Attached files
file | filename |
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EX-32.1 - Skinny Nutritional Corp. | v201957_ex32-1.htm |
EX-31.1 - Skinny Nutritional Corp. | v201957_ex31-1.htm |
EX-32.2 - Skinny Nutritional Corp. | v201957_ex32-2.htm |
EX-31.2 - Skinny Nutritional Corp. | v201957_ex31-2.htm |
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2010
or
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
|
For
the transition period from ________ to
______________.
Commission
File No. 0-51313
Skinny
Nutritional Corp.
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0314792
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
3
Bala Plaza East, Suite 101
Bala Cynwyd, PA
|
19004
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Issuer’s
telephone number: (610) 784-2000
(Former
Name, Former Address and Former Fiscal Year, if Changes
Since
Last Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company
|
Smaller reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o Yes þ No
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: The registrant had 332,026,127 shares of
common stock, $0.001 par value, issued and outstanding as of November 12,
2010.
SKINNY
NUTRITIONAL CORP.
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
||
Item
1.
|
Condensed
Financial Statements
|
|
Balance
sheets, September 30, 2010 (unaudited) and December 31,
2009
|
3
|
|
Statements
of operations for the three and nine months ended September 30, 2010 and
2009 (unaudited)
|
4
|
|
Statement
of Stockholders' Deficiency for the nine months ended September 30,
2010
|
5
|
|
Statements
of cash flows for the nine months ended September 30, 2010 and 2009
(unaudited)
|
6
|
|
Notes
to condensed financial statements (unaudited)
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of financial condition and results of
operations
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
25
|
Item
4.
|
Controls
and Procedures
|
25
|
PART
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
27
|
Item
1A.
|
Risk
Factors
|
27
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
27
|
Item
3.
|
Defaults
Upon Senior Securities
|
28
|
Item
4.
|
Removed
and Reserved
|
28
|
Item
5.
|
Other
Information
|
28
|
Item
6.
|
Exhibits
|
29
|
Signatures
|
30
|
FORWARD
LOOKING STATEMENTS
This
Report contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and the Securities
Exchange Act of 1934. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions,
including those described in the “Risk factors” section in our Annual Report on
Form 10-K for the year ended December 31, 2009, as filed with the SEC on April
2, 2010, and our other reports filed with the Commission. No
forward-looking statement is a guarantee of future performance and you should
not place undue reliance on any forward-looking statement. Our actual
results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words
“may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,”
“intend,” “plan,” and “estimate,” as well as similar expressions, are meant to
identify such forward-looking statements. Forward-looking statements
contained herein include, but are not limited to, statements relating
to:
|
·
|
our future
financial results;
|
|
·
|
our future
growth and expansion into new markets;
and
|
|
·
|
our future
advertising and marketing
activities.
|
Except
as otherwise required by law, we undertake no obligation to update or revise any
forward-looking statement contained in this report. As used in this
Report, references to the “we,” “us,” “our” refer to Skinny Nutritional Corp.
unless the context indicates otherwise.
2
I.
Part I. FINANCIAL INFORMATION
Item 1.
Condensed Financial Statements
SKINNY
NUTRITIONAL CORP.
CONDENSED
BALANCE SHEETS
SEPTEMBER
30,
|
DECEMBER 31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 59,992 | $ | 190,869 | ||||
Accounts
receivable, net
|
722,672 | 568,135 | ||||||
Inventory
|
456,815 | 323,435 | ||||||
Prepaid
expenses
|
42,916 | 120,392 | ||||||
Total
Current Assets
|
1,282,395 | 1,202,831 | ||||||
Property
and Equipment, net
|
35,989 | 24,792 | ||||||
Deposits
|
62,192 | 49,192 | ||||||
Trademarks
|
783,101 | 783,101 | ||||||
Total
Assets
|
$ | 2,163,677 | $ | 2,059,916 | ||||
Liabilities
and Stockholders’ Deficit
|
||||||||
Current
Liabilities
|
||||||||
Revolving
line of credit
|
$ | 728,487 | $ | 321,815 | ||||
Note
payable
|
- | 45,924 | ||||||
Accounts
payable
|
2,721,541 | 906,030 | ||||||
Accrued
expenses
|
891,254 | 814,518 | ||||||
Total
Current Liabilities
|
4,341,282 | 2,088,287 | ||||||
Commitments
and Contingencies
|
||||||||
Stockholders’
Deficit:
|
||||||||
Series
A Convertible Preferred stock, $.001 par value, 1,000,000 shares
authorized, 2,020 shares issued and outstanding at September 30, 2010 and
2,465 issued and outstanding at December 31, 2009
|
2 | 2 | ||||||
Common
stock, $.001 par value, 500,000,000 shares authorized, 329,509,460 shares
issued and outstanding at September 30, 2010 and 289,921,081 shares issued
and outstanding at December 31, 2009
|
329,510 | 289,921 | ||||||
Deferred
financing costs
|
- | (157,832 | ) | |||||
Additional
paid-in capital
|
33,802,478 | 30,752,359 | ||||||
Accumulated
deficit
|
(36,309,595 | ) | (30,912,821 | ) | ||||
Stockholders’
Deficit
|
(2,177,605 | ) | (28,371 | ) | ||||
Total
Liabilities and Stockholders’ Deficit
|
$ | 2,163,677 | $ | 2,059,916 |
The
accompanying notes are an integral part of the condensed financial
statements.
3
SKINNY
NUTRITIONAL CORP.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
|
NINE MONTHS ENDED
|
|||||||||||||||
SEPTEMBER 30,
|
SEPTEMBER 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue,
Net
|
$ | 1,882,912 | $ | 1,543,799 | $ | 5,911,218 | $ | 3,861,549 | ||||||||
Cost
of Goods Sold
|
1,415,451 | 1,023,984 | 4,304,346 | 2,686,817 | ||||||||||||
Gross
Profit
|
467,461 | 519,815 | 1,606,872 | 1,174,732 | ||||||||||||
Operating Expenses
:
|
||||||||||||||||
Marketing
and advertising
|
1,182,028 | 995,634 | 3,428,731 | 2,109,237 | ||||||||||||
General
and administrative
|
1,408,121 | 950,744 | 3,426,520 | 2,423,781 | ||||||||||||
Total
Operating Expenses
|
2,590,149 | 1,946,378 | 6,855,251 | 4,533,018 | ||||||||||||
Net
Loss from Operations
|
(2,122,688 | ) | (1,426,563 | ) | (5,248,379 | ) | (3,358,286 | ) | ||||||||
Interest
expense
|
(64,100 | ) | (103,444 | ) | (148,395 | ) | (277,809 | ) | ||||||||
Net
Loss
|
(2,186,788 | ) | (1,530,007 | ) | (5,396,774 | ) | (3,636,095 | ) | ||||||||
Deemed
dividends in preferred stock
|
— | 1,377,333 | — | 1,377,333 | ||||||||||||
Net
loss attributable to common stockholders
|
$ | (2,186,788 | ) | $ | (2,907,340 | ) | $ | (5,396,774 | ) | $ | (5,013,428 | ) | ||||
Weighted
average common shares outstanding, basic and diluted
|
325,667,369 | 227,270,224 | 308,591,418 | 227,270,224 | ||||||||||||
Net
loss per share attributable to common stockholders, basic and
diluted
|
$ | (.01 | ) | $ | (.01 | ) | $ | (.02 | ) | $ | (.02 | ) |
The
accompanying notes are an integral part of the condensed financial
statements.
4
SKINNY
NUTRITIONAL CORP.
CONDENSED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)
Additional
|
Deferred
|
|||||||||||||||||||||||||||||||
Preferred Stock
|
Common Stock
|
Paid-In
|
Financing
|
Accumulated
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Costs
|
Deficit
|
Total
|
|||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||
Balance,
December 31, 2009
|
2,465 | $ | 2 | 289,921,081 | $ | 289,921 | $ | 30,752,359 | $ | ( 157,832 | ) | $ | (30,912,821 | ) | $ | (28,371 | ) | |||||||||||||||
Options
issued in exchange for services
|
865,544 | 865,544 | ||||||||||||||||||||||||||||||
Deferred
financing costs
|
157,832 | 157,832 | ||||||||||||||||||||||||||||||
Warrants
issued for service
|
5,768 | 5,768 | ||||||||||||||||||||||||||||||
Conversion
of preferred stock into common stock
|
(445 | ) | 741,667 | 742 | (742 | ) | - | |||||||||||||||||||||||||
Issuance
of common stock in exchange for services and
equipment
|
12,180,045 | 12,180 | 799,403 | 811,583 | ||||||||||||||||||||||||||||
Issuance
of common stock net of offering costs
($193,187)
|
26,666,667 | 26,667 | 1,380,146 | 1,406,813 | ||||||||||||||||||||||||||||
Net
loss for the nine months ended September 30, 2010
|
(5,396,774 | ) | (5,396,774 | ) | ||||||||||||||||||||||||||||
Balance,
September 30, 2010
|
2,020 | $ | 2 | 329,509,460 | $ | 329,510 | $ | 33,802,478 | $ | 0 | $ | (36,309,595 | ) | $ | (2,177,605 | ) |
The
accompanying notes are an integral part of the condensed financial
statements.
5
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE
MONTHS ENDED
|
||||||||
SEPTEMBER 30
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Net
loss
|
$ | (5,396,774 | ) | $ | (3,636,095 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Allowance
for doubtful accounts
|
(24,817 | ) | — | |||||
Depreciation
|
4,590 | 11,103 | ||||||
Options
issued for services
|
865,544 | 474,849 | ||||||
Warrants
issued for services
|
5,768 | 330,000 | ||||||
Stock
issued for services
|
969,415 | 415,298 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(129,720 | ) | (819,515 | ) | ||||
Inventories
|
(133,380 | ) | (243,261 | ) | ||||
Prepaid
expenses
|
77,476 | 4,642 | ||||||
Deposits
|
(13,000 | ) | 12,154 | |||||
Accounts
payable
|
1,815,511 | 243,086 | ||||||
Accrued
expense
|
76,736 | 460,448 | ||||||
Settlements
Payable
|
— | (75,000 | ) | |||||
Total
Adjustments
|
3,514,123 | 813,804 | ||||||
Net
Cash Used In Operating Activities
|
(1,882,651 | ) | (2,822,291 | ) | ||||
Cash
Flows from Investing Activities:
|
||||||||
Purchase
of trademarks
|
— | (783,101 | ) | |||||
Purchase
of property and equipment
|
(15,787 | ) | (101,762 | ) | ||||
Net
Cash Used In Investing Activities
|
(15,787 | ) | (884,863 | ) | ||||
Cash
Flows from Financing Activities:
|
||||||||
Advance
purchase on common stock
|
— | (375,600 | ) | |||||
Proceeds
from revolving line of credit
|
406,672 | 611,029 | ||||||
Repayment
of note payable
|
(45,924 | ) | (110,001 | ) | ||||
Common
stock issued, net of issuance costs
|
1,406,813 | 1,915,196 | ||||||
Payment
of convertible notes including interest
|
— | (40,000 | ) | |||||
Preferred
stock issued
|
— | 1,500,000 | ||||||
Net
Cash Provided by Financing Activities
|
1,767,561 | 3,500,624 | ||||||
Net
Decrease in Cash
|
(130,877 | ) | (206,530 | ) | ||||
Cash
– Beginning
|
190,869 | 236,009 | ||||||
Cash
– Ending
|
$ | 59,992 | $ | 29,479 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 148,395 | $ | 277,809 | ||||
Non-cash
financing activity for deemed dividend on preferred stock
|
— | 1,377,333 | ||||||
Non-cash
financing activity for convertible debt
|
— | 4,000 |
The
accompanying notes are an integral part of the condensed financial
statements.
6
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND
OPERATIONS
Skinny
Nutritional Corp (the “Company”), is incorporated in Nevada and its
operations are located in Pennsylvania.
The
Company is the exclusive worldwide owner of several trademarks for the use of
the term “Skinny.” The Company develops and markets a line of functional
beverages, all branded with the name “Skinny” that are marketed and distributed
primarily to calorie and weight conscious consumers.
NOTE 2 - BASIS OF
PRESENTATION
The
accompanying condensed financial statements for the three and nine months ended
September 30, 2010 and 2009 are unaudited and have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”).
