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| SKNN.OB > SEC Filings for SKNN.OB > Form 10-K on 10-Apr-2009 | All Recent SEC Filings |
10-Apr-2009
Annual Report
FORWARD-LOOKING STATEMENTS
The following discussion includes forward looking statements and uncertainties, including plans, objectives, goals, strategies, financial projections as well as known and unknown uncertainties. The actual results of our future performance may differ materially from the results anticipated in these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievement. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-K.
OVERVIEW
Our Company
We are a development stage company. We have not yet realized any revenues from our planned operations.
We have designed and continue to develop an innovative footwear product - a two-part footwear structure consisting of an outer collapsible "Skin" and an inner orthopedic support section called the "Bone." This structure enables consumers to purchase one inner section and multiple outer skins - resulting in multiple style variations from the same pair of inner section, with the same feel and fit despite the type of Skin being worn. Our primary activities have been conducting research and development, performing business, strategic and financial planning, and raising capital.
We have initially designed and manufactured men's and women's footwear and distributed to a test market through soft commercial launches in 2007 and 2008. Due to technological advances in the product, we updated the design of the Bone to be launched for the Spring/Summer 2009 season. The Bone is designed such that it can only be worn once it is inside the Skin and not on its own. As a result of the product enhancements and advanced technologies all inventory was rendered obsolete at December 31, 2008.
We anticipate marketing our products via traditional footwear channels, non-traditional apparel channels, the Internet and other retail locations that traditionally do not have a footwear department. Due to the interchangeability of a Skin and a Bone, a consumer will know how the product will fit and feel once they own a Bone, allowing the customer to purchase a Skin from various venues without having to try on the product.
Our objective is to create a new attire concept that allows and encourages consumers to more frequently change their footwear - positioning the Skins concept between footwear and apparel. Our footwear will initially be designed with an active, youthful lifestyle in mind. We will initially design most of our styles to be fashionable and marketable to the 18- to 35-year old consumer, with consideration in the future to lines that will appeal to the broad cross-section of the population.
PLANNED OPERATIONS
Product Development
We have designed, outsourced manufactured and are marketing a patented quality men's and women's footwear. We completed a test and soft launch to limited number of select retailers during the third quarter of 2007 and the second quarter of 2008. The focus is on creating a high-end line of Skins priced at a manufacturer's suggested average retail price of $110 to $130 for women and $140 to $160 for men. Based upon test launches in 2007 and 2008, further market research conducted with our retail partners, design consultants, and practical feedback, the Bone now has no toe-box in an attempt to increase comfort and provide a better fit to a wider audience of consumers. The Bone and Skins technology, as it stands today, has now been field tested with different retailers, different consumers and is scalable and transferable. Our Skins are being designed by our in-house designer and other outsourced design firms. They collaboratively put together the collection for men's and women's Skins, the packaging and retail displays, and help in refining the creative identity of the brand.
We continue to seek ways to lower costs, and explore other materials with various characteristic benefits and will always look to improve upon our product. As a result we made the decision to use a manufacturer located in Brazil and use a sourcing agent with local Brazilian shoe manufacturing expertise. We believe that the change in manufacturer will both reduce our production costs while raising the quality of our product. The Brazilian made Spring/Summer 2009 Collection ("SS 2009") was delivered in March 2009 and shipped to retailers through April 2009. We are currently taking orders on the Brazilian made Fall/Winter 2009 Collection ("F/W 2009").
Sourcing
On November 24, 2008 the Company entered into a Buying Agency Agreement with LJP International, LLC. Pursuant to the agreement, LJP will serve as the Company's non-exclusive buying and sourcing agent and will be responsible for sourcing of raw materials, arranging manufacturing facilities, monitoring manufacturer quality, finished product inspection, and coordinating freight forwarders. The Company will pay LJP an amount equal to 8% of the FOB country of origin price for product ordered, shipped, and accept by the Company. Either party may terminate the agreement at any time upon providing the other party with 90 days written notice.
Planned Distribution
We plan to act as a wholesaler and market our products to specialty, department, and Internet retail locations via our marketing and branding efforts in addition to international distributors.
