UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




(Mark
One)




x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the fiscal year ended
December 31,
2009





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




For the transition period
from                                                    to






0-51313





Commission
file number




SKINNY
NUTRITIONAL CORP.





(Exact
name of small business issuer as specified in its charter)




Nevada
            
            88-0314792(State
      of incorporation)
            
            (IRS
      Employer Identification Number)




3
Bala Plaza East, Suite 101


Bala
Cynwyd, PA 19004





(Address
of principal executive office)






(610)
784-2000





(Issuer’s
telephone number)




Securities
registered under Section 12(b) of the Exchange Act: NONE




Securities
registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.001 per
share




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15 (d) of the Securities Exchange Act.  Yes  ̈ No x




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 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
 ̈




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” in Rule
12b-2 of the Exchange Act. (check one):





Large
      accelerated filer    ̈
            Accelerated
      filer  ̈Non-accelerated
      filer     ̈
            Smaller
      reporting company x(do
      not check if a smaller reporting company)














Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K    (ss.229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x




State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter (June 30, 2009): $30,010,231.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: On March 25, 2010 there were
292,668,294 shares outstanding of common stock of the
Registrant





DOCUMENTS
INCORPORATED BY REFERENCE




List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(e) under the Securities Act of 1933.




None










SKINNY
NUTRTIONAL CORP.


INDEX
TO ANNUAL REPORT ON FORM 10-K


FOR
THE YEAR ENDED DECEMBER 31, 2009





PAGEPart
      IItem
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            14Item
      1B.
            Unresolved
      Staff Comments
            25Item
      2.
            Properties
            25Item
      3.
            Legal
      Proceedings
            25Item
      4.
            Reserved
            26Part
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder
Matters
            26Item
      6.
            Selected
      Financial Data
            27Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            28Item
      7A.
            Quantitative
      and Qualitative Disclosure about Market Risk
            44Item
      8.
            Financial
      Statements and Supplementary Data
            44Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            44Item
      9A.
            Controls
      And Procedures
            44Item
      9B.
            Other
      Information
            47Part
      IIIItem
      10.
            Directors,
      Executive Officers, and Corporate Governance
            47Item
      11.
            Executive
      Compensation
            49Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            56Item
      13.
            Certain
      Relationships And Related Transactions, Director
    Independence
            58Item
      14.
            Principal
      Accountant Fees and Services
            60Part
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            61Signatures
            
            66




i




PART
I





Item
1.  Business





Forward
Looking Statements





This
Report contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and the Securities
Exchange Act of 1934. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions,
including those described in “Risk factors.” No forward-looking statement is a
guarantee of future performance and you should not place undue reliance on any
forward-looking statement. Our actual results may differ materially from those
projected in any forward-looking statements, as they will depend on many factors
about which we are unsure, including many factors which are beyond our control.
The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,”
“intend,” “plan,” and “estimate,” as well as similar expressions, are meant to
identify such forward-looking statements. Forward-looking statements contained
herein include, but are not limited to, statements relating to:





•
            Our
      future financial results;





•
            Our
      future growth and expansion into new markets;
  and




•
            Our
      future advertising and marketing
activities.




Except
as otherwise required by law, we undertake no obligation to update or revise any
forward-looking statement contained in this Annual Report. As used in this
Report, references to the “we,” “us,” “our” refer to Skinny Nutritional Corp.
unless the context indicates otherwise.





Business
Development





Skinny
Nutritional Corp. (“Skinny”), is the worldwide owner of several trademarks for
the use of the term “Skinny” focused in the area of healthier beverages and
foods. We have developed and are marketing a line of enhanced waters, all
branded with the name “Skinny Water” that are marketed and distributed primarily
to primarily health conscious consumers. Our business strategy is to develop a
variety of functional beverages and foods utilizing our Skinny trademarks. These
trademarks include Skinny Water® , Skinny
Tea ® , Skinny
Shakes ® , Skinny
Java ®,Skinny
Shots, Skinny Smoothies, Skinny Bar, Skinny Snacks and other Skinny related
products. In 2004 we began implementing our business plan of marketing and
distributing Skinny Water as a dietary supplement. As described in greater
detail below, in October 2006 we restructured our supplier relationships and
changed our corporate name to Skinny Nutritional Corp. to evidence our focus on
marketing and distributing nutritional products branded “Skinny” designed to
assist consumers in healthy hydration to assist them in achieving their
weight-management efforts.





We were originally incorporated on
June 20, 1984, in the State of Utah as Parvin Energy, Inc. Our name was later
changed to Sahara Gold Corporation and on July 26, 1985 we changed our corporate
domicile to the State of Nevada and on January 24, 1994 we changed our name to
Inland Pacific Resources, Inc. On December 18, 2001, we entered into an
agreement and plan of reorganization with Creative Enterprises, Inc., a Delaware
corporation, and changed our name to Creative Enterprises International, Inc.
This agreement provided that all shares of common stock of the Delaware
corporation issued and outstanding on that date be exchanged for shares of
common stock issued by the Nevada corporation, which changed its name after the
reorganization to Creative Enterprises International, Inc. Prior to the
reorganization, we had 32,659,591 shares of common stock outstanding and
pursuant to the agreement, we effected a 1 for 16.33 reverse stock split. This
reduced the number of outstanding shares to 2,000,000. We then issued an
additional 2,500,000 post-split common shares in the acquisition. On September
18, 2002 we filed a registration statement on Form SB-2 with the Securities and
Exchange Commission. This registration statement was amended on five occasions
and ultimately withdrawn on September 30, 2004 prior to being declared effective
by the SEC. The registration statement was filed solely on behalf of certain of
our security holders and in conjunction with an offering of warrants to our
then-current stockholders and did not attempt to register shares to be sold
directly by our company. This filing was withdrawn for a number of reasons.
First, the shares of common stock held by the proposed selling security holders
became eligible to be resold pursuant to Rule 144(k) and accordingly did not
require us to further prosecute the registration statement. In addition, as we
were entering into a new line of business shortly after filing the final
amendment to the registration statement, the additional expense and effort
required was not justified in light of availability of the exemption provided by
Rule 144(k). We decided to change our line of business as management
subsequently determined that it would not be cost-effective for us to continue
to attempt to develop a market in the United States for the products described
in that registration statement. In 2004, management was able to negotiate
license agreements with Peace Mountain Natural Beverage Corporation (as
described below) in order to provide us with the rights to various Skinny
trademarks necessary to engage in our present business line. On November 15,
2006, holders of approximately 53% of our issued and outstanding common stock
consented in writing to the adoption of resolutions approving, among other,
things, the change in our corporate name to “Skinny Nutritional Corp.” to more
accurately describe our evolving operations. This change became effective
December 27, 2006.   This discussion relates solely to the
operations of Skinny Nutritional Corp.




1




For our
2009 and 2008 fiscal year, we generated revenues of $4,146,066 and $2,179,055,
respectively, and incurred a net loss of $7,305,831 and $6,232,123, of which
$3,104,316 and $3,080,179 was non-cash related. Since our formation and prior to
2006, our operations were devoted primarily to startup and development
activities, including obtaining start-up capital; developing our corporate
hierarchy, including establishing a business plan; and identifying and
contacting suppliers and distributors of functional beverages. Starting in our
2006 fiscal year, we have been able to devote our resources to product
development, marketing and sales activities regarding our line of Skinny
beverages, including the procurement of a number of purchase orders from
distributors and retailers. This trend continued in our 2009 fiscal
year.





Our
principal executive offices are located at 3 Bala Plaza East, Suite 101, Bala
Cynwyd, Pennsylvania. Our telephone number is (610) 784-2000.





Business
Overview





Our
Current Products





We
operate our business in the rapidly evolving beverage industries and are
currently focused on developing, distributing and marketing nutritionally
enhanced l beverages. Enhanced beverages have been leading the growth of
beverage consumption in the United States. The company principally operates
through marketing and distributing the “Skinny Water®” line of enhanced
beverages.





Our
Skinny Water product, which we originally introduced in 2005, was reformulated
in 2008 and now   includes six flavors (Acai Grape Blueberry,
Raspberry Pomegranate, Peach Mango Mandarin, Lemonade Passionfruit, Goji Fruit
Punch and Orange Cranberry Tangerine).  We expect to launch three new
flavors called Skinny Water Sport and new packaging in the 2nd
quarter  2010.  Skinny Water® is formulated with a
proprietary blend of electrolytes, vitamins, and antioxidants and contains no
calories or sugar, and has no preservatives or artificial colors. Skinny Water’s
Raspberry Pomegranate flavor features the all natural, clinically tested
ingredient, (“Super CitriMax”) plus a combination of calcium and
potassium.





Our
current business strategy is to continue to expand our distribution of our line
of   Skinny Waters ®.    Skinny
Water is currently distributed by 56 distributors in 25 states, as well as
Ireland and Bermuda.  Management believes that Skinny Water is
available in over approximately 5,000 retail outlets.  Retailers
currently selling Skinny Water include  a national distribution
relationship with Target Corporation, as well as Acme Markets, Stop & Shop,
Giant of Carlise, Wegmans, Harris Teeter, Shop Rites, Fry’s, Walgreens, and
select 7 Elevens.   The company distributes its beverages through
direct-store-delivery(DSD) beverage distributors , such as Canada Dry Bottling
Company of  New York, Canada Dry Delaware Valley, Canada Dry Potomac,7
Up Reno,7 Up Modesto, Hensley Corp, and many others throughout the
US.  We will continue to focus on establishing a market for the Skinny
beverages in the United States, and internationally and generate sales and brand
awareness through samplings, , in-store advertisements, point of sale materials,
retail promotions, event marketing, national print ads, internet marketing
celebrity endorsements, and public relations.





General
Business Developments





Financing
Activities





In fiscal
2009, the Company had conducted a private offering in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”) and Rule 506 promulgated thereunder
pursuant to which it sought to raise an aggregate amount of $2,100,000 of shares
of Series A Preferred Stock. The shares of Series A Preferred Stock had an
initial conversion rate of $0.06 per share, with customary adjustments for stock
splits, stock dividends and similar events. At the conclusion of this offering,
the Company accepted total subscriptions of $2,035,000 for an aggregate of
20,350 shares of Series A Preferred Stock. The Company has been using the net
proceeds from this offering of approximately $1,940,000 for working capital,
repayment of debt and general corporate purposes. The Company agreed to pay
commissions to registered broker-dealers that procured investors in this
offering and issue such persons warrants to purchase such number of shares as
equals 10% of the total number of shares actually sold in the Offering to
investors procured by them. Such warrants shall be exercisable at the per share
price of $0.07 for a period of five years from the date of issuance. The
securities offered have not been registered under the Securities Act and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. Based on the representations made in
the transaction documents, the Company believes that the investors are
“accredited investors”, as defined in Rule 501(a) promulgated under the
Securities Act.




At the
Company’s annual meeting of stockholders held on July 2, 2009, the Company’s
stockholders approved the proposal to increase the Company's authorized number
of shares of Common Stock, and the Company filed a Certificate of Amendment to
its Articles of Incorporation with the State of Nevada on July 6, 2009. In
accordance with the Certificate of Designation, Preferences, Rights and
Limitations of the Series A Preferred Stock, upon the effectiveness of such
filing, all of the 20,350 shares of Series A Preferred Stock subscribed for by
investors were automatically convertible into an aggregate of 33,916,667 shares
of common stock. As of December 31, 2009, holders of 17,885 shares of Series A
Preferred Stock had received 29,808,333 shares of common stock upon conversion
and the holders of the remaining shares of Series A Preferred Stock have not yet
surrendered such shares for cancellation. The issuance of the foregoing
securities were exempt from registration under the Securities Act of 1933, as
amended, under Section 3(a)(9).




2





Commencing in November 2008, a private
offering was conducted pursuant to which the company sought to raise an
aggregate amount of $1,875,000 of shares of common stock (the “November
Offering”). On February 5, 2009, the Company completed the November
Offering. Total proceeds in the November Offering for common shares issued
in 2009 was $1,199,203, net of offering costs. Total proceeds received in 2009
and 2008 relating to the November Offering was $1,867,690. There were 21,230,418
common shares issued in 2009. The Company used the net proceeds from the
November Offering for working capital, repayment of debt and general corporate
purposes. In connection with the November Offering, the Company’s Chief
Executive Officer, Chief Financial Officer and Chairman agreed not to exercise a
total of 12,000,000 options and 2,000,000 warrants beneficially owned by them
until such time as the Company’s stockholders adopt an amendment to its Articles
of Incorporation to increase the number of the Company’s authorized shares of
common stock. The Company agreed to pay commissions to registered broker-dealers
that procured investors and issue such persons warrants to purchase such number
of shares that equals 10% of the total number of shares actually sold in the
November Offering to investors procured by them. Agent warrants are exercisable
at the per share price of $0.07 for a period of five years from the date of
issuance. We paid total commissions of $20,959 and issued agent warrants to
purchase 349,317 shares of common stock.





