10-Q 1 v123856_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number
000-51119

SKINS INC.
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)
 
20-4711789 
(I.R.S. Employer
Identification No.)
 
 
 
1115 Broadway, 12th Floor
New York, NY
(Address of principal executive offices)
 
 
10010 
(Zip Code)

(212) 710-2712
(Registrant's telephone number, including area code)
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 x 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o
 
Accelerated filer  ¨
 
 
 
Non-accelerated filer  ¨
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x 

There were 56,066,793 shares outstanding of registrant's common stock, par value $.001 per share, as of August 14, 2008.
 
SKINS INC.
(A DEVELOPMENT STAGE COMPANY)

FORM 10-Q
 
 
 
  
Page
PART I - FINANCIAL INFORMATION
  
 
 
 
  
 
ITEM 1.
FINANCIAL STATEMENTS
  
1
 
 
  
 
 
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007 (audited)
  
2
 
 
  
 
 
Consolidated Statements of Operations for the Three and Six Months ended June 30, 2008 and 2007 and the period from Inception (May 18, 2004) to June 30, 2008 (unaudited)
  
3
 
 
  
 
 
Consolidated Statements of Stockholders' Equity (Deficiency) the period from Inception (May 18, 2004) to June 30, 2008 (unaudited)
  
4
 
 
  
 
 
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2008 and 2007, and the period from Inception (May 18, 2004) to June 30, 2008 (unaudited)
  
5
 
 
  
 
 
Notes to Condensed Consolidated Interim Financial Statements
  
6
 
 
  
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  
23
 
 
  
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
28
 
 
  
 
ITEM 4.
CONTROLS AND PROCEDURES
  
28
 
 
  
 
PART II - OTHER INFORMATION
  
28
 
 
  
 
ITEM 1.
LEGAL PROCEEDINGS
  
28
 
 
  
 
ITEM 1A.
RISK FACTORS
  
28
 
 
  
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
29
 
 
  
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
  
29
 
 
  
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
29
 
 
  
 
ITEM 5.
OTHER INFORMATION
  
29
 
 
  
 
ITEM 6.
EXHIBITS
  
29
 
 
  
 
SIGNATURES
 
  
30
 
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q and article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, the financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

The results for the three and six months ended June 30, 2008 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-KSB for the period ended December 31, 2007 filed with the Securities and Exchange Commission on April 14, 2008.
 
1
 
SKINS INC. AND SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS
 
  
June 30,
2008
  
December 31,
 2007
  
 
  
(unaudited)
  
 
  
ASSETS
  
 
  
 
  
Current assets:
  
 
  
 
  
Cash and cash equivalents
  
$
110,542
  
$
6,186
  
Prepaid expenses
    
64,454
    
251,034
  
Inventory (Note 5)
    
346,338
    
-
  
Total current assets
    
521,334
    
257,220
  
 
          
Property and equipment, net (Note 6)
    
254,981
    
13,209
  
Software costs, net (Note 7)
    
6,117
    
16,634
  
Capitalized production molds (Note 8)
    
128,780
    
10,660
  
Patent costs, net (Note 9)
    
177,849
    
159,400
  
Other intangibles, net (Note 10)
    
4,427
    
1,378
  
Total Assets
  
$
1,093,488
  
$
458,501
  
 
          
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
          
Current liabilities:
          
Accounts payable and accrued liabilities (Note 11)
  
$
891,842
  
$
750,425
  
Liquidated damages
    
21,988
    
21,988
  
Notes Payable, net of discounts (Note 12)
    
-
    
95,777
  
Total current liabilities
    
913,830
    
868,190
  
 
          
Commitments and contingencies (Note 13)
          
 
          
Stockholders' Equity (Deficiency) (Notes 1 and 15)
          
Common Stock, $.001 par value; 436,363,650 shares authorized; 56,066,793 and 40,961,294 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively
   
56,067
    
40,961
  
Additional paid in capital
    
13,638,921
    
10,570,983
  
Deficit accumulated in the development stage
    
(13,515,330
)
  
(11,021,633
)
Total stockholders' equity (deficiency)
    
179,658
    
(409,689
)
 
            
Total Liabilities and Stockholders' Equity (Deficiency)
  
$
1,093,488
  
$
458,501
  

The accompanying notes are an integral part of the consolidated interim financial statements.
 
2
 
SKINS INC. AND SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
  
Three Months Ended
June 30,
  
Six Months Ended
June 30,
  
Period from Inception (May 18, 2004) to
June 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
2008
  
Operating expenses:  
  
 
  
 
  
 
  
 
  
 
  
 
  
  
  
  
  
  
  
  
  
  
  
Design and development
  
$
189,913
  
$
550,495
  
$
299,166
  
$
885,131
  
$
2,634,010
  
 
                      
Selling, general and administrative
    
1,168,367
    
993,669
    
2,086,322
    
2,136,187
    
9,865,022
  
 
                      
Total operating expenses
    
(1,358,280
)
  
(1,544,164
)
  
(2,385,488
)
  
(3,021,318
)
  
(12,499,032
)
 
                      
Operating loss
    
(1,358,280
)
  
(1,544,164
)
  
(2,385,488
)
  
(3,021,318
)
  
(12,499,032
)
 
                                
Unrealized (loss) on derivative instruments
    
-
    
-
    
-
    
-
    
(1,306,754
)
Liquidated damages
    
-
    
-
    
-
    
-
    
(21,988
)
Interest income
    
2,182
    
19,801
    
2,182
    
29,803
    
77,757
  
Loss on disposal of property and equipment
    
-
    
-
    
(1,993
)
  
-
    
(24,172
)
Amortization of discount on notes payable
   
(14,283
)
  
-
    
(100,873
)
  
-
    
(104,003
)
Interest expense
    
(1,200
)
  
-
    
(7,525
)
  
-
    
(12,996
)
 
                      
Net loss
  
$
(1,371,581
)
$
(1,524,363
)
$
(2,493,697
)
$
(2,991,515
)
$
(13,891,188
)
 
                      
Basic and diluted loss per share
  
$
(0.03
)
$
(0.04
)
$
(0.05
)
$
(0.08
)
    
 
                      
Weighted average number of common shares outstanding, basic and diluted
    
53,447,890
    
37,190,070
    
46,832,630
    
36,211,762
      
 
The accompanying notes are an integral part of the consolidated interim financial statements.
 
3
 
SKINS INC. AND SUBSIDIARY
(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) 
 
 
  
 
 
 
Deficit
 
 
 
 
 
 
 
Additional
Paid-in
 
Accumulated
Total
 
Total
Stockholders'
 
 
 
Common Stock
 
(deficit in)
 
Development 
 
Equity/
 
 
 
Shares 
 
Amounts
 
Capital
 
Stage
 
(Deficiency)
  
Transfer of net liabilities from a predecessor entity - May 18, 2004
      
$
-
  
$
(32,312
)
$
-
  
$
(32,312
)
Shares issued on June 1, 2004
    
954,513
    
955
    
9,045
        
10,000
  
Shares issued on July 2, 2004
    
954,513
    
955
    
9,045
        
10,000
  
Shares issued on August 4, 2004
    
1,909,026
    
1,909
    
18,091
        
20,000
  
Shares issued on August 10, 2004
    
1,909,026
    
1,909
    
18,091
        
20,000
  
Shares issued on December 1, 2004
    
8,338,484
    
8,338
    
79,162
        
87,500
  
Shares issued on December 30, 2004
    
144,077
    
144
    
1,356
        
1,500
  
Shares issued on December 31, 2004
    
3,818,053
    
3,818
    
36,182
        
40,000
  
Net Loss
    
-
    
-
    
-
    
(152,706
)
  
(152,706
)
Balances at December 31, 2004
    
18,027,692
    
18,028
    
138,660
    
(152,706
)
  
3,982
  
 
                      
Shares issued for services on October 20, 2005
    
1,376,308
    
1,376
    
(1,370
)
  
-
    
6
  
Net Loss January 1, 2005 to October 20, 2005
                
(223,152
)
  
(223,152
)
Recapitalization of deficit upon merger of Skins Shoes, LLC into Skin Shoes, Inc. on October 20, 2005 (Note 1)
            
(375,858
)
  
375,858
    
-
  
Net Loss Oct 21, 2005 to Dec 31, 2005
    
  
    
-
    
-
    
(309,162
)
  
(309,162
)
Balances at December 31, 2005
    
19,404,000
    
19,404
    
(238,568
)
  
(309,162
)
  
(528,326
)
 
                      
Reclassification of Share based liability Awards to equity Awards upon the re-Adoption of the 2005 Incentive Stock Plan on March 16, 2006
    
-
    
-
    
241,157
    
-
    
241,157
  
Skins Inc. net assets assumed - March 20, 2006
    
14,821,434
    
14,821
    
1,693,886
        
1,708,707
  
Conversion of convertible debenture - Common Stock - March 20, 2006
    
178,572
    
179
    
119,821
        
120,000
  
Shares issued for consulting services on April 3, 2006
    
122,000
    
122
    
145,058
        
145,180
  
Share based Compensation, June 30, 2006
            
86,156
        
86,156
  
Share based Compensation, September 30, 2006
            
130,218
        
130,218
  
Reclassification of Derivative Liability as Form SB-2 became effective on October 10, 2006
            
1,890,600
        
1,890,600
  
Warrants Exercised December 5, 2006
    
30,000
    
30
    
29,970
        
30,000
  
Warrants Exercised December 8, 2006
    
120,000
    
120
    
119,880
        
120,000
  
Warrants Exercised December 11, 2006
    
320,000
    
320
    
319,680
        
320,000
  
Warrants Exercised December 12, 2006
    
115,715
    
116
    
115,599
        
115,715
  
Warrants Exercised December 14, 2006
    
119,000
    
119
    
118,881
        
119,000
  
Warrants Exercised December 15, 2006
    
274,000
    
274
    
273,726
        
274,000
  
Warrants Exercised December 19, 2006
    
363,476
    
363
    
363,113
        
363,476
  
Warrants Exercised December 21, 2006
    
238,572
    
238
    
238,334
        
238,572
  
Warrants Exercised December 22, 2006
    
100,000
    
100
    
99,900
        
100,000
  
Share based Compensation, December 31, 2006
            
356,240
        
356,240
  
Net Loss
    
  
    
