemical components product formulations work process work process inventory consists merchandise inventory currently interim production stage partially completed yet market ready merchandise inventory merchandise inventory consists completed formulations market ready packaging formulations batch controlled subject various government regulations among things govern purity safety product cases limit concentration certain ingredients would restrict distribution products medical professionals inventory transit inventory consists primarily bulk product raw materials title transferred company inventory yet arrive designated warehouse facility either company owned contract management evaluated inventory december 31 2010 2009 obsolete inventory excluded reported inventory value accordingly allowance obsolescence necessary note 5 prepaid expenses current assets prepaid expenses current assets december 31 2010 2009 consist primarily deferred advertising costs 1st quarter 2010 entered advertising campaign customer involved inclusion trial sachet packs product mailer customer process mailer incur associated media communication costs supply sachet packets inclusion produced delivered sachets customer however 2010 customer decided delay promotion accordingly deferred value sachets pending customer’s decision commence campaign customer indicated campaign commence q2 2011 expense deferred advertising campaign commences operations consulting 2 nd 3 rd quarters 2010 advanced funds consultant providing operational guidance connection business project currently development cost expensed project agreement finalized divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 6 intangible assets significant components intangible assets december 31 2010 2009 consist primarily distribution rights year ended december 31 2009 company issued 3000000 shares common stock exchange 10 year exclusive distribution agreement brazil transaction valued 025 per share company though joint venture exclusive distributor currently developing generic minoxidil product along appropriate packaging brazilian market planned introduction 4th quarter 2011 company amortize brand distribution rights next 10 years follows pure guild brand rights supplier agreement 3rd quarter 2009 approached customerdistributor develop private label brand premium products associated packaging materials pure guild brand products result part project obtained 50 interest pure guild brand permanent exclusive rights manufacture pure guild products exchange rights provided 106666 product representing approximately 70 initial stocking order value rights amortized 5 years basic term agreement note 7 accounts payable accrued expenses significant components accounts payable accrued expenses december 31 2010 2009 consist primarily trade payables 354795 418703 accrued expenses claims advertising marketing 175136 364566 production materials 24038 38460 freight 4500 24349 human resources 25367 12684 warrant expense 116522 credits due customers 20474 2421 83717 604311 1061422 divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 7 accounts payable accrued expenses continued accrued expenses claims discussed fully note 8 company responded several claims suppliers primarily advertisers media suppliers alleging unpaid balances services materials provided company responded many cases services materials fully comply required specifications supplier commitments cases company shifted purchasing compatible suppliers company accrued estimated settlement value claim based evaluation individual circumstances matter note 8 commitments contingencies 2010 2009 company operated several material agreements listed lease office facilities · company leases corporate headquarters office space located miami beach florida company negotiated cancellation original lease entered december 2007 continues operate miami beach facility month basis 5700 per month 68400 annual basis · march 2009 company leased 3500 square foot facility pompano beach florida production facility assemble small production runs products lease provides monthly rent 2600 expired march 2011 company currently negotiations terminate lease · march 2010 company entered lease 7500 square feet new production facilities deerfield beach florida new facility replaced pompano beach production facilities began operations april 2010 lease provides monthly rent 3437 first year increasing scale years 2 5 lease matures 5 years provides 5 year renewal option · december 2010 company entered lease 570 square feet sales facilities ashville north carolina lease provides monthly rent 1600 first year small increase second year lease matures 2 years provides 2 year renewal option company committed lease payments next five years follows divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 8 commitments contingencies continued pending threatened litigation · divine skin inc received several pending threatened litigations various suppliers typically nonpayment goods services pending threatened litigations generally directed ds laboratories inc one operating trade names divine skin vendor disputes typical normal course business divine skin vigorously challenged claims grounds substandard materials services provided established accrual certain media materials freight supplier claims 111777 440059 december 31 2010 december 31 2009 respectively company working resolve claims negotiated settlements several suppliers resulting reduction supplier claim recorded repayment structured payout discussed accruals provided facts claim warrants · divine skin inc named lawsuit brought former employee 301 model entity also related divine skin inc common ownership divine skin named originally hired employee rather 301 model latter yet established entity management vigorously defending position employee terminated two weeks cause employee subsequently violated noncompete agreement accordingly anticipate material assessment settlement result lawsuit note 9 equity recapitalization january 2009 divine skin authorized amendment restatement articles incorporation provide