Subsequently,
in August 2009, the Company commenced a private offering of shares of common
stock in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act and Rule 506 promulgated thereunder (the “August
Offering”) pursuant to which it offered an aggregate amount of 41,666,667 shares
of common stock for $2,500,000 of shares of Common Stock. The shares of
Common Stock were offered and sold at a purchase price of $0.06 per share. At
the conclusion of the offering in December 2009, the Company had accepted total
subscriptions of $1,766,000 for an aggregate of 29,433,333 shares of Common
Stock. Net proceeds from such sales are approximately $1,680,000. The Company is
using the net proceeds from the August Offering for working capital, repayment
of debt and general corporate purposes. The Company agreed to pay commissions to
registered broker-dealers that procured investors in the Offering and issue such
persons warrants to purchase such number of shares that equals 10% of the total
number of shares actually sold in the Offering to investors procured by them.
Such warrants shall be exercisable at the per share price of $0.07 for a period
of five years from the date of issuance. In the August Offering, the Company
paid commissions of $6,500 to registered broker-dealers and issued warrants to
purchase 92,857 to a selling agent that procured investors in this
offering.




Acquisition of Trademarks





The
company had obtained the exclusive worldwide rights pursuant to a license
agreement with Peace Mountain  to bottle and distribute a dietary
supplement called Skinny Water®.  On July 7, 2009, the closing of the
previously announced Asset Purchase Agreement with Peace Mountain occurred and
we acquired from Peace Mountain certain trademarks and other intellectual
property assets. The acquired marks include the trademarks “Skinny Water®”,
“Skinny Shake” TM, “Skinny Tea®”, “Skinny BarTM”, “Skinny SmoothieTM’’, “Skinny
JavaTM”, Skinny Shot, Skinny Snacks and Skinny Juice. In consideration of the
purchase of such assets, we agreed to pay Peace Mountain $750,000 in cash
payable as follows: (i) $375,000 payable up front and (ii) $375,000, less an
amount equal to the royalties paid by the Company during the first quarter of
2009 in the amount of $37,440, payable in four quarterly installments
commencing May 1, 2010. In connection with the acquisition of these assets,
we and Peace Mountain also agreed to settle in all respects a dispute between
the parties that was the subject of a pending arbitration proceeding. Pursuant
to the settlement agreement, the Company and Peace Mountain agreed to the
dismissal with prejudice of the pending arbitration proceeding and to a mutual
release of claims. In connection with the foregoing, the parties also entered
into a Trademark Assignment Agreement and Consulting Agreement. Effective with
the closing, the transactions contemplated by these additional agreements were
also consummated. Under the Consulting Agreement, which is effective as of June
1, 2009, entered into between the Company and Mr. John David Alden, the
principal of Peace Mountain, the Company will pay Mr. Alden a consulting fee of
$100,000 per annum for a two year period. Under this agreement, Mr. Alden will
provide the Company with professional advice concerning product research,
development, formulation, design and manufacturing of beverages and related
packaging. Further, the Consulting Agreement provides that the Company issue to
Mr. Alden warrants to purchase an aggregate of 3,000,000 shares of Common Stock,
exercisable for a period of five years at a price of $0.05 per
share.





Distribution
Agreements with Canada Dry Affiliates





As
described in greater detail below, in fiscal 2009 we entered into distribution
agreements with a number of independent beverage distributors affiliated with
Canada Dry. In July 2009, we entered into a distribution agreement with Canada
Dry Bottling Company of New York and appointed them as our exclusive distributor
for the New York City metropolitan area. Subsequently, we entered into
distribution agreements with three other Canada Dry affiliated distributors in
the mid-Atlantic area to give us an integrated distribution network from
metropolitan New York City to Virginia.





Advisory
Board





On March
20, 2008, the Company announced it established an advisory board to provide
advice on matters relating to the Company’s products. On such date, the Company
appointed the following individuals to its advisory board: Pat Croce, Ron Wilson
and Michael Zuckerman. As described below, in December 2008, we appointed Mr.
Wilson as our Chief Executive Officer and President. In fiscal 2010, the Company
expanded the advisory board and appointed Messrs. Niki Arakelian, Ruben Azrak,
Barry Josephson and John Kilduff to its advisory board. Additional information
about our arrangements with advisory board members is provided under the caption
“Board of Advisors” in Item 10 of this Annual Report on Form 10-K.




3





Our
Industry





Weight
management is a challenge for a significant portion of the U.S. population. The
2003-2004 National Health and Nutrition Examination Study estimated that 66% of
the adult population is overweight and 33% is obese, an increase from 47% and
15%, respectively, in 1976.  According to the U.S. Department of Health and
Human Services, overweight or obese individuals are increasingly at risk for
diseases such as diabetes, heart disease, certain types of cancer, stroke,
arthritis, breathing problems and depression. However, there is evidence that
weight loss may reduce the risk of developing these diseases.





In
addition to the health risks, there are also cultural implications for those who
are overweight or obese. U.S. consumers are inundated with imagery in media,
fashion, and entertainment that depicts the thin body as the ideal type. Despite
the high percentage of overweight or obese individuals in the U.S., the
popularity of dieting would seem to indicate consumers’ desire to be
“skinny”.  According to Gallup surveys, approximately 62 million
people in the United States were on a diet during 2006. Approximately
6 million participated in commercial weight loss programs and
49 million conducted some form of self-directed diet. We believe our
products are well positioned to attract both types of
dieters.  Further in 2009 and 2010, there has been proposed
legislation introduced to implement a tax on sugar based beverages, New York
City and Philadelphia have been leading this movement. Additionally, local and
state governments have adopted policies to have food and beverage companies to
make calorie contents move visible on menus and labels.  Because of
these consumer trends and political movements, the Company believes its zero
calorie, zero sugar and zero sodium positioning for its line of Skinny Waters is
very viable.





We have historically positioned our products to compete in the
dietary supplement market as functional beverages. However, we announced in
December 2009 that we intend to reposition our line of Skinny Waters as a
conventional beverage rather than a dietary supplement. The change was made
after a consideration of market analysis and in response to a recent draft
guidance and related correspondence from the U.S. Food and Drug Administration
(FDA). This decision is also consistent with changes to the packaging and
labeling of the Company’s product line which we are in the process of
implementing, and we expect to complete this change during the second quarter of
2010.





The
functional beverage market includes a wide variety of beverages with one or more
added ingredients to satisfy a physical or functional need. This category
includes: vitamin and herbal enhanced flavored waters, ready-to-drink (RTD)
teas, sports drinks, energy drinks, and single-serve (SS) fresh juice. These
industries are highly competitive and are subject to continuing changes with
respect to the manner in which products are provided and how products are
selected. We investigate means of reducing our product cost, with no impact on
product integrity, to enable us to reduce the impact of these expenses on our
revenues.





Functional
beverages are marketed through various channels, including health food stores
and mass-market (which may include retail and grocery store chains). As a
product, Skinny Water competes with functional beverages as well as dietary
supplements.





Our
Products





The
Company operates its business in the rapidly evolving beverage industry and is
currently focused on developing, distributing and marketing nutritionally
enhanced beverages.  Enhanced beverages have been leading the growth
of beverage consumption in the United States.  Our line of products
currently consists of six flavors of Skinny Water. Skinny Water, which was
introduced in 2005, has been reformulated and was launched in our second fiscal
quarter of 2008. The Company intends to market additional “Skinny” beverages in
the future.  Skinny Water Sport Drinks are planned to be introduced in
the 2nd quarter
of 2010 with 3 flavors.





Skinny
Water ®





The
Skinny Water® product line presently consists of six flavors (Acai Grape
Blueberry, Raspberry Pomegranate, Peach Mango Mandarin, Lemonade Passionfruit,
Goji Fruit Punch and Orange Cranberry Tangerine). Skinny Water® is formulated
with a proprietary blend of electrolytes, vitamins, and antioxidants. These
formulations were launched in 2008. Each product is a naturally-flavored,
nutritionally enhanced beverage with zero calories, zero sugar and zero sodium.
We originally formulated Skinny Water as water containing a proprietary, natural
appetite suppressant, with a natural water appearance. Rather than focus on
appetite suppression, our current products are designed as a calorie-free
alternative to other currently available enhanced beverages. These products
contain no artificial flavors or colors and are also preservative
free.  A great amount of research and development was put into
developing the taste.  Each flavor is fortified with a different
vitamin and antioxidant package and every beverage contains calcium, potassium
and epigallocatechin gallate (“EGCG”), a green tea extract.  The
company plans  to launch Skinny Water Sport Drinks in the 2nd quarter
of 2010 and new product extensions with zero calories, sugar and sodium with no
preservatives.





To market
this product, management of the company had relied on the licenses from Peace
Mountain Natural Beverages Corp. (“Peace Mountain”) and Wild
Flavors.  However, as previously reported, in July 2009 the company
completed the acquisition of the trademark “Skinny Water®.” Skinny Water®
contains no calories or sugar, and has no preservatives or artificial colors.
Skinny Water’s Raspberry Pomegranate flavor features the all natural, clinically
tested ingredient, (“Super CitriMax”), supplied by Interhealth Nutraceuticals,
plus a combination of calcium and potassium. Super CitriMax has been shown to
suppress appetite without stimulating the nervous system when used in
conjunction with diet and exercise. Skinny Water also includes ChromeMate® which
is a patented form of biologically active niacin-bound chromium called chromium
nicotinate or polynicotinate that we also obtain from Interhealth.




4





Skinny
Water is currently being bottled using a hot-fill method at 2 locations by
Cliffstar Corporation in Dunkirk, NY and Fontana, CA. This bi-coastal
arrangement was set up to shorten shipping times to our distributors. We will be
looking for additional bottlers to attain the most efficient delivery to our
distributors.  We currently bottle our product in 12 and 24 bottle
cases and  variety packs.





Our
Raspberry Pomegranate Skinny Water product includes the dietary ingredient,
“SuperCitriMax,” which is available for use in beverages and foods in the U.S.
and a number of other countries. Super CitriMax has been affirmed GRAS
(Generally Recognized as Safe) for use in functional beverages by the Burdock
Group, a toxicology specialist that evaluates the safety of food and beverage
ingredients. This process involved an intensive review of all safety and
toxicology data by a panel of scientific experts. (Source: Interhealth
Nutraceuticals, Inc.). Further, human clinical studies of Super Citrimax,
conducted through Georgetown University Medical Center resulted in findings that
included, weight loss, reduction in appetite, and an increase in fat burning and
metabolism when used in conjunction with diet and exercise. The results of their
findings are published in the peer-reviewed journal, Nutrition Research (24(1):
45-58, 2004). This product also includes ChromeMate (R) which
is a patented form of biologically active niacin-bound chromium called chromium
nicotinate or polynicotinate that we also
obtain from Interhealth.





On August
1, 2004 we entered into a three year license agreement with Peace Mountain
Natural Beverages Corporation pursuant to which we license the exclusive right
to bottle and distribute the “Skinny Products” worldwide. Under this agreement,
Skinny Products include “Skinny Water”, “Diet Water”, “Skinny Tea”, “Skinny
Juice”, Skinny Smoothies, Skinny Java, Skinny Shot and “Skinny
Shake”.   Our license agreement with Peace Mountain Natural
Beverages Corporation was for a three year term and originally provided that it
will automatically renew for additional one year periods unless terminated,
provided that we satisfy the minimum purchase amount specified in the contract
or make a $10,000 monthly payment. We have spent significant resources building
the Skinny Water brand name.





5





On
October 4, 2006, we entered into an amendment to our License and Distribution
Agreement with Peace Mountain. Pursuant to this amendment, we agreed to pay
Peace Mountain an amount of $30,000 in two equal monthly installments commencing
on the date of the amendment in satisfaction of allegations of non-performance
by Peace Mountain. In addition, the parties further agreed to amend and restate
the company’s royalty obligation to Peace Mountain, pursuant to which amendment,
we were required to have a minimum royalty obligation to Peace Mountain based on
a percentage of wholesale sales with a quarterly minimum of $15,000. Skinny’s
rights to the trademarks were in perpetuity as long as it satisfied the
quarterly minimum payment of $15,000.  As previously described, in
July 2009, the Company acquired from Peace Mountain the “Skinny Water” trademark
and other intellectual property assets, including proprietary trade secrets and
domain names, and settled an outstanding dispute between the two
companies.





On June
7, 2004 we entered into an agreement with Interhealth Nutraceuticals
Incorporated and obtained the right to sell, market, distribute and package
Super CitriMax ®
in bottled liquid dietary supplement products. This right was granted by
Interhealth on a non-exclusive basis. We use Super CitriMax ®
in certain of our Skinny Water products. We must purchase quantities of Super
CitriMax ®
from the manufacturer and are licensed to use InterHealth’s trademarks and logos
in marketing products containing Super CitriMax®.  Our
agreement with Interhealth will continue unless terminated by either
party.





Planned
Products





We intend
to expand our product line to introduce additional products in the beverage and
food categories at such times as management believes that market conditions are
appropriate. Products under development or consideration include new Skinny
Water flavors, Teas, Shakes, Smoothies and Javas.  We are also
planning to release our new line of Skinny Water Sport Drinks in the second
quarter of 2010, which will introduce the Kiwi Lime, Blue Raspberry, and Pink
Berry flavors.  We had previously announced that we were researching
the new, all natural sweeteners derived from Stevia as an additional zero
calorie sweeteners to use in our products; however, we have not been satisfied
with the results of our product development and testing efforts and do not
currently anticipate introducing a flavor with this
sweetener.  However, we are continuing to focus our research and
development efforts in the area of zero calorie natural sweetener systems that
we could use in our future lines of beverages.





Distribution,
Sales and Marketing





Marketing
and Sales Strategy





Our
primary marketing objective is to cost-effectively promote our brand and to
build sales of our products through our retail accounts and distributor
relationships. We use a combination of sampling, in store point of sale
materials, retail promotions, online advertising, public relations and
promotional/event strategies to accomplish this objective. Management believes
that in-store merchandising is a key element to providing maximum exposure and
sales to its brand.