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to those
rules and regulations. Accordingly, these interim financial statements
should be read in conjunction with the audited financial statements and notes
thereto contained in Skinny Nutritional Corp.’s (the “Company”) Annual Report on
Form 10-K for the year ended December 31, 2009, as filed with the SEC on
April 2, 2010. The results of operations for the interim periods shown in
this report are not necessarily indicative of results to be expected for other
interim periods or for the full fiscal year. In the opinion of management,
the information contained herein reflects all adjustments necessary for a fair
statement of the interim results of operations. All such adjustments are
of a normal, recurring nature. Certain reclassifications have been made to
the prior year amounts to conform to the current year presentation.
The year
ended condensed balance sheet was derived from audited financial statements in
accordance with the rules and regulations of the SEC, but does not include all
disclosures required for financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America.
NOTE 3 - GOING CONCERN AND MANAGEMENT
PLANS
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the Company has incurred losses since its inception and has not yet been
successful in establishing profitable operations. These factors raise
substantial doubt about the ability of the Company to continue as a going
concern. In this regard, management is dependent on raising additional
funds through sales of its common stock or through loans from
shareholders. There is no assurance that the Company will be successful in
raising additional capital or achieving profitable operations. The
condensed financial statements do not include any adjustments that might result
from the outcome of these uncertainties.
To date,
the Company has needed to rely upon selling equity and debt securities in
private placements to generate cash to implement our plan of operations. We have
an immediate need for cash to fund our working capital requirements and business
model objectives and we intend to either undertake private placements of our
securities, either as a self-offering or with the assistance of registered
broker-dealers, or negotiate a private sale of our securities to one or more
institutional investors and have engaged an investment banker to assist us in
this process. Except with respect to our current private placement as
described in Note 15, the Company has no agreements with any third parties for
such transactions. No assurances can be given that we will be successful in
raising sufficient capital from any proposed financings, including the financing
described in Note 15.
At
September 30, 2010, our cash was approximately $60,000. The Company has been
substantially reliant on capital raised from private placements of our
securities, in addition to our revolving line of credit from United Capital
Funding, to fund our operations. During the nine months ended September 30,
2010, the Company raised an aggregate amount of $1,600,000 less $193,187 of
offering costs, from the sale of securities to accredited investors in private
placements.
Based on
our current levels of expenditures and our business plan, we believe that our
cash (including the proceeds received from our recent private placement) at
September 30, 2010, will only be sufficient to fund our anticipated levels of
operations for a minimal period and that without raising additional capital, the
Company will be limited in its projected growth. This will depend, however, on
our ability to execute our 2010 and 2011 operating plan and to manage our costs
in light of developing economic conditions and the performance of our business.
Accordingly, generating sales in that time period is important to support our
business. However, we cannot guarantee that we will generate such growth. If we
do not generate sufficient cash flow to support our operations during that time
frame, we will need to raise additional capital and may need to do so sooner
than currently anticipated. We cannot assure you that any financing can be
obtained or, if obtained, that it will be on reasonable terms.
7
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS - CONTINUED
NOTE
3 - GOING CONCERN AND MANAGEMENT PLANS (CONTINUED)
If we
raise additional funds by selling shares of common stock or convertible
securities, the ownership of our existing shareholders will be diluted. Further,
if additional funds are raised though the issuance of equity or debt securities,
such additional securities may have powers, designations, preferences or rights
senior to our currently outstanding securities. Further, if expenditures
required to achieve our plans are greater than projected or if revenues are less
than, or are generated more slowly than, projected, we will need to raise a
greater amount of funds than currently expected. The Company cannot provide
assurance that it will be able to obtain additional sources of liquidity and/or
modify operations to maintain liquidity on terms that are acceptable to the
Company, if at all. These factors raise substantial doubt of the Company's
ability to continue as a going concern.
NOTE 4 -
INVENTORY
The
components of inventories are as follows:
September 30,
2010
|
December 31,
2009
|
|||||||
Raw
Materials
|
$ | 357,331 | $ | 94,688 | ||||
WIP
|
- | 38,258 | ||||||
Finished
Goods
|
99,484 | 190,489 | ||||||
Total
|
$ | 456,815 | $ | 323,435 |
8
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS-CONTINUED
NOTE
5 - RELATED PARTY TRANSACTIONS
Mr.
William R. Sasso, a former member of the Board of Directors, who served on the
Company’s Board of Directors until October 2010, has participated as
an investor in certain private placements conducted by Skinny Nutritional
Corp. Mr. Sasso is a partner at the law firm of Stradley, Ronon, Stevens
& Young, LLP (“SRSY”), which provides legal services to us from time to time
as outside counsel. In February 2010, we issued 529,625 shares of common
stock, which was valued based upon the value of the services provided, to SRSY
in lieu of payment of approximately $59,000 in outstanding fees owed to such
firm. The reporting person is Chairman of SRSY and also a partner serving on
SRSY's board of directors and management committee. In May 2010, the
Company issued 625,000 shares of common stock, valued based upon the value of
the services provided, to the law firm of SRSY, in lieu of payment of
approximately $50,000 in outstanding fees owed to such firm. As of
September 30, 2010 there was approximately $64,000 due SRSY and the Company
incurred expense of approximately $54,000 for the nine months ended September
30, 2010.
In
February 2010, the Company’s Board of Directors approved the grant of 200,395
restricted shares of common stock which was based upon the fair market value of
the common stock at the end of each month, to its Chief Financial Officer
in lieu of an amount of approximately $20,000 owed for accrued
compensation.
On June
10, 2010, Ronald D. Wilson, who served as the President and Chief Executive
Officer and a member of the Board of Directors of the Company since December
2008, resigned from his positions as Chief Executive Officer and President
effective as of June 30, 2010, and further agreed not to stand for reelection at
the Company’s annual meeting of stockholders, which was held on July 14, 2010.
Following Mr. Wilson’s decision, the Board of Directors of the Company appointed
Mr. Michael Salaman, to serve as the Company’s Chief Executive Officer,
effective June 30, 2010. In connection with the above matters, on June 10,
2010, the Company entered into a separation agreement with Mr. Wilson which
memorializes the terms of his resignation. Pursuant to the separation agreement
and in consideration of the general release granted by Mr. Wilson to the
Company, the Company entered into a consulting agreement with Mr. Wilson under
which he will provide consulting services to the Company for a term expiring
December 31, 2010 in connection with the Company’s acquisition of distribution
accounts. Pursuant to the separation and consulting agreements, the Company
agreed to pay to or provide Mr. Wilson with the following: (a) continued
compensation at the rate of $12,500 per each thirty day period of service during
the term of the consulting agreement; (b) the continued provision of health
benefits and automobile reimbursement through December 31, 2010; and
(c) the issuance of a maximum of 2,000,000 restricted shares of common
stock, with 750,000 shares issued on the effective date of the consulting
agreement, and the open issuance of the remaining shares being subject to the
occurrence of certain milestones prior to June 30, 2011, based upon the value of
the stock at the date the milestone is achieved. In addition, the Company
confirmed in the separation agreement that all unvested stock options held by
Mr. Wilson shall be deemed vested as of the date of termination of his
employment and that such options shall remain exercisable for their original
exercise period in accordance with the terms of such options and that the
warrants to purchase shares of common stock held by him as of the termination
date shall continue in full force and effect in accordance with their
terms. As of September 30, 2010, the Company issued 750,000 shares of
common stock to Mr. Wilson as a result of the consulting agreement. The Company
incurred $59,250 of expense relating to this transaction, which was based upon
the fair market value of the common stock on the date of the agreement. As
of September 30, 2010, the Company accrued for the issuance
of 250,000 shares of common stock as a result of reaching certain
milestones under the agreement with its former Chief Executive Officer.
The value of these shares was equal to approximately $20,000 which represents
the fair value of the stock on the date of the agreement.
In
February 2008, the Company entered into a three year bottle supply agreement
with Zuckerman-Honickman, Inc. (“ Z-H ”), a privately
held packaging company that is supplier of plastic and glass bottles to the
beverage industry in North America, Z-H pursuant to which the Company purchases
all of its requirements for bottles from Z-H. This agreement was subsequently
amended in October 2008 to extend the term for an additional four years, along
with rebate incentives for purchasing milestones. Since the commencement
of this agreement, the Company has purchased the following amounts of product
from Z-H: approximately $737,000 during fiscal 2008, approximately $1,234,000
during fiscal 2009 and during fiscal 2010, approximately $1,447,000 through
the nine months ended September 30, 2010. As of September 30, 2010, there
was approximately $579,000 due to Z-H. Although the Company is required to
purchase all of its bottle requirements from Z-H under this agreement, the
agreement does not mandate any quantity of purchase commitments. Our
newly-elected board member, Michael Zuckerman, is a principal of Z-H. Mr.
Zuckerman undertakes to recuse himself from any votes that may come before the
Board of Directors (or any committees of the board on which he may serve) that
concern the Company’s agreements with Z-H, or otherwise impact upon
Z-H.
On August
16, 2010, the Company entered into employment agreements with each of its
Chief Executive Officer, Mr. Michael Salaman, and its Chief Financial Officer,
Mr. Donald J. McDonald. Pursuant to their employment agreements, the Company
agreed to appoint Mr. Salaman in the capacity as the Chief Executive Officer and
President of the Company and to employ Mr. McDonald as the Chief Financial
Officer of the Company. The employment agreements are effective as of August 12,
2010.
The
employment agreements are for an initial term of three years from the effective
date, provided, however that upon each one year anniversary of the effective
date, the agreements will automatically extend for an additional one year period
unless either party provides notice to the other that the agreements should not
extend. Under the employment agreements, Mr. Salaman will receive a base salary
at the initial rate of $150,000 per annum and Mr. McDonald shall receive a base
salary at the initial rate of $140,000. However, the base salary shall increase
annually by an amount determined by the Board or Compensation Committee, based
on benchmarks set by the Board or Compensation Committee. In addition, the
Executives shall be eligible to receive an annual cash bonus, the amount of
which to be determined in the discretion of the Board of Directors or its
designated committee. Further, the Company also granted each of the Executives
3,000,000 shares of restricted common stock upon their execution of the
agreement. During the nine months ended September 30, 2010, the Company incurred
$360,000 of expense relating to these transactions, which was valued based on
the fair market value of the common stock on the date of the
agreements.
Since the
third quarter of 2008, Mr. Francis Kelly, a member of the Company’s Board of
Directors, has participated as an investor in certain private placements
conducted by the Company. In March 2009, the Company sold and issued to
Mr. Kelly an aggregate of 1,666,667 shares of common stock of the Company, which
shares were issued at a per share price of $0.06. In addition, in May 2009, Mr.
Kelly purchased an aggregate of 600 shares of the Company’s Series A Preferred
Stock which shares converted into 1,000,000 shares of common stock upon the
approval of our shareholders of the amendment to our articles of incorporation
to increase our authorized number of shares of common stock in July 2009.
Further, in November 2009, Mr. Kelly purchased an aggregate of 1,000,000 shares
of common stock, which shares were issued at a per share price of $0.06. In May
2010, Mr. Kelly purchased an aggregate of 500,000 shares of common stock and
warrants to purchase an additional 500,000 shares of common stock, which
securities were issued for a purchase price of $0.06 for one share and one
warrant. As of September 30, 2010, Mr. Kelly beneficially owns 4,833,334 shares
of common stock, inclusive of 416,667 shares held by his spouse and owns
warrants to purchase 500,000 shares of common stock.
Since the
beginning of the Company’s 2009 fiscal year, Mr. John J. Hewes, a member of the
Company’s Board of Directors, has participated as an investor in certain private
placements. In May 2009, Mr. Hewes purchased an aggregate of 500 shares of the
Company’s Series A Preferred Stock which shares converted into 833,333 shares of
common stock upon the approval of our shareholders of the amendment to our
Articles of Incorporation to increase our authorized number of shares of common
stock in July 2009. In May 2010, Mr. Hewes purchased an aggregate of 2,500,000
shares of common stock and warrants to purchase an additional 2,500,000 shares
of common stock, which securities were issued for a purchase price of $0.06 for
one share and one warrant. As of September 30, 2010, Mr. Hewes beneficially owns
6,083,333 shares of common stock, and owns warrants to purchase 2,500,000 shares
of common stock.