Our management will consider the children's market and more mainstream middle-market retailers once our brand is more established. Our management is also considering licensing our technology in the future.
We have designed, outsourced manufactured, and are now marketing quality men's and women's footwear with distribution to select retailers that began in March 2009. Our management is currently writing orders for the Fall/Winter 2009 retail season. The planned distribution will encompass independent specialty retailers, national retailers and department stores, E-tailers, and some International distribution.
Results of Operations and Financial Condition
Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
There were no earned revenues during the years ended December 31, 2008 and 2007.
Design and development expenses were $858,261 and $1,859,238 for the years ended December 31, 2008 and 2007, respectively. The decrease of $1,000,977 was primarily attributable to a decrease in the amount of design and development costs from the prior year needed to further develop the product and bring it to market due to the lack of resources.
Selling, general and administrative expenses (SG&A) for the years ended December 31, 2008 and 2007 were $3,651,975 and $4,780,436, respectively.
The decrease in SG&A expenses of $1,128,461 are primarily attributable to increases in employee compensation and benefits of approximately $80,000 to staff the business in anticipation of bringing the product to market, increased warehouse and operating expenses of $5,000, increases in non-cash and other charges such as additional non cash fees paid to promissory note holders totaling approximately $187,000, and an increase in depreciation of approximately $190,000, which were offset by reductions in travel of approximately $274,000, marketing and advertising expenses of approximately $459,000, professional and other expenses of approximately $326,000, share-based compensation of approximately $333,000, termination expenses for a previous employee of $170,000, and non recurring income of $28,000.
Our net loss for the year ended December 31, 2008 was $4,621,672 or $0.09 per share as compared to a net loss of $6,612,193 or $0.18 per share for the year ended December 31, 2007.
Liquidity and Capital Resources
As of December 31, 2008, we had no established source of revenues and had accumulated losses of $16,019,163 since inception. Our ability to continue as a going concern is dependent upon achieving production, sales, profitability and our ability to obtain the necessary financing to meet our obligations and pay our liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. The financial statements contained in this Form 10-K do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We anticipate that additional funding may be generated from the sale of common shares and/or debt with an equity feature and from asset based financing or factoring.
At December 31, 2008, we had $88 in cash . We earned no revenues since our inception in May 2004.
Generally, we have primarily financed operations to date through the proceeds of the private placement of equity securities, the proceeds of warrants exercised, and the issuance of promissory notes.
We received net proceeds of $2,261,462 from the private placements that were conducted in connection with the share exchange transaction during the fiscal quarter ended March 31, 2006. During the fourth quarter of fiscal 2006 and the first quarter of fiscal 2007 we received cash proceeds from warrant exercises totaling $1,680,763 and $609,462, respectively.
On May 21, 2007, we closed a financing transaction pursuant to which we sold a total of 4,000,000 units to seven investors and raised an aggregate of $3,000,000. Each unit consists of one share of our common stock and one share purchase warrant that is exercisable at an exercise price of $1.00 per share at any time upon election of the holder during the 30 months after the offering. Net proceeds from the private offering were $2,962,013 (net of issuance costs of $37,987).
From December 2007 through March 2008, we issued secured promissory notes in a total amount of $705,000 to various lenders. The notes bore interest at the rate of 5% per annum compounded annually and were secured by the grant of a security interest by us to the lenders in all of our intellectual property rights, patents, copyrights, trademarks which we now have or acquire and all proceeds and products thereof. We agreed to repay the Loan upon our completion of a financing, and in no event later than six months from each of the notes' date of issuance. Pursuant to the notes, and in consideration of entering into the notes, the lenders received a total of 1,285,976 shares of our common stock. In addition, the lenders received piggy-back registration rights with respect to the shares. In April 2008, we conducted a private placement and the lenders invested the principal amounts due under the notes into the placement and waived interest due under the notes. As part of the consideration, we issued an additional 316,298 shares of common stock to the lenders as part of the transaction.
On April 9, 2008, we sold a total of 13,403,225 units to 27 investors and raised aggregate gross proceeds of approximately $2,680,645 in a private offering. Of the gross proceeds of $2,680,645 raised in the offering,
(i) $1,935,000 represents cash received by the Company from investors,
(ii) $705,000 represents an amount due under six secured promissory notes previously issued by the Company that was invested by five holders into this offering, and
(iii) $40,645 represents amounts owed by the Company to three non-employee board members and two advisory board members in lieu of payment for fees due to them.