Through
our arrangement with Target Corporation we continue to sell Skinny Water through
approximately 1,700 stores nationally. Management believes that Skinny
products have been authorized for sale in over 5,000 chain  stores and
in numerous independent stores around the country. These retailers include
convenience stores, supermarkets, drug stores and club stores. As described
below, we are also developing a National Direct Store Delivery (DSD) network of
distributors in local markets. To date, we have arrangements with approximately
56 DSDs in 25 states in the U.S. Currently we have been authorized to sell
Skinny products in ACME Markets, Giant of Carlisle, Stop & Shop, Harris
Teeter, Wegmans , Shop Rite stores and select Walgreen and CVS stores and a
limited number of Costco stores.





In
addition, in December 2009, the Company announced its intention to reposition
its line of Skinny Waters as a beverage rather than a dietary supplement. The
change was made after a consideration of market analysis and in response to a
recent draft guidance and related correspondence from the U.S. Food and Drug
Administration (FDA). This decision is also consistent with changes to the
packaging and labeling of the Company’s product line now being implemented.
Skinny Water will continue to have zero calories, zero sugar, zero sodium and
zero preservatives and the Company believes it will not experience any material
adverse effects in transitioning its Skinny Water product line as conventional
beverages. By taking these steps, the Company expects to more directly compete
with other functional beverage companies, while contemporaneously addressing
FDA’s correspondence.  The Company expects to implement this change
during the second fiscal quarter of 2010.





Distribution
Strategy





The company’s distribution strategy is
to build out a national direct store delivery (DSD) network of local
distributors, creating a national distribution system to sell our products.
Distributors include non-alcoholic distributors, beer wholesalers and energy
beverage distributors. To date, we have relationships with approximately 56 DSDs
in 25 states in the U.S.  We work with the DSD to obtain corporate
authorization from chain stores in a particular market. It often takes more than
one DSD to deliver to all the stores within a chain. The company must coordinate
promotions and advertising between the chain stores and the DSD. The company
also negotiates any slotting fees that are required for product placement and is
typically obligated for such fees.





6





We also
distribute our products directly to select national retail accounts based on
purchase order relationships. DSDs will distribute to grocery, convenience,
health clubs, retail drug, and health food establishments. We will contract with
independent trucking companies to transport the product from contract packers to
distributors. Distributors will then sell and deliver our products directly to
retail outlets, and such distributors or sub-distributors stock the retailers’
shelves with the products. Distributors are responsible for merchandising the
product at store level. We are responsible for managing our network of
distributors and the hiring of sales managers, who are responsible for their
respective specific channel of sales distribution.





As
previously disclosed, on July 16, 2009, we entered into a distribution agreement
(the “Distribution Agreement”) with Canada Dry Bottling Company of New York (the
“Distributor”) under which the Distributor has been appointed as the Company’s
exclusive distributor of Skinny Water and other products in the New York City
metropolitan area (the “Territory”). The Company also granted the Distributor a
right of first refusal to serve as the Company’s exclusive distributor in the
Territory for new or additional beverages that it wishes to introduce in the
Territory. Distributor will use reasonable efforts to promote the sale of the
Products in the Territory; however, no performance targets are mandated by the
Distribution Agreement. Under the Distribution Agreement, the Company agreed to
pay a specified amount to the Distributor for any sales of Products made by the
Company in the Territory to customers that do not purchase Products from outside
distributors.  In addition, the Company agreed to cover a minimum
amount for slotting fees during the initial term of the Distribution Agreement.
The Distribution Agreement may be terminated by the Company due to a material
breach of the agreement by or the insolvency of the Distributor, subject to
notice and cure provisions. The Distributor may terminate the Distribution
Agreement at any time upon written notice. Following any termination, the
Company will purchase or cause a third party to purchase all inventory and
materials that are in good and merchantable condition and are not otherwise
obsolete or unusable. The price to be paid for such materials shall be equal to
the Distributor’s laid-in cost of all such inventory and materials. In the event
the Company elects not to renew the Distribution Agreement at the end of the
initial term or any renewal term and Distributor is not otherwise in breach of
the Agreement with the time to cure such breach having expired, the Company
shall pay Distributor, a termination penalty based on a multiple of its gross
profit per case, as calculated pursuant to the terms of the Distribution
Agreement. The Agreement is a multi-year contract with automatic renewal
provisions, unless either party provides notice of non-
renewal.   The agreement also provides for customary covenants by
the parties regarding insurance and indemnification.





Subsequently,
we expanded our distribution arrangements with Canada Dry-affiliated
distributors and now have agreements with four Canada Dry affiliated
distributors that service the mid-Atlantic region and the New York City
metropolitan area. In addition, in 2009 we also augmented our West Coast
distribution network by entering into distribution agreements with regional
distributors covering portions of southern California and Arizona. Under many of
our distribution agreements, we granted exclusivity within the
contractually-defined territory and agreed to be responsible for the payment of
slotting fees that may be required by retailers. Further, under certain of these
agreements, we also will pay the distributor a termination penalty in the event
we elect not to renew the agreement and the distributor is not in breach of its
obligations.





In
addition, we have and may continue to seek to augment our distribution network
by establishing relationships with larger distributors in markets that are
already served.  It is very important for us that we continue to
enhance our distribution network to larger distributors who can provide a full
spectrum of services, to help ensure that our products reach the appropriate
retail channels.  To the extent that we need to terminate an agreement
with an existing distributor in order to accomplish this, we may be required to
pay a termination fee unless we have grounds to terminate a distributor for
cause. Although our payments of such fees have not been material to date, such
amounts may increase in subsequent quarters.





Sources and Availability of Raw Materials;
Manufacturing





The
company’s proprietary formulas are purchased from Wild Flavors, based on our
specifications, which consists of the “flavor system” and the various
electrolytes, vitamins and antioxidant packages that make up our formulas and
taste profiles.




We
purchase supplies of Super CitriMax and Chromemate from Interhealth for certain
of our Skinny Water products on a non-exclusive basis. Skinny Water requires
bottles, labels, caps, water, and other flavors and nutraceutical ingredients
from reliable outside suppliers, including Super CitriMax and Chromemate. We
fulfill these requirements through purchases from various sources, including
purchases from Interhealth. Other than Super CitriMax and Chromemate, we believe
there are adequate suppliers of the aforementioned products at the present time,
but cannot predict future availability or prices of such products and materials.
Since Super CitriMax is only available from Interhealth, the termination of that
agreement may have a materially adverse impact on our business and results of
operations. We also expect the above referenced supplies to experience price
fluctuations. The price and supply of materials will be determined by, among
other factors, demand, government regulations and legislation.





Contract
Packing Arrangements





We do not
directly manufacture our products but instead outsource the manufacturing
process to third party bottlers and contract packers (also sometimes referred to
herein as co-packers). Our bottle products are hot filled, we purchase certain
raw materials such as concentrates, flavors, supplements, bottles, labels,
trays, caps and other ingredients. These raw materials are delivered to our
third party co-packers. We currently use two independent contract packers known
as co-packers to prepare, bottle and package our bottle products. Once the
product is manufactured, we purchase and store the finished product at that
location or in nearby third party warehouses.





7





The
co-packers assemble our products and charge us a fee, by the case. We follow a
“fill as needed” manufacturing model to the best of our ability and we have no
significant backlog of orders. Substantially all of the raw materials used in
the preparation, bottling and packaging of our products are purchased by us or
by our contract packers in accordance with our specifications. Skinny Water is
currently being bottled at 2 locations by Cliffstar Corporation in Dunkirk, NY
and in Fontana, CA. This bi-coastal arrangement was set up to shorten shipping
times to our distributors. We will be sourcing additional bottlers in different
areas of the country to attain the most efficient delivery to our
distributors.  We currently bottle our product in 12 and 24 bottle
cases, in single flavor and variety packs. Other than minimum case volume
requirements per production run for most co-packers, we do not typically have
annual minimum production commitments with our co-packers. Our co-packers may
terminate their arrangements with us at any time, in which case we could
experience disruptions in our ability to deliver products to our
customers.





We will
review our contract packing needs in light of regulatory compliance and
logistical requirements and may add or change co-packers based on those needs.
We experienced increases in co-packing fees in 2008 and 2009 primarily related
to a change from cold-fill packing to hot-fill packing, which is a more costly
manufacturing process. While we expect increases in our costs of raw materials
to continue in 2010, we believe we may see some stabilization or decreases in
our co-packing fees as a result of expected volume increases.





Generally,
we obtain the ingredients used in our products from domestic suppliers and each
ingredient has several reliable suppliers; however, as described above, we rely
on InterHealth Nutraceuticals for Super CitriMax and
Chromemate.  Other ingredients, such as our vitamin packages,
antioxidant packages and flavorings come from third party
suppliers.  Although, these supply arrangements are subject to
interruption based on, for example, market conditions, our suppliers have given
us assurances that our supply will not be interrupted. We are in the process of
negotiating a supply contract with an additional vendor in order to assist us in
forecasting and hedging our needs for the future.





We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that our current co-packing arrangements have the
capacity to handle increased business we may face in the next twelve months. To
the extent that any significant increase in business requires us to supplement
or substitute our current co-packers, we believe that there are readily
available alternatives, so that there would not be a significant delay or
interruption in fulfilling orders and delivery of our products. In addition, we
do not believe that growth will result in any significant difficulty or delay in
obtaining raw materials, ingredients or finished product.




Currently,
we purchase our proprietary flavor concentrates from a third party flavor house,
Wild Flavors. In connection with the development of new products and flavors,
independent suppliers bear a large portion of the expense for product
development, thereby enabling us to develop new products and flavors at
relatively low cost. We anticipate that for future flavors and additional
products, we may purchase flavor concentrate from other flavor houses with the
intention of developing other sources of flavor concentrate for each of our
products. If we have to replace a flavor supplier, we could experience
disruptions in our ability to deliver products to our customers, which could
have a material adverse effect on our results of operations.




We are
still subject to freight surcharges in addition to these agreements, but
anticipate a stabilization or reduction of these costs in 2010 due to lower fuel
prices.  Also, we anticipate that an indirect effect of our
transitioning from a dietary supplement to a conventional beverage will be the
removal and reduction of certain ingredients, which may result in a lower cost
of goods.





Quality
Control





Our
products are made from high quality ingredients and natural flavors. We seek to
ensure that all of our products satisfy our quality standards. Contract packers
are selected and monitored in an effort to assure adherence to our production
procedures and quality standards. Samples of our products from each production
run undertaken by each of our contract packers are analyzed and categorized in a
reference library.




For every
run of product, our contract packer undertakes extensive on-line testing of
product quality and packaging. This includes testing levels of sweetness, taste,
product integrity, packaging and various regulatory cross checks. For each
product, the contract packer must transmit all quality control test results to
us for reference following each production run.




Testing
includes microbiological checks and other tests to ensure the production
facilities meet the standards and specifications of our quality assurance
program. Water quality is monitored during production and at scheduled testing
times to ensure compliance with beverage industry standards. The water used to
produce our products is filtered and is also treated to reduce alkalinity.
Flavors are pre-tested before shipment to contract packers from the flavor
manufacturer. We are committed to an on-going program of product improvement
with a view toward ensuring the high quality of our product through a program
for stringent contract packer selection, training and
communication.





8




Competition





The
market for functional beverages is highly competitive. In order to compete
effectively, we believe that we must convince independent distributors and
retailers that our products have the potential to be a leading brand in the
segments in which we compete. Taste, branding, and pricing of the products is an
important component of our competitive strategy. We will seek to ensure that the
price for our products is competitive with the other products with which we
compete.  We compete with other companies not only for consumer
acceptance but also for shelf space in retail outlets and for marketing focus by
distributors, most of whom also distribute other brands with which our products
compete. The principal methods of competition include product quality, trade and
consumer promotions, pricing, packaging and the development of new products. We
expect our distributors to assist us in generating demand for our
products.





We
believe that the principal competitive factors in the functional beverage and
weight loss market are:





●
            brand
      recognition and trustworthiness;●
            functionality
      of product formulations;●
            distribution;●
            shelf
      space;●
            sponsorships;●
            product
      quality and taste;●
            pricing;●
            new
      flavors and product development initiatives;●
            attractive
      packaging; and●
            the
      ability to attract and retain customers through promotion and
      advertising.





We
compete with other beverage companies not only for consumer acceptance but also
for shelf space in retail outlets and for marketing focus by our distributors,
all of whom also distribute other beverage brands. Our products compete with all
non-alcoholic beverages, most of which are marketed by companies with
substantially greater financial resources than ours. We also compete with
regional beverage producers and “private label” soft drink suppliers.
Significant competitors for Skinny Water in the functional beverage category are
product lines such as Vitamin Water, Vitamin Water Zero, Fuze, SoBe Life Water,
SoBe Life Water Zero, and Function.  The beverage market is highly
competitive, and includes international, national, regional and local producers
and distributors, many of whom have greater financial, management and other
resources than us. These brands have enjoyed broad, well-established national
recognition for years, through well-funded ad and other branding campaigns. In
addition, the companies manufacturing these products generally are greater in
size and have greater financial, personnel, distribution and other resources
than we do and have greater access to additional financing.