9
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS-CONTINUED
NOTE
6 - CREDIT ARRANGEMENTS
On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”) which provided for an initial
borrowing limit of $300,000. Currently, this arrangement has been extended
through February 2011 and the borrowing limit has been increased to extend our
line to 85% of outstanding eligible receivables or $2,000,000. As of
September 30, 2010, we had $728,487 outstanding through this arrangement. All
accounts submitted for purchase must be approved by UCF. The applicable
factoring fee is 0.30% of the face amount of each purchased account and the
purchase price is 85% of the face amount. UCF will retain the balance as a
reserve, which it holds until the customer pays the factored invoice to UCF. In
the event the reserve account is less than the required reserve amount, we will
be obligated to pay UCF the shortfall. In addition to the factoring fee, we will
also be responsible for certain additional fees upon the occurrence of certain
contractually-specified events. As collateral securing the obligations, we
granted UCF a continuing first priority security interest in all accounts and
related inventory and intangibles. Upon the occurrence of certain
contractually-specified events, UCF may require us to repurchase a purchased
account on demand. In connection with this arrangement, each of our Chief
Executive Officer and Chief Financial Officer agreed to personally guarantee our
obligations to UCF. The agreement will automatically renew for successive one
year terms until terminated. Either party may terminate the agreement on three
month’s prior written notice. We are liable for an early termination fee in the
event we fail to provide them with the required written notice.
On April
4, 2007, the Company closed on a secure loan arrangement with Valley Green Bank
pursuant to which it received funds in the amount of $340,000. As of September
30, 2010 the balance of this loan has been paid in its
entirety.
NOTE
7 - INCOME TAXES
The
Company accounts for income taxes in accordance with ASC Topic 740-10. This
guidance requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available operating
loss or tax credit carryforwards. At December 31, 2009, the Company has
available unused operating loss carryforwards of approximately $9,209,000 which
may be applied against future taxable income and which expire in various years
between 2021 and 2030.
The
amount of and ultimate realization of the benefits from the operating loss
carryforwards for income tax purposes is dependent, in part, upon the tax laws
in effect, the future earnings of the Company, and other future events, the
effects of which cannot be determined because of the uncertainty surrounding the
realization of the loss carryforwards. The Company has established a valuation
allowance equal to the tax effect of the loss carryforwards and, therefore, no
deferred tax asset has been recognized for the loss carryforwards.
NOTE
8 - STOCKHOLDERS’ EQUITY
At
September 30, 2010, the Company had 500,000,000 shares of common stock
authorized par value $.001. Shares outstanding at September 30, 2010 were
329,509,460. In addition, the Company also had 1,000,000 shares of
preferred stock authorized at a par value of $.001. Shares of preferred
stock outstanding at September 30, 2010 were 2,020 shares of Series A
Convertible Preferred Stock. Pursuant to the Certificate of Designation,
Preferences, Rights and Limitations of the Series A Convertible Preferred Stock,
all shares of Series A Preferred Stock were subject to mandatory conversion upon
the filing by the Company of a Certificate of Amendment with the Secretary of
State of Nevada increasing the number of authorized shares of Common Stock of
the Company, which occurred on July 6, 2009. Accordingly, any certificates
representing shares of Series A Preferred Stock which remain outstanding solely
represent the right to receive the number of shares of Common Stock into which
they are convertible.
During
the nine months ended September 30, 2010, we issued additional shares of common
stock and other equity securities as described below and in Notes 5 and 9 to
these condensed financial statements. During the nine months ended September 30,
2010, the Company issued 1,215,000 shares of common stock, worth approximately
$103,000 valued at the fair value of the stock on the effective date of the
consulting agreement, to a consultant for services rendered. In March
2010, the Company issued 877,193 shares of common stock to an equipment vendor
in consideration for its assignment and transfer to the Company of promotional
advertising materials valued at $50,000. The vendor is an entity affiliated with
Mr. Arakelian, a member of the Company’s advisory board. In March 2010, the
Company issued 100,000 shares of common stock to a financial consultant in
consideration of services rendered in connection with our 2009 private
placement.
10
On March
20, 2008, the Company established an advisory board to provide advice on matters
relating to the Company’s products. The Company initially appointed the
following individuals to its advisory board: Pat Croce, Ron Wilson and Michael
Zuckerman. In December 2008, we appointed Mr. Wilson as our Chief Executive
Officer and President. In fiscal 2010, the Company reconstituted the
advisory board and appointed Messrs. Niki Arakelian, Ruben Azrak, Barry
Josephson and John Kilduff to its advisory board. In consideration
for their agreement to serve on our advisory board, the Company granted Mr.
Arakelian warrants to purchase 100,000 shares of common stock valued at
approximately $6,000, which was based upon the fair market value of the common
stock on the date of agreement, and issued each of the other new appointees
250,000 restricted shares of common stock, or an aggregate of 750,000, valued at
approximately $39,000, which was based upon the fair market value of the common
stock on the date of agreement, shares of common stock. The warrants
granted to Mr. Arakelian are exercisable for a period of four years at an
exercise price of $0.06 per share.
In June
2010, the Company entered into a sponsorship agreement with Plaid Paisley LLC.
In consideration of the agreements set forth therein, the Company agreed to
issue 1,250,000 shares of restricted common stock and agreed to pay in the
aggregate $150,000 payable in three equal installments. The total expense
recognized under this agreement through September 30, 2010 is approximately
$121,000. The common stock was valued based upon the fair market value
of the common stock on the date of the agreement. Further, in June 2010,
we agreed to grant up to 250,000 shares of restricted common stock to a
consultant which shares may be issued upon the occurrence of certain milestones.
We also agreed with this consultant that it may elect to receive the consulting
fees due under the agreement in restricted shares of common stock in lieu of the
payment of cash fees. As of September 30, 2010, 50,000 shares were earned
under this agreement; however, as of such date, the Company did not issue any
shares under this agreement. During the nine months ended September 30,
2010, the Company incurred approximately $4,000 of expense relating to this
transaction, which was based upon the fair market value of the stock on the date
of the agreement.
On July
14, 2010, the Company granted 250,000 shares of restricted stock to each of
its three newly elected directors, Messrs. John J. Hewes, Francis Kelly and
Michael Zuckerman. The Company recognized approximately $49,000 of
expense, which was valued based upon the fair value of the stock on the date the
parties were elected to the Board of Directors. In August 2010, the
Company issued 250,000 shares of common stock to Mr. William R. Sasso, who was a
member of the Company’s Board of Directors at the time of such grant, in
consideration of his service on the board. These shares were valued at
approximately $16,000, which was based upon the fair value of the shares on the
date the Board of Directors approved the stock grant. In August 2010, the
Company granted 100,000 shares of common stock to a beverage distributor in
consideration of entering into a distribution agreement with the Company and
further authorized the issuance to such distributor of additional shares of
common stock in the event that it achieves certain performance targets with
respect to product sales under the distribution agreement. The Company incurred
approximately $6,000 of expense, which was valued based upon the fair
value of the shares on the date of the agreement.
On
September 13, 2010, the Company’s Board of Directors approved the grant of an
aggregate of 7,435,000 shares of restricted common stock to certain employees of
the Company under the Company’s 2009 Equity Incentive Compensation Plan. The
restricted stock awards are subject to the following vesting provisions: 25% of
each award shall be vested on the grant date and the balance of such awards will
vest in equal installments of 25% on each of the subsequent three anniversary
dates of date of grant. Accordingly, an aggregate of 1,858,750 shares were
vested on the grant date. Of the total restricted shares granted, each of the
Company’s Chief Executive Officer and Chief Financial Officer were granted
2,000,000 restricted shares. The Company incurred approximately $108,000 of
expense, which was valued based upon the fair value of the shares on the date
approved by the Board of Directors. As of September 30, 2010 no shares were
issued under this grant.
11
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS-CONTINUED
NOTE
9 - SALE OF EQUITY SECURITIES
In August
2009, the Company commenced a private offering of shares of common stock (the
“August Offering”) pursuant to which it offered an aggregate amount of
$2,500,000 of shares of common stock. The shares of common stock were offered
and sold at a purchase price of $0.06 per share. At the conclusion of the
offering in December 2009, the Company had accepted total subscriptions of
$1,766,000 for an aggregate of 29,433,335 shares of common stock. Net proceeds
from such sales were approximately $1,680,000. The Company used the net proceeds
from the August Offering for working capital, repayment of debt and general
corporate purposes. The Company agreed to pay commissions to registered
broker-dealers that procured investors in the August Offering and issue
such persons warrants to purchase such number of shares that equals 10% of the
total number of shares actually sold in the August Offering to investors
procured by them. Such warrants shall be exercisable at the per share price of
$0.07 for a period of five years from the date of issuance. In the August
Offering, the Company paid commissions of $6,500 to registered broker-dealers
and issued warrants to purchase 92,857 to a selling agent that procured
investors in this offering.
During
the first two quarters of fiscal 2009, the Company conducted a private offering
in (the "Offering") pursuant to which it sought to raise an additional aggregate
amount of $2,100,000 of shares of Series A Preferred Stock. The shares of Series
A Preferred Stock have a conversion rate of $0.06 per share, with customary
adjustments for stock splits, stock dividends and similar events. In the
Offering the Company accepted total subscriptions of $2,035,000 for an aggregate
of 20,350 shares of Series A Preferred Stock. The Company's statements of
cash flows as of December 31, 2009, as stated in the Annual Report Form 10-K,
reflects the issuance of preferred stock in the Offering of $1,430,000, net of
offering costs, since subscriptions for $510,000, net of offering costs, were
released to the Company from escrow in July 2009, subsequent to the Company
increasing the number of authorized shares of common stock on July 6, 2009,
which triggered the automatic conversion of preferred shares to common.
Therefore, the Company issued 8,916,667 common shares in lieu of 5,350 preferred
shares. The Company used the proceeds from the Offering for working
capital, repayment of debt and general corporate purposes. Following the
approval by the Company's stockholders of the proposal to increase the Company's
authorized number of shares of common stock on July 2, 2009, the Company filed a
Certificate of Amendment to its Articles of Incorporation with the State of
Nevada on July 6, 2009. In accordance with the Certificate of Designation,
Preferences, Rights and Limitations of the Series A Preferred Stock, upon the
effectiveness of such filing, all of the 20,350 shares of Series A Preferred
Stock subscribed for by investors were automatically convertible into an
aggregate of 33,916,667 shares of common stock. As of September 30, 2010,
holders of 18,330 shares of Series A Preferred Stock had received 30,550,000
shares of common stock upon conversion and the holders of the remaining 2,020
shares of Series A Preferred Stock have not yet surrendered such shares for
cancellation.
In May
2010, the Company conducted a private offering pursuant to which it
offered an aggregate amount of $2,000,000 of shares of common stock, par value
$0.001 per share of the Company and warrants to purchase shares of common stock
(“May Offering”). On May 24, 2010, the Company terminated further selling
efforts in connection with the May Offering. In the May Offering, the Company
sold an aggregate amount of $1,600,000 of securities and issued to the investors
an aggregate of 26,666,667 shares of common stock and 26,666,667 warrants.
The purchase price per share of common stock and warrant is $0.06. The warrants
are exercisable at an exercise price of $0.10 per share during the period
commencing on the issue date of the warrant and expire 24 months from the
initial exercise date. The warrants also provide that if the closing price
of the Company’s common stock is at least $0.14 per share for 20 consecutive
trading days, the Company may redeem such warrants and in such event a
subscriber must exercise such warrants within a limited period from the date
that a notice of redemption is delivered by the Company or the warrants
shall be automatically cancelled and only represent the right to receive a
redemption payment of $.001 per share. The total net proceeds derived from the
May Offering, after payment of offering expenses and commissions, are
approximately $1,407,000. The Company used the proceeds from the May Offering
for working capital and general corporate purposes.
In
addition, the Company agreed to pay commissions to registered broker-dealers
that procured investors in the May Offering of 10% of the proceeds received from
such purchasers and to issue such persons warrants to purchase such number of
shares as equals 10% of the total number of shares of common stock sold in the
May Offering to investors procured by them. Such warrants shall be exercisable
at a per share price of $0.10 and otherwise be on the same terms and conditions
as the warrants granted to the investors. The Company engaged Philadelphia
Brokerage Corporation (“ PBC ”) as the
placement agent for the May Offering. Total offering costs were $193,187, which
included commissions paid to PBC of $160,000, with an additional amount of
approximately $33,000 for legal and transfer agent fees. The Company issued to
PBC, or its designees, a total of 2,666,666 warrants.
12
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS-CONTINUED
NOTE
10 - STOCK PURCHASE WARRANTS
In
January 2010, the Company granted 100,000 warrants to an advisory board member
in a private transaction in consideration of services rendered. These warrants
are exercisable for a period of four years with an exercise price of $.06 . The
stock based compensation expense related to these warrants is approximately
$6,000.
As
previously discussed, the Company granted 92,857 warrants to a selling agent in
the August Offering and an additional 2,666,666 warrants to its placement agent
in connection with the May Offering. Also, there were
26,666,667 warrants granted to investors in connection with the May
Offering.