among things authorized common stock increased 300000000 shares b 30000000 shares “blank check” preferred stock authorized immediately thereafter company declared stock dividend 10000 shares one share subsequent stock dividend 100000000 shares common stock outstanding common stock sold private placement memorandum ppm first quarter 2009 company began selling common stock purchase price 050 per share qualified investors offering conducted “best efforts” basis respect shares offering also provides company shall pay selling agents following fees commissions 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds ppm offering made solely “non us persons” within meaning rule 902 regulation securities act 1933 securities registered approved sec state securities commission state authority passed accuracy adequacy memorandum third quarter 2009 offering retroactively repriced 025 per share total 767548 additional shares issued additional cost investors previously paid 050 per share achieve repricing divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 9 equity continued following table summarizes transactions private placement offering follows company received accepted funded subscriptions purchase 4883096 common shares offering referred company received 856642 net proceeds issuance costs 364132 accepted funded subscriptions recorded component company’s equity pending issuance common shares common shares issued amounts previously recorded funded subscriptions transferred common stock par value additional paid capital accordingly march 31 2010 ppm expired share certificates paid subscriptions issued common stock sold privately first quarter 2010 company began selling common stock purchase price 018025 per share qualified investors offering conducted “best efforts” basis respect shares offering also provides company shall pay selling agents following fees commissions 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds following table summarizes transactions private offering follows issues common stock third quarter 2009 company issued 74000 common shares consultants professional advisors services shares valued 025 per share consistent revised offering price ppm company also issued 13000 shares certain “friends family” company acknowledgement assistance starting company shares offered cost company assigned value transactions fourth quarter 2009 company issued 3000000 shares exclusive distribution rights brazil shares valued 025 per share consistent revised offering price ppm addition company issued 28000 certain investors also valued 025 per share consistent revised offering price ppm divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 9 equity continued also fourth quarter 2009 company repurchased 5000000 shares founder company 0015 75000 part effort restructure company’s equity ownership part restructuring effort founders company also surrendered 2982095 shares nominal value first quarter 2010 company issued 25000 shares services valued 018 per share resulted expense 4500 second quarter 2010 entered consulting agreement investor relations group provide certain corporate promotional material strategic advice third quarter 2010 200000 shares common stock advanced consultant future services transaction valued 70000 fair value date issuance date consultant completed agreed upon services accordingly terminated agreement demanded return stock since agreed services provided shares considered fully paid accordingly recorded stock receivable contra equity account fourth quarter 2010 company issued 244000 shares investor relations services valued 036 per share resulted expense 87840 warrants company issued warrants selling agent purchase one share common stock company every ten shares sold ppm offering exercise price warrant 001 per share warrants exercisable period five years date issuance based ppm’s “repriced” sale price 025 per share warrants “in money” upon issuance year ended december 31 2009 company issued warrants 485510 shares related ppm resulted issuance costs 116522 based value warrants granted first quarter 2010 selling agent assisted private sale 1112000 share company’s common stock regulation company agreed grant selling agent additional warrants terms offered ppm offering accordingly company issued warrants 111200 shares related private sale shares accrued additional expense financial consulting services based value warrants 18904 also first quarter 2010 company issued warrants investor relations consultant aggregate purchase 500000 shares common stock prices ranging 025 035 per share depending tranche warrants recorded fair value 2071 resulted charge operations second quarter 2010 selling agent assisted private sale 1734000 company’s common stock regulation company agreed grant selling agent additional warrants terms offered ppm offering accordingly company issued warrants 173400 shares related private sale shares accrued additional expense financial consulting services based value warrants 58956 third quarter 2010 selling agent assisted private sale 660000 company’s common stock regulation company agreed grant selling agent additional warrants terms offered ppm offering accordingly company issued warrants 61000 shares related private sale shares warrants offered sale 50000 shares company accrued additional expense financial consulting services based value warrants 20740 fourth quarter 2010 selling agent assisted private sale 1000000 company’s common stock regulation company agreed grant selling agent additional warrants terms offered ppm offering accordingly company issued warrants 100000 shares related private sale shares accrued additional expense financial consulting services based value warrants 35000 divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 9 equity continued option selling agent engaged company also entered consulting agreement assisted company filing registration statement form 10 quotation shares counter bulletin board otcbb company issued option selling agent purchase 2000000 share common stock exercise price 001 per share grant date option valued based