 
   
 
   
(4,100,278
)
  
(4,100,278
)
Balances at December 31, 2006
    
36,206,769
    
36,206
    
6,103,651
    
(4,409,440
)
  
1,730,417
  
 
                      
Warrants Exercised January 5, 2007
    
100,000
    
100
    
99,900
        
100,000
  
Warrants Exercised January 6, 2007
    
11,904
    
12
    
11,882
        
11,894
  
Warrants Exercised January 10, 2007
    
100,000
    
100
    
99,900
        
100,000
  
Warrants Exercised January 25, 2007
    
200,000
    
200
    
199,800
        
200,000
  
Warrants Exercised February 7, 2007
    
59,524
    
60
    
59,464
        
59,524
  
Warrants Exercised February 26, 2007
    
138,070
    
138
    
137,906
    
-
    
138,044
  
Repurchase of options
    
-
    
-
    
(30,445
)
  
-
    
(30,445
)
Share based Compensation, March 31, 2007
            
195,381
        
195,381
  
Shares issued on May 21, 2007 (net of issuance costs of $37,987)
    
4,000,000
    
4,000
    
2,958,013
        
2,962,013
  
Share based Compensation,  June 30, 2007
            
156,138
        
156,138
  
Warrants exercised July 24, 2007
    
60,000
    
60
    
59,865
        
59,925
  
Warrants exercised August 7, 2007
    
10,000
    
10
    
9,965
        
9,975
  
Warrants exercised August 14 2007
    
75,000
    
75
    
75,000
        
75,075
  
Share based compensation, September 30, 2007
            
213,453
        
213,453
  
Shares issued on October 31, 2007 to correct prior balances
    
2
                  
Discount on note payable for common stock to be issued - December 21, 2007 (Note 12)
            
57,353
        
57,353
  
Share based compensation for the three months ended December 31, 2007
            
163,757
        
163,757
  
Net loss
    
-
    
-
    
  
   
(6,612,193
)
  
(6,612,193
)
Balances at December 31, 2007
    
40,961,294
    
40,961
    
10,570,983
    
(11,021,633
)
  
(409,689
)
 
                      
Discount on notes payable for common stock to be issued - January 7, 2008 (Note 12)
            
68,382
        
68,382
  
Discount on note payable for common stock to be issued- February 11, 2008 (Note 12)
            
15,294
        
15,294
  
Discount on note payable for common stock to be issued- February 14, 2008 (Note 12)
            
50,000
        
50,000
  
Discount on note payable for common stock to be issued- February 28, 2008 (Note 12)
            
8,478
        
8,478
  
Shares issued on March 14, 2008 for the common stock to be issued on the December 21, 2007 note discount (Note 12)
    
220,588
    
221
    
(221
)
      
-
  
Shares issued on March 14, 2008 for the common stock to be issued on the January 7, 2008 note discount (Note 12)
    
220,588
    
221
    
(221
)
      
-
  
Shares issued on March 14, 2008 for the common stock to be issued on the February 11, 2008 note discount (Note 12)
    
58,824
    
59
    
(59
)
      
-
  
Shares issued on March 14, 2008 for the common stock to be issued on the February 14, 2008 note discount (Note 12)
    
185,185
    
185
    
(185
)
      
-
  
Shares issued on March 14, 2008 for the common stock to be issued on the February 28, 2008 note discount (Note 12)
    
32,609
    
32
    
(32
)
      
-
  
Discount on note payable for common stock to be issued- March 17, 2008 (Note 12)
            
90,909
        
90,909
  
Share based compensation for the three months ended March 31, 2008
            
74,454
        
74,454
  
Proceeds received on March 27, 2008 for issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
            
150,000
        
150,000
  
Proceeds received on March 28, 2008 for issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
            
160,000
        
160,000
  
 
                              
Proceeds received on April 1, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
100,000
          
100,000
  
Compensation expense on repriced stock options April 2, 2008 (Note 14)
                
76,338
          
76,338
  
Proceeds received on April 2, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
150,000
          
150,000
  
Proceeds received on April 3, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
45,000
          
45,000
  
Proceeds received on April 4, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
215,000
          
215,000
  
Proceeds received on April 7, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
65,000
          
65,000
  
Proceeds received on April 9, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
200,000
          
200,000
  
Exchange of $705,000 of secured promissory notes, net of unamortized discount of $186,413 and accrued interest of $6,114 for private placement units on April 9, 2008 (Note 15)
                
524,701
          
524,701
  
Fee expense on additional shares to be issued to secured promissory note holders in lieu of principal and interest payment as of April 9, 2008 (Note 15)
               
186,413
          
186,413
  
Private placement units from April 9, 2008 offering to be issued to non-employee and advisory board members in lieu of payment of fees owed (Note 15)
                
40,645
          
40,645
  
Proceeds received on April 11, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
600,000
        
600,000
  
Proceeds received on April 12, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
220,000
          
220,000
  
Proceeds received on April 15, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
20,000
          
20,000
  
Proceeds received on April 16, 2008 for the issuance of common stock in relation to the April 9, 2008 private placement (Note 15)
                
10,000
          
10,000
  
Issuance of shares on April 18, 2008 in relation to March 17, 2008 promissory note (Note 15)
    
568,182
    
569
    
(569
)
        
-
  
Shares issued on May 28, 2008 related to private placement cash proceeds received in March and April 2008, less direct costs of $66,547 (Note 15)
    
9,675,000
    
9,675
    
(76,222
)
        
(66,547
)
Shares issued on May 28, 2008 related to exchange of promissory notes in April 9, 2008 private placement (Note 15)
    
3,525,000
    
3,525
    
(3,525
)
      
-
  
Shares issued on May 28, 2008 for Fee Expense in relation to additional shares on exchange of promissory notes (Note 15)
    
316,298
    
316
    
(316
)
        
-
  
Shares issued on May 28, 2008 in relation to April 9, 2008 private placement for payment of fees due to non-employee board and advisory board members (Note 15)
    
203,225
    
203
    
(203
)
        
-
  
Shares issued on May 28, 2008 to consultant in relation to the April 9, 2008 private placement (Note 15)
    
100,000
    
100
    
(100
)
        
-
  
Share-based compensation for the three months ended June 30, 2008
                
78,977
          
78,977
  
Net loss
                           
(2,493,697
)
  
(2,493,697
)
Balances at June 30, 2008 (unaudited)
    
56,066,793
  
$
56,067
  
$
13,638,921
  
$
(13,515,330
)
$
179,658
  
 
The accompanying notes are an integral part of the consolidated interim financial statements.
 
4
 
SKINS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS     
(Unaudited)
 
   
Six Months Ended
June 30,
  
Period from
Inception
(May 18, 2004) to
June 30,
  
   
2008
  
2007
  
2008
  
Cash flows used in operating activities:
  
 
  
 
  
 
  
Net loss
  
$
(2,493,697
)
$
(2,991,515
)
$
(13,891,188
)
 
                  
Adjustments to reconcile net loss from operations to net cash used in operating activities:
                  
Depreciation
    
25,113
    
1,964
    
45,082
  
Amortization
    
15,268
    
12,984
    
44,601
  
Issuance of common stock for services
    
18,140
    
36,295
    
145,186
  
Share based compensation expense
    
229,769
    
351,519
    
1,772,269
  
Loss on write down of molds
    
-
    
105,635
    
114,376
  
Loss on disposal of property and equipment
    
1,993
    
-
    
24,172
  
Amortization on discount of note payable
    
100,873
    
-
    
104,003
  
Unrealized loss on derivative instruments
    
-
    
-
    
1,306,754
  
Issuance of common stock for fee in lieu of payment
    
186,413
    
-
    
186,413
  
Changes in operating assets and liabilities:
                  
Prepaid expenses
    
168,440
    
(85,913
)
  
(63,363
)
Inventory
    
(346,338
)
  
(480,467
)
  
(346,338
)
Accounts payable and accrued liabilities
    
188,176
    
257,252
    
922,784
  
Liquidated Damages
    
-
    
-
    
21,988
  
Net cash used in operating activities
    
(1,905,850
)
  
(2,792,246
)
  
(9,613,261
)
 
                  
Cash flows used in investing activities:
                  
 Purchases of molds
    
(118,120
)
  
(114,376
)
  
(243,156
)
Software costs
    
-
    
(29,600
)
  
(31,551
)
Purchase of property and equipment
    
(268,877
)
  
(32,801
)
  
(322,256
)
Patent Costs
    
(23,052
)
  
(13,775
)
  
(188,405
)
Other intangibles
    
(3,198
)
  
-
    
(4,588
)
Cash used in investing activities
    
(413,247
)
  
(190,552
)
  
(789,956
)
 
                 
Cash flows provided by financing activities:
                  
Cash assumed in connection with Recapitalization
    
-
    
-
    
2,261,462
  
Related-party payments
    
-
    
-
    
(26,924
)
Proceeds from issuance of Common Stock, net of direct costs of $66,547 for the six months ended June 30, 2008
    
1,868,453
    
3,571,475
    
7,454,666
  
Proceeds from notes payable
    
555,000
    
-
    
855,000
  
Repurchase of options (Note 14) 
    
-
    
(30,445
)
  
(30,445
)
Net cash provided by financing activities
    
2,423,453
    
3,541,030
    
10,513,759
  
 
                    
Net increase in cash and cash equivalents
    
104,356
    
558,232
    
110,542
  
Cash and cash equivalents at beginning of period
    
6,186
    
1,754,926
    
-
  
Cash and cash equivalents at end of period
  
$
110,542
  
$
2,313,158
  
$
110,542
  
 
Supplemental Disclosure of Cash Flow Information 
  
  
  
 
  
  
  
Cash paid during this period for: 
  
  
  
 
  
  
  
Interest 
  
$
-
  
$
-
  
$
5,266
  
 
              
Supplemental Schedule of Non-Cash Investing and Financing Activities:
              
On May 18, 2004 the Company received Net Liabilities from a predecessor entity totaling
  
 
-
  
 
-
  
 
32,312
  
Net liabilities assumed from reverse acquisition on March 20, 2006, net of cash of $2,261,462
    
-
    
-
    
552,755
  
Conversion of convertible debenture, assumed from reverse acquisition, to common stock
    
-
    
-
    
120,000
  
Conversion of convertible debenture, assumed from reverse acquisition, to warrant liability
    
-
    
-
    
30,000
  
Transfer of deficit due to merger of Skin Shoes, LLC into Skin Shoes, Inc. on October 20, 2005
    
-
    
-
    
375,568
  
Issuance of Common Stock to consultants on April 3, 2006 for services to be provided for a two year term
    
-
    
-
    
145,180
  
Reclassification of share based liability awards to equity awards upon the re-adoption of the 2005 Incentive Stock Plan on March 16, 2006
    
-
    
-
    
241,157
  
Reclassification of derivative liability to equity upon the declaration of the SB-2 registration statement as effective.
    