A summary
of the status of the Company’s outstanding stock warrants as of September 30,
2010 is as follows:
Shares
|
Weighted-Average
Exercise Price
|
|||||||
Outstanding
at December 31, 2009
|
24,152,765 | 0.11 | ||||||
Granted
|
29,526,190 | 0.10 | ||||||
Exercised
|
- | |||||||
Forfeited
|
(160,000 | ) | 0.45 | |||||
Outstanding
at September 30, 2010
|
53,518,955 | 0.10 |
NOTE
11- FAIR VALUE MEASUREMENTS
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (i.e. an exit price). The accounting guidance includes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The three levels of the fair value hierarchy are as
follows:
|
·
|
Level 1- Unadjusted quoted prices
for identical assets or liabilities in active
markets;
|
|
·
|
Level 2-Inputs other than quoted
prices in active markets for identical assets or liabilities that are
observable whether directly or indirectly for substantially the full term
of the asset or liability;
and
|
|
·
|
Level 3-Unobservable inputs for
the asset or liability, which include management’s own assumptions about
what the assumptions market participants would use in pricing the asset or
liability, including assumptions about
risk.
|
The
carrying amount reported in the condensed balance sheets for cash, accounts
receivable, accounts payable, accrued expenses approximates fair value because
of the short-term maturity of those instruments. The fair value of the revolving
line of credit approximates fair value due to short-term nature of the
borrowings under the factoring arrangement with United Capital
Funding.
The
carrying amounts and fair value of the Company’s financial instruments are
presented below as of September 30, 2010.
Carrying Amount
|
Fair Value
|
|||||||
Revolving
line of credit (Level 3)
|
$ | 728,487 | $ | 728,487 |
13
SKINNY
NUTRITIONAL CORP.
NOTES
TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS-CONTINUED
NOTE
12 - CONCENTRATIONS
Two
customers accounted for approximately 30% of the Company's total revenue for the
nine months ended September 30, 2010 and two customers accounted for
approximately 27% of the Company's total revenue for the nine months ended
September 30, 2009, representing 25% and 32% of the Company's total accounts
receivable as of and for the nine months ended September 30, 2010 and
2009.
Three
suppliers accounted for approximately 51% of the Company's total purchases for
the nine months ended September 30, 2010 and one supplier accounted for
approximately 20% of the Company's total purchases for the nine months ended
September 30, 2009, representing 52% and 28% of the Company's total accounts
payable as of and for the nine months ended September 30, 2010 and
2009.
NOTE
13 - CONTINGENCIES
Certain
conditions may exist as of the date the condensed financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The Company’s
management and its legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s condensed financial
statements. If the assessment indicates that a potentially material loss
contingency is not probable, but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material, would be
disclosed.
On
February 24, 2010, the Company filed a lawsuit with the Court of Common Pleas of
Montgomery County (the “Court”) against Beverage Incubators, Inc. and Victory
Beverage Company, Inc. (collectively, “Bev Inc.”), alleging breach of contract
and unjust enrichment claims concerning Bev Inc.’s failure to pay certain
invoices from the Company for product received from the Company. The
caption of the proceeding is Skinny Nutritional Corp. v. Beverage
Incubators, Inc., et al. The amount in controversy is $115,900. On
June 15, 2010, a default judgement was entered against the
defendant.
In
addition, the Company may be subject to claims and litigation arising in the
ordinary course of business. The Company’s management considers that any
liability from any reasonably foreseeable disposition of such other claims and
litigation, individually or in the aggregate, would not have a material adverse
effect on its financial position, results of operations or cash
flows.
NOTE
14- COMMITMENTS
In May
2010, we entered into a distribution agreement with Polar Beverages under which
we appointed them as our exclusive distributor of Skinny Water and other
products in New England and parts of New York. The distributor will use
reasonable efforts to promote the sale of the products in the territory;
however, no performance targets are mandated by the distribution agreement.
Under the distribution agreement, we agreed to pay specified amounts to the
distributor as an “invasion fee” and agreed to cover a minimum amount for
slotting fees during the initial term of the agreement. In the event we elect
not to renew the distribution agreement at the end of the initial term or any
renewal term and the distributor is not otherwise in breach of the agreement
with the time to cure having expired, we shall pay them a termination penalty
based on a multiple of its gross profit per case, as calculated pursuant to the
terms of the agreement.
Subsequently,
in September and October of 2010 we expanded our distribution network by
entering into agreements with Columbia Distributing and Fremont/Admiral Beverage
Corp. respectively. Columbia Distributing services the states of Oregon
and Washington, and Fremont/Admiral Beverage Corp services the states of Alaska,
Utah, Wyoming, New Mexico, and parts of Colorado and Texas. The
distributors will use reasonable efforts to promote the sale of the products in
the territory; however, no performance targets are mandated by the distribution
agreements.
Under
many of our distribution agreements, we granted exclusivity within the
contractually-defined territory and agreed to be responsible for the payment of
slotting fees that may be required by retailers. In addition, we often agree to
pay specified amounts to our distributors as an "invasion fee" if the integrity
of their contractually-defined territory is breached. Although our distributors
will use reasonable efforts to promote the sale of our products, no performance
targets are required by our distribution agreements. Further, under
certain of these agreements, we also will pay the distributors a termination
penalty in the event we exercise a right to terminate for convenience, or if we
elect not to renew and the distributor is not in breach. We have and may
continue to seek to augment our distribution network by establishing
relationships with larger distributors in markets that are already served. To
the extent that we need to terminate an agreement with an existing distributor
in order to accomplish this, we may be required to pay a termination fee unless
we have grounds to terminate a distributor for cause.
The
Company evaluates events that have occurred after the condensed balance sheet
date but before the condensed financial statements are issued. Based upon the
evaluation, the Company did not identify any additional recognized or
non-recognized subsequent events, other than those already disclosed, that would
have required adjustment or disclosure in the condensed financial
statements.
In
October 2010, the Company commenced a new private placement of securities of up
to $3,000,000 of shares of our common stock, at a per share offering price of
$0.03. The Company entered into subscription agreements with certain
accredited investors pursuant to which it agreed to issue and sell to the
investors and the investors agreed to purchase an aggregate of 12,866,667
shares of common stock. Net proceeds from such sales, after payment
of commissions of approximately $27,500, are approximately $358,500.
The Company intends to use the proceeds for working capital and general
corporate purposes. The Company agreed to pay commissions to registered
broker-dealers that procured investors in the Offering of 10% of the proceeds
received from such purchasers and to issue such persons such number of shares of
restricted common stock as equals 5% of the total number of shares of common
stock sold in the offering to investors procured by them. As of November 15,
2010, no common stock has been issued.
Further,
an additional 1,100,000 shares of restricted common stock were issued to a
consultant for services rendered subsequent to the end of the quarter ended
September 30, 2010.
In June
2010, the Company entered into a sponsorship agreement with Plaid Paisley LLC.
In consideration of the agreements set forth therein, and in October 2010, the
Company issued 1,250,000 shares to the designee of Plaid Paisley
LLC.
In October 2010, an investor converted 100 shares of the Company's
Series A Preferred Stock to 166,667 shares of common stock.
14
Item
2. Management’s Discussion and Analysis or Plan of
Operation.
This
management’s discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. You should read the following discussion and analysis in
conjunction with our condensed financial statements and related notes included
elsewhere in this Report. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including but not limited to those described elsewhere in this report and listed
under “Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year
ended December 31, 2009 and other reports filed with the Securities and Exchange
Commission. Except for historical information, the following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “Cautionary Notice Regarding Forward Looking
Statements” above.
Overview
Nature
of Operations
We were
originally incorporated in the State of Utah on June 20, 1984 as Parvin Energy,
Inc. Our name was later changed to Sahara Gold Corporation and on July 26, 1985
we changed our corporate domicile to the State of Nevada and on January 24, 1994
we changed our name to Inland Pacific Resources, Inc. On December 18, 2001, we
entered into an agreement and plan of reorganization with Creative Enterprises,
Inc. and changed our name to Creative Enterprises International, Inc. On
November 15, 2006, a majority of our common stockholders provided written
consent to change the name of the Company to Skinny Nutritional Corp. to more
accurately describe our evolving operations. This change became effective
December 27, 2006. This discussion relates solely to the operations
of Skinny Nutritional Corp.
Since our
formation and prior to 2006, our operations were devoted primarily to startup
and development activities, including obtaining start-up capital; developing our
corporate hierarchy, including establishing a business plan; and identifying and
contacting suppliers and distributors of functional beverages and dietary
supplements. A majority of the Company’s resources have been devoted to product
development, marketing and sales activities regarding the product line of Skinny
products, including the procurement of a number of purchase orders from
distributors.
Our
Current Products
We
operate our business in the rapidly evolving beverage industry and are currently
focused on developing, distributing and marketing nutritionally
enhanced beverages. Enhanced beverages have been leading the growth of
beverage consumption in the United States. Through the year ended December 31,
2009 and during the present fiscal year, the Company principally operates
through marketing and distributing of the “Skinny Water®” line of enhanced
waters.
During
the second fiscal quarter of 2010, we introduced Skinny Water Sport Drinks,
which consist of the following products: Blue Raspberry (Fit), Pink Berry Citrus
(Power), Goji Black Cherry (Shape) and Kiwi Lime (Active). In total, Skinny
Water® product line consists of nine flavors and in addition to the Sports line,
includes our Acai Grape Blueberry, Raspberry Pomegranate, Peach Mango Mandarin,
Lemonade Passionfruit, and Orange Cranberry Tangerine flavors. We are also
developing new product extensions with zero calories, sugar and sodium and with
no preservatives.
Skinny
Water® is formulated with a proprietary blend of electrolytes, vitamins and
antioxidants. To market this product, we had relied on the licenses from Peace
Mountain Natural Beverages Corp. (“Peace Mountain”) and Interhealth
Nutraceuticals. As previously reported, in July 2009, we completed the
purchase of certain trademarks and other intellectual property assets from Peace
Mountain, including the trademark “Skinny Water”. Skinny Water® contains
no calories or sugar, and has no preservatives or artificial colors.
Skinny Water’s Raspberry Pomegranate flavor features the all natural, clinically
tested ingredient, Hydroxycitric Acid (“Super CitriMax”) plus a combination of
calcium , potassium and ChromeMate®. Super CitriMax has been shown to suppress
appetite without stimulating the nervous system when used in conjunction with
diet and exercise. ChromeMate® is a patented form of biologically active
niacin-bound chromium called chromium nicotinate or polynicotinate that we also
obtain from Interhealth.
In
addition, the Company is currently developing a version of Skinny Water with a
natural, zero-calorie sweetener, which we expect will be available to be sold at
natural food markets.
15
The
current business strategy is to develop and maintain current regional
distribution relationships with larger distributors such as our agreements with
Canada Dry-affiliated distributors and Polar Beverage Co. and establish and
maintain relationships with national and regional retailers such as Target
Corporation. We intend to continue to focus on establishing a market for the
Skinny beverages in markets across the United States and generate sales and
brand awareness through sampling, street teams and retail promotions and
advertisements as well as building a national sales and distribution network to
take the Company’s products into retail and direct store delivery (DSD)
distribution channels. In fiscal 2009 and 2010, we increased our network
of distributors to approximately 47 distributors in 28
states.
We will
principally generate revenues, income and cash by selling and distributing
finished products in the beverage, health and nutrition industries. We will sell
these products through national retailers and local or regional
distributors. We have been focused on, and will continue to increase
existing product lines and further develop our markets. We have established
relationships with national retailers, including Target, Stop & Shop, Giant,
ACME, Harris Teeter, Shop Rite and select Walgreens, Costco and 7-Eleven stores
for the retail sale of Skinny Water. In addition to these chains, the
Company believes that its products are available in numerous independent stores
throughout the US. We expect to continue our efforts to distribute Skinny Water
through the distributors and retailers. However, these distributors and
retailers were not bound by significant minimum purchase commitments and we do
not expect that this will change in the near future. Accordingly, we must rely
on recurring purchase orders for product sales and we cannot determine the
frequency or amount of orders any retailer or distributor may make.