Based on
these key competitive factors, we believe that we can compete effectively in the
enhanced beverage industry. We, however, have no control over how successful
competitors will be in addressing these factors. By focusing our marketing and
promotion of Skinny Water as a great tasting zero calorie, sugar, sodium and
preservative-free alternative, we believe that we have a competitive advantage
in our market.





9




Research
and Development





We
undertake research and development activities in order to monitor developments
within the functional beverage industry and to identify or develop new,
marketable products. These activities include reviewing periodicals, scientific
research and relevant clinical studies and working with our suppliers. We must
review the safety and efficacy of ingredients, production standards, labeling
information, label claims and potential patent, trademark, legal or regulatory
issues. Research and development expenses in the last two years have not been
material. Although we may undertake research studies regarding our products, we
do not expect to incur significant increases in research and development
expenses in the near term. Throughout we will focus our efforts on Skinny Water,
Skinny Water Sport Drinks, Skinny Teas, Skinny Smoothies Skinny Java and Skinny
Shakes.





Proprietary
Rights, Brand Names and Trademarks




We have
spent significant resources building the Skinny Water brand name. We regard
consumer recognition of and loyalty to all of our brand names and trademarks as
extremely important to the long-terms success of our business. Until July 2009,
we licensed the trademarks “Skinny Water,” “Skinny Tea,” “Skinny Juice,” “Skinny
Shake,” and “Diet Water” from Peace Mountain. We continue to license the
trademark “Super CitriMax Clinical Strength” from Interhealth Nutraceuticals. As
discussed above, in July 2009, we completed the purchase from Peace Mountain of
certain trademarks and other intellectual property assets relating to the
design, development, manufacture, distribution, and sale of Skinny Water and
certain other beverage products. The acquired marks include the trademarks
“Skinny Water®”, “Skinny Shake” ®, “Skinny Tea®”, “Skinny Shot®”, “Skinny
Smoothie®’’, and “Skinny Java®”.  We now own the proprietary rights to
our products. The termination of our license agreements with Interhealth may
have a material adverse effect on our consolidated financial position and
results of operations. We use non-disclosure agreements with employees and
distributors to protect our rights and those of our suppliers.





Government Regulation





The
production and marketing of our products are governed by the rules and
regulations of various federal, state and local agencies, including, but not
limited to the United States Food and Drug Administration (“FDA”), the Federal
Trade Commission (“FTC”), and all fifty state Attorneys General. This regulatory
regime serves to ensure that the product is safe, our claims are truthful and
substantiated and that our products meet defined quality standards. Other than
as described below, we have not encountered any regulatory action as a result of
our operations to date, however,  no assurance can be given that we
will not encounter regulatory action in the future. The FDA, pursuant to the
Federal Food, Drug, and Cosmetic Act (“FFDCA”), regulates the formulation,
manufacturing, packaging, labeling, distribution and sale of dietary
supplements, while the FTC regulates the advertising of these products. In
addition, all states regulate product claims through various forms of consumer
protection statutes.




The FDA
has broad authority to enforce the provisions of the FFDCA applicable to bottled
water and dietary supplements, including powers to issue a public “Warning
Letter” to a company, to publicize information about illegal products, to
request a voluntary recall of illegal products from the market, and to request
the Department of Justice to initiate civil seizure and/or injunction actions,
and civil and criminal penalty proceedings in the United States Federal courts.
The FTC exercises jurisdiction over the advertising of dietary supplements and
foods and has the authority over both “deceptive” and “unfair” advertising and
other marketing practices.





In
addition to its broad investigative powers, the FTC has the power to initiate
administrative and judicial proceedings against a company and may also seek a
temporary restraining order or preliminary injunction against a company pending
the final determination of an action The FTC’s remedies also include consumer
redress, civil and criminal penalties. Weight loss products in particular are
subject to increased regulatory scrutiny due to intensified campaigns by FDA,
FTC and states’ attorneys general. Any type of investigation or enforcement
action either by the FDA, FTC or any other federal, state or local agency would
likely have a material adverse effect on our consolidated financial position or
results of operations.




We are
subject to the food labeling regulations required by the Nutritional Labeling
Education Act of 1991 (“NLEA”). These regulations require all companies which
offer food for sale and have annual gross sales of more than $500,000 to place
uniform labels in specified formats disclosing the amounts of specified
nutrients on all food products intended for human consumption and offered for
sale. This regulation would apply to all of our products. The FFDCA contains
exemptions and modifications of labeling requirements for certain types of food
products, such as with foods containing insignificant amounts of nutrients. The
FFDCA also establishes the circumstances in which companies may place nutrient
content claims or health claims on labels.





10





Dietary
supplements are subject to the Dietary Supplement Health and Education Act of
1994 labeled (“DSHEA”). In 1994, the FFDCA was amended by DSHEA, which
establishes a new framework governing the composition and labeling of dietary
supplements. With respect to composition, DSHEA defines “dietary supplements” as
“a vitamin; a mineral; an herb or other botanical; an amino acid; a dietary
substance for use by man to supplement the diet by increasing total dietary
intake; or a concentrate, metabolite, constituent, extract, or combination of
any of the above dietary ingredients.” The provisions of DSHEA define dietary
supplements and dietary ingredients; establish a new framework for assuring
safety; outline guidelines for literature displayed where supplements are sold;
provide for use of claims and nutritional support statements; require ingredient
and nutrition labeling; and grant FDA the authority to establish regulations
concerning good manufacturing practices (“GMPs”). We believe that our contract
manufacturers meet the current regulations of the FDA specifically with regard
to bottled water including good manufacturing practices (“GMPs”).





Government
Regulation of Dietary Supplements




Historically,
we have intended that Skinny Water be regulated as a dietary supplement by FDA
under DSHEA.  However, as we announced in December 2009, we are
planning to reposition our line of Skinny Water from a dietary supplement to a
conventional beverage.  We are in the process of implementing this
decision and need to take certain measures in implementing this change, such as
modifying our labels to ensure compliance with other applicable regulations, as
discussed above. However we believe this classification would be more in line
with our competitors, most of whom are also classified as conventional
beverages.  The Company’s decision was also influenced, in part, by a
letter we received from the FDA in November of 2009 (the “2009 Letter”)
informing us that we are, in their view, closer to a conventional beverage than
a dietary supplement.  The letter did not require any action, however,
despite this, we feel that the classification of conventional beverage much more
accurately reflects Skinny Water’s market potential, and will allow us to appeal
to a much broader market.  Skinny Water will continue to have zero
calories, zero sugar, zero sodium, and zero preservatives, and we believe we
will not experience any material adverse effects in transitioning the Skinny
Water product line to conventional beverages.  By taking these steps,
we expect to more directly compete with other conventional beverage
companies.





Generally,
under DSHEA, dietary ingredients that were on the market before October 15, 1994
may be used in dietary supplements without notifying the FDA. However, a “new”
dietary ingredient (i.e., a dietary ingredient that was “not marketed in the
United States before October 15, 1994”) must be the subject of a new dietary
ingredient notification submitted to the FDA, unless the ingredient has been
“present in the food supply as an article used for food” without being
“chemically altered.” A new dietary ingredient notification must provide the FDA
evidence of a “history of use or other evidence of safety” establishing that use
of the dietary ingredient “will reasonably be expected to be safe.” We believe
that the dietary ingredient presently utilized in Skinny Water is not a new
dietary ingredient. However, should the FDA disagree at any time in the future,
we may need to cease marketing our dietary supplement products that contain such
ingredient and promptly file (or have the supplier of this ingredient file) a
new dietary ingredient notification with FDA. There can be no assurance that the
FDA will accept the evidence of safety for any new dietary ingredients that we
may market now or in the future, and the FDA’s refusal to accept such evidence
could prevent the marketing of such dietary ingredients and would have a
material adverse effect on our consolidated financial position or results of
operations.





In
addition, DSHEA permits “statements of nutritional support” to be included in
labeling for dietary supplements without FDA pre-approval. Such statements may
describe how a particular dietary ingredient affects the structure, function or
general well being of the body, or the mechanism of action by which a dietary
ingredient may affect body structure, function or well-being. A dietary
supplement may not claim to diagnose, cure, mitigate, treat, or prevent a
disease unless such claim has been reviewed and approved by the FDA as a “health
claim” or “qualified health claim.”





A company
that uses a statement of nutritional support in labeling must possess evidence
substantiating that the statement is truthful and not misleading. The label and
labeling of our products do contain statements of nutritional support, however,
and we have no assurance that FDA will find the company’s substantiation
adequate to support the statements of nutritional support being made for our
Skinny products. If the statement of nutritional support appears on a product
label or labeling of a dietary supplement, there must also appear on such label
and labeling a FDA disclaimer statement, which is as follows: “This statement
has (or these statements have) not been evaluated by the Food and Drug
Administration.





This
product is not intended to diagnose, treat, cure, or prevent any disease.”
Pursuant to DSHEA, we are also required to notify the FDA about our use of the
statement(s) within 30 days of marketing the product (the “30 Day Letter”). Upon
receiving the 30 Day Letter and thereafter if FDA were to determine that a
particular statement of nutritional support is an unacceptable drug claim, an
unauthorized version of a “health claim,” or unsubstantiated, a company may be
prevented from using the claim and may face further regulatory action. There is
no assurance that FDA will not make any of the aforementioned determinations
with regard to the claims made for any of the company’s products and no
assurance that FDA will find the company’s substantiation evidence for Skinny
Water or on any other of our products, if ever requested, adequate to support
the claims being made for the company’s products.





FDA has
already stated in a Courtesy Letter dated September 22, 2005 (the “2005
Letter”), that the use of the term “water” in the name of our “Skinny Water”
product appears to cause our product to be a bottled water, which is a
standardized, conventional food, not a dietary supplement. A “Courtesy Letter”
is the term commonly used to describe the written letter sent by FDA in response
to a 30 Day Letter - it is not a Warning Letter. We disagreed with the position
taken by FDA that Skinny Water is “bottled water,” a conventional food and in
response to the 2005 Letter, we submitted a written response to FDA stating our
position. The 2009 Letter, referenced above, was issued by the FDA as a response
to our correspondence.




11




Recently,
the FDA proposed GMPs specifically for dietary supplements. These new GMP
regulations, if finalized, would be more detailed than the GMPs that currently
apply to dietary supplements and may, among other things, require dietary
supplements to be prepared, packaged and held in compliance with certain rules,
and might require quality control provisions similar to those in the GMP
regulations for drugs. There can be no assurance that, if the FDA adopts GMP
regulations for dietary supplements, we or our suppliers will be able to comply
with the new rules without incurring substantial expense that might have a have
a material adverse effect on our consolidated financial position or results of
operations.





12





In
addition, the advertising and sale of dietary supplement products are subject to
regulation by the FTC under the FTCA. The Federal Trade Commission Act (“FTCA”)
prohibits unfair methods of competition and unfair or deceptive acts or
practices in or affecting commerce. The FTCA provides that the dissemination or
the causing to be disseminated of any false advertisement pertaining to drugs or
foods, which would include dietary supplements, is an unfair or deceptive act or
practice. Under the FTC’s “substantiation doctrine”, an advertiser is required
to have a “reasonable basis” for all objective product claims before the claims
are made. Failure to adequately substantiate claims may be considered either
deceptive or unfair practices. Pursuant to this FTC requirement, we are required
to have adequate substantiation for all advertising claims made for our products
at the time such claims are made.





In recent
years, the FTC has instituted numerous enforcement actions against dietary
supplement companies for failure to adequately substantiate claims made in
advertising or for the use of false or misleading advertising claims. The FTC
has specifically launched a nationwide law enforcement sweep called “Project
Waistline” against companies making false and/or unsubstantiated weight loss
claims. The initiative was created to stop deceptive advertising, provide
refunds to consumers harmed by unscrupulous weight-loss advertisers, and
encourage media outlets not to carry advertisements containing bogus weight loss
claims and to educate consumers to be on their guard against companies promising
weight loss without diet or exercise. These enforcement actions have often
resulted in consent decrees and the payment of substantial civil penalties
and/or restitution by the companies involved. Since we market a dietary
supplement product, there can be no assurance that FTC (or FDA) will not
investigate our products. Should FTC choose to investigate, we have no assurance
that the company’s substantiation evidence for the claims made on Skinny Water
or on any other of our products will be adequate and as a result enforcement
actions/remedies could ensue.





Other
Regulatory Considerations





Our
products are subject to state regulation. Under state consumer protection laws,
state attorneys general, like the FTC can bring actions against us should they
believe that the claims being made for any of our products are not truthful, are
misleading and/or if they believe that the claims are not substantiated. States
have also obtained significant monetary penalties against companies that have
sold products with false, misleading or unsubstantiated weight loss
claims.





We may be
subject in the future to additional laws or regulations administered by federal,
state, local regulatory authorities, the repeal or amendment of laws or
regulations which we consider favorable, or more stringent interpretations of
current laws or regulations. We cannot predict the nature of future laws,
regulations, interpretations or applications, nor can we predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on our business in the future. Such future laws and
regulations could, however, require the reformulation of products to meet new
standards, the recall or discontinuance of product that cannot be reformulated,
the imposition of additional record keeping requirements, expanded documentation
of product efficacy, expanded or modified labeling and scientific
substantiation, including health warnings or restrictions on benefits described
for our products. Any or all of such requirements could negatively impact sales
of our products or increase our cost, resulting in a material adverse impact on
our operations, consolidated financial position or results of
operations.