-
    
-
    
1,890,600
  
Exchange of $705,000 of secured promissory notes, net of unamortized discount of $186,413 and accrued interest of $6,114, for private placement units on April 9, 2008
    
524,701
    
-
    
524,701
  
Discounts on notes payable for common stock to be issued December 31, 2007, January 7, February 11, February 24, February 28, March 17, 2008 (Note 12)
   
233,063
    
-
    
290,416
  
203,225 shares of common stock issued to non-employee and Advisory Board members for payment of fees due
  
$
40,645
  
$
-
  
$
40,645
  
 
The accompanying notes are an integral part of the consolidated interim financial statements.
 
5
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 1: DESCRIPTION OF BUSINESS
 
Overview

Skins Inc. and subsidiary (“Company”), a Nevada corporation with its corporate office located in New York City, has designed and continues to develop a patented two-part, footwear structure consisting of an outer collapsible “Skin” and an inner orthopedic support section called the “Bone.” The design is intended to allow consumers to purchase one inner section, the Bone, and numerous outer Skins, resulting in multiple style variations from the same pair of shoes, with the same feel and fit despite which Skin is being worn.

Basis of presentation, organization and other matters

On March 20, 2006, the Company, as Logicom Inc. (“Logicom”), acquired all of the outstanding capital stock of Skins Footwear Inc. (formerly known as Skin Shoes, Inc.) (“Skins Footwear”). Skins Footwear thereupon became a wholly owned subsidiary of Logicom, and the former shareholders of Skins Footwear became shareholders of the Company. The business of Skins Footwear became the only business of Logicom.

Logicom was incorporated in the State of Nevada on January 23, 2004. Logicom was in the development stage since its formation and it had not realized any revenues from its planned operations. Logicom entered into a share exchange agreement with all of the shareholders of Skins Footwear, a privately held development stage footwear company, on November 2, 2005.
 
Skins Footwear was originally organized on May 18, 2004 as a New Jersey limited liability company under the name Skin Shoes, LLC. On October 11, 2005, Skins Shoes, LLC created a Delaware corporation under the name Skin Shoes, Inc. as a wholly owned subsidiary and merged with and into Skin Shoes, Inc. on October 20, 2005, resulting in Skin Shoes, Inc. becoming the surviving Delaware corporation and the limited liability company ceasing to exist. The merger on October 20, 2005 was a conversion of a non-taxable entity to a taxable corporation. The deficit accumulated in the development stage on October 20, 2005 was treated as a return of capital to the members of Skin Shoes, LLC, which was then contributed to Skin Shoes, Inc., and as a result the accumulated deficit was reclassified to additional paid in capital at October 20, 2005 in the consolidated statements of stockholders' equity. On April 10, 2006, Logicom changed its corporate name to Skins Inc. and Skins Shoes, Inc. changed its corporate name to Skins Footwear Inc.

The acquisition of Skins Footwear by the Company on March 20, 2006 was accounted for as a recapitalization by the Company. The recapitalization was the merger of a private operating company (Skins Footwear) into a non-operating public shell corporation (the Company) with nominal net assets and as such is treated as a capital transaction, rather than a business combination. As a result no Goodwill is recorded. The transaction is the equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation. The pre acquisition financial statements of Skins Footwear are treated as the historical financial statements of the consolidated companies. The financial statements presented reflect the change in capitalization for all periods presented, therefore the capital structure of the consolidated enterprise, being the capital structure of the legal parent, is different from that appearing in the financial statements of Skins Shoes, LLC and Skins Shoes, Inc. in earlier periods due to the recapitalization.
 
Development Stage
 
The Company is in the development stage. Since its formation the Company has not realized any revenues from its planned operations. The Company intends to design, manufacture and market high quality men's and women's footwear. The Company's primary activities since incorporation have been conducting research and development, performing business, strategic and financial planning, and raising capital. The deficit accumulated in the development stage presented on the consolidated balance sheet on June 30, 2008 will not agree with the total loss from May 18, 2004 (inception date) to June 30, 2008 due to the treatment of the merger of the non-taxable entity to a taxable corporation on October 20, 2005 described in paragraph three of Note 1, basis of presentation, organization and other matters.
 
6
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 1: DESCRIPTION OF BUSINESS (continued)

Going Concern

The financial statements have been prepared using accounting principles generally accepted in the United States of America applicable for a going concern which assumes that the Company will realize its assets and discharge its liabilities in the ordinary course of business. As of June 30, 2008, the Company had no established source of revenues and has accumulated losses of $13,891,188 since its inception. As of July 31, 2008, management estimates that the Company has exhausted its cash on hand and if it is unable to obtain additional financing or enter into a merger or acquisition, it may not have sufficient cash to continue operations beyond August 31, 2008. Its ability to continue as a going concern is dependent upon achieving production or sale of goods, the ability of the Company to obtain the necessary financing to meet its obligations and pay its liabilities arising from normal business operations when they come due and upon profitable operations. The outcome of these matters cannot be predicted with any certainty at this time and raises substantial doubt that the Company will be able to continue as a going concern. These unaudited consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

The Company intends to overcome the circumstances that impact its ability to remain a going concern through a combination of the commencement of revenues, with interim cash flow deficiencies being addressed through additional equity and debt financing. The Company anticipates raising additional funds through public or private financing, strategic relationships or other arrangements in the near future to support its business operations; however the Company currently do not have commitments from third parties for additional capital. The Company cannot be certain that any such financing will be available on acceptable terms, or at all, and its failure to raise capital when needed could limit its ability to continue its operations. The Company’s ability to obtain additional funding prior to August 31, 2008, and thereafter, will determine its 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 the Company’s financial performance, results of operations and stock price and require it to curtail or cease operations, sell off its assets, seek protection from its creditors through bankruptcy proceedings, or otherwise. Furthermore, additional equity financing may be dilutive to the holders of the Company’s common stock, and debt financing, if available, may involve restrictive covenants, and strategic relationships, if necessary to raise additional funds, may require that the Company relinquish valuable rights.

NOTE 2: CONDENSED PRESENTATION

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, these financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

The results for the six months ended June 30, 2008 are not necessarily indicative of the results of operations for the full year. These financial statements should be read in conjunction with the summary of accounting policies and the notes to condensed consolidated interim financial statements for the year ended December 31, 2007 included in our annual report on Form 10-KSB.

NOTE 3: NET LOSS PER COMMON SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. For each the three-and six -months ended June 30, 2008 and 2007, the Company had 1,404,000 common shares held in escrow, respectively. The escrow amounts for all periods prior to the March 20, 2006 transaction are shown retroactively based on the recapitalization of the Company (Note 1). The shares held in escrow are excluded from the weighted average common share calculation at each date because all the necessary conditions for the release of the escrow shares have not been satisfied.
 
Diluted net loss per share is computed by dividing the net loss by the weighted average number of common and common equivalent shares outstanding during the period. Basic and diluted net loss per share are the same.
 
7
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 3: NET LOSS PER COMMON SHARE (continued)

Net Loss per Common Share
 
   
Three Months ended
  
Six Months ended
  
 
  
June 30,
  
June 30,
  
 
  
2008
  
2007
  
2008
  
2007
  
 
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
(Unaudited)
  
Numerator:
  
 
  
 
  
 
  
 
  
Net loss - basic and diluted
  
$
(1,371,581
)
$
(1,524,363
)
$
(2,493,697
)
$
(2,991,515
)
 
                      
Denominator:
                      
Weighted average shares - basic
    
53,447,890
    
37,190,070
    
46,832,630
    
36,211,762
  
 
                      
Effect of dilutive stock options and warrants
    
-
    
-
    
-
    
-
  
 
                      
Denominator for diluted earnings per share
    
53,447,890
    
37,190,070
    
46,832,630
    
36,211,762
  
 
                      
Loss per share:
                      
Basic
  
$
(0.03
)
$
(0.04
)
$
(0.05
)
$
(0.08
)
 
                      
Diluted
  
$
(0.03
)
$
(0.04
)
$
(0.05
)
$
(0.08
)

At June 30, 2008 and 2007 the Company’s stock options outstanding totaled 3,548,643 and 3,509,375, respectively. In addition, at June 30, 2008 and 2007, the Company’s warrants outstanding were 18,217,939 and 4,707,939, respectively. Inclusion of the Company’s options and warrants in diluted loss per share for the three months ended June 30, 2008 and 2007 have an anti-dilutive effect because the Company incurred a loss from continuing operations.

NOTE 4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Recently Adopted and Issued Accounting Pronouncements

Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157; “Fair Value Measurements” (“SFAS 157”), which did not have a material impact on the Company’s consolidated financial statements. SFAS 157 establishes a common definition for fair value, a framework for measuring fair value under generally accepted accounting principles in the United States, and enhances disclosures about fair value measurements. In February 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. 157-2, which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company is evaluating the expected impact of SFAS 157 for nonfinancial assets and nonfinancial liabilities on its consolidated financial position and results of operations.
 
8
 
Skins Inc. and Subsidiary
(A Development Stage Company) 
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently Adopted and Issued Accounting Pronouncements (continued)

In December 2007, the FASB issued Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 (Consolidated Financial Statements)" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. In addition, SFAS 160 requires certain consolidation procedures for consistency with the requirements of SFAS 141(R) "Business Combinations." SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company is currently evaluating the impact adoption of SFAS 160 may have on the financial statements.