Our
primary operating expenses include the following: direct operating expenses,
such as transportation, warehousing and storage, overhead, fees and marketing
costs. We have and will continue to incur significant marketing expenditures to
support our brands including advertising costs, sales expense including payroll,
point of sale, slotting fees, sponsorship fees and promotional events. We
have focused on developing brand awareness through sampling both in stores and
at events. Retailers and distributors may receive rebates, promotions, point of
sale materials and merchandise displays. We seek to use in-store promotions and
in-store placement of point-of-sale materials and racks, price promotions,
sponsorship and product endorsements. The intent of these marketing expenditures
is to enhance distribution and availability of our products as well as awareness
and increase consumer preference for our brand, greater distribution and
availability, awareness and promote long term growth.
Acquisition
of Trademarks
The
Company had obtained the exclusive worldwide rights pursuant to a license
agreement with Peace Mountain to bottle and distribute a dietary
supplement called Skinny Water®. On July 7, 2009, the closing of the
previously announced Asset Purchase Agreement with Peace Mountain occurred and
we acquired from Peace Mountain certain trademarks and other intellectual
property assets, including proprietary trade secrets and domain names. The
acquired marks include the trademarks “Skinny Water®”, “Skinny Shake®”, “Skinny
Tea®”, “Skinny Bar™”, “Skinny Smoothie®’’, and “Skinny Java®”. In consideration
of the purchase of such assets, we agreed to pay Peace Mountain $750,000 in cash
payable as follows: (i) $375,000 payable up front and (ii) $375,000, less an
amount equal to the royalties paid by the Company during the first quarter of
2009 in the amount of $37,440, payable in four quarterly installments
commencing May 1, 2010. In connection with the acquisition of these assets,
we and Peace Mountain also agreed to settle in all respects a dispute between
the parties that was the subject of a pending arbitration proceeding. Pursuant
to the settlement agreement, the Company and Peace Mountain agreed to the
dismissal with prejudice of the pending arbitration proceeding and to a mutual
release of claims. In connection with the foregoing, the parties also entered
into a Trademark Assignment Agreement and Consulting Agreement. Effective with
the closing, the transactions contemplated by these additional agreements were
also consummated. Under the Consulting Agreement, which is effective as of June
1, 2009, entered into between the Company and Mr. John David Alden, the
principal of Peace Mountain, the Company will pay Mr. Alden a consulting fee of
$100,000 per annum for a two year period. Under this agreement, Mr. Alden will
provide the Company with professional advice concerning product research,
development, formulation, design and manufacturing of beverages and related
packaging. Further, the Consulting Agreement provides that the Company issue to
Mr. Alden warrants to purchase an aggregate of 3,000,000 shares of Common Stock,
exercisable for a period of five years at a price of $0.05 per share. The
Company has also registered the trademark Skinny Water® in various international
markets, including the European Union, Mexico and the Republic of Korea and has
registered the trademark Skinny Water Zero™ in the European Union.
Planned
Products
During
the quarter ended June 30, 2010, we introduced our Skinny Water Sport™ product
line. We intend to expand our product line to introduce the following products
at such times as management believes that market conditions are appropriate.
Products under development or consideration include new Skinny Water flavors,
Skinny Water Teas, Shakes, Smoothies and Coffees.
Advisory
Board
On March
20, 2008, the Company established an advisory board to provide advice on matters
relating to the Company’s products. The Company initially appointed the
following individuals to its advisory board: Pat Croce, Ron Wilson and Michael
Zuckerman. In December 2008, we appointed Mr. Wilson as our Chief Executive
Officer and President. In fiscal 2010, the Company reconstituted the
advisory board and appointed Messrs. Niki Arakelian, Ruben Azrak, Barry
Josephson and John Kilduff to its advisory board. In consideration
for their agreement to serve on our advisory board, the Company granted Mr.
Arakelian warrants to purchase 100,000 shares of common stock and issued each of
the other new appointees 250,000 restricted shares of common stock. The warrants
granted to Mr. Arakelian are exercisable for a period of four years at an
exercise price of $0.06 per share. Following the resignation of Mr. William
Sasso from the Company’s Board of Directors in October 2010, he agreed to serve
on the advisory board. Currently, these five individuals comprise the advisory
board.
16
Product
Research and Development
We intend
to expand our line of products, as described in the “Overview” section of this
Management’s Discussion and Analysis, at such time as management believes that
market conditions are appropriate. Management will base this determination on
the rate of market acceptance of the products we currently offer. We do not
engage in material product research and development activities. New products are
formulated based on our license arrangements with our suppliers and
licensors.
Marketing
and Sales Strategy
Our
primary marketing objective is to cost-effectively promote our brand and to
build sales of our products through our retailer accounts and distributor
relationships. We will use a combination of sampling, print, online advertising,
public relations and promotional/event strategies to accomplish this objective.
Management believes that proper in-store merchandising is a key element to
providing maximum exposure and to increase sales. In addition, we have
been seeking celebrity tie-ins to further enhance our visibility and during the
quarter ended June 30, 2010, we entered into a sponsorship agreement for the
Brad Paisley H20 Tour which is scheduled to last until February 2011 in numerous
markets across the United States. In addition, in June 2010, we were a
sponsor of the LPGA Shop Rite Classic golf tournament.
Through
our arrangement with Target Corporation we continue to sell Skinny Water through
approximately 1,700 stores nationally, as well as through retailers that include
convenience stores, supermarkets, drug stores and club stores. As described
below, we are also developing a National Direct Store Delivery (DSD) network of
distributors in local markets. To date, we have arrangements with approximately
47 DSDs in 28 states in the U.S. Currently we have been authorized to sell
Skinny products in ACME Markets, Stop & Shop, Giant of Carlisle, BJ’s, Shop
Rite and select CVS and Walgreens among others. Management believes that
Skinny Waters are now available in retailers with a combined store count
nationwide in excess of 5,000 stores. We are also seeking to develop sales
channels with institutional customers, such as school districts, food service
providers and the military. Further, we are also exploring international markets
for the distribution of our product line.
In
connection with our marketing campaign, we have various sales, advertising and
marketing programs to introduce our products to numerous distribution channels
and retail outlets in the U.S. These programs have included the development of a
team of experienced beverage salesman in New England, Philadelphia, New York
City, upstate New York, Baltimore, Washington, D.C., Phoenix, Los Angeles and
San Francisco markets, designing and printing of point of sale material, the
leasing and branding of mobile trucks, purchasing print ads, allocation of free
samples of Skinny Water and investing in initial store placements. For the
nine months ended September 30, 2010, our marketing expenditures were
$3,428,731 as compared to $2,109,237 for the prior period. We expect to incur
significant marketing and advertising expenditures during the balance of fiscal
2010 to market our products. We believe that marketing and advertising are
critical to our success, and to our ability to enhance our distribution network
for our products.
Distribution
Strategy
The
Company’s distribution strategy is to build out a national direct store delivery
(DSD) network of local distributors, creating a national distribution system to
sell our products. Distributors include beer wholesalers, non-alcoholic
distributors, and energy beverage distributors. To date, we have arrangements
with approximately 47 DSDs in 28 states in the U.S. and 2 distributors outside
the U.S. We work with the DSD to deliver our products, merchandise them
and assist us to obtain corporate authorization from chain stores in a
particular market. It often takes more than one DSD to deliver to all the stores
within a chain. The Company must coordinate promotions and
advertising between the chain stores and the DSD. The Company also negotiates
any slotting fees that are required for product placement.
We also
distribute our products directly to select national and regional retail accounts
based on purchase order relationships. DSDs will distribute to grocery,
convenience, health clubs, retail drug, and health food establishments. We will
contract with independent trucking companies to transport the product from
contract packers to distributors. Distributors will then sell and deliver our
products directly to retail outlets, and such distributors or sub-distributors
stock the retailers’ shelves with the products. Distributors are responsible for
merchandising the product at store level. We are responsible for managing our
network of distributors and the hiring of sales managers, who are responsible
for their respective specific channel of sales distribution.
In July
2009, we entered into a distribution agreement with Canada Dry Bottling Company
of New York under which we appointed them as our exclusive distributor of Skinny
Water and other products in the New York City metropolitan area. The distributor
will use reasonable efforts to promote the sale of the products in the
territory; however, no performance targets are mandated by the distribution
agreement. Under the distribution agreement, we agreed to pay specified amounts
to the distributor as an “invasion fee” and agreed to cover a minimum amount for
slotting fees during the initial term of the agreement. In the event we elect
not to renew the distribution agreement at the end of the initial term or any
renewal term and the distributor is not otherwise in breach of the agreement
with the time to cure having expired, we shall pay them a termination penalty
based on a multiple of its gross profit per case, as calculated pursuant to the
terms of the agreement.
Subsequently,
we expanded our distribution arrangements with Canada Dry-affiliated
distributors and now have agreements with four Canada Dry affiliated
distributors, including Davis Beverage Group, Inc., that service the
mid-Atlantic region and the New York City metropolitan area. In addition, in
2009 we also augmented our West Coast distribution network by entering into
distribution agreements with regional distributors covering portions of southern
California and Arizona. In June 2010, we announced that we entered into a
distribution agreement with Polar Beverage Co. a large distributor servicing New
England. In addition, we have also commenced a distribution pilot program with
the Dr Pepper Snapple Group for two select markets in the Midwest.
In May
2010, we entered into a distribution agreement with Polar Beverages under which
we appointed them as our exclusive distributor of Skinny Water and other
products in New England and parts of New York. The distributor will use
reasonable efforts to promote the sale of the products in the territory;
however, no performance targets are mandated by the distribution agreement.
Under the distribution agreement, we agreed to pay specified amounts to the
distributor as an “invasion fee” and agreed to cover a minimum amount for
slotting fees during the initial term of the agreement. In the event we elect
not to renew the distribution agreement at the end of the initial term or any
renewal term and the distributor is not otherwise in breach of the agreement
with the time to cure having expired, we shall pay them a termination penalty
based on a multiple of its gross profit per case, as calculated pursuant to the
terms of the agreement.
Subsequently,
in September and October of 2010 we expanded our distribution network by
entering into agreements with Columbia Distributing and Fremont/Admiral Beverage
Corp. respectively. Columbia Distributing services the states of Oregon
and Washington, and Fremont/Admiral Beverage Corp services the states of Alaska,
Utah, Wyoming, New Mexico, and parts of Colorado and Texas. The
distributors will use reasonable efforts to promote the sale of the products in
the territory; however, no performance targets are mandated by the distribution
agreement.
Under
many of our distribution agreements, we granted exclusivity within the
contractually-defined territory and agreed to be responsible for the payment of
slotting fees that may be required by retailers. In addition, we often agree to
pay specified amounts to our distributors as an "invasion fee" if the integrity
of their contractually-defined territory is breached. Although our distributors
will use reasonable efforts to promote the sale of our products, no performance
targets are required by our distribution agreements. Further, under
certain of these agreements, we also will pay the distributors a termination
penalty in the event we exercise a right to terminate for convenience, or if we
elect not to renew the agreement and the distributor is not in breach of its
obligations. We have and may continue to seek to augment our distribution
network by establishing relationships with larger distributors in markets that
are already served. To the extent that we need to terminate an agreement with an
existing distributor in order to accomplish this, we may be required to pay a
termination fee unless we have grounds to terminate a distributor for cause.
Although our payment of such fees has not been material to date, such amounts
may increase in subsequent quarters.
17
Liquidity,
Going Concern and Management Plans
To date,
the Company has needed to rely upon selling equity and debt securities in
private placements to generate cash to implement our plan of operations. We have
an immediate need for cash to fund our working capital requirements and business
model objectives and we intend to either undertake private placements of our
securities, either as a self-offering or with the assistance of registered
broker-dealers, or negotiate a private sale of our securities to one or more
institutional investors, and have engaged an investment banker to assist us in
this process. Currently, the Company can give no assurances that we will
be successful in raising sufficient capital from any proposed
financings.
At
September 30, 2010, our cash was approximately $60,000. The Company has been
substantially reliant on capital raised from private placements of our
securities, in addition to our revolving line of credit from United Capital
Funding, to fund our operations. During the nine months ended September
30, 2010, we raised an aggregate of $1,600,000 from the sales of
securities, less offering costs of approximately $193,000, to accredited
investors in a private placement. During the 2009 fiscal year, we raised an
aggregate amount of $4,900,203 from the sales of securities to accredited
investors in private transactions. See the discussion below under the
caption “Liquidity and Capital Resources” for additional information regarding
these transactions.