In addition, the Company issued 100,000 units to a financial consultant that provided services in connection with the offering in lieu of $20,000 payment in cash for such services.
Each unit was sold for $0.20 and consists of one share of common stock of the Company and one share purchase warrant, exercisable at an exercise price of $0.40 per share at any time upon election of the holder during the 24 month period following the offering.
Pursuant to a private placement offering the Company sold 4,900,000 private placement units for $245,000 in September 2008. Each Unit was sold for $0.05 and consists of one share of the Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per Warrant. The Warrants expire 30 months from the date of issuance.
On November 7, 2008 and November 19, 2008 the Company sold 3,000,000 and 1,800,000 private placement units for $150,000 and $90,000, respectively, pursuant to a private placement offering. Each unit was sold for $0.05 and consisted of one share of Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per share. The Warrants expire 30 months from the date of issuance.
On November 11, 2008 the Company closed on a Revolving Loan and Security Agreement (the "Loan Agreement) which included a September 12, 2008 Facility Letter signed with Ashford Finance, LLC ("Ashford"), their terms of which provide for a $3 million Letter of Credit and Accounts Receivable financing facility. The Loan Agreement terminates on November 30, 2009. All financings by Ashford are subject to Ashford's sole discretion. All Letters of Credit funded for inventory production will be based upon purchase orders from customers acceptable to Ashford. In addition Ashford will finance up to 75% of eligible accounts receivable, as defined. This agreement is collateralized by a first priority security interest in all Company assets, as defined. In addition all borrowings under the terms of the Facility are personally guaranteed by Mark Klein, the Company's Chief Executive Officer. To date the Company has not made any borrowings under the Loan Agreement.
Net cash used in operating activities for the year ended December 31, 2008 was $2,385,647 as compared to net cash used of $5,324,722 in the same period in 2007. The decrease in net cash used was primarily attributable to a decrease in net loss from operations during the year ended December 30, 2008 as compared to the same period in 2007, which was primarily attributable to a decrease in operating expenditures compared to the year ended December 31, 2007. Operating expenditures consisted principally of design and development, advertising and promotion, legal and accounting fees and salaries and costs to bring the product to market.
Cash used in investing activities for the year ended December 31, 2008 was $528,904, as compared to $260,023 during the same period in 2007. The increase in net cash used was primarily attributable to an increase in our purchase of molds, store displays and property and equipment.
Net cash provided by financing activities for the year ended December 31, 2008 was $2,908,453, as compared to $3,836,005 for the same period in 2007. The decrease was primarily attributable to the Company receiving $555,000 from the issuance of secured promissory notes to various lenders, the raising of $1,868,453 (net of direct costs of $66,547) from the April 9, 2008 private placement, and raising $485,000 from the September 2008 and November 2008 private placement offerings while the Company raised a net $2,962,013 in the May 21, 2007 financing transaction.
At December 31, 2008, we had 3,459,092 stock options and 27,767,592 common stock purchase warrants outstanding. The outstanding stock options have a weighted average exercise price of $0.39 per share as adjusted for the April 2, 2008 option repricing. The outstanding warrants have a weighted average exercise price of $0.36 per share. Accordingly, at December 31, 2008, the outstanding options and warrants represented a total of 36,283,867 shares issuable for a maximum of $11,478,038 if these options and warrants were exercised in full. The exercise of these options and warrants is completely at the discretion of the holders. There is no assurance that any of these options or any additional warrants will be exercised.