In December 2007, the FASB issued Statement No. 141(R), "Business Combinations” (“SFAS 141(R)”). SFAS 141(R) expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities, including contingencies, be recorded at the fair value determined on the acquisition date and changes thereafter reflected in revenue, not goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. Adoption of SFAS 141(R) is required for combinations after December 15, 2008. Early adoption and retroactive application of SFAS 141(R) to fiscal years preceding the effective date are not permitted. The Company is currently evaluating the impact adoption of SFAS 141(R) may have on the financial statements.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133 (Summary - On March 19, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities and (c) derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Specifically, Statement 161 requires:
 
 
·
Disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation;
     
 
·
Disclosure of the fair values of derivative instruments and their gains and losses in a tabular format;
 
 
·
Disclosure of information about credit-risk-related contingent features; and
     
 
·
Cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed.
 
Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. The Company is currently evaluating the impact adoption of SFAS 161 may have on the financial statements.

In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS 69 has been criticized because it is directed to the auditor rather than the entity. SFAS 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.

SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, the GAAP hierarchy will remain in SAS 69 for state and local governmental entities and federal governmental entities. The Company is currently evaluating the impact adoption of SFAS 162 may have on the financial statements.
 
In May 2008, the financial accounting standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 1401”). FSP APB 14-1 clarifies that convertible debt instruments may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants.” Management does not anticipate this pronouncement to have any effect on the Company’s financial statements.

9
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 5: INVENTORY
 
Inventory at June 30, 2008 (unaudited) and December 31, 2007 consisted of the following:
 
 
  
June 30,
  
December 31,
  
 
  
2008
  
2007
  
Raw Materials
  
$
247,017
  
$
-
  
Finished Goods
    
99,321
    
-
  
 
  
$
346,338
  
$
-
  
 
Inventory was located at the Company’s independently contracted warehouse and production factories in the United States and China. Inventory is stated at the lower of cost (first-in, first-out) or market.
 
NOTE 6: PROPERTY AND EQUIPMENT, NET

Property and equipment, net at June 30, 2008 and December 31, 2007 consist of the following: 
 
 
  
June 30,
  
December 31,
  
 
  
2008
  
2007
  
Sewing equipment
  
$
1,882
  
$
1,882
  
Computer equipment
    
18,624
    
19,652
  
Store displays
    
267,343
    
-
  
 
    
287,849
    
21,534
  
 Less accumulated depreciation
    
32,868
    
8,325
  
 
  
$
254,981
  
$
13,209
  

Depreciation expense related to property and equipment was $23,438 and $1,166 for the three months ended June 30, 2008 and 2007 and $25,113 and $1,964 for the six months ended June 30, 2008 and 2007, respectively.
 
NOTE 7: SOFTWARE COSTS

Software costs, net at June 30, 2008 and December 31, 2007 consist of the following: 
 
 
  
June 30,
  
December 31,
  
 
  
2008
  
2007
  
Website design costs
  
$
31,551
  
$
31,551
  
 Less accumulated amortization
    
25,434
    
14,917
  
 
  
$
6,117
  
$
16,634
  

Amortization expense related to software costs was $5,259 and $9,866 for the three months ended June 30, 2008 and 2007 and $10,517 and $9,866 for the six months ended June 30, 2008 and 2007, respectively.
 
10
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
 
NOTE 8: CAPITALIZED PRODUCTION MOLDS

During the six months ended June 30, 2008, and the year ended December 31, 2007, respectively, the Company purchased $118,120 and $125,036 of production molds. The Company periodically evaluates the value of its assets and will write off the unamortized value if it is determined that the asset will not be recovered in the ordinary course of business. During the year ended December 31, 2007, the Company determined that capitalized molds of $114,376 to be obsolete. The Company’s capitalized production molds are $128,780 at June 30, 2008 and $10,660 at December 31, 2007, respectively.

No amortization of production molds is included in the June 30, 2008 and 2007 consolidated statement of operations as they were not placed in service.
 
NOTE 9: PATENT COSTS
 
The Company periodically evaluates the recoverability of unamortized patents and will write off the unamortized value if it is determined they no longer have value. Patent costs as of June 30, 2008 and December 31, 2007 consists of:

 
  
June 30,
2008
  
December 31,
2007
  
Patent costs
  
$
196,856
  
$
173,804
  
 
            
Less accumulated amortization
    
19,007
    
14,404
  
 
            
 
  
$
177,849
  
$
159,400
  
 
Amortization expense related to patents was $2,384 and $1,637 for the three months ended June 30, 2008 and 2007 and $4,603 and $3,118 for the six months ended June 30, 2008 and 2007, respectively. The estimated aggregate amortization expense for the next five years is estimated to be approximately $10,000 for each year.

NOTE 10: OTHER INTANGIBLES

The Company’s capitalized internet brand name was $4,588 and $1,390 at June 30, 2008 and December 31, 2007, respectively, and is being amortized using the straight line method over an estimated useful life of 10 years. Accumulated amortization at June 30, 2008 and December 31, 2007 is $161 and $12, respectively. Amortization expense related to other intangibles was $115 and $0 for the three months ended June 30, 2008 and 2007 and $149 and $0 for the six months ended June 30, 2008 and 2007, respectively.
 
11
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
 
NOTE 11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
           Accounts payable and accrued liabilities at June 30, 2008 and December 31, 2007 consist of the following: 
 
 
  
June 30,
2008
  
December 31,
2007
  
 
  
 
  
 
  
Trade payables
  
$
583,952
  
$
590,556
  
Professional fees
    
155,886
    
87,943
  
Commissions payable
    
38,000
    
28,000
  
Board Fees and Director Fees
    
46,250
    
18,750
  
Recruiting fees payable
    
44,000
    
-
  
Other accrued liabilities
    
23,754
    
25,176
  
 
  
$
891,842
  
$
750,425
  
 
NOTE 12: NOTES PAYABLE

On December 21, 2007, January 7, 2008, February 11, 2008, February 24, 2008, February 28, 2008 and March 17, 2008, the Company issued Secured Promissory Notes totaling $705,000 to various lenders (the “Notes”). The Notes bore interest at a rate of 5% per annum compounded annually and were secured by the grant of a security interests by the Company to the lenders in all of its intellectual property rights, patents, copyrights, trademarks which the Company now has or acquires and all proceeds and products thereof. The Company agreed to repay the loans upon the Company’s completion of a financing, and in no event later than six months from the Notes’ respective date of issuance. Pursuant to the Notes, and in consideration of entering into the Notes, the lenders collectively received a total of 1,285,976 shares of the Company’s common stock (the “Shares”). In addition, the lenders received piggy-back registration rights with respect to the Shares.

A total discount of $290,416 was taken on the Notes for the fair value of the shares of common stock issuable upon each note's issuance date. The unamortized discount at June 30, 2008 and December 31, 2007 is $0 and $54,223, respectively. The Company amortized the discount using the effective interest rate method over the term of the Notes.
 
The Company issued 717,794 and 568,182 common shares on March 14 and April 18, 2008, respectively, related to the issuance of the notes.

Amortization of discounts was $14,283 and $0 for the three months ended June 30, 2008 and 2007 and $100,873 and $0 for the six months ended June 30, 2008 and 2007, respectively.

On April 9, 2008, the Company conducted a private placement and all the lenders invested their principal amount due under the Notes of $705,000 net of amortized discount of $186,413 into the placement and waived interest due under the Notes of $6,114 for 3,525,000 shares of common stock. As part of the consideration, the Company issued an additional 316,298 shares of common stock to the lenders as part of the transaction (Note 15).
 
12
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 13: COMMITMENTS AND CONTINGENCIES

On November 7, 2006 the Company entered into a factoring agreement with FCC, LLC (“First Capital”) through October 31, 2008. The agreement provides for the Company to sell its credit-approved accounts receivable to First Capital without recourse as to bad debts but with recourse as to all future customer claims. First Capital will provide cash advances to the Company in an amount equal to 85% of the value of the assigned accounts receivable, as defined. In addition the First Capital will make cash advances to the Company against the value of the Company’s future finished goods inventory, up to a maximum of $500,000. The unpaid advances will bear interest at the greater of 6% or 1% above the prime rate. Upon commencement of factoring, the Company’s obligation to First Capital will be secured by all of its tangible and intangible assets. The Company has the right to terminate the agreement prior to its expiration term, for a maximum fee payable of $24,000.

The Company entered into an agreement with SLAM (Sportie LA Media) in March 2007 to obtain SLAM’s advertising, marketing, promoting and consulting services. The agreement between the Company and SLAM has an effective date of March 1, 2007 and expired on February 29, 2008. The Company has continued the contract on a month to month basis at $500 per month.

On May 4, 2007, the Company entered into an agreement to lease new corporate office space effective June 1, 2007. The agreement requires the Company to pay approximately $95,000 through May 31, 2008, but the Company may terminate this agreement and vacate the premise upon 60 days’ written notification. On May 31, 2008, the lease expired. The Company and lessor agreed to continue the lease on a month to month basis until a new lease agreement is executed.

On February 9, 2008, the Company and Dennis Walker executed an Employment Agreement (the “Agreement”) in connection with the employment of Mr. Walker as the Company’s Senior Vice President of Sales. Pursuant to the terms of the Agreement, the Company will employ Mr. Walker for a period of three years with successive one-year automatic renewals unless either party provides 180-days’ advance notice of intent not to renew. The Company will pay Mr. Walker an annual base salary of $200,000 with a bonus of up to 40% of the base salary at the discretion of the Board of Directors or its Compensation Committee. Mr. Walker is also eligible to receive paid vacation and other benefits made available by the Company to its executives, including a monthly automobile allowance. The Company also agreed to grant Mr. Walker 50,000 options exercisable at fair market value on the date of grant under the Company’s Amended and Restated 2005 Incentive Plan. In the event Mr. Walker is terminated without cause or he resigns with good reason, as defined in the agreement, he will be entitled to severance pay from the Company. The amount of the severance pay will be an amount equal to (i) ten months of his base pay if the termination of his employment occurs during the first year of employment under the Agreement, (ii) eleven months of his base pay if termination of his employment occurs during the second year of employment under the Agreement, or (iii) months of his base pay if the termination occurs during the third year of employment under the Agreement. The severance pay would be paid in accordance with the Company’s usual paydays during the applicable severance period.