We
commenced a private offering of the Company's securities in reliance
upon the exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended and Rule 506 promulgated thereunder of a total of
$2,500,000 of our securities, consisting of an aggregate of 41,666,667 shares of
its common stock and warrants to purchase an additional 41,666,667 shares of
common stock. We did not sell any securities under this proposed offering. In
October 2010, we commenced a new private placement of our securities in reliance
upon Section 4(2) of the Securities Act of 1933, as amended and Rule 506
promulgated thereunder, of up to $3,000,000 of shares of our common stock, at a
per share offering price of $0.03. The securities will only be offered to
“accredited investors”, as such term is defined in Rule 501(a) promulgated under
the Securities Act and we intends to use the proceeds from the offering for
working capital and general corporate purposes. The securities have not been
registered under the Securities Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. This disclosure does not constitute an offer to sell or the
solicitation of an offer to buy any the Company’s securities, nor shall there be
any sale of these securities by the Company in any state or jurisdiction in
which the offer, solicitation or sale would be unlawful. This disclosure is
being issued pursuant to Rule 135c of the Securities Act.
Based on
our current levels of expenditures and our business plan, we believe that our
existing cash (including the proceeds received from our recent private
placement), will only be sufficient to fund our anticipated levels of operations
for a period of less than twelve months and that without raising additional
capital, the Company will be limited in its projected growth. This will depend,
however, on our ability to execute on our 2010 and 2011 operating plan and to
manage our costs in light of developing economic conditions and the performance
of our business. Accordingly, generating sales in that time period is important
to support our business. However, we cannot guarantee that we will generate such
growth. If we do not generate sufficient cash flow to support our operations
during that time frame, we will need to raise additional capital and may need to
do so sooner than currently anticipated. A “going concern” explanatory paragraph
was issued by our independent auditor in their report on our financial
statements for the year ended December 31, 2009, citing recurring losses and
negative cash flows from operations. We cannot assure you that any financing can
be obtained or, if obtained, that it will be on reasonable terms.
If we
raise additional funds by selling shares of common stock or convertible
securities, the ownership of our existing shareholders will be diluted. Further,
if additional funds are raised though the issuance of equity or debt securities,
such additional securities may have powers, designations, preferences or rights
senior to our currently outstanding securities. Further, if expenditures
required to achieve our plans are greater than projected or if revenues are less
than, or are generated more slowly than, projected, we will need to raise a
greater amount of funds than currently expected. The Company cannot provide
assurance that it will be able to obtain additional sources of liquidity and/or
modify operations to maintain liquidity on terms that are acceptable to the
Company, if at all. These factors raise substantial doubt of the Company's
ability to continue as a going concern.
Satisfaction
of Cash Requirements and Financing Activities
We have
historically primarily been funded through the issuance of common stock, debt
securities and external borrowings. We believe that net cash on hand as of the
date of this report is only sufficient to meet our expected cash needs for
working capital and capital expenditures for a period of less than twelve months
and without raising additional capital, the Company will be limited in its
projected growth. Accordingly, we have an immediate need for additional capital.
To raise additional funds, we intend to either undertake private placements of
our securities, either as a self-offering or with the assistance of registered
broker-dealers, or negotiate a private sale of our securities to one or more
institutional investors. The Company can give no assurances that we will be
successful in raising sufficient capital from any proposed financings.
Further, we cannot be assured that any additional financing will be available
or, even if it is available that it will be on terms acceptable to us. Any
inability to obtain required financing on sufficiently favorable terms could
have a material adverse effect on our business, results of operations and
financial condition. If we are unsuccessful in raising additional capital and
increasing revenues from operations, we will need to reduce costs and operations
substantially. Further, if expenditures required to achieve our plans are
greater than projected or if revenues are less than, or are generated more
slowly than, projected, we will need to raise a greater amount of funds than
currently expected. Without realization of additional capital, it would be
unlikely for us to continue as a going concern.
18
As
previously disclosed, in May 2010, the Company conducted a private
offering pursuant to which it offered an aggregate amount of
$2,000,000 of shares of common stock, par value $0.001 per share of the Company
and warrants to purchase shares of common stock (“May Offering”). On May
24, 2010, the Company terminated further selling efforts in connection with the
May Offering. In the May Offering, the Company sold an aggregate amount of
$1,600,000 of securities and issued to the investors an aggregate of 26,666,667
shares of common stock and 26,666,667 warrants. The purchase price per
share of common stock and warrant is $0.06. The warrants are exercisable at an
exercise price of $0.10 per share during the period commencing on the issue date
of the warrant and expire 24 months from the initial exercise date. The
warrants also provide that if the closing price of the Company’s common stock is
at least $0.14 per share for 20 consecutive trading days, the Company may redeem
such warrants and in such event a subscriber must exercise such warrants within
a limited period from the date that a notice of redemption is delivered by
the Company or the warrants shall be automatically cancelled and only
represent the right to receive a redemption payment of $.001 per share. The
total net proceeds derived from the May Offering, after payment of offering
expenses and commissions of approximately $193,000, are approximately
$1,407,000. The Company used the proceeds from the May Offering for working
capital and general corporate purposes.
In
addition, the Company agreed to pay commissions to registered broker-dealers
that procured investors in the May Offering of 10% of the proceeds received from
such purchasers and to issue such persons warrants to purchase such number of
shares as equals 10% of the total number of shares of common stock sold in the
May Offering to investors procured by them. Such warrants shall be exercisable
at a per share price of $0.10 and otherwise be on the same terms and conditions
as the warrants granted to the investors. The Company engaged Philadelphia
Brokerage Corporation (“ PBC ”) as the
placement agent for the May Offering. Total offering costs were $193,187, which
included commissions paid to PBC of $160,000 with an additional amount of
approximately $33,000 for legal and transfer agent fees. The Company
issued to PBC, or its designees, a total of 2,666,666 warrants.
In
October 2010, we commenced a new private placement securities in reliance upon
Section 4(2) of the Securities Act of 1933, as amended and Rule 506 promulgated
thereunder, of up to $3,000,000 of shares of our common stock, at a per share
offering price of $0.03. The securities will only be offered to “accredited
investors”, as such term is defined in Rule 501(a) promulgated under the
Securities Act. The Company entered into subscription agreements with certain
accredited investors pursuant to which we agreed to issue and sell to the
investors and the investors agreed to purchase an aggregate of 12,866,667
shares of Common Stock. Net proceeds from such sales, after payment of
offering expenses and commissions of approximately $27,500, are approximately
$358,500. We intend to use the proceeds for working capital and
general corporate purposes. We agreed to pay commissions to registered
broker-dealers that procured investors in the Offering of 10% of the proceeds
received from such purchasers and to issue such persons such number of shares of
restricted common stock as equals 5% of the total number of shares of Common
Stock sold in the Offering to investors procured by them. The securities have
not been registered under the Securities Act and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements. This disclosure does not constitute an offer to sell
or the solicitation of an offer to buy any the Company’s securities, nor shall
there be any sale of these securities by the Company in any state or
jurisdiction in which the offer, solicitation or sale would be unlawful. This
disclosure is being issued pursuant to Rule 135c of the Securities
Act.
We have
developed operating plans that project profitability based on known assumptions
of units sold, retail and wholesale pricing, cost of goods sold, operating
expenses as well as the investment in advertising and marketing. These operating
plans are adjusted monthly based on actual results for the current period and
projected into the future and include statement of operations, balance sheets
and sources and uses of cash. If we are able to meet our operating targets,
however, we believe that we will be able to satisfy our working capital
requirements. No assurances can be given that our operating plans are accurate
nor can any assurances be provided that we will attain any such targets that we
may develop.
In fiscal
2009, the Company had conducted a private offering to which it sought to raise
an aggregate amount of $2,100,000 of shares of Series A Preferred Stock. The
shares of Series A Preferred Stock had an initial conversion rate of $0.06 per
share, with customary adjustments for stock splits, stock dividends and similar
events. At the conclusion of this offering, the Company accepted total
subscriptions of $2,035,000 for an aggregate of 20,350 shares of Series A
Preferred Stock. The Company used the net proceeds from this offering of
approximately $1,940,000 for working capital, repayment of debt and general
corporate purposes. The Company agreed to pay commissions to registered
broker-dealers that procured investors in this offering and issue such persons
warrants to purchase such number of shares as equals 10% of the total number of
shares actually sold in the Offering to investors procured by them. Such
warrants shall be exercisable at the per share price of $0.07 for a period of
five years from the date of issuance.
Following
the approval by the Company’s stockholders of the proposal to increase the
Company’s authorized number of shares of common stock, the Company filed a
Certificate of Amendment to its Articles of Incorporation with the State of
Nevada on July 6, 2009. In accordance with the Certificate of Designation,
Preferences, Rights and Limitations of the Series A Preferred Stock, upon the
effectiveness of such filing, all of the 20,350 shares of Series A Preferred
Stock subscribed for by investors were automatically convertible into an
aggregate of 33,916,667 shares of common stock. As of September 30, 2010,
holders of 18,330 shares of Series A Preferred Stock had received 30,550,000
shares of common stock upon conversion and the holders of the remaining 2,020
shares of Series A Preferred Stock have not yet surrendered such shares for
cancellation.
19
In August
2009, the Company commenced a private offering of shares of common stock in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder (the “August Offering”)
pursuant to which it offered an aggregate amount of 41,666,667 shares of common
stock for $2,500,000. The shares of common stock were offered and sold at
a purchase price of $0.06 per share. At the conclusion of the offering in
December 2009, the Company had accepted total subscriptions of $1,766,000 for an
aggregate of 29,433,335 shares of common stock. Net proceeds from such sales
were approximately $1,680,000. The Company used the net proceeds from the August
Offering for working capital, repayment of debt and general corporate purposes.
The Company agreed to pay commissions to registered broker-dealers that procured
investors in the August Offering and issue such persons warrants to purchase
such number of shares that equals 10% of the total number of shares actually
sold in the August Offering to investors procured by them. Such warrants shall
be exercisable at the per share price of $0.07 for a period of five years from
the date of issuance. In the August Offering, the Company paid commissions of
$6,500 to registered broker-dealers and issued warrants to purchase 92,857 to a
selling agent the procured investors in this offering.
Results
of Operations: Three Months Ended September 30, 2010 compared to Three Months
Ended September 30, 2009
Net
revenues were $1,882,912 for the three months ended September 30, 2010, (net of
billbacks of $277,382 and slotting fees of $45,868) as compared to
$1,543,799 for the three months ended September 30, 2009. This increase
reflects increased product sales as a result of management focusing resources on
the marketing and distribution and branding of our Skinny Water flavors,
preparing for the launch of these products into the Company’s current 47 Direct
Store Delivery (“DSD”) in 28 states.
Gross
profit was $467,461 for the three months ended September 30, 2010 as
compared to $519,815 for the three months ended September 30, 2009, reflecting
increased costs due to the establishment of the Skinny brand name, and
continuing efforts to manage our cost of goods sold in bottling, raw material
costs, reformulation and freight costs, associated with our relationships with
our bottle supplier, flavor house and co-packer.
Marketing and advertising was
$1,182,028 for the three months ended September 30, 2010 as compared to $995,634
for the three months ended September 30, 2009 reflecting the Company’s increased
efforts to effectively establish the Skinny brand with retailers and
distributors and for general brand promotion to introduce Skinny Water to
the retail marketplace on a national level. This increase includes expenses
consisting of in-store advertising and sampling events and adding additional
sales staff and sampling teams for the expanded territories.
Operating
expenses were $2,590,149 for the three months ended September 30, 2010 as
compared to $1,946,378 for the three months ended September 30, 2009. The
costs were associated with marketing expense to expand the Skinny Water flavors,
as described below, along with the cost of hiring additional sales staff for the
new expanded territories, along with the costs of the non-cash items of $719,024
for the three months ended September 30, 2010 for depreciation, employee
options, stock warrant and compensation expense in addition to stock issued for
services as compared to $634,835 for the same prior year
period.
20
Interest
expense was $64,100 for the three months ended September 30, 2010 as compared to
$103,444, for the three months ended September 30, 2009 reflecting the
borrowings to manage our inventory and receivables along with the overall
financing of the operations during the prior year third quarter. Our note
payable due to Valley Green Bank was paid in its entirety during the second
quarter of 2010.
Net
losses from operations were $2,122,688, for the three months ended September 30,
2010, inclusive of non-cash loss of $719,024 as compared to a loss of
$1,426,563, inclusive of non-cash loss of $634,835 for the three months ended
September 30, 2009.
Net
revenues were $5,911,218 for the nine months ended September 30, 2010, (net of
billbacks of $723,092 and slotting fees of $275,962) as compared to $3,861,549
for the nine months ended September 30, 2009. This increase reflects
increased product sales as a result of management focusing resources on the
marketing and distribution and branding of our Skinny Water flavors, preparing
for the launch of these products with the Company’s current distributors in 28
states and the launch, in the second quarter, of our new product line Skinny
Sport.