On June 16, 2008 the Company appointed Michael Solomon as its new Chief Financial Officer and executed an employment letter on July 9, 2008. Mr. Solomon will be paid $175,000 base salary per year which will be increased to $200,000 per year after the Company completes a financing transaction or series of financing transactions cumulatively totaling in excess of $1 million. Mr. Solomon also was granted 150,000 shares of the Company's common stock to be issued upon his appointment and received an additional 250,000 shares of common stock three months from the commencement of his employment. On July 30, 2008, the Company and Mr. Solomon, entered into an amendment (the "Amendment") to the employment letter agreement dated July 9, 2008. Pursuant to the terms of the Amendment, the 150,000 restricted shares of the Company's Common Stock granted to Mr. Solomon and the 250,000 restricted shares to be to Mr. Solomon under his agreement are subject to certain additional restrictions and subject to forfeiture, as set forth in the Amendment. On October 30, 2008 the Company issued 400,000 shares of common stock to Mr. Solomon. As a result the Company recorded $92,000 of share-based compensation from this issuance.
If we are unable to obtain additional financing, enter into a merger or acquisition, or generate revenue we may not have sufficient cash to continue operations for beyond December 31, 2009. We anticipate raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support our business operations; however we currently may not have commitments from third parties for sufficient additional capital. We cannot be certain that any such financing will be available on acceptable terms, or at all, and our failure to raise capital when needed could limit our ability to continue our operations. Our ability to obtain additional funding prior to December 31, 2009, and thereafter, will determine our ability to continue as a going concern. Failure to secure additional financing in a timely manner and on favorable terms would have a material adverse effect on our financial performance, results of operations and stock price and require us to curtail or cease operations, sell off our assets, seek protection from our creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of our common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, may require that we relinquish valuable rights.
RECENT EVENTS
Stock Option Issuances
On February 5, 2009 the Company Board of Directors approved the issuance of 13,418,182 stock options to Board members, Company officers, employees, and consultants. All stock options were issued at an exercise price of $0.055, fair market value on the date of grant, expire 24 months from that date, and were fully vested upon grant except for 1 million of the options which were issued to certain consultants. Of the total granted 7,168,182 stock options represented payment in lieu of $197,125 of accrued salary, board member fees, and certain consulting fees.
January 2009 Private Placement
On January 16, 2009 and January 20, 2009 the Company sold 600,000 and 200,000 private placement units, respectively, for $40,000. During January 2009 the Company sold 757,500 private placement units to Michael J. Rosenthal, the Company Chairman, for $37,875. Each unit was sold for $0.05 and consisted of one share of Company Common stock and one purchase Warrant representing one and one-half shares of Company Common Stock, exercisable at an exercise price of $0.05 per share. The Warrants expire 30 months from the date of issuance.
March 2009 Financing Agreements
a. Tangiers Investors, LP Securities Purchase Agreement and Convertible Debenture
On March 23, 2009 the Company signed with Tangiers Investors, LP, a limited partnership ("Tangiers") a Securities Purchase Agreement ("SPA") and a Registration Rights Agreement. ("Registration Rights Agreement"). In addition, the Company sold a one-year 7% Convertible Debenture to Tangiers for $85,000.
Under terms of the SPA Tangiers will purchase from the Company up to $2 million of Common Stock during an 18 month commitment period ("Commitment Period") commencing with a registration statement, filed by the Company being declared effective by the Securities and Exchange Commission. Under the Registration Rights Agreement the registration statement must remain effective during the Commitment Period, and must include all shares anticipated being sold to Tangiers. Any sales of Common Stock to Tangiers will be made at the Company's sole discretion. Any funding under the SPA will be used for general corporate purposes.
The Company may sell to Tangiers shares of Common Stock every 10 Trading Days ("Trading Days"),as defined. The purchase price of the Common Stock shall be 90% of the Market Price which is defined as the lowest daily volume weighted average price of the Common Stock during the five consecutive Trading Days after the Company gives Notice ("Notice") to Tangiers of its intent to sell Common Shares under the SPA. The maximum total dollar amount sold to Tangiers will be equal to the average daily trading volume in dollar amount during the ten Trading Days preceding the notice of sale by the Company to Tangiers but in no case shall be more than $250,000. In addition the total number of shares of Common Stock purchased by Tangiers during the Commitment Period shall not exceed 9.9% of the then outstanding Common Stock of the Company. For at least ten days after any Notice is given to Tangiers the Company may not sell or issue Common Stock, Preferred Stock, purchase warrants, or stock options except on terms or exceptions described in the SPA. Further, the Company will not, without prior written consent of Tangiers and which shall not be unreasonably withheld, enter into any other equity line of credit financing agreement.