Environmental
Protection





We are
operating within existing federal, state and local environmental laws and
regulations and are taking action aimed at assuring compliance therewith.
Compliance with such laws and regulations is not expected to materially affect
our capital expenditures, earnings or competitive position.





Seasonality




Typically
in the functional water industry, revenue is strongest in the 2nd and
3rd
quarters of the year. Although our business experiences fluctuations in sales
due to seasonality, we have added distributors in more temperate climates, such
as California and Arizona, in an effort to mitigate some of the seasonality in
our revenues. We believe the overall impact of seasonality on revenue is
difficult to predict at this time.





Number
of Employees





As of
December 31, 2009, we had a total of twenty-one full time employees. Our
independent contractors provide services to us on an at-will basis. Our
employees are not subject to any collective bargaining agreement. We believe
that employee relations are good.




13




Item
1A. Risk Factors.





The
following discussion should be read together with our financial statements and
related notes appearing elsewhere in this Annual Report. This discussion
contains forward-looking statements based upon current expectations that involve
numerous risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including but not limited to those set forth under “Risk factors” and elsewhere
in this Annual Report. We undertake no obligation to update any information
contained in these forward-looking statements.




General Risks Related to Our
Business




We
have a limited operating history and our business model is highly speculative at
the present time.





We only
have a limited operating history upon which potential investors may base an
evaluation of our prospects. To date, we have only had limited revenues and our
business model is subject to a high degree of risk. For the year ended December
31, 2009, we had revenues of $4,146,066 as compared to revenues of $2,179,055
for the year ended December 31, 2008. There can be no assurance that we will be
able to continue to generate revenues or that we will be profitable. Prospective
investors may lose all or a portion of their investment. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in a highly competitive market, such as the market in which we
compete. Such risks include, but are not limited to, our ability to obtain and
retain customers and attract a significant number of new customers, the growth
of the markets we intend to pursue, our ability to implement our growth
strategy, especially the sales and marketing efforts, and the introduction of
new products by us and our competitors.





We
have a history of operating losses. If we continue to incur operating losses, we
eventually may have insufficient working capital to maintain
operations.




As of
December 31, 2009, we had an accumulated deficit of $30,752,359, of which
$19,652,598 is directly related to the development of Skinny Nutritional
products. For the years ended December 31, 2009 and December 31, 2008, we
incurred losses from operations of $7,305,031, inclusive of non-cash expense of
$3,104,316 related to option, warrant and service issued stock, and $6,232,123,
inclusive of non-cash related expense of $3,080,789 related to option, warrant
and debt conversion expense, respectively .  If we are not able to
begin to earn an operating profit at some point in the future, we will
eventually have insufficient working capital to maintain our operations as we
presently intend to conduct them.





We
have limited working capital and will need to raise additional capital in the
future and our independent auditors have included a “going concern” opinion in
their report.




At
December 31, 2009, our cash and cash equivalents was approximately $191,000. We
have been substantially reliant on capital raised from private placements of our
securities to fund our operations. During the 2009 fiscal year, we raised an
aggregate amount of $4,900,203 from the sale of securities to accredited
investors in private transactions pursuant to Rule 506 of Regulation D
under the Securities Act of 1933, as amended. We believe that net cash on hand
as of the date of this report and cash anticipated from operations will only be
sufficient to meet our expected cash needs for working capital and capital
expenditures for a minimal period, without raising additional capital from the
sale of our securities. This will depend, however, on our ability to execute on
our 2010 operating plan and to manage our costs in light of developing economic
conditions and the performance of our business.





Accordingly,
we have an immediate need for additional cash which we must satisfy either by
immediately developing a market for our products, selling additional securities
in private placements or by negotiating for an extension of credit from third
party lenders. If we are unable to obtain additional capital, we will need to
reduce costs and operations substantially. Our independent auditors have
included a “going concern” explanatory paragraph in their report to our
financial statements for the year ended December 31, 2009, citing recurring
losses from operations. Our capital needs in the future will depend upon factors
such as market acceptance of our products and any other new products we launch,
the success of our independent distributors and our production, marketing and
sales costs. None of these factors can be predicted with certainty.





If we are unable to achieve
sufficient levels of sales to break-even, we will need substantial additional
debt or equity financing in the future for which we currently have no
commitments or arrangement. We cannot assure you that any additional financing,
if required, will be available or, even if it is available that it will be on
terms acceptable to us. If we raise additional funds by selling stock or
convertible securities, the ownership of our existing shareholders will be
diluted. Further, if additional funds are raised though the issuance of equity
or debt securities, such additional securities may have powers, designations,
preferences or rights senior to our currently outstanding securities and, in the
case of additional equity securities, the ownership of our existing shareholders
will be diluted. Any inability to obtain required financing on sufficiently
favorable terms could have a material adverse effect on our business, results of
operations and financial condition. If we are unsuccessful in raising additional
capital and increasing revenues from operations, we will need to reduce costs
and operations substantially. Further, if expenditures required to achieve our
plans are greater than projected or if revenues are less than, or are generated
more slowly than, projected, we will need to raise a greater amount of funds
than currently expected.





14




Our letter of credit was supported by a demand loan and we may be
required to repay this amount on the demand of the lender.





On April
4, 2007, we closed on a secure loan arrangement with Valley Green Bank pursuant
to which we received funds in the amount of $340,000.  Interest will
be charged on the unpaid principal of this new loan arrangement until the full
amount of principal has been paid at the rate of 8.25% per annum. We were
obligated to repay this new loan in full immediately on the bank’s demand, but
in no event later than March 20, 2008. Since that date the bank has extended the
term of the loan to July 2010. Interest payments are due on a monthly basis. The
loan is secured by collateral consisting of a perfected first priority pledge of
certain marketable securities held by our Chairman and entities with which he is
affiliated. We also agreed to a confession of judgment in favor of the bank in
the event we default under the loan agreements. The loan agreements also require
the consent of the bank for certain actions, including incurring additional debt
and incurring certain liens. The maturity of this loan has been extended to July
2010 and the current balance on the loan is $25,924.  No assurances,
however, can be given that the bank will continue to extend the term of this
loan for any specific duration, if at all.





We
entered into a secured financing arrangement based on our accounts receivable
and if we are unable to make the scheduled payments on this facility or maintain
compliance with other contractual covenants, we may default on this
agreement.





On
November 23, 2007, we entered into a one-year factoring agreement with United
Capital Funding of Florida (“UCF”). The agreement initially provided for an
initial funding limit of $300,000.  Currently, this arrangement has
been extended through February, 2011 and the borrowing limit has been increased
to extend our line to 85% of the face of the eligible receivables subject to a
maximum of $2,000,000.  As of December 31, 2009, we had an amount
outstanding under this arrangement of $321,815 and as of  March 31,
2010, we have a balance of 564,684 outstanding under this arrangement. Under
this arrangement, all accounts submitted for purchase must be approved by UCF.
The applicable factoring fee is 0.30% of the face amount of each purchased
account and the purchase price is 80% of the face amount. UCF will retain the
balance as a reserve, which it holds until the customer pays the factored
invoice to UCF. In the event the reserve account is less than the required
reserve amount, we will be obligated to pay UCF the shortfall. In addition to
the factoring fee, we will also be responsible for certain additional fees upon
the occurrence of certain contractually-specified events. As collateral securing
the obligations, we granted UCF a continuing first priority security interest in
all accounts and related inventory and intangibles. In addition, upon the
occurrence of certain contractually-specified events, UCF may require us to
repurchase a purchased account on demand. In connection with this arrangement,
each of our Chairman and Chief Executive Officer agreed to personally guarantee
our obligations to UCF. The agreement will automatically renew for successive
one year terms until terminated. Either party may terminate the agreement on
three month’s prior written notice. We are liable for an early termination fee
in the event we fail to provide UCF with the required written
notice.  We are currently negotiating with the lender for more
favorable terms.  In case of an uncured default, the following actions may
be taken against us:




·
            All
      outstanding obligations would be immediately due and
    payable;




·
            Any
      future advancement of funds facility would cease;
  and





·
            All
      collateral, as defined in the agreement, could be seized and disposed
      of.





Fluctuations
in our quarterly revenue and results of operations may lead to reduced prices
for our stock.





Our
quarterly net revenue and results of operations can be expected to vary
significantly in the future. The business in which we compete experiences
substantial seasonality caused by the timing of customer orders and fluctuations
in the size and rate of growth of consumer demand. In other particular fiscal
quarters, our net revenues may be lower and vary significantly. As a result, we
cannot assure you that our results of operations will be consistent on a
quarterly or annual basis. If our results of operations in a quarter fall below
our expectations or those of our investors; the price of our common stock will
likely decrease.





Our revenues will decline and our
competitive position will be adversely affected if we are unable to introduce
successful products on a timely basis.





Our
business performance depends on the timely introduction of successful products
or enhancements of existing products. Our inability to introduce products or
enhancements, or significant delays in their release, could materially and
adversely affect the ultimate success of our products and, in turn, our
business, results of operations and financial condition. The process of
introducing products or product enhancements is extremely complex, time
consuming and expensive.





15




Our
business is subject to many regulations and noncompliance is
costly.




The
production, marketing and sale of our beverages, including contents, labels,
caps and bottles, and claims made for our products are subject to the rules and
regulations of various federal, provincial, state and local health agencies,
including the U.S. Food and Drug Administration and the Federal Trade
Commission. If a regulatory authority or any state attorney general were to find
that a current or future product or production run is not in compliance with any
of these regulations or that any of the claims made for our products are false,
misleading or not adequately substantiated, we may be fined, production may be
stopped or we may be forced to make significant changes to the products or
claims made for them, thus adversely affecting our financial conditions and
operations. Similarly, any adverse publicity associated with any noncompliance
may damage our reputation and our ability to successfully market our products.
The rules and regulations of FDA, FTC and other federal, provincial, state and
local agencies are subject to change from time to time and while we closely
monitor developments in this area, we have no way of anticipating whether
changes in these rules and regulations will impact our business adversely.
Additional or revised regulatory requirements, whether labeling, environmental,
tax or otherwise, could have a material adverse effect on our financial
condition and results of operations.





Our
products are highly regulated at both the state and federal level.





The
manufacture, packaging, labeling, advertising, promotion, distribution and sale
of our products are subject to regulation by numerous governmental agencies
which regulate our products. Our products are subject to regulation by, among
other regulatory entities, the Food and Drug Administration (“FDA”) and the
Federal Trade Commission (“FTC”). Advertising and other forms of promotion and
methods of marketing of our products are subject to regulation by the FTC which
regulates these activities under the Federal Trade Commission Act
(“FTCA”).




The
manufacture, labeling and advertising of our products are also regulated by
various state and local agencies as well as those of each foreign country to
which we distribute our products. If we are unable to comply with applicable
regulations and standards in any jurisdiction, we might not be able to sell our
products in that jurisdiction, and our business could be seriously
harmed.





Previously,
we have intended that Skinny Water be regulated as a dietary supplement by FDA
under the Federal Food, Drug and Cosmetic Act (“FFDCA”).  However, as
we announced in December 2009, we are planning to reposition our line of Skinny
Water from a dietary supplement to a conventional beverage.  We are in
the process of implementing this decision and need to take certain measures in
implementing this change, such as modifying our labels to ensure compliance with
other applicable regulations, as discussed above. However we believe this
classification would be more in line with our competitors, most of whom are also
classified as conventional beverages.  The Company’s decision was also
influenced, in part, by a letter we received from the FDA informing us that we
are, in their view, much closer to a conventional beverage than a dietary
supplement.  The letter did not require any action, however, despite
this, we feel that the classification of conventional beverage much more
accurately reflects Skinny Water’s market potential, and will allow us to appeal
to a much broader market.  Skinny Water will continue to have zero
calories, zero sugar, zero sodium, and zero preservatives, and we believe we
will not experience any material adverse effects in transitioning the Skinny
Water product line to conventional beverages.  By taking these steps,
we expect to more directly compete with other functional beverage companies,
while contemporaneously addressing the FDA’s correspondence.





Notwithstanding
the manner in which we position our products, they are subject to extensive
regulation by the FDA, including relating to adulteration and misbranding. For
instance, we are responsible for ensuring that all dietary ingredients in a
supplement are safe, and to the extent our product is a dietary supplement, must
notify the FDA in advance of putting a product containing a new dietary
ingredient (i.e., an ingredient not present in the U.S. food supply as an
article used for food before October 15, 1994) on the market and furnish
adequate information to provide reasonable assurance of the ingredient’s safety.
Furthermore, if we make statements about the supplement’s effects on the
structure or function of the body, we must, among other things, have adequate
substantiation that the statements are truthful and not misleading. In addition,
our product labels must bear proper ingredient and nutritional labeling and our
products must be manufactured in accordance with current good manufacturing
practices or “GMPs” for foods. The FDA has published notice of its intention to
issue new GMPs specific to dietary supplements, which, when finally adopted may
be more expensive to follow than prior GMPs. A dietary supplement product can be
removed from the market if it is shown to pose a significant or unreasonable
risk of illness or injury. Moreover, if the FDA determines that the “intended
use” of any of our products is for the diagnosis, cure, mitigation, treatment or
prevention of disease, the product would meet the definition of a drug and could
not be sold as a dietary supplement until such time that the “intended use” of
the product is not for the diagnosis, cure, mitigation, treatment or prevention
of disease.  It is also important to note that, upon repositioning our
product as a conventional beverage, we will be subject to different regulations
applying to this class of beverage, with which we must also
comply.  Our failure to comply with applicable FDA regulatory
requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines and criminal
prosecutions.