Gross
profit was $1,606,872 for the nine months ended September 30, 2010 as
compared to $1,174,732 for the nine months ended September 30, 2009, reflecting
increased revenue due to the establishment of the Skinny brand name, and
continuing emphasis on managing our cost of goods sold in bottling, raw material
costs, through reformulation, and freight costs, associated with our
relationships with our bottle supplier, flavor house and co-packer.
Marketing and advertising was
$3,428,731 for the nine months ended September 30, 2010 as compared to
$2,109,237 for the nine months ending September 30, 2009 reflecting the
Company’s increased efforts to effectively establish the Skinny brand with
retailers and distributors and for general brand promotion to introduce
Skinny Water to the retail marketplace on a national level. This increase
includes expenses consisting of in-store advertising and sampling events,
sponsorship fees and adding additional sales staff and sampling teams for the
expanded territories.
Operating
expenses were $6,855,251 for the nine months ended September 30, 2010 as
compared to $4,533,018 for the nine months ended September 30, 2009. The
costs were associated with marketing expense to expand the Skinny Water flavors,
as described below, along with the cost of hiring additional sales staff for the
new expanded territories, sponsorship fees, along with the costs of the non-cash
items of $1,845,317 for the nine months ended September 30, 2010 for
depreciation, employee options, stock warrant and compensation expense in
addition to stock issued for services as compared to $1,231,250 for same prior
year period.
Interest
expense was $148,395 for the nine months ended September 30, 2010 as compared to
$277,809 for the nine months ended September 30, 2009, reflecting the borrowings
to manage our inventory and receivables along with the overall financing of
the operations during the nine months ended September 30, 2010 as compared to
the prior period. Our note payable due to Valley Green Bank was paid in
its entirety during the second quarter of 2010.
Net
losses from operations were $5,248,379, for the nine months ended September 30,
2010, inclusive of non-cash loss of $1,845,317 as compared to a loss of
$3,358,286, inclusive of non-cash loss of $1,231,250 for the nine months ended
September 30, 2009.
21
Liquidity
and Capital Resources
Cash
Flow
Cash
totaled $59,992 at September 30, 2010, compared to $29,479 at September 30,
2009. The change in cash primarily reflects our use of funds during the nine
months ended September 30, 2010 for operations, partially offset by operating
losses.
Operating
Activities
Net cash
used in operating activities totaled $1,882,651 for the nine months ended
September 30, 2010 as compared to $2,822,291 for the nine months ended
September 30, 2009. This is primarily attributable to net losses of $5,396,774
and to create additional inventory to service our increased revenue base,
partially offset by non-cash expense of $1,845,317 for the nine months ended
September 30, 2010, as compared to $1,231,250 for the same prior year
period.
Investing
Activities
Net cash
used in investing activities totaled $15,787 for the nine months ended September
30, 2010 as compared to $884,863 for the prior year period. Cash used in
investing activities during the 2009 period primarily represented net purchases
of office equipment and trademarks.
Financing
Activities
Net cash
provided by financing activities totaled $1,767,561 for the nine months ended
September 30, 2010 and $3,500,624 for the prior year period. Cash provided by
financing activities was primarily due to our use of proceeds from our revolving
line of credit during the first, second and third quarter of 2010 and 2009. In
addition, from the sale of our securities in our private placement during
the second quarter of 2010, as well as securities issued in our private
placement during the first and second quarters of 2009.
Other
Transactions Impacting our Capital Resources
On April
4, 2007, the Company closed on a secure loan arrangement with Valley Green Bank
pursuant to which it received funds in the amount of $340,000. As of September
30, 2010 the balance of this loan has been paid in its
entirety.
On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”) which provided for an initial
borrowing limit of $300,000. This arrangement has been renewed and the borrowing
limit has been incrementally increased to extend our line to the lesser of 85%
of outstanding eligible receivables or $2,000,000. As of September 30,
2010 we had $728,487 outstanding through this arrangement. All accounts
submitted for purchase must be approved by UCF. The applicable factoring fee is
0.30% of the face amount of each purchased account and the purchase price is 85%
of the face amount. UCF will retain the balance as a reserve, which it holds
until the customer pays the factored invoice to UCF. In the event the reserve
account is less than the required reserve amount, we will be obligated to pay
UCF the shortfall. In addition to the factoring fee, we will also be responsible
for certain additional fees upon the occurrence of certain
contractually-specified events. As collateral securing the obligations, we
granted UCF a continuing first priority security interest in all accounts and
related inventory and intangibles. Upon the occurrence of certain
contractually-specified events, UCF may require us to repurchase a purchased
account on demand. In connection with this arrangement, each of our Chief
Executive Officer and Chief Financial Officer agreed to personally guarantee our
obligations to UCF. The agreement will automatically renew for successive one
year terms until terminated. Either party may terminate the agreement on three
month’s prior written notice. We are liable for an early termination fee in the
event we fail to provide them with the required written notice.
On June
10, 2010, Ronald D. Wilson, who served as the President and Chief Executive
Officer and a member of the Board of Directors of the Company since December
2008, resigned from his positions as Chief Executive Officer and President
effective as of June 30, 2010, and further agreed not to stand for reelection at
the Company’s annual meeting of stockholders, which was held on July 14, 2010.
Following Mr. Wilson’s decision, the Board of Directors of the Company appointed
Mr. Michael Salaman, to serve as the Company’s Chief Executive Officer,
effective June 30, 2010. In connection with the above matters, on June 10,
2010, the Company entered into a separation agreement with Mr. Wilson which
memorializes the terms of his resignation. Pursuant to the separation agreement
and in consideration of the general release granted by Mr. Wilson to the
Company, the Company entered into a consulting agreement with Mr. Wilson under
which he will provide consulting services to the Company for a term expiring
December 31, 2010 in connection with the Company’s acquisition of distribution
accounts. Pursuant to the separation and consulting agreements, the Company
agreed to pay to or provide Mr. Wilson with the following: (a) continued
compensation at the rate of $12,500 per each thirty day period of service during
the term of the consulting agreement; (b) the continued provision of health
benefits and automobile reimbursement through December 31, 2010; and
(c) the issuance of a maximum of 2,000,000 restricted shares of common
stock, with 750,000 shares issued on the effective date of the consulting
agreement, which was based upon the fair market value of the common stock on the
date of the agreement and the open issuance of the remaining shares being
subject to the occurrence of certain milestones prior to June 30, 2011, based
upon the value of the stock at the date the milestone is achieved. In addition,
the Company confirmed in the separation agreement that all unvested stock
options held by Mr. Wilson shall be deemed vested as of the date of termination
of his employment and that such options shall remain exercisable for their
original exercise period in accordance with the terms of such options and that
the warrants to purchase shares of common stock held by him as of the
termination date shall continue in full force and effect in accordance with
their terms. As of September 30, 2010, the Company issued 750,000 shares
of common stock to Mr. Wilson as a result of the consulting agreement. The
Company incurred $59,250 of expense relating to this transaction, which was
based upon the fair market value of the common stock on the date of the
agreement. As of September 30, 2010, the Company accrued for the issuance
of 250,000 shares of common stock as a result of reaching certain milestones
under its agreement with its former Chief Executive Officer. The value of
these shares was equal to approximately $20,000 which represents the fair value
of the stock on the date of the agreement.
22
During
the nine months ended September 30, 2010, we issued additional shares of common
stock and other equity securities as follows. During the nine months ended
September 30, 2010, the Company issued 1,215,000 shares of common stock, worth
approximately $103,000 valued at the fair value of the stock on the effective
date of the consulting agreement, to a consultant for services rendered.
In May 2010, the Company issued 625,000 shares of common stock to the law firm
of Stradley, Ronon, Stevens & Young, LLP (“ SRSY ”), which
provides legal services to us from time to time as outside counsel. Such shares
were issued in lieu of payment of approximately $50,000 in outstanding fees owed
to such firm. In February 2010, the Company granted 529,625 restricted shares of
common stock to SRSY, in lieu of payment of approximately $59,000 in outstanding
fees owed to such firm. Mr. William R. Sasso, a former member of the Company’s
Board of Directors, is Chairman of SRSY and is also a partner serving on SRSY’s
board of directors and management committee.
On July
14, 2010, the Company granted 250,000 shares of restricted stock to each of
its three newly elected directors, Messrs. John J. Hewes, Francis Kelly and
Michael Zuckerman. In August 2010, the Company issued 250,000 shares of
common stock to Mr. William R. Sasso, who was a member of the Company’s board of
directors at the time of such grant, in consideration of his service on the
board.
As
of August 12, 2010, the Company approved employment agreements with each of
its Chief Executive Officer, Mr. Michael Salaman, and its Chief Financial
Officer, Mr. Donald J. McDonald. Pursuant to such agreements, the Company
granted 3,000,000 shares of restricted common stock to each of its Chief
Executive Officer and Chief Financial Officer.
In August
2010, the Company granted 100,000 shares of common stock to a beverage
distributor in consideration of entering into a distribution agreement with the
Company and further authorized the issuance to such distributor of additional
shares of common stock in the event that it achieves certain performance targets
with respect to product sales under the distribution agreement.
On
September 13, 2010, the Company’s board of directors approved the grant of an
aggregate of 7,435,000 shares common stock to certain employees of the Company
under the Company’s 2009 Equity Incentive Compensation Plan. The restricted
stock awards are subject to the following vesting provisions: 25% of each award
shall be vested on the grant date and the balance of such awards will vest in
equal installments of 25% on each of the subsequent three anniversary dates of
date of grant. Accordingly, an aggregate of 1,858,750 shares were vested on the
grant date. Of the total restricted shares granted, each of the Company’s Chief
Executive Officer and Chief Financial Officer were granted 2,000,000 restricted
shares. No stock was issued at September 30, 2010.
In
February 2010, we granted 200,395 restricted shares of common stock to our chief
financial officer in lieu of an amount of approximately $20,000 owed for accrued
compensation . In addition, in January 2010, the Company issued warrants
to purchase 100,000 shares of common stock to an individual in consideration of
his agreement to join our advisory board. Such warrants are exercisable for a
period of four years at an exercise price of $0.06 per share.
In June
2010, the Company entered into a sponsorship agreement with Plaid Paisley LLC.
In consideration of the agreements set forth therein, the Company agreed to
issue 1,250,000 shares of restricted common stock and agreed to pay in the
aggregate $150,000 payable in three equal installments. The total expense
recognized under this agreement through September 30, 2010 is approximately
$121,000. The common stock was valued based upon the fair market value of
the common stock on the date of the agreement.
Further,
in June 2010, we agreed to grant up to 250,000 shares of restricted common stock
to a consultant which shares may be issued upon the occurrence of certain
milestones. We also agreed with this consultant that it may elect to receive the
consulting fees due under the agreement in restricted shares of common stock in
lieu of the payment of cash fees. As of September 30, 2010, 50,000 shares were
earned under this agreement; no shares were issued under this agreement as of
September 30, 2010. During the nine months ended September 30, 2010,
the Company incurred approximately $4,000 of expense relating to this
transaction, which was based upon the fair market value of the stock on the date
of the agreement.
In March
2010, the Company issued 877,193 shares of common stock to an equipment vendor
in consideration for its assignment and transfer to the Company of promotional
advertising materials valued at $50,000. The vendor is an entity affiliated with
Mr. Arakelian, a new member of our advisory board. In March 2010, the
Company agreed to issue 250,000 shares of common stock to each of three
individuals in consideration for such persons joining the Company’s advisory
board, or an aggregate of 750,000 shares of common stock, and issued 100,000
shares of common stock to a financial consultant in consideration of services
rendered in connection with our 2009 private placement.
In
February 2008, the Company entered into a three year bottle supply agreement
with Zuckerman-Honickman, Inc. (“ Z-H ”), a privately
held packaging company that is supplier of plastic and glass bottles to the
beverage industry in North America, Z-H pursuant to which the Company purchases
all of its requirements for bottles from Z-H. This agreement was subsequently
amended in October 2008 to extend the term for an additional four years.
Following the expiration of the term of this agreement, Z-H will a right of
first refusal to match any third party suppliers offer to continue to serve as
the Company’s supplier. Since the commencement
of this agreement, the Company has purchased the following amounts of product
from Z-H: approximately $737,000 during fiscal 2008, approximately $1,234,000
during fiscal 2009 and during fiscal 2010, approximately $1,447,000 through
the nine months ended September 30, 2010. As of September 30, 2010, there
was approximately $579,000 due to Z-H. Although the Company is required to
purchase all of its bottle requirements from Z-H under this agreement, the
agreement does not mandate any quantity of purchase commitments. Our
newly-elected board member, Michael Zuckerman, is a principal of Z-H. Mr.