On February 12, 2008, the Company entered into an office space lease agreement (the “Lease”) with Summit Office Suites. Pursuant to the terms of the Lease, the Company will pay a base monthly rent of $1,430 (including utilities, maintenance, and a rate abatement) for a room located at 1115 Broadway, 12th Floor, New York, NY 10010. Other one-time and continuing fees are due and payable. The Company terminated the lease effective May 31, 2008.

On March 27, 2008, the Company received the resignation of its Chief Operating Officer (“COO”), from his position with the Company effective immediately. On April 8, 2008, the Company entered into a separation agreement and release (“Separation Agreement”) with its COO in connection with his resignation as COO of the Company. Pursuant to the Separation Agreement, the COO agreed that he was not entitled to any further payments or benefits, including any annual incentive/performance bonus, under his employment agreement with the Company. The COO also agreed to release the Company from any and all claims and rights that the COO may have against the Company, including, but not limited to, any claims arising out of or relating to the employment agreement, those claims of which the COO is not aware, and all claims for attorney’s fees, costs, and interest. In exchange, the Company agreed to amend the COO’s stock option agreement to permit the vesting of 250,000 options, permit participation of such options in the option repricing, and permit the options to be exercisable for one year from the date of the termination of its COO’s employment.
  
On May 27, 2008, the Company amended the agreement with TLD Asian Pacific Ltd (“TLD”) with an effective date of August 10, 2007 for a period of twelve months from the effective date. According to the amended agreement the Company agreed to pay TLD $9,000 monthly totaling $108,000 over the twelve month period pursuant to which TLD will continue to be responsible for conceptualization, development, commercialization, product and consulting on the engineering and further development of Skins and Bones on a non-exclusive basis. Prior to the signing of the agreement the Company was paying TLD $9,600 monthly. TLD agreed to payback retroactively to August 10, 2007, $6,000 of previously paid fees.
13
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)
 
NOTE 14: STOCK OPTIONS
 
In October 2005, Skins Footwear's Board of Directors approved the 2005 Incentive Plan (the “2005 Plan”). The 2005 Plan provides that the following types of awards may be granted under the 2005 Plan: stock appreciation rights (“SARs”); incentive stock options (“ISOs”); non-qualified stock options (“NQSOs”); restricted stock awards; unrestricted stock awards; and performance share awards which entitle recipients to acquire shares upon the attainment of specified performance goals, stock units and other stock-based awards, short-term cash incentive awards or any other award. Under the 2005 Plan, awards may be granted with respect to a maximum of 3,375,000 shares of Skins Footwear's common stock, subject to adjustment in connection with certain events such as a stock split, merger or other recapitalization of the Company. On September 28, 2007, the Company held its annual meeting of stockholders at which an amendment of our 2005 Incentive Plan was approved to increase the authorized number of shares that are available for issuance under the 2005 Incentive Plan by 1,625,000 shares, to a total of 5,000,000 shares.
 
 
 
·
Two board members were granted 421,875 options each at an exercise price of $0.80 that vest ratably over a 36-month period.
 
 
·
Two consultants were granted 421,875 options each at an exercise price of $0.80 a share that vests ratably over a 36-month period.
 
 
·
One consultant was granted 421,875 options at an exercise price of $0.80 that vested immediately for finder fee services.   

As part of the Share Exchange Agreement dated November 2, 2005, the Company assumed Skins Footwear 's 2005 Incentive Plan.
 
The awards granted to the two board members were treated as liability awards upon the grant on October 24, 2005. The treatment of the awards as liability was due to an insufficient number of authorized shares at the time of issuance. The Company used the intrinsic value method to determine compensation on these liability awards.

March 16, 2006 Replacement Option Grants 
 
On March 16, 2006 as a result of the granting of options in excess of the authorized shares allowed, Skins Footwear canceled and re-adopted its 2005 Incentive Stock Plan. In connection thereof, Skins Footwear increased its authorized shares to 4,000,000. Additionally, all options granted under the original plan were canceled and re-granted in accordance with the terms of the re-adopted 2005 Incentive Stock Option Plan.
 
14
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)
 
The replacement options to the two board members were treated as replacement equity awards. On the date of replacement the Company calculated the fair value (calculated method) of the replacement options using a Black-Scholes option valuation model that uses the assumptions noted in the following table. At the time of the replacement of the options the Company was non-public and calculated its expected volatility based on the calculated method using the Dow Jones US Footwear Index. The Company elected to use the calculated method because it did not have a trading history for its stock and it was a development stage company. The Company chose the Dow Jones US Footwear Index because it represents an industry index closest to which the Company operates. The Company estimates option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
Expected volatility
    
17.30
%
 
      
Expected dividends
    
0
  
 
      
Expected Term (Years)
    
3
  
 
      
Risk free interest rate
    
4.70
%
 
The total incremental compensation expense from the cancellation and replacement of the awards was $196,763, which is expected to be recognized over a period of 32 months from March 16, 2006. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $10,009 and $18,447 and $12,245 and $36,894, respectively related to the replacement option grants to the board members.  On October 19, 2007, one of the board members that was granted 421,875 replacement options resigned. Any non vested portion of the option expired immediately and the vested portion of the option was exercisable for a period of 90 days following optionee’s termination. As of January 19, 2008, the former board member did not exercise any of the vested options; subsequently all options have been forfeited.
 
 
·
The 421,875 options granted to two-consultants that vest over a 36-month period were granted for services not yet rendered. The Company used the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with these grants. The Company measured the compensation associated with these grants based on the fair value of the equity instruments issued. There is no measurement date to calculate the fair value of the options at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the two consultants was not complete. The Company calculated the expense at each reporting period based upon fair value of the options that vested during the reporting period using the fair value on the reporting date. Fair value was calculated using the Black-Scholes model. The options were treated as liability awards upon the original grant because the Company did not have a sufficient number of authorized shares. The options became equity awards on the date they were cancelled and re-granted. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $6,828 and $72,057 and $19,548 and $164,434, respectively.
     
 
·
The remaining 421,875 options were granted to a non-employee for services that had already been provided. The Company used the provisions of EITF-00-19 to account for these options. At the grant date and at December 31, 2005, the Company treated the option grant as liability award because it did not have enough authorized shares to settle the contract in equity. Therefore, these options were recorded at fair value as a liability at December 31, 2005. The fair value of the options was calculated using the Black-Scholes model at December 31, 2005. On March 16, 2006 the Company increased its authorization of Common Stock therefore alleviating the potential liability. The Company recorded the fair value of the options using a Black-Scholes model as of March 16, 2006 and reclassified the total remaining liability from these awards to additional paid in capital.
 
15
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)

The fair value of the options granted to consultants was calculated using the Black-Scholes option valuation model with the following assumptions at the applicable dates noted:

 
  
June 30,
2008
  
 June 30,
2007
  
Expected volatility
    
135.82
%
  
100.23
%
Expected dividends
    
None
    
None
  
Expected term (in years)
    
2.3
    
2
  
Risk-free interest rate
    
2.87
%
  
4.5
%

2006 Option Grants
 
On May 15, 2006 the Company granted 150,000 options to the Vice President of Sales. The options vest quarterly beginning three months after the grant date at 12,500 per quarter and have an exercise price of $1.10. The options expire on May 15, 2011.

On June 19, 2006 the Company granted 150,000 options to the Vice President of Finance and Operations. The options vest quarterly beginning three months after the grant date at 12,500 per quarter and have an exercise price of $1.19. In March 2007 the Company cancelled all of these options in exchange for a cash payment to this Vice President of $88,500.
 
For the three months ended March 31, 2007, the Company recorded a total compensation expense of $67,190 related to the Former Vice President's June 19, 2006 option grant. Total compensation was made up of the $9,135 service period expense for the quarter and the $58,055 from the unrecognized compensation that effectively vests upon repurchase of the options. The $30,445 cost in excess of the repurchase amount is the difference between the $88,500 total cash paid less the unrecognized cost of $58,055 and is recognized as a charge to additional paid in capital.

The total compensation expense related to the non-vested options on 2006 awards at June 30, 2008 is $38,075. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $12,811 and $7,614 and $15,228 and $24,206, respectively related to the two grants above.
 
16
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)

On May 9, 2006 the Company granted 300,000 options to a consultant at a per share exercise price of $1.06. The options vest quarterly beginning three months from the date of the agreement and expire 30 days after the related investor relations agreement is terminated. The Company used the provisions of FAS 123(R) and EITF 96-18 to account for the compensation expense associated with this grant. The Company measured the compensation associated with this grant based on the fair value of the equity instrument. There is no measurement date to calculate the fair value of this grant at the date of grant because the performance commitment had not yet occurred and the performance by the consultant was not complete. The Company calculated the expense at each reporting period based on the fair value of the options that vested during the reporting period. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $0 and $29,451 and $35 and $97,416, respectively. 

On October 12, 2006 the Company granted 375,000 options to a consultant. 175,000 options vest immediately with the remaining 175,000 vesting annually over a three-year period with the first vesting occurring one year after the year of grant. In addition, the Company granted three other consultants a total of 80,000 options that vest annually over a three-year period with the first vesting occurring one year after the year of grant. The 455,000 options were granted for services not yet occurred. The Company used the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with these grants. The Company measured the compensation associated with these grants based on the fair value of the equity instruments issued. There is no measurement date to calculate the fair value of the options at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the consultants were not complete. The Company will calculate the expense at each reporting period based upon fair value of the options that vested during the reporting period using the fair value on the reporting date. At June 30, 2008 and 2007 no options under this grant had vested, therefore no expense had been incurred.

The fair value of the options granted to a consultant on May 9, 2006 was calculated using the Black-Scholes option valuation model on February 9, 2008 (vest date) with the following assumptions:

 
  
May 9, 2006
Consultant Grant (Vest 2008)
  
Expected Volatility
    
114.58
%
Expected dividends
    
None
  
Expected Term (Years)
    
.25
  
Risk Free Interest Rate
    
2.31
%
 
2007 Option Grants

On March 14, 2007 the Company granted 20,000 options to an employee of the Company. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.63. The options expire on March 14, 2011. On November 8, 2007, the employee resigned and the options were forfeited.
 