In
addition, our advertising is subject to regulation by the FTC under the FTCA,
which prohibits unfair methods of competition and unfair or deceptive acts or
practices in or affecting commerce. Further, the FTCA provides that the
dissemination or the causing to be disseminated of any false or misleading
advertisement pertaining to, among other things, drugs or foods, which includes
dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s
“substantiation doctrine,” an advertiser is required to have a “reasonable
basis” for all product claims at the time the claims are first used in
advertising or other promotions. Failure to adequately substantiate claims may
be considered either as a deceptive or unfair practice. Pursuant to this FTC
requirement, we are required to have adequate substantiation for all advertising
claims made about our products. The type of substantiation will be dependent
upon the product claims made. For example, a health claim normally would require
competent and reliable scientific evidence, while a taste claim may only require
competent and reliable survey evidence.




16





In recent years the FTC has initiated
numerous investigations of dietary supplement and weight loss products and
companies. The FTC has specifically launched a nationwide law enforcement sweep
called “Project Waistline” against companies making false and/or inadequately
substantiated weight loss claims. The initiative was created to stop deceptive
advertising, provide refunds to consumers harmed by unscrupulous weight-loss
advertisers, and encourage media outlets not to carry advertisements containing
bogus weight loss claims and to educate consumers to be on their guard against
companies promising weight loss without diet or exercise. These enforcement
actions have often resulted in consent decrees and the payment of substantial
civil penalties and/or restitution by the companies involved. If the FTC has
reason to believe the law is being violated (e.g., we do not possess adequate
substantiation for product claims), it can initiate enforcement action. The FTC
has a variety of processes and remedies available to it for enforcement, both
administratively and judicially, including compulsory process authority, cease
and desist orders, and injunctions. FTC enforcement could result in orders
requiring, among other things, limits on advertising, consumer redress, and
divestiture of assets, rescission of contracts and such other relief as may be
deemed necessary. Violation of such orders could result in substantial financial
or other penalties. Any such action by the FTC would materially adversely affect
our ability to successfully market our products.




If
we lose key personnel or fail to integrate replacement personnel successfully,
our ability to manage our business could be impaired.





Our
future success depends upon the continued service of our key management as well
as upon our ability to attract, motivate and retain highly qualified employees
with management, marketing, sales, creative and other skills. Currently, all of
our employees are at-will and we cannot assure you that we will be able to
retain them. The loss of any key employee could result in significant
disruptions to our operations, including adversely affecting the timeliness of
product releases, the successful implementation and completion of company
initiatives, the effectiveness of our disclosure controls and procedures and our
internal control over financial reporting, and the results of our operations. In
addition, hiring, training, and successfully integrating replacement sales and
other personnel could be time consuming, may cause additional disruptions to our
operations, and may be unsuccessful, which could negatively impact future
revenues. Further, our business, operating results and financial condition could
also be materially and adversely affected if we fail to attract additional
highly qualified employees. In our industry, competition for highly skilled and
creative employees is intense and costly. We expect this competition to continue
for the foreseeable future, and we may experience increased costs in order to
attract and retain skilled employees. We cannot assure you that we will be
successful in attracting and retaining skilled personnel.





Significant competition in our
industry could adversely affect our business.




Our
market is highly competitive and relatively few products achieve significant
market acceptance. Further, the market for dietary supplements is also highly
competitive and our competitors in the functional beverage segment include well
known brands such as Glaceau Vitamin Water® and SoBe
Life Water® . These
current and future competitors may also gain access to wider distribution
channels than we do. As a result, these current and future competitors may be
able to:




•
            respond
      more quickly to new or emerging technologies or changes in customer
      preferences;





•
            carry
      larger inventories;





•
            undertake
      more extensive marketing campaigns;
and





•
            adopt
      more aggressive pricing policies.





We may
not have the resources required for us to respond effectively to market or
technological changes or to compete successfully with current and future
competitors. Increased competition may also result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on our business, results of operations or financial condition. We
cannot assure you that we will be able to successfully compete against our
current or future competitors or that competitive pressures will not have a
material adverse effect on our business, results of operations and financial
condition.





We
must rely on the performance of distributors, major retailers and chains for the
success of our business and their performance may adversely affect our
operations and financial condition.





We must
engage distributors to sell our products principally to major retailers and
chains including supermarkets, drugstores and convenience stores. We also have
distribution arrangements with retail accounts, including Target, to distribute
our products through their venues. These relationships are typically on a
purchase-order basis. We do not have any relationships with distributors that
are subject to significant minimum purchase commitments. Accordingly, we cannot
assure any given level of performance by our distributors and we do not have any
assurance that these accounts will result in recurring orders. The poor
performance of our distributors, retailers or chains or our inability to collect
accounts receivable from our distributors, retailers or chains could materially
and adversely affect our results of operations and financial condition. Further,
these arrangements are terminable at any time by these retailers or
us.




17





During
the latter part of fiscal 2009 and into fiscal 2010, we have established a
distribution network in the New York City metropolitan area and mid-Atlantic
region through independent distribution agreements with distributors affiliated
with Canada Dry. In entering into these agreements, we granted distributors
exclusivity within the contractually-defined territory and a right of first
refusal to distribute additional beverages we wish to introduce in the
territory. Further, under these agreements, we may be required to pay the
distributor a termination penalty in the event we elect not to renew the
agreement and the distributor is not in breach of its obligations. However,
these agreements do not require any minimum performance requirements on the part
of the distributors. Accordingly, we will be substantially reliant on the
performance by these distributors in order to successfully and profitably sell
our products in these territories. To the extent that we must enter into
distribution agreements on comparable terms in other markets, our ability to be
successful will be dependent on the performance of such
distributors.





In
addition, distributors and retailers of our products offer products which
compete directly with our products for retail shelf space and consumer
purchases. Accordingly, there is a risk that distributors or retailers may give
higher priority to products of our competitors. In the future, our distributors
and retailers may not continue to purchase our products or provide our products
with adequate levels of promotional support. Accordingly, there can be no
assurance that we will be able successfully to sell, market, commercialize or
distribute our products at any time in the future. The failure or inability of
distributors to successfully sell our products in their territories will
adversely affect our results of operations, cash flows and financial condition
and may require us to expand substantial amounts in order to seek relationships
with other distributors and in generating a market for our
products.





A
decision by any of these retailers, or any other large retail accounts we may
obtain, to decrease the amount purchased from us or to cease carrying our
products could have a material adverse effect on our reputation, financial
condition and consolidated results of operations. In addition, we may not be
able to establish additional distribution arrangements with other national
retailers. In addition, if we become more dependent on national retail chains,
these retailers may assert pressure on us to reduce our pricing to them or seek
significant product discounts. In general, our margins are lower on our sales to
these customers because of these pressures. Any increase in our costs for these
retailers to carry our product, reduction in price, or demand for product
discounts could have a material adverse effect on our profit margin. Finally,
our “direct to retail” distribution arrangements may have an adverse impact on
our existing relationships with our independent regional distributors, who may
view our “direct to retail” accounts as competitive with their business, making
it more difficult for us to maintain and expand our relationships with
independent distributors.





We
will rely heavily on independent distributors, and this could affect our ability
to efficiently and profitably distribute and market our products, maintain our
existing markets and expand our business into other geographic
markets.





Our
ability to establish a market for our unique brands and products in new
geographic distribution areas, as well as maintain and expand our existing
markets, is dependent on our ability to establish and maintain successful
relationships with reliable independent distributors strategically positioned to
serve those areas. Although we had established relationships with distributors
in a number of markets across the United States for our products, and have
established a distribution network with Canada Dry-affiliated distributors, none
of our distribution agreements include significant minimum purchase commitments.
Further, these agreements typically may be terminated by the distributor at any
time, and may require our payment of a termination fee. Therefore, we may not be
able to maintain our current distribution relationships or establish and
maintain successful relationships with distributors in new geographic
distribution areas. Moreover, there is the additional possibility that we may
have to incur additional expenditures to attract and maintain key distributors
in one or more of our geographic distribution areas in order to profitably
exploit our geographic markets.





Further,
we expect that any distributor we engage with will sell and distribute competing
products, and our products may represent a small portion of their business. To
the extent that our distributors are distracted from selling our products or do
not employ sufficient efforts in managing and selling our products, our sales
and profitability will be adversely affected. Our ability to maintain our
distribution network and attract additional distributors will depend on a number
of factors, many of which are outside our control. Some of these factors
include:




•
            the
      level of demand for our brands and products in a particular distribution
      area,




•
            our
      ability to price our products at levels competitive with those offered by
      competing products, and




•
            our
      ability to deliver products in the quantity and at the time ordered by
      distributors.




We cannot
ensure that we will be able to meet all or any of these factors in any of our
current or prospective geographic areas of distribution. Our inability to
achieve any of these factors in a geographic distribution area will have a
material adverse effect on our relationships with our distributors in that
particular geographic area, thus limiting our ability to expand our market,
which will likely adversely effect our revenues and financial
results.




18





We
will incur significant time and expense in attracting additional distributors
for our products.




Our
marketing and sales strategy presently, and in the future, will rely on the
availability and performance of independent distributors. We currently do not
have any long-term, written distribution agreements with significant minimum
purchase commitments. For example, even though our agreements with Canada
Dry-affiliated distributors are for multi-year terms, no performance targets are
mandated. Accordingly, we expect to incur additional time and expense in
assisting our distributors in generating a demand for our products. We intend to
enter into written agreements with key distributors for varying terms and
duration; however, many distribution relationships may be based solely on
purchase orders and be terminable by the distributor at will. We do not
anticipate that in the future we will be able to establish, long-term
contractual commitments from many of our distributors. In addition, we cannot
provide any assurance as to the level of performance by our distributors under
such agreements, that these agreements will include minimum purchase commitments
by the distributors or that those agreements will not be terminated early.
Moreover, there is the possibility that we may have to incur significant
additional expenditures or agree to additional obligations to attract and
maintain key distributors in one or more of our geographic distribution areas in
order to profitably exploit our geographic markets, including the granting of
exclusive rights for a defined territory or imposition of termination payments.
For example, under our distribution agreements with Canada Dry-affiliated
distributors, we granted exclusivity within the contractually-defined territory
and agreed to be responsible for the payment of slotting fees that may be
required by retailers. Further, under these agreements, we also will pay the
distributor a termination penalty in the event we elect not to renew the
agreement and the distributor is not in breach of its obligations. There is no
assurance that we will be able to establish distribution relationships or
maintain successful relationships with distributors in our geographic
distribution areas. If we are unable to establish or maintain successful
distribution relationships, our business, financial condition, results of
operations and cash flows will be adversely affected.





Because our distributors are not required to place minimum orders
with us, we need to carefully manage our inventory levels, and it is difficult
to predict the timing and amount of our sales.





Our
independent distributors are not required to place minimum monthly or annual
orders for our products. In order to reduce inventory costs, independent
distributors typically order products from us on a recurring basis in
quantities based on the demand for the


products
in a particular distribution area. Accordingly, there is no assurance as to the
timing or quantity of purchases by any of our independent distributors or that
any of our distributors will continue to purchase products from us in the same
frequencies and volumes as they may have done in the past. In order to be able
to deliver our products on a timely basis, we need to maintain adequate
inventory levels of the desired products. However, we cannot predict the number
of cases sold by any of our distributors. If we fail to meet our shipping
schedules, we could damage our relationships with distributors and/or retailers,
increase our shipping costs or cause sales opportunities to be delayed or lost,
which would unfavorably impact our future sales and adversely affect our
operating results. In addition, if the inventory of our products held by our
distributors and/or retailers is too high, they will not place orders for
additional products, which would also unfavorably impact our future sales and
adversely affect our operating results.





We
rely on third-party bottlers, which could result in inefficiencies in our
management of our marketing and distribution efforts.





We do not
directly manufacture our products, but instead outsource such manufacturing to
bottlers and other contract packers.   As a consequence, we
depend on third parties to produce our beverage products and deliver them to
distributors. Our ability to attract and maintain effective relationships with
these parties for the production and delivery of our products in a particular
geographic distribution area is important to the achievement of successful
operations within each distribution area. Competition for bottlers’ business is
intense and this could make it more difficult for us to obtain new or
replacement bottlers, or to locate back-up bottlers, in our various distribution
areas, and could also affect the economic terms of our agreements with them. Our
bottlers may terminate their arrangements with us at any time, in which case we
could experience disruptions in our ability to deliver products to our
customers. We may not be able to maintain our relationships with current
contract bottlers or establish satisfactory relationships with new or
replacement parties. The failure to establish and maintain effective
relationships with bottlers for a distribution area could increase our
manufacturing costs and thereby materially reduce profits realized from the sale
of our products in that area. In addition, a disruption or delay in production
of any of such products could significantly affect our revenues from such
products as alternative co-packing facilities in the United States with adequate
capacity may not be available for such products either at commercially
reasonable rates, and/or within a reasonably short time period, if at all. 
Consequently, a disruption in production of such products could adversely affect
our revenues.




In
addition, to the extent demand for our products exceeds available inventory and
the capacities produced by contract packing arrangements, or orders are not
submitted on a timely basis, we will be unable to fulfill distributor orders on
demand. Conversely, we may produce more product than warranted by the actual
demand for it, resulting in higher storage costs and the potential risk of
inventory spoilage. Our failure to accurately predict and manage our contract
packaging requirements may impair relationships with our independent
distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain profitable relationships with those
distributors and key accounts.