Upon execution of the SPA the Company will pay a $100,000 Commitment Fee ("Commitment Fee") to Tangiers payable in shares of Common Stock which shall be determined by dividing the Commitment Fee by the lowest volume weighted average price of the Company's Common Stock during the ten business days immediately following the execution of the SPA (March 23, 2009). The shares to be issued as payment of the Commitment Fee have no registration rights.
In addition, Tangiers purchased from the Company a 7% Convertible Debenture ("Tangiers Debenture") for $85,000 cash. The Tangiers Debenture matures on March 23, 2010 ("Maturity Date") and accrues interest, which is payable on the Maturity date in cash or with shares of Common Stock, at the Company's sole discretion. The Tangiers Debenture may not be prepaid without the written consent of Tangiers. The Tangiers Debenture may be converted, in whole or in part, at any time at the sole discretion of Tangiers, at the Conversion Price ("Conversion Price"), which shall be equal to 75% of the average of the three lowest volume weighted average trading prices of the Company's Common Stock during the five Trading Days prior to conversion. However, if the average of the three lowest volume weighted average trading prices is below $0.01 the Company can elect to prepay at a premium of 125% the portion of the Tangier Debenture which was subject to the conversion election. The Conversion Price shall be subject to adjustment as defined in the SPA and the conversion privileges shall not be effective if a conversion shall cause Tangiers to own more than 9.9% of the then outstanding Common Stock of the Company.
In the case of an Event of Default, as defined, or a Fundamental Corporate Change, as defined, the Maturity Date shall be accelerated and the principal amount due shall be increased by 150%. In the event of late payment of principal or interest the Conversion Price shall be subject to adjustment, as defined.
The Tangiers transactions closed on April 1, 2009.
b. JED Management Corp. Convertible Debentures
On March 19, 2009 and March 25, 2009 the Company sold two 8% Convertible Debentures ("the Debentures") to JED Management Corp. ("JED") for $185,000 each.
Principal and accrued interest on the Debentures matures on as follows: $76,000 on March 19, 2011, $109,000 on March 25, 2011 for the first of the Debentures, and $185,000 on March 25, 2011on the second of the Debentures. The Company may prepay, at its sole discretion, any portion of the principal for 125% of the amount being prepaid plus any portion of the accrued interest. JED, at its sole discretion, may convert the principal plus accrued interest into shares of Common Stock at a price of (60%) of the lowest closing bid price, determined on the then current trading market for the Company's Common Stock, for 10 trading days prior to conversion. In addition, one of the Debenture's, in lieu of conversion may be exchanged, including all principal and interest, for non-trade debt of $275,000.
For a period of six months from March 19, 2009 and March 25, 2009, respectively, JED shall be entitled to "piggyback" registration rights on registration statements being filed by the Company except if the registration statements are being filed for the purposes of Private Investment in Public Equity ("Pipe")transactions.
In the case of an Event of Default, as defined, the payment of principal and accrued interest shall be immediately due and payable if JED so elects.
On March 27, 2009 JED exchanged the second of the debentures for $275,000 of payables of the Company pursuant to Assignment and Assumption Agreements ("A-A Agreements") between JED and two of the Company's vendors. Pursuant to the A-A Agreements JED purchased from the vendors, at a discount, payables owed to the vendors provided that the Company agrees to convert to common stock the payables, now owned by JED, at 60% of the lowest closing bid price for 10 days prior to the conversion date. All conversions of the payables into common stock are made at the sole discretion of JED. From March 27, 2009-April 9, 2009 JED converted $30,000 of payables into 559,211 shares of common stock.
On April 2, 2008, we repriced a total of 2,794,625 options that we had previously granted to certain of our employees, directors and consultants. The options, all of which had been previously issued pursuant to our Amended And Restated 2005 Incentive Plan (the "Plan"), were repriced to be $0.40 per share, which is greater than the $0.33 closing trading price of our common stock on the date the Board of Directors approved the transaction. The Board of Directors resolved that an exercise of $0.40 per share would provide an incentive to the recipients of the repriced options to continue to work in the best interests of our company. The other terms of the options, including the vesting schedules, . . .
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