On April 13, 2007 the Company granted 500,000 options to its Chief Operating Officer. The options vest in six semi-annual installments from the date of grant over three years, and have a per share exercise price of $1.25. The options expire on April 13, 2012.
 
17
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)

On March 27, 2008, the Company received the resignation of its Chief Operating Officer (“COO”), from his position with the Company effective immediately. On April 8, 2008, the Company entered into a separation agreement and release (“Separation Agreement”) with its COO in connection with his resignation as COO of the Company. Pursuant to the Separation Agreement, the COO agreed that he was not entitled to any further payments or benefits, including any annual incentive/performance bonus, under his employment agreement with the Company. The COO also agreed to release the Company from any and all claims and rights that the COO may have against the Company, including, but not limited to, any claims arising out of or relating to the employment agreement, those claims of which the COO is not aware, and all claims for attorney’s fees, costs, and interest. In exchange, the Company agreed to amend the COO’s stock option agreement to permit the vesting of 250,000 options, permit participation of such options in the option repricing on April 2, 2008, and permit the options to be exercisable for one year from the date of the termination of its COO’s employment.

On July 3, 2007, the Company granted 200,000 options to its Chief Financial Officer. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.29. The options expire on July 3, 2011. On the same date, the Company granted 25,000 options to the Vice President of Sales. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.29. The options expire on July 3, 2011. The stock options as of the date of the grant shall be expensed as compensation in the Company's consolidated statement of operations ratably over a 36 month service period.

On May 22, 2008, effective immediately, Deborah A. Gargiulo tendered her resignation as Chief Financial Officer of the Company. As of the date of her resignation, 200,000 options were forfeited, which resulted in the reversal of unvested cumulative compensation of $41,679 and the reversal of $11,300 of additional compensation related to the non-vested options that were repriced dated April 2, 2008.

On August 27, 2007, the Company granted 20,000 options to an employee of the Company. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $1.37. The options expire on August 27, 2012. On March 14, 2008 the employee resigned and the options were forfeited.

On August 27, 2007, the Company granted 150,000 options to a Director of the Company’s Board of Directors (the “Appointment Date”). The options vest on an annual basis from January 9, 2007, the date the Director was appointed to the Company, and vest over three years, with the first one-third vesting to occur one year from the Appointment Date. The grant has a per share exercise price of $1.37. The options expire on August 27, 2012. The stock options as of the date of the grant shall be expensed as compensation in the Company's consolidated statement of operations ratably over a 36 month service period.

On September 28, 2007, the Company granted warrants to a consultant to purchase up to 150,000 shares of common stock from the Company at an exercise price of $1.38 per share. The warrants were granted to the consultant in accordance with an Investor Relations Agreement dated May 9, 2006, as amended by the First Addendum dated September 19, 2007, entered into by the Company and the consultant. The vesting schedule of the consultant warrants are contingent upon the number of shares issued upon the exercise of investor warrants sold by the Company in a private placement in May 2007. A total of 4,000,000 warrants were issued in that private placement. The warrants become exercisable, subject to terms and conditions of the investor relations agreement, as follows: the first one-third of the consultant’s warrants vest upon the exercise of 1,217,200 investor warrants, the second one-third of the consultant’s warrants vest upon the exercise of 2,434,400 investor warrants, and the final one-third of the consultant’s warrants vest upon the exercise of 3,651,600 investor warrants. The Company used the provisions of FAS 123(R) and EITF 96-18 to account for the compensation expense associated with this warrant issuance. The Company measures the compensation associated with this issuance based on the fair value of the equity instrument. There was no measurement date to calculate the fair value of this issuance at the date of grant because the performance commitment had not yet occurred and the performance by the consultant was not complete. The Company calculates the expense at each reporting period based on the fair value of the warrants that will vest during the reporting period. At June 30, 2008 no warrants under this issuance had vested, therefore no expense had been incurred.

On November 12, 2007, the Company granted 24,000 options to a consultant. The first one-third of the options vest on December 1, 2007, and the second and final one-third of the options vest on December 1, 2008 and 2009, respectively. The grant has an exercise price of $0.78 per share. The options expire on April 7, 2012. The Company will use the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the compensation expense associated with this grant. The Company will measure the compensation associated with these grants based on the fair value of the equity instruments. At June 30, 2008, no additional options vested, therefore no expense had been incurred. 

The total compensation expense related to the non-vested options on 2007 awards to employees at June 30, 2008 is $121,283. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $40,202 and $28,569 and $96,779 and $28,569, respectively. 
 
18
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)
 
2008 Option Grants

On February 29, 2008, the Company granted 50,000 options to its Senior Vice President of Sales. On the same date, the Company granted 50,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $0.24. The options expire on February 29, 2012 and February 28, 2013, respectively. The stock options as of the date of the grant have a fair value of $18,956, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period.

On March 26, 2008, the Company granted 50,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $0.31. The options expire on March 26, 2013. The stock options as of the date of the grant have a fair value of $13,175, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period.

On April 9, 2008, the Company granted 125,000 options to an employee. The options vest on an annual basis over three years, with the first one-third vesting on the one year anniversary of the grant date and have a per share exercise price of $0.59. The options expire on April 9, 2012. The stock options as of the date of the grant have a fair value of $60,216, which shall be expensed as compensation in the Company’s consolidated statement of operations ratably over a 36 month service period. 

On June 10, 2008, in accordance with a May 27th, 2008 revised agreement with TLD Asian Pacific Ltd (“TLD”), the Company granted a designee of TLD 257,143 options with an exercise price of $0.28 a share. The 257,143 options were calculated dividing $72,000 by the closing price of the Company’s common stock on the date of grant or $0.28 per share. The options have a term of five years from the date of grant and have the following vesting schedule: 214,290 options vested upon grant, 21,427 options vest on July 10, 2008, and 21,426 options vest on August 10, 2008. During the three and six months ended June 30, 2008 the Company recognized $60,002 of expense relating to this grant.

The total compensation expense related to the non-vested options on 2008 awards to employees at June 30, 2008 is $74,146. For the three months ended June 30, 2008 and 2007 and for the six months ended June 30, 2008 and 2007, the Company recorded compensation expense of $6,252 and $0 and $6,721 and $0, respectively. 
 
19
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 14: STOCK OPTIONS (continued)

The fair value of the options granted to employees on February 29, 2008, March 26, 2008, and April 9, 2008 were calculated using the Black-Scholes option valuation model with the following assumptions:   
 
 
  
February 29, 2008
Option Grants
  
March 26,
2008
Option Grant
  
April 9,
2008
Option Grant
  
Expected volatility
    
115.51
%
  
125.74
%
  
130.89
%
Expected dividends
    
None
    
None
    
None
  
Expected term (in years)
    
4-5
    
5
    
4
  
Risk-free interest rate
    
2.50
%
  
2.55
%
  
2.59
%
 
On April 2, 2008, the Board of Directors of the Company acted to reprice a total of 2,794,625 options that it had previously granted to certain employees, directors and consultants of the Company. The options, all of which had been previously issued pursuant to the 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 the Company’s common stock on the date of approval by the Board of Directors. 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 the Company. The other terms of the options, including the vesting schedules, remained unchanged as a result of the repricing. Total additional compensation expense on non-vested options relating to the April 2, 2008 repricing is approximately $26,000 which will be expensed ratably over the 7 to 29 months service periods that remain. Additional compensation expense on vested and unvested options relating to the April 2, 2008 repricing is $73,422 and $2,916, respectively, is included in selling, general and administrative expenses for the three and six months ended June 30, 2008.

The repriced options had originally been issued with $0.80 to $1.37 per share option exercise prices, which prices reflected the then current market prices of the Company’s stock on the dates of original grant. As a result of the sharp reduction in the Company’s stock price, the Board of Directors believed that such options no longer would properly incentivize the Company’s employees, officers and consultants who held such options to work in the best interests of the Company and its stockholders. Moreover, the Board of Directors believed that if these options were repriced, that such options would provide better incentives to such employees, officers and directors.

A summary of option activity under the 2005 Plan as of June 30, 2008 and changes during the six months then ended is presented below:   
 
   
Shares 
  
Weighted
Average
Exercise
Price
  
Weighted -
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
  
Options
  
 
  
 
  
 
  
 
  
Outstanding, January 1, 2008
    
3,486,500
  
$
1.00
          
Granted
    
532,143
    
.35
          
Cancelled
    
(470,000
)
  
.40
    
  
   
  
 
Outstanding, June 30, 2008
    
3,548,643
  
$
.39
    
2.96
  
$
-
  
 
                  
Exercisable, June 30, 2008
    
2,679,164
  
$
.39
    
2.69
  
$
-
  
 
A summary of the status of the Company's non-vested shares as of June 30, 2008, and changes during the six months ended June 30, 2008, is presented below:
 
 
  
 Shares
  
 Weighted-
Average
Grant-Date
Fair Value
  
Non-vested Shares
  
  
  
  
  
Non-vested, January 1, 2008
    
1,461,225
  
$
.72
  
Granted
    
532,143
    
.35
  
Cancelled
    
(470,000
)
  
1.10
  
Vested
    
(653,889
)
  
.54
  
Non-vested, June 30, 2008
    
869,479
  
$
.59
  
 
20
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 15: STOCKHOLDERS’ EQUITY (DEFICIENCY)

On April 9, 2008, the Company 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 a $20,000 payment in cash for such services.

The offering was made pursuant to a U.S. investor subscription agreement and an offshore subscription agreement, each dated April 9, 2008, 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. The Company agreed to register the shares of common stock and the shares of common stock underlying the warrants on a registration statement that must be filed with the Securities and Exchange Commission within the earlier of 21 days after the closing of the offering or 10 days after the Company filed its Annual Report on Form 10-KSB. The Company filed the registration statement on Form S-1 on April 24, 2008. The registration statement was declared effective on August 7, 2008.

In an effort to preserve cash for Company operations, it agreed to convert the $40,645 in debt owed to the non-employee board members and advisory board members into the offering in lieu of payment for fees due to them. 