offering price ppm 025 per share 480000 option expires five years option vests exercisable subject certain lock leak provisions commence upon effective date company obtaining otcbb listing leak provisions limit exercisability option number 200000 shares per quarter first quarter 2010 company obtained trading symbol accordingly recorded expense consulting services 160000 2010 reflecting structured vesting preferred stock first quarter 2009 three shareholders company time constituted shareholders company exchanged aggregate 10000000 shares common stock 10000000 shares series preferred stock provided certificate designation series preferred stock dated january 14 2009 filed april 2009 amended september 2009 share series preferred stock entitled 2 votes per share series preferred stock votes together company’s common stock except otherwise provided florida law divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 10 income taxes provision income taxes year ended december 31 2010 2009 summarized follows provision income taxes year ended december 31 2010 offset available net operating loss carryforwards however management expects available credits exhausted 2011 provision income taxes year ended december 31 2010 2009 differs amount computed applying federal statutory rate income loss provision benefit income taxes follows deferred income taxes reflect net tax effect tax carry forward items temporary differences recognition income expenses financial reporting purposes tax purposes tax effect temporary differences representing deferred tax assets liabilities december31 2010 december 31 2009 follows december 31 2010 december 31 2009 company valuation allowance deferred tax assets 159284 120954 relates net operating losses pro forma valuation allowance increased 38330 year ended december 31 2010 increase 2010ytd attributable accumulated net operating losses year ended december 31 2010 december 31 2010 december 31 2009 company net operating loss carryforwards 466035 316222 respectively unused net operating loss carryforwards expire various dates beginning 2029 december 31 2010 2009 company unrecognized tax benefit accordingly related accrued interest penalties divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 11 2009 equity incentive plan overview company initiated 2009 equity incentive plan 1 attract retain best available personnel positions substantial responsibility 2 provide additional incentives employees directors consultants 3 promote success company companys affiliates options granted plan may incentive stock options nonstatutory stock options determined administrator time grant stock purchase rights time vested andor performance vested restricted stock appreciation rights unrestricted shares may also granted plan subject plan initial maximum number shares common stock may issued plan 5000000 shares 100000 shares common stock may granted one participant respect options stock purchase rights stock appreciation rights one calendar year period common stock issued plan may either authorized unissued shares held treasury eligibility nonstatutory stock options stock purchase rights stock awards stock appreciation rights unrestricted shares may granted service providers incentive stock options may granted employees limitations option shall designated either incentive stock option nonstatutory stock option however notwithstanding designation employee becomes eligible given year exercise incentive stock options shares fair market value excess 100000 options representing excess shall treated nonstatutory stock options term option shall stated applicable option agreement stated ten years date grant however case incentive stock option granted optionee time incentive stock option granted owns directly indirectly stock representing ten percent 10 total combined voting power classes stock company parent subsidiary term incentive stock option shall five 5 years date grant shorter term may provided applicable option agreement exercise vesting unless otherwise determined administrator provided option agreement option shall vest become exercisable onesixth 16 shares subject option date nine months date grant additional onesixth 16 shares subject option every nine months thereafter fully vested exercisable divine skin inc dba ds laboratories subsidiaries notes consolidated financial statements continued note 12 significant customers company’s product revenues represent primarily sales revita spectral dnc nr08 individually exceeds 10 total sales collectively represent 557 total sales oligo dx spectral dncl collectively account another 142 total sales q410ytd two customers generated 419 company’s sales 285 outstanding accounts receivable balance december 31 2010 customers distributors company sales customers q410ytd accounts receivable december 31 2010 sales customers q409ytd accounts receivable december 31 2009 note 13 consolidation variable interest entity company holds variable interest velocity storage packaging llc “velocity” entity company primary beneficiary velocity performs packaging shipping services exclusively company companies variable interest relates financing arrangement whereby operational expenses including labor costs facility costs operational expenses reimbursed company velocity’s cost company equity investment velocity assets liabilities equity structure velocity financially supported company form reimbursement 100 operational costs accordingly company determined velocity variable interest entity vie company primary beneficiary guidance offered asc 81010 since velocity sufficient equity risk entity finance activities asc 81010 requires enterprise consolidate vie enterprise variable interest absorb majority entitys expected losses occur note 14 subsequent events common stock sold privately first quarter 2011 company sold 3611000 shares common stock purchase price 025027 per share qualified investors resulting total gross proceeds 911000 company paid selling agents following fees commissions 560000 shares issued 15 sales commission 5 due diligence fee payment expenses 10 gross proceeds