Zuckerman undertakes to recuse himself from any votes that may come before the
Board of Directors (or any committees of the board on which he may serve) that
concern the Company’s agreements with Z-H, or otherwise impact upon
Z-H.
23
New
Employment Agreements
As
of August 16, 2010, the Company entered into employment agreements with
each of its Chief Executive Officer, Mr. Michael Salaman, and its Chief
Financial Officer, Mr. Donald J. McDonald. Except for base salary and titles,
the employment agreements are identical in all material respects and are
summarized below. The employment agreements are effective as of August 12, 2010.
As used in the following summary, the term “Executive(s)” shall refer to Messrs.
Salaman and McDonald. Pursuant to their employment agreements, the Company
agreed to employ and appoint Mr. Salaman in the capacity as the Chief Executive
Officer and President of the Company and to employ Mr. McDonald as the Chief
Financial Officer of the Company. The employment agreements are for an initial
term of three years from the effective date, provided, however that upon each
one year anniversary of the effective date, the agreements will automatically
extend for an additional one year period unless either party provides notice to
the other that the agreements should not extend. Under the employment
agreements, Mr. Salaman will receive a base salary at the initial rate of
$150,000 per annum and Mr. McDonald shall receive a base salary at the initial
rate of $140,000. However, the base salary shall increase annually by an
amount determined by the Board or the Compensation Committee based on benchmarks
set by the Board or Compensation Committee. In addition, the Executives
shall be eligible to receive an annual cash bonus, the amount of which to be
determined in the discretion of the Board of Directors or its designated
committee. Further, the Company also granted each of the Executives 3,000,000
shares of restricted common stock upon their execution of the agreement. The
employment agreements also provide that in the event the Company proposes to
issue new shares of Common Stock (or equity securities convertible into or
exercisable or exchange for, shares of Common Stock) in a transaction for the
principal purpose of raising capital, then each Executive will be provided the
opportunity to purchase such number of newly-issued equity securities to permit
them to maintain their then-current percentage interest, at the same time, and
under the same terms and conditions, as such shares are offered for purchase by
other persons.
The
employment agreements further provides that upon either the occurrence of a
change of control or in the event of the termination of the Executive’s
employment either (i) by the Company without cause or (ii) by the Executive for
good reason, then effective as of the consummation of such change of control or
termination date, and notwithstanding anything herein or in any stock option
agreement to the contrary, (a) the Executive’s right to purchase shares of
Common Stock of the Company pursuant to any stock option or stock option plan
shall immediately fully vest and become exercisable and (b) the exercise period
in which he may exercise such options shall be extended to the duration of their
original term, as if the Executive remained an employee of the Company. In
addition, in the event of the termination of employment by the Company without
“cause” or by an Executive for “good reason,” as those terms are defined in the
employment agreements, the Executive would be entitled to: (i) base salary for
the final payroll period of employment, through the date employment with the
Company terminates; (ii) a severance payment of an amount equal to the sum of
his base salary for the amount of time remaining in the term of the employment
agreement plus the bonus compensation paid for the fiscal year immediately
preceding termination, either in accordance with the Company’s regular pay
periods or in a lump-sum payment in the sole discretion of the Board; and (iii)
have the Company pay the premium cost of continued participation in the
Company’s group health plans and make payments to his health savings account, if
any, in accordance with Company policy until the sooner to occur of (a) the
expiration of the severance pay period and (b) the date he becomes eligible to
enroll in any health plan of another employer. The benefits payable upon
termination without cause or for good reason would also be paid to an Executive
in the event the agreement is terminated due to disability, except that the
severance payment and continuation of benefits would be calculated on the basis
of one year.
The
foregoing description of the Company’s employment agreements with Messrs.
Salaman and McDonald are qualified in their entirety by reference to the full
text of such agreements, which were filed as Exhibits 10.6 and 10.7 to our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2010.
24
Off-Balance
Sheet Arrangements
We have
not created, and are not party to, any special-purpose or off-balance sheet
entities for the purpose of raising capital, incurring debt or operating parts
of our business that are not consolidated into our financial statements and do
not have any arrangements or relationships with entities that are not
consolidated into our financial statements that are reasonably likely to
materially affect our liquidity or the availability of our capital
resources.
We have
entered into various agreements by which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
provisions are included in contracts arising in the normal course of business
under which we customarily agree to hold the indemnified party harmless against
losses arising from a breach of the contract terms. Payments by us under such
indemnification clauses are generally conditioned on the other party making a
claim. Such claims are generally subject to challenge by us and to dispute
resolution procedures specified in the particular contract. Further, our
obligations under these arrangements may be limited in terms of time and/or
amount and, in some instances, we may have recourse against third parties for
certain payments made by us. It is not possible to predict the maximum potential
amount of future payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of each particular
agreement. Historically, we have not made any payments under these agreements
that have been material individually or in the aggregate. As of September 30,
2010, we were not aware of any obligations under such indemnification agreements
that would require material payments.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Not
applicable.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
Our
management, with the participation of the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-(e)) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon that evaluation we have concluded that our disclosure controls
and procedures are not effective in ensuring that all material information
required to be filed with the SEC is recorded, processed, summarized and
reported within the time period specified in the rules and forms of the SEC
because of material weaknesses in our internal control over financial reporting
as discussed below and in our Annual Report on Form 10-K for the year ended
December 31, 2009, as filed with the SEC on April 2, 2010.
In light
of the material weaknesses described in our Annual Report on Form 10-K for the
year ended December 31, 2009, as filed with the SEC on April 2, 2010, our
management continues to perform additional analyses and other post-closing
procedures to ensure that our unaudited interim condensed financial statements
are prepared in accordance with U.S. GAAP. Accordingly, our management believes
that the unaudited interim condensed financial statements included in this
report fairly present in all material respects our financial condition, results
of operations and cash flows for the periods presented.
Changes
in Internal Control Over Financial Reporting
As
previously reported in our Annual Report on Form 10-K for the year ended
December 31, 2009, as filed with the SEC on April 2, 2010, the Company
intends to engage additional outside consultants to assist management in further
enhancing its ability to identify and report on issues related to equity
transactions. With respect to the identified material weakness pertaining
to the Company’s closing procedures to allow it to estimate its allowance for
doubtful accounts and accrued expenses, the Company has evaluated its policies
and procedures and matrices to improve monitoring of potentially doubtful
accounts. In addition, with respect to the material weakness identified
regarding its inability to timely perform a formal assessment of its controls
over financial reporting, the Company has engaged an external consultant to
assist the Company in undertaking its assessment in a timely
manner.
25
During
the quarter ended September 30, 2010, the Company's management continued to
implement the steps outlined above. No other changes to internal controls over
financial reporting have come to management’s attention during the
quarter ended September 30, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Inherent
Limitations on Effectiveness of Controls
We do not
expect that disclosure controls or internal controls over financial reporting
will prevent all errors or all instances of fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system's objectives will be met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and any design may not succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures. Because of the inherent limitation of a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
26
Part
II – OTHER INFORMATION
Item
1. Legal Proceedings.
Except as
reported below and in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2010, we are not currently a party to any lawsuit or proceeding
which, in the opinion of our management, is likely to have a material adverse
effect on us.
On
February 24, 2010, the Company filed a lawsuit with the Court of Common Pleas of
Montgomery County (the “Court”) against Beverage Incubators, Inc. and Victory
Beverage Company, Inc. (collectively, “Bev Inc.”), alleging breach of contract
and unjust enrichment claims concerning Bev Inc.’s failure to pay certain
invoices from the Company for product received from the Company. The
caption of the proceeding is Skinny Nutritional Corp. v. Beverage
Incubators, Inc., et al. The amount in controversy is $115,900. On
June 15, 2010, a default judgement was entered against the
defendant.
We are
subject to claims and litigation arising in the ordinary course of business. Our
management considers that any liability from any reasonably foreseeable
disposition of such other claims and litigation, individually or in the
aggregate, would not have a material adverse effect on our financial position,
results of operations or cash flows.
Item
1A. Risk Factors
Our
operating results and financial condition have varied in the past and may in the
future vary significantly depending on a number of factors. In addition to the
other information set forth in this report, you should carefully consider the
factors discussed in the “Risk Factors” sections in our Annual Report on Form
10-K for the year ended December 31, 2009, as filed with the SEC on April 2,
2010, for a discussion of the risks associated with our business, financial
condition and results of operations. These factors, among others, could have a
material adverse effect upon our business, results of operations, financial
condition or liquidity and cause our actual results to differ materially from
those contained in statements made in this report and presented elsewhere by
management from time to time. The risks identified by the Company in its reports
are not the only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently believe are immaterial also may
materially adversely affect our business, results of operations, financial
condition or liquidity. We believe there have been no material changes in our
risk factors from those disclosed in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, as filed with the SEC on April 2,
2010.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Except as
described below, we did not issue any securities that were not registered under
the Securities Act of 1933, as amended during the fiscal quarter ended September
30, 2010 other than those disclosed elsewhere in the Quarterly Report on
Form 10-Q and in previous SEC filings.
During
the quarter ended September 30 2010, the Company issued 400,000 restricted
shares of common stock to a consultant for services rendered. There were
100,000 shares issued in each of July and August 2010 and an additional 200,000
shares issued September 2010. Subsequent to the quarter ended September 30,
2010, the Company issued an aggregate of 1,100,000 shares to a consultant for
services rendered.
In August
2010, the Company issued 250,000 shares of common stock to Mr. William R. Sasso,
who was a member of the Company’s Board of Directors at the time of such grant,
in consideration of his service on the board.
In June
2010, the Company entered into a sponsorship agreement with Plaid Paisley LLC.
In consideration of the agreements set forth therein, in October 2010, the
Company issued 1,250,000 shares to the designee of Plaid Paisley
LLC.
On
September 13, 2010, the Company’s Board of Directors approved the grant of an
aggregate of 7,435,000 shares of common stock to certain employees of the
Company under the Company’s 2009 Equity Incentive Compensation Plan. The
restricted stock awards are subject to the following vesting provisions: 25% of
each award shall be vested on the grant date and the balance of such awards will
vest in equal installments of 25% on each of the subsequent three anniversary
dates of date of grant. Accordingly, an aggregate of 1,858,750 shares were
vested on the grant date. Of the total restricted shares granted, each of the
Company’s Chief Executive Officer and Chief Financial Officer were granted
2,000,000 restricted shares. No stock was issued at September 30,
2010.
In
September 2010, the Company granted 100,000 shares of common stock, worth
approximately $6,000, to a beverage distributor in consideration of entering
into a distribution agreement with the Company and further authorized the
issuance to such distributor of additional shares of common stock in the event
that it achieves certain performance targets with respect to product sales under
the distribution agreement.
The
issuance of the foregoing securities were exempt from registration under the
Securities Act of 1933, as amended, under Section 4(2) thereof as transactions
by an issuer not involving any public offering inasmuch as the Company believes
the acquirers are accredited investors or were otherwise provided with access to
material information about the Company, that acquired the securities for
investment purposes and such securities were issued without any form of general
solicitation or general advertising.
During
the quarter ended September 30, 2010, we did not repurchase any shares of
our common stock.
27
Item
3. Defaults Upon Senior Securities
None.
Item
4. Removed and Reserved
None.
Item
5. Other Information
None.
28
Item
6. Exhibits
The
following exhibits are filed herewith or incorporated by reference.
Incorporated by Reference
|
||||||||||
Exhibit
Number
|
Exhibit Description
|
Form
|
Filing
Date
|
Exhibit
|
Filed
Herewith
|
|||||
10.1
|
Employment
Agreement with Michael Salaman ††
|
10-Q
|
11/15/10
|
10.6
|
||||||
10.2
|
Employment
Agreement with Donald J. McDonald ††
|
10-Q
|
11/15/10
|
10.7
|
||||||
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
||||||||
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
||||||||
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
X
|
||||||||
††
|
Compensation
plans and arrangements for executives and others.
|
29
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SKINNY
NUTRITIONAL CORP.
|
||
November
15, 2010
|
By:
|
/s/ Michael Salaman
|
Michael
Salaman
|
||
Chief
Executive Officer
|
||
By:
|
/s/ Donald J. McDonald
|
|
Donald
J. McDonald
|
||
Chief
Financial
Officer
|