21
 
Skins Inc. and Subsidiary
(A Development Stage Company)
Notes to Condensed Consolidated Interim Financial Statements
(Unaudited)

NOTE 15: STOCKHOLDERS’ EQUITY (DEFICIENCY) (continued)

Upon execution of the secured notes (Note 12), the holders received shares of common stock in an amount that was equal to (x) half of the principal amount of the note divided by (y) the closing trading price of the Company’s common stock on the date of the note. The lowest trading price used to calculate the number so shares to be issued under the secured notes was $0.22 per share. In consideration of the holders investing the principal due into private placement in lieu of payment and waiving any and all interest due, each holder that received shares upon the execution of the note based on a trading price higher than $0.22 per share were issued additional shares of common stock. These additional shares were equal to the number of shares that would have been received if $0.22 were in the formula, minus the number of shares actually received upon execution of the secured note. A total of 316,298 additional shares were issued to these secured note holders. The Company booked a fee expense equal to the fair value of the additional common shares issuable at April 9, 2008 or approximately $187,000 in its consolidated statement of operations for the three and six months ended June 30, 2008. Our former Chief Financial Officer and Chairman of the Board were each note holders that converted amounts of $15,000 and $100,000, respectively, in the private placement on the same terms and conditions as the rest of the investors.

 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 will receive an additional 250,000 shares of common stock three months from the commencement of his employment. The common shares issued were originally subject to only certain legal restrictions. The total fair value of the common stock on the date of grant is $92,000 $34,500 amortized on a straight-line basis over a six month period from the commencement date. The remaining $57,500 will be amortized on a straight line basis over a six month period beginning three months from the commencement date. For the three months and six months ended June 30, 2008 the Company recognized $2,875 of compensation expense which is included in selling, general and administrative expenses.

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 400,000 restricted shares of the Company’s Common Stock originally granted to Mr. Solomon on June 16, 2008 were subject to certain additional restrictions and subject to forfeiture, including the following:

(i) While an employee of the Company, Mr. Solomon will only be able to sell the shares in the event of a corporate action such as a merger, acquisition, sale of substantially all of the Company’s assets, change in control (as defined in the agreement), dissolution, or windup of the Company; however Mr. Solomon may, at the sole discretion of the Company, be allowed to sell some or all of the shares outside of this restriction.

(ii) If Mr. Solomon is terminated without cause or terminates employment for good reason, each as defined in the Amendment, Mr. Solomon may keep any of the shares granted to him for five years from the date of termination; however, Mr. Solomon will only be able to sell the shares in the event of a corporate action, unless otherwise authorized by the Company in its discretion. If at the end of the five year period the Company has not completed a corporate action or the Company has not allowed Mr. Solomon to sell the shares then Mr. Solomon will lose rights in any remaining shares at that time.

(iii) If Mr. Solomon is terminated for cause, he will lose all rights to all shares granted to him or due to be granted to him immediately.

(iv) Any sales of the shares are further restricted by the applicable securities regulations and in no event may a sale of the shares be in violation of such regulations or in conflict with the Company’s insider trading policy.

The Company concluded that the modification of the restricted terms was a probable to probable modification as defined by FAS 123(R) and therefore would not affect the fair value of the original grant or result in additional compensation because the modification does not affect the number of shares expected to vest.

On July 30, 2008 (“date of grant”), the Company entered into a finder’s agreement with Alicia Johnson pursuant to which the Company agreed to issue 200,000 shares of common stock to Ms. Johnson in exchange for locating and placing Michael Solomon with the Company as its new Chief Financial Officer. Pursuant to the agreement, if during a six month probation period, starting on June 16, 2008, the Company terminates the employment of Mr. Solomon for cause or Mr. Solomon voluntarily terminates employment for any reason, Ms. Johnson agreed to use best efforts to locate the Company a suitable replacement candidate during the remaining portion of the six month period. Ms. Johnson agreed that the 200,000 shares to be issued to her can only be transferred or sold after the expiration of the six-month probation. In addition, if Ms. Johnson fails to present a suitable replacement candidate for the Company, if such requirement should arise, the 200,000 shares issued to her would be returned to the Company and cancelled. The Company will use the provisions of FAS 123(R) and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services to account for the finders fee expense associated with the common stock grant. The Company will measure the compensation associated with this grant based on the fair value of the common stock issued. There is no measurement date to calculate the fair value of the common stock at the date of grant because the performance commitment had not yet occurred (there are no sufficiently large disincentives for non-performance) and the performance by the Ms. Johnson was not complete. Pursuant to FAS 5, Accounting for Contingencies, the Company concluded that it is probable that a loss contingency related to the agreement with Ms. Johnson had occurred. As such, the Company has accrued on the date of grant a finders fee expense of $44,000 which equal to the fair value of the 200,000 common shares granted. Since the quantity and terms of the common stock grant are known up front and the measurement date has not occurred the Company will record any change in fair value of the common shares during any interim periods within the Statement of Operations.

NOTE 16: SUBSEQUENT EVENT

On July 25, 2008 Steve Reimer, a member of the Company’s board of directors resigned his board seat, effective on July 31, 2008. As a result of his resignation, Mr. Reimer forfeited 39,551 options originally granted to him on March 16, 2006. The Company recorded compensation expense of $9,732 in July 2008 based on Mr. Reimer's fully vested options on July 31, 2008.
 
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financial condition and plan of operation should be read in conjunction with our financial statements and the related notes, and the other financial information included in this report. This Management's Discussion and Analysis or Plan of Operation describes the matters we consider to be important to understanding our history, technology, current position, financial condition and future plans. Our fiscal year begins on January 1 and ends on December 31.

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.

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 a soft commercial launch during the third quarter of 2007. Due to technological advances in the product, we plan for an updated design of the Bone to be launched for the Fall/Winter 2008 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, we agreed to replace the existing Bones at retail and will replace the Skins as well, to ensure an ideal fit and match for the Skins and Bone. The improvements to the product, rendered inventory to be obsolete for the year ended December 31, 2007.

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.
 
 As of June 30, 2008, we had no established source of revenues and had accumulated losses of $13,891,188 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-Q 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.

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PLANNED OPERATIONS

Product Development

We have designed, outsourced manufactured and are marketing a patented quality men’s and women’s footwear with a limited distribution to select retailers that began in mid-April 2008. This marked our first mainstream limited consumer launch, after completing a test soft launch to a select 20 retailers during the third quarter of 2007. 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. The first test collection (Fall/Winter 2007) had approximately five to six styles per gender ranging three to five color ways per each style. The Spring/Summer 2008 Collection “(SS 08)” had approximately eight to nine styles per gender ranging three to five color ways per each style. Due to further updates to the Bone and a late delivery to retailers this past April we only shipped a portion of the SS 2008 styles produced. We are currently taking orders on Holiday 2008 and SS 2009. These collections feature an updated version of the new Bone. The updated Bone has no toe-box in an attempt to increase comfort and provide a better fit to a wider audience of consumers. The new version of the Bone interoperates with the existing SS 2008 Skins. The change to the new Bone came about through further market research conducted with our retail partners, design consultants, and the practical feedback that came about through the limited distribution this past SS 2008 season. The Bone and Skins technology, as it stands today, has now been field tested with different retailers, different consumers and is scalable and transferable. We continue to seek ways to lower costs, and explore other materials with various benefits and will always look to improve upon our product.

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.  

During the third quarter 2007, we launched our product to a test market of approximately 20 select independent stores. In conjunction with the soft launch, we announced our Consumer Partnership Program, which is a program aimed to elicit feedback from consumers to aid us in product development and internal research. As part of the program, we gave the Bone portion of the product to participating consumers without charge. As a result of input from our retail partners, continuous fit trials, and feedback from consumers through the Consumer Partnership Program, we were able to incorporate this information into a new Bone. On November 7, 2007, we announced an updated design of the Bone, an advanced product to be launched in first half 2008 for the SS 2008 season. This new Bone, as described above, has had one additional major update of not including a toe-box and will be introduced to consumers in our Winter and Holiday 08 deliveries. All participants in our consumer partnership program and all of customers who have proof of purchase for either the 2007 test launch or the previous SS 08 deliveries, will receive, at no charge, the latest version of the Bone. Individuals who participated in the program will receive an email coupon that can be redeemed at their local retailer or online.

As a result of the new Bone design, we informed our retail partners that we would not require payment for shipped product until the new Bones are supplied to them. Therefore, we will not recognize any revenue from our shipment of product in April 2008 until such time as the new Bones are delivered to the retail partners. In addition, in order to reduce any further inconvenience to our retail partners, and to save shipping and freight expenses, we requested that the retail partners store product at their locations until such time that the new Bones can be provided. Approximately 45% of our finished goods inventory are located at retail partner locations.

The engineering of the Bone and Skin allows for a pressure fit attachment. The Bone is an exact fit to all corresponding Skins in the same size. The Skin cannot be worn on its own. The Bone is designed such that it can only be worn with a Skin and not on its own. As a result of the product enhancements and advanced technologies, we agreed to replace the existing Bones at retail and will replace the Skins, as well to ensure an ideal fit and match for the Skins and Bone. The improvements to the product, rendered inventory to be obsolete, as defined in management’s discussion below, for the test launch we conducted in SS 2007. The Bones we shipped to limited retailers this SS 08 will be switched with the updated Bone in addition to the inventory we currently have in our warehouse. All new Winter-Holiday 2008 goods will be assembled with the newly updated Bone.

Sourcing

On November 28, 2007, the Company executed a Buying Agency and Sourcing Agreement with Atsco Footwear, LLC. Pursuant to the agreement, Atsco will serve as the Company’s non-exclusive buying and sourcing agent and will be responsible for sourcing, commercialization and product line review. The Company will pay Atsco a commission of 7% of the $5 million and 5% for the amounts above the first $5 million at the FOB country of origin price for merchandise sourced by Atsco and shipped to the Company. The agreement has an initial term of one year, from November 15, 2007 through November 15, 2008, and each party has the option to extend the initial term of the agreement for an additional year upon providing written notice to the other party no less than thirty days prior to the expiration of the initial term. Either party may terminate the agreement at any time upon providing the other party with three months written notice. Mark Itzkowitz, the President of Atsco, is also an advisory member of the Board of Directors of the Company.

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.

