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)

 

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Issuer’s telephone number:  (610) 784-2000

 

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(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.

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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:

 

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our future financial results;

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our future growth and expansion into new markets; and

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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.

 

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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.

 

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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.

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.

 

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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.

 

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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. 

 

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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.

 

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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.

 

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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.

 

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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.

 

 

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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.

 

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.

 

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SIGNATURES

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

	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