19





Our
failure to accurately estimate demand for our products could adversely affect
our business and financial results.




We may
not correctly estimate demand for our products.  Our ability to estimate
demand for our products is imprecise, particularly with new products, and may be
less precise during periods of rapid growth, particularly in new markets. 
If we materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, bottles,
labels, flavors, supplements, certain sweeteners, or packing arrangements, we
might not be able to satisfy demand on a short-term basis.  Moreover,
industry-wide shortages of certain juice concentrates, supplements and
sweeteners have been and could, from time to time in the future, be
experienced.  Such shortages could interfere with and/or delay production
of certain of our products and could have a material adverse effect on our
business and financial results.  We generally do not use hedging agreements
or alternative instruments to manage this risk.




We
rely upon our ongoing relationships with our key flavor suppliers.  If we
are unable to source our flavors on acceptable terms from our key suppliers, we
could suffer disruptions in our business.




Generally,
flavor suppliers hold the proprietary rights to their flavors. 
Consequently, we do not have the list of ingredients or formulae for our flavors
and certain of our concentrates readily available to us and we may be unable to
obtain these flavors or concentrates from alternative suppliers on short notice.
Industry-wide shortages of certain juice concentrates, supplements and
sweeteners have been, and could, from time to time in the future, be
experienced.  Such shortages could interfere with and/or delay production
of certain of our products.  If we have to replace a flavor supplier, we
could experience temporary disruptions in our ability to deliver products to our
customers which could have a material adverse effect on our results of
operations.




We
need to effectively manage our growth and execution of our business plan. Any
failure to do so would negatively impact our profitability.




To manage
operations effectively and maintain profitability, we must continue to improve
our operational, financial and other management processes and systems. Our
success also depends largely on our ability to maintain high levels of employee
utilization, to manage our production costs and general and administrative
expense, and otherwise to execute on our business plan. We need to maintain
adequate operational controls and focus as we add new brands and products,
distribution channels, and business strategies. There are no assurances that we
will be able to effectively and efficiently manage our growth. Any inability to
do so could increase our expenses and negatively impact our profit
margin.




20




Disruption
of our supply chain could have an adverse effect on our business, financial
condition and results of operations.




Our
ability and that of our suppliers, business partners (including packagers),
contract manufacturers, independent distributors and retailers to make, move and
sell products is critical to our success. Damage or disruption to our or their
manufacturing or distribution capabilities due to weather, natural disaster,
fire or explosion, terrorism, pandemics such as avian flu, strikes or other
reasons, could impair our ability to manufacture or sell our products. Failure
to take adequate steps to mitigate the likelihood or potential impact of such
events, or to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations, as well as
require additional resources to restore our supply chain.





We
have limited the liability of our directors.





The
General Corporation Law of Nevada permits provisions in the articles, by-laws or
resolutions approved by stockholders which limit liability of directors for
breach of fiduciary duty to certain specified circumstances, namely, breach of
their duties of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law; acts involving unlawful
payment of dividends or unlawful stock purchases or redemptions, or any
transaction from which a director derived an improper personal benefit. Our
Amended and Restated By-laws indemnify the Officers and Directors to the full
extent permitted by Nevada law. The By-laws (with these exceptions) eliminates
any personal liability of a Director to the stockholders for monetary damages
for breach of a Director's fiduciary duty.





Therefore,
a Director cannot be held liable for damages to the shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
Director. Our Articles may provide for indemnification to the full extent
permitted under law, which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with the company to the full extent and under all circumstances
permitted by law. Indemnification is permitted under Nevada law if a director or
officer acts in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the corporation. A director or officer must be
indemnified as to any matter in which he successfully defends himself.
Indemnification is prohibited as to any matter in which the director or officer
is adjudged liable to the corporation. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, and controlling persons pursuant to the foregoing provisions or
otherwise, management has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.




Certain Factors Relating to
Our Industry





We
compete in an industry that is brand-conscious, so brand name recognition and
acceptance of our products are critical to our success.




Our
business is substantially dependent upon awareness and market acceptance of our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. It is too early in the product life cycle
of our brands to determine whether our products and brands will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of our brands will be
substantially dependent upon acceptance of our brand by consumers, distributors
and retailers. Accordingly, any failure of our brand to maintain or increase
acceptance or market penetration would likely have a material adverse affect on
our revenues and financial results.





21




Competition from traditional
non-alcoholic beverage manufacturers may adversely affect our distribution
relationships and may hinder development of our existing markets, as well as
prevent us from expanding our markets .





The
functional beverage industry is highly competitive. We compete with other
beverage companies not only for consumer acceptance but also for shelf space in
retail outlets and for marketing focus by our distributors, all of who also
distribute other beverage brands. Our products compete with all non-alcoholic
beverages, most of which are marketed by companies with greater financial
resources than what we have. Some of these competitors are placing severe
pressure on independent distributors not to carry competitive functional
beverage brands such as ours. We also compete with national beverage
producers.





Some of
our direct competitors include Vitamin Water, Sobe Life Water, and Fuze.
Increased competitor consolidations, market place competition, particularly
among branded beverage products, and competitive product and pricing pressures
could impact our earnings, market share and volume growth. If, due to such
pressure or other competitive threats, we are unable to sufficiently maintain or
develop our distribution channels, we may be unable to achieve our current
revenue and financial targets. As a means of maintaining and expanding our
distribution network, we intend to introduce product extensions and additional
brands. There can be no assurance that we will be able to do so or that other
companies will not be more successful in this regard over the long term.
Competition, particularly from companies with greater financial and marketing
resources than us, could have a material adverse affect on our existing markets,
as well as our ability to expand the market for our products.





We may face intellectual property
infringement claims and other litigation which would be costly to
resolve.




We are
not aware that any of our products infringe on the proprietary rights of third
parties. However, we cannot assure you that third parties will not assert
infringement claims against us in the future with respect to current or future
products. There has been substantial litigation in the industry regarding
copyright, trademark and other intellectual property rights. Whether brought by
or against us, these claims can be time consuming, result in costly litigation
and divert management’s attention from our day-to-day operations, which can have
a material adverse effect on our business, operating results and financial
condition. Further, similar to our competitors, we will likely become subject to
litigation. Such litigation may be costly and time consuming and may divert
management’s attention from our day-to-day operations. In addition, we cannot
assure you that such litigation will be ultimately resolved in our favor or that
an adverse outcome will not have a material adverse effect on our business,
results of operations and financial condition.





We may face increased competition and
downward price pressure if we are unable to protect our intellectual property
rights.





Our
business is heavily dependent upon our confidential and proprietary intellectual
property. We rely primarily on a combination of confidentiality and
non-disclosure agreements, patent, copyright, trademark and trade secret laws,
as well as other proprietary rights laws and legal methods, to protect our
proprietary rights. However, current U.S. and international laws afford us
only limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy our products or obtain and use
information that we regard as proprietary. Furthermore, the laws of some foreign
countries may not protect our proprietary rights to as great an extent as
U.S. law. Our business, results of operations and financial condition could
be adversely affected if a significant amount of unauthorized copying of our
products were to occur or if other parties develop products substantially
similar to our products. We cannot assure you that our attempts to protect our
proprietary rights will be adequate or that our competitors will not
independently develop similar or competitive products.





We
compete in an industry characterized by rapid changes in consumer preferences,
so our ability to continue developing new products to satisfy our consumers’
changing preferences will determine our long-term success.




Our
current market distribution and penetration may be limited with respect to the
population as a whole to determine whether the brand has achieved initial
consumer acceptance, and there can be no assurance that this acceptance will
ultimately be achieved. Based on industry information and our own experience, we
believe that in general, alternative or New Age beverage brands and products may
be successfully marketed for five to nine years after the product is introduced
in a geographic distribution area before consumers’ taste preferences change,
although some brands or products have longer lives. In light of the limited life
for alternative or New Age beverage brands and products, a failure to introduce
new brands, products or product extensions into the marketplace as current ones
mature could prevent us from achieving long-term profitability. In addition,
customer preferences are also affected by factors other than taste, such as the
recent media focus on obesity in youth. If we do not adjust to respond to these
and other changes in customer preferences, our sales may be adversely
affected.





We
could be exposed to product liability claims for personal injury or possibly
death.




Although
we have product liability insurance in amounts we believe are adequate, we
cannot assure that the coverage will be sufficient to cover any or all product
liability claims. To the extent our product liability coverage is insufficient;
a product liability claim would likely have a material adverse affect upon our
financial condition. In addition, any product liability claim successfully
brought against us may materially damage the reputation of our products, thus
adversely affecting our ability to continue to market and sell that or other
products.





22




The
global economic crisis may adversely impact our business and results of
operations.





The
beverage industry can be affected by macro economic factors, including changes
in national, regional, and local economic conditions, employment levels and
consumer spending patterns. The recent disruptions in the overall economy and
financial markets as a result of the global economic crisis have adversely
impacted the U.S. market. This has reduced consumer confidence in the economy
and could negatively affect consumers’ willingness to purchase our products as
they reduce their discretionary spending. Moreover, current economic conditions
may adversely affect the ability of our distributors to obtain the credit
necessary to fund their working capital needs, which could negatively impact
their ability or desire to continue to purchase products from us in the same
frequencies and volumes as they have done in the past. We also may be unable to
access credit markets on favorable terms or at all. There can be no assurances
that government responses to the disruptions in the financial markets will
restore consumer confidence, stabilize the markets or increase liquidity and the
availability of credit. If the current economic conditions persist or
deteriorate, sales of our products could be adversely affected, the credit
status of our customers could be impacted, collectibility of accounts receivable
may be compromised and we may face obsolescence issues with our inventory, any
of which could have a material adverse impact on our operating results and
financial condition.





23


Certain Factors Related to
Our Common Stock





Because
our common stock is traded on the OTC Bulletin Board, a shareholder’s ability to
sell shares in the secondary trading market may be limited.




Our
common stock is currently listed for trading in the United States on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of or to obtain accurate quotations as to the price of our securities than if
the securities were traded on the NASDAQ Stock Market or another national
exchange, like The New York Stock Exchange or American Stock
Exchange.





Because
our common stock is considered a “penny stock,” a shareholder may have
difficulty selling shares in the secondary trading market.




In
addition, our common stock is subject to certain rules and regulations relating
to “penny stock” (generally defined as any equity security that is not quoted on
the NASDAQ Stock Market and that has a price less than $5.00 per share, subject
to certain exemptions). Broker-dealers who sell penny stocks are subject to
certain “sales practice requirements” for sales in certain nonexempt
transactions (i.e., sales to persons other than established customers and
institutional “accredited investors”), including requiring delivery of a risk
disclosure document relating to the penny stock market and monthly statements
disclosing recent price information for the penny stock held in the account, and
certain other restrictions. For as long as our common stock is subject to the
rules on penny stocks, the market liquidity for such securities could be
significantly limited. This lack of liquidity may also make it more difficult
for us to raise capital in the future through sales of equity in the public or
private markets.





The
price of our common stock may be volatile, and a shareholder’s investment in our
common stock could suffer a decline in value.




There has
been significant volatility in the volume and market price of our common stock,
and this volatility may continue in the future. In addition, there is a greater
chance for market volatility for securities that trade on the OTC Bulletin Board
as opposed to a national exchange. This volatility may be caused by a variety of
factors, including the lack of readily available quotations, the absence of
consistent administrative supervision of “bid” and “ask” quotations and
generally lower trading volume. In addition, factors such as quarterly
variations in our operating results, changes in financial estimates by
securities analysts or our failure to meet our or their projected financial and
operating results, litigation involving us, general trends relating to the
beverage industry, actions by governmental agencies, national economic and stock
market considerations as well as other events and circumstances beyond our
control could have a significant impact on the future market price of our common
stock and the relative volatility of such market price. The price of our common
stock has been and could continue to be subject to wide fluctuations in response
to certain factors, including, but not limited to, the following:





•
            quarter
      to quarter variations in results of
operations;





•
            our
      announcements of new products;





•
            our
      competitors’ announcements of new
products;





•
            general
      conditions in the beverage industry;
or





•
            investor
      and customer perceptions and expectations regarding our products, plans
      and strategic position and those of our competitors and
      customers.





Additionally,
the public stock markets experience extreme price and trading volume volatility.
This volatility has significantly affected the market prices of securities of
many companies for reasons often unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our common stock.




There
are outstanding a significant number of shares available for future sales under
Rule 144.





As of
December 31, 2009, of the 289,921,081 issued and outstanding shares of our
Common Stock, approximately135,036,334 shares may be deemed “restricted shares”
and, in the future, may be sold in compliance with Rule 144 under the securities
Act of 1933, as amended. Rule 144 provides that a person holding restricted
securities for a period of one year may sell in brokerage transactions an amount
equal to 1% of our outstanding Common Stock every three months. A person who is
a “non-affiliate” of our Company and who has held restricted securities for over
two years is not subject to the aforesaid volume limitations as long as the
other conditions of the Rule are met. Possible or actual sales of our Common
Stock by certain of our present shareholders under Rule 144 may, in the future,
have a depressive effect on the price of our Common Stock in any market which
may develop for such shares. Such sales at that time may have a depressive
effect on the price of our Common Stock in the open market.





24




There are a significant number of
outstanding securities convertible or exercisable into shares of common stock,
the conversion or exercise of which may have a dilutive effect on the price of
our common stock.