We will consider the children's market and more mainstream middle-market retailers once our brand is more established. We may also consider 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 beginning in April 2008. This marked our first limited main stream consumer launch after completing a test soft launch to a select 20 retailers during the third quarter of 2007 this past fall season. We are currently taking orders for Winter-Holiday 2008 and Spring-Summer 2009. The planned distribution will encompass independent specialty retailers, national retailers and department stores, E-tailers, and some International distribution. We believe that the initial purchase order amount we can expect per retailer will be a weighted average of 60 pairs per gender at an average wholesale price of $57 per pair of Skins. We further plan on selling fill-in orders two to three times as the season progresses.   
 
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RECENT EVENTS

April 2008 Private Placement

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.

The purpose of the Private Placement was to raise working capital. 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.

The offering was made pursuant to a U.S. investor subscription agreement and an offshore subscription agreement, each dated April 9, 2008, respectively. 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. The Company agreed to register the shares of common stock and the shares of common stock underlying the warrants on a registration statement. The Company filed the registration statement on Form S-1 on April 24, 2008. The registration statement was declared effective on August 7, 2008.

In an effort to preserve cash for Company operations, it agreed to convert the $40,645 in debt owed to the non-employee board members and advisory board members into the offering in lieu of payment for fees due to them. Similarly, the Company agreed to convert the $705,000 in principal debt owed under the secured promissory notes into the offering to preserve cash for Company operations. Each of the secured note holders agreed to waive payment of any and all interest due under the notes.
 
Upon execution of the secured notes, the holders received shares of common stock in an amount that was equal to (x) half of the principal amount of the note divided by (y) the closing trading price of the Company’s common stock on the date of the note. The lowest trading price used to calculate the number of shares to be issued under the secured notes was $0.22 per share. In consideration of the holders investing the principal due into private placement in lieu of payment and waiving any and all interest due, each holder that received shares upon the execution of the note based on a trading price higher than $0.22 per share were issued additional shares of common stock. These additional shares were equal to the number of shares that would have been received if $0.22 were in the formula, minus the number of shares actually received upon execution of the secured note. A total of 316,298 additional shares were issued to these secured note holders. The Company has booked a fee expense equal to the fair value of the additional common shares issuable at April 9, 2008 or 186,413 in its consolidated statement of operations. Our former Chief Financial Officer and Chairman of the Board were each note holders that converted amounts of $15,000 and $100,000, respectively, in the private placement on the same terms and conditions as the rest of the investors.

April 2008 Option Repricing

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, remained unchanged as a result of the repricing. Total additional compensation expense on non vested options relating to the April 2, 2008 repricing is approximately $25,923 which will be expensed ratably over the 7 to 29 months service period that remain. The Company recorded $2,916 compensation expense for the three and six months ended June 30, 2008 related to the amortization of the unvested repriced options. Additional compensation expense on vested options relating to the April 2, 2008 repricing of $73,422 was fully expensed on April 2, 2008. The repriced options had originally been issued with $0.80 to $1.37 per share option exercise prices, which prices reflected the then current market prices of our stock on the dates of original grant. As a result of the recent sharp reduction in our stock price, our Board of Directors believed that such options no longer would properly incentivize our employees, officers, directors and consultants who held such options to work in the best interests of our company and stockholders.
 
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December 2007 through March 2008 Promissory Notes

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. The Company booked a fee expense equal to the fair value of the additional common shares issuable at April 9, 2008 or $186,413 in its consolidated statement of operations.

Results of Operations and Financial Condition

Three and Six Months Ended June 30, 2008 Compared with Three and Six Months Ended June 30, 2007

There were no earned revenues during the three and six months ended June 30, 2008 and 2007.

Design and development expenses for the three and six months ended June 30, 2008 and 2007 were $189,913 and $550,495 and $299,166 and $885,131, respectively. These changes of $360,582 and $585,965 were primarily attributable to a decrease in the amount of design and development costs from the prior year needed to bring the product to market in 2008.

Selling, general and administrative expenses (SG&A) for the three and six months ended June 30, 2008 and 2007 were $1,168,367 and $993,669 and $2,086,322 and $2,136,187 respectively.

For the three months ended June 30, 2008 the increase in SG&A expenses are primarily attributable to increases in employee compensation of approximately $17,000 to staff the business in anticipation of bringing the product to market, increased warehouse and operating expenses of approximately $51,000, and increases in non-cash charges such as share-based compensation of $43,000 and additional non-cash fees paid to promissory note holder totaling approximately $187,000 which were offset by reductions in advertising of approximately $94,000, termination expenses for a previous employee of $29,000.

For the six months ended June 30, 2008 the decrease in SG&A expenses are primarily attributable to increases in employee compensation and benefits of approximately $155,000 to staff the business in anticipation of bringing the product to market, increased warehouse and operating expenses of $50,000, and increases in non-cash and other charges such as additional non cash fees paid to promissory note holders totaling approximately $187,000 which were offset by reductions in travel of approximately $66,000, advertising expenses of approximately $68,000, professional and other expenses of approximately $106,000, share-based compensation of approximately $78,000, termination expenses for a previous employee of $173,000, and non recurring income of $49,000.
 
Our net loss for the three and six months ended June 30, 2008 was $1,371,581 or $0.03 per share and $2,493,697 or $0.05 per share, respectively as compared to a net loss of $1,524,363, or $.04 per share and $2,991,515 or $ .08 per share, for the same respective periods in 2007.

Liquidity and Capital Resources

At June 30, 2008, we had $110,542 in cash and cash equivalents. 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.
 
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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.

Net cash used in operating activities for the six months ended June 30, 2008 was $1,905,850 as compared to net cash used of $2,792,246 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 six months ended June 30, 2008 as compared to the same period in 2007, which was primarily attributable to a decrease in operating expenditures compared to the six months ended June 30, 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 six months ended June 30, 2008 was $413,247, as compared to $190,552 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 six months ended June 30, 2008 was $2,423,453, as compared to $3,541,030 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 and raising $1,868,453 (net of direct costs of $66,547) from the April 9, 2008 private placement while the Company raised a net $3,571,445 in the May 21, 2007 financing transaction.
 
 At June 30, 2008, we had 3,548,643 stock options and 18,217,939 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 $0.56 per share. Accordingly, at June 30, 2008, the outstanding options and warrants represented a total of 21,766,582 shares issuable for a maximum of $11,558,604 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 will receive 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 will be subject to certain additional restrictions and subject to forfeiture, as set forth in the Amendment.

We presently have a factoring agreement in place which currently will enable us to borrow up to $500,000 related to purchasing finished goods inventory. Per the terms of the agreement, we will also be able to factor and receive advance proceeds of up to 85% of our future accounts receivable, if any, upon the date of shipment of product from our United States inventory warehouse to customers.

At July 31, 2008, our management estimates that we have exhausted our cash on hand. If we are unable to obtain additional financing or enter into a merger or acquisition, we may not have sufficient cash to continue operations for beyond August 31, 2008. 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 do not have commitments from third parties for 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 August 31, 2008, 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.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.
 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.
 
ITEM 4. CONTROLS AND PROCEDURES
 
(a) Evaluation of disclosure controls and procedures
 
The Company's management evaluated, with the participation of its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design/operation of its disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(c) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2008.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our principal executive officer and our principal financial officer. Based on that evaluation, management concluded that our financial disclosure controls and procedures were not effective related to the preparation of the Form 10-Q filing as of June 30, 2008.

The controls designed were adequate for financial disclosures required for the preparation of the Form 10-Q filing; however, due to lack of resources in the company’s accounting department the controls were not operating effectively. The remediation plan for improving the effectiveness over financial disclosure controls, which caused the material weakness over financial disclosures, will include creating a financial disclosures roll-forward model in accordance with the disclosures required for each periodic filing with the SEC. This model will be maintained and updated by Skins staff and management as new business transactions require additional financial disclosures. These financial disclosures will be reviewed by an outside financial disclosure expert for completeness and accuracy earlier in the financial statement closing process cycle in order to help ensure completeness and accuracy for reporting financial disclosures.

(b) Changes in internal control over financial reporting

During the quarter ended June 30, 2008 we took remediation steps to remedy the material weaknesses identified in our Form 10-KSB for the year ended December 31, 2007 to enhance internal control over financial reporting. As noted in 4(a) above, we noted a material weakness in our financial disclosure controls at June 30, 2008. We are in the process of updating our remediation process as noted in Item 4(a). In addition, and as disclosed in the Form 8-K filing filed with the Securities and Exchange Commission on May 29, 2008, our CFO resigned her position effective May 22, 2008. A new CFO was appointed on June 16, 2008 and has assumed the internal control duties of the CFO. Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that, except as stated above, there were no changes in our internal control over financial reporting that occurred during the second quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.
 
ITEM 1A. RISK FACTORS

Other than as set forth below, there have been no material changes from the risk factors disclosed in the “Risk Factors” section of our 2007 Form 10-KSB, as filed with the Securities and Exchange Commission on April 14, 2008.
 
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If we are unable to obtain additional financing or enter into a merger or acquisition, we may not have sufficient cash to continue operations beyond August 31, 2008.

In May 2007 the Company sold a total of 4,000,000 units in a private offering for aggregate proceeds of $3,000,000, and in April 2008, the Company conducted another private placement that raised approximately $2,680,645 in gross proceeds. The Company has also raised approximately $705,000 by issuing secured promissory notes entered into from December 2007 through March 2008, all of which were invested in the April 2008 private placement in lieu of repayment. As of July 31, 2008, our management estimates that we have exhausted our cash on hand. If we are unable to obtain additional financing or enter into a merger or acquisition, we may not have sufficient cash to continue operations beyond August 31, 2008.

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 do not have commitments from third parties for 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 August 31, 2008, 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
ITEM 5. OTHER INFORMATION

None.
ITEM 6. EXHIBITS
 
 
31.1
Certification of Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
 
31.2
Certification of Principal Financial and Accounting Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
 
 
 
 
32.1
Certification of Principal Executive Officer and Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
 
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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 
SKINS INC.
(Registrant)
 
 		  
 		  
 
August 18, 2008
 By:  
/s/ Mark Klein
 
Mark Klein
 
Chief Executive Officer, President and Director
(Principal Executive Officer)
 
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