As of
December 31, 2009, there were outstanding and immediately exercisable options to
purchase 14,487,500 shares of Common Stock and other warrants to purchase
24,152,765 shares of Common Stock. The shares underlying warrants (including the
warrants that are granted upon conversion of the debentures) represent
approximately 8% of our common stock, and the shares underlying our currently
outstanding options represent approximately 5% of our common stock. The exercise
of these securities will cause dilution to our shareholders and the sale of the
underlying Common Stock (or even the potential of such exercise or sale) may
have a depressive effect on the market price of our securities. Moreover, the
terms upon which we will be able to obtain additional equity capital may be
adversely affected, since the holders of the outstanding options and warrants
can be expected to exercise them at a time when we would, in all likelihood, be
able to obtain any needed capital on terms more favorable to us than the
exercise terms provided by the outstanding options and warrants.





Our Board of Directors has the
ability to issue “blank check” Preferred Stock.





Our
Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares
of “blank check” preferred stock, with such designation rights and preferences
as may be determined from time to time by the Board of Directors. Currently,
there are no shares of preferred stock are issued and outstanding. The Board of
Directors is empowered, however, without shareholder approval, to issue shares
of preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of our common stock. In the event of such issuances, the preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of our company. Although we have no
present intention to issue any additional shares of our preferred stock, there
can be no assurance that we will not do so in the future.




Item
1B. Unresolved Staff Comments




We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





Item
2:  Property





During
the 2008 fiscal year our corporate offices were located at 3 Bala Plaza East,
Suite 117, Bala Cynwyd, Pennsylvania. On January 9, 2009, we entered into a
sublease with Hallinan Capital Corp. for approximately 1,978 square feet of
office space located at Three Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004.
The premises will serve as the Company’s new corporate headquarters. The
sublease expires two years following the commencement date and will terminate on
such expiration date provided that either party gives six months notice of its
intention to terminate the lease to the other party. In the event that neither
party provides such notice, the sublease will continue on a month to month
basis, with either party having the right to terminate at any time upon the
provision of six months written notice. The sublease will, however, terminate
without regard to such notice provisions upon the expiration or termination of
the lease under which the premises have been sublet to the Company. The sublease
calls for monthly payments of $5,192.25 from the commencement date and through
October 2009. Thereafter, the rent due under the sublease will be increased by
$1,978 per annum.





Item
3:  Legal Proceedings





Except as
described below, we are not currently a party to any lawsuit or proceeding
which, in the opinion of our management, is likely to have a material adverse
effect on us.





On
February 24, 2010, the Company filed a lawsuit with the Court of Common Pleas of
Montgomery County (the “Court”) against Beverage Incubators, Inc. and Victory
Beverage Company, Inc. (collectively, “Bev Inc.”), alleging breach of contract
and unjust enrichment claims concerning Bev Inc.’s failure to pay certain
invoices from the Company for product received from the Company.  The
amount in controversy is $115,900.30.  The Company is currently
awaiting Bev Inc.’s answer to the Company’s filed complaint.





We are
aware that a third party based in the United Kingdom  has made
allegations concerning our trademark rights in the European Union. During the
fourth quarter of the 2009 fiscal year, the company vigorously refuted these
allegations through correspondence with this third party. Although the Company
does not make any assertions that this matter is resolved, as of the date of
this report, the Company has not received a response to its correspondence. The
Company intends to continue to vigorously contest any claims which this third
party may raise concerning the validity of its trademarks and management does
not believe that this matter will have a material adverse effect on the
Company’s business, results of operations or financial condition.




25





In
addition, we are subject to other claims and litigation arising in the ordinary
course of business. Our management considers that any liability from any
reasonably foreseeable disposition of such other claims and litigation,
individually or in the aggregate, would not have a material adverse effect on
our consolidated financial position, results of operations or cash
flows.




Item
4:  Reserved.





PART
II




Item
5:  Market for Common Equity and Related Stockholder
Matters





Following
the Company’s  name change, our common stock has traded on the OTC
Bulletin Board since December 27, 2006 under the symbol SKNY.OB. Our common
stock previously traded on the OTC Bulletin Board under the symbol CEII.OB from
June 21, 2006 until December 26, 2006. Previously, our common stock traded on
the OTC Pink Sheets under the symbol CEII.PK. The table set forth below
shows the high and low bid information for the past two years.  These
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. According to
our stock transfer agent records, we had approximately 585 shareholders of our
common stock as of December 31, 2009, and as of such date there were 289,921,081
common shares issued and outstanding





High Bid
            
            
            Low BidFiscal
      2009March
      31, 2009
            
            $
            .12
            
            
            $
            .11June
      30, 2009
            
            $
            .10
            
            
            $
            .10September
      30, 2009
            
            $
            .11
            
            
            $
            .10December
      31, 2009
            
            $
            .08
            
            
            $
            .07Fiscal
      2008March
      31, 2008
            
            $
            0.15
            
            
            $
            0.03June
      30, 2008
            
            $
            0.51
            
            
            $
            0.10September
      30, 2008
            
            $
            0.39
            
            
            $
            0.15December
      31, 2008
            
            $
            0.19
            
            
            $
            0.06





Dividends
and Dividend Policy





There are
no restrictions imposed on us that limit our ability to declare or pay
dividends on our common stock, except as limited by state corporate law. During
the year ended December 31, 2009, no cash or stock dividends  were
 declared  or  paid  and  none  are  expected
to be paid in the foreseeable future. We expect to continue to retain all
earnings generated by our future operations for the development and growth of
our business. The board of directors will determine whether or not to pay
dividends in the future in light of our earnings, financial condition, capital
requirements and other factors.





Transfer
Agent





The
transfer agent for our Common Stock is Interwest Transfer Agency, Salt Lake
City, UT.





26




Securities
authorized for issuance under equity compensation plans




The
following table provides information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation plans as of December 31, 2009.





Plan Category
            
            Number of
              Securities to be
              Issued upon
              Exercise of
              Outstanding
              Options,
      Warrants and
              Rights
              (a)
            
            Weighted Average
              Exercise
              Price of
              Outstanding
              Options
      and warrants
              (b)
            
            Number of
              Securities
              Remaining
              Available for
              Future Issuance
              Under Equity
              Compensation
              Plans Excluding
              Securities
              Reflected in
              Column (a)
              (c)Equity
      Compensation Plans Approved by Stockholders
            
            27,637,500
            
            
            .19
            
            14,850,000Equity
      Compensation Plans Not Approved by Stockholders (1)
            
            24,152,765
            
            
            .11
            
            N/ATotal
            
            51,790,265







(1)
Consists of warrants issued to third parties for services rendered.





Recent
Sales of Unregistered Securities





We did
not issue any securities that were not registered under the Securities Act of
1933 during the fiscal year ended December 31, 2009 or during the current
fiscal year, other than those disclosed in previous SEC filings and as described
below.





In
October 2009, the Company issued an aggregate of 359,382 restricted shares of
common stock to a service provider in partial consideration of amounts due to
such person and in December 2009, the Company issued an aggregate of 175,000
restricted shares of common stock to two service providers in partial
consideration of amounts due to such persons for their agreement to modify their
existing arrangements with the Company.





In 2009,
the Company issued 510,000 restricted shares of common stock to a consultant for
services rendered.  There were 250,000 shares issued in October 2009
and 130,000 shares issued in November and December 2009.





During
the current fiscal year, the Company has issued additional shares of its common
stock and other equity securities as follows. In each of the months of January
2010, February 2010, and March 2010, the Company issued 130,000 restricted
shares of common stock to a consultant for services rendered.





In March
2010, the Company issued 877,193 shares of common stock to an equipment vendor
in consideration for its assignment and transfer to the Company of tangible
property consisting of beverage coolers valued at $50,000. In March 2010, the
Company agreed to issue 250,000 shares of common stock to each of three
individuals in consideration for such persons joining the Company’s advisory
board and issued 100,000 shares of common stock to a financial consultant in
consideration of services rendered in connection with our 2009 private
placement. In addition, in January 2010, the Company issued warrants to purchase
92,857 shares of common stock to an individual in consideration of his agreement
to join our advisory board. Such warrants are exercisable for a period of five
years at an exercise price of $0.07 per share.





The
issuance of the foregoing securities were exempt from registration under the
Securities Act of 1933, as amended, under Section 4(2) thereof as transactions
by an issuer not involving any public offering inasmuch as the Company believes
the acquirers are accredited investors that acquired the securities for
investment purposes and such securities were issued without any form of general
solicitation or general advertising.




Stock
Repurchases




During
fiscal 2009, we did not repurchase any shares of our common stock.





Item
6.   Selected Financial Data





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.




27





Item
7.   Management’s Discussion and Analysis of Financial Condition
and Results of Operations




This management’s discussion and
analysis of financial condition and results of operations contains
forward-looking statements that involve risks and uncertainties. Please see
“Item 1—Business—Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these statements. You
should read the following discussion in conjunction with our audited
consolidated financial statements and the notes to our audited consolidated
financial statements included elsewhere in this report. Our actual results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including but not limited to those listed under “Item
1A—Risk Factors” and included in other portions of this report.





Overview





Nature
of Operations





We were
originally incorporated in the State of Utah on June 20, 1984 as Parvin Energy,
Inc. Our name was later changed to Sahara Gold Corporation and on July 26, 1985
we changed our corporate domicile to the State of Nevada and on January 24, 1994
we changed our name to Inland Pacific Resources, Inc. On December 18, 2001, we
entered into an agreement and plan of reorganization with Creative Enterprises,
Inc. and changed our name to Creative Enterprises International, Inc. and on
November 15, 2006, a majority of our common stockholders provided written
consent to change the name of the company to Skinny Nutritional Corp. to more
accurately describe our evolving operations. This change became effective
December 27, 2006. See “Our Products and Strategy” below. This discussion
relates solely to the operations of Skinny Nutritional Corp.





28




Since our
formation and prior to 2006, our operations were devoted primarily to startup
and development activities, including obtaining start-up capital; developing our
corporate hierarchy, including establishing a business plan; and identifying and
contacting suppliers and distributors of functional beverages and dietary
supplements. Thereafter, a majority of our resources have been devoted to
product development, marketing and sales activities regarding our line of Skinny
Water enhanced beverages, including the procurement of a number of purchase
orders from distributors and securing retailer authorizations.





Our
Current Products





We
operate our business in the rapidly evolving beverage industries and are
currently focused on developing, distributing and marketing nutritionally
enhanced beverages. Enhanced beverages have been leading the growth of beverage
consumption in the United States. Through the year ended December 31, 2009, we
have operated our business in the rapidly evolving functional beverage industry,
principally through marketing and distributing our “Skinny Water” line of
enhanced waters.





The Skinny Water® product line includes
six flavors (Acai Grape Blueberry, Raspberry Pomegranate, Peach Mango Mandarin,
Lemonade Passionfruit, Goji Fruit Punch and Orange Cranberry Tangerine). We plan
to launch Skinny Water Sport Drinks in the 2nd quarter
of 2010 and are developing  new product extensions with zero calories,
sugar and sodium and with no preservatives.





Skinny
Water is formulated with a proprietary blend of electrolytes, vitamins, and
antioxidants. To market this product, we had relied on the licenses from Peace
Mountain and Interhealth. As previously reported, in July 2009, we completed the
purchase of certain trademarks and other intellectual property assets from Peace
Mountain, including the trademark “Skinny Water”.  Skinny Water®
contains no calories or sugar, and has no preservatives or artificial
colors.  Skinny Water’s Raspberry Pomegranate flavor features the all
natural, clinically tested ingredient, Hydroxycitric Acid (“Super CitriMax”)
plus a combination of calcium and potassium. Super CitriMax has been shown to
suppress appetite without stimulating the nervous system when used in
conjunction with diet and exercise. Skinny Water also includes ChromeMate® which
is a patented form of biologically active niacin-bound chromium called chromium
nicotinate or polynicotinate that we also obtain from Interhealth.





The
current business strategy is to develop and maintain current national
distribution relationship with Canada Dry-affiliated distributors and Target
Corporation, focus on establishing a market for the Skinny beverages in the
United States and generate sales and brand awareness through sampling, street
teams and retail promotions and advertisements as well as building a national
sales and distribution network to take the company’s products into retail and
direct store delivery (DSD) distribution channels.  In fiscal 2009, we
increased our network of distributors to 56 distributors in 25
states.





We will
principally generate revenues, income and cash by selling and distributing
finished products in the beverage, health and nutrition industries. We will sell
these products through national retailers and local or regional distributors. We
have been focused on, and will continue to increase our existing product lines
and further develop our markets. We have established relationships with national
retailers, including Target, Stop & Shop, Giant, ACME, Harris Tweeter, Shop
Rite, and select Walgreens, select Costcos and 7 Elevens for the distribution of
Skinny Water. In addition to these chains, the company believes that its
products are available in numerous independent stores throughout the US. We
expect to continue our efforts to distribute Skinny Water through the
distributors and retailers. However, these distributors and retailers were not
bound by significant minimum purchase commitments and we do not expect that this
will change in the near future. Accordingly, we must rely on recurring purchase
orders for product sales and we cannot determine the frequency or amount of
orders any retailer or distributor may make.





Our
primary operating expenses include the following: direct operating expenses,
such as transportation, warehousing and storage, overhead, fees and marketing
costs. We have and will continue to incur significant marketing expenditures to
support our brands including advertising costs, sales expense including payroll,
point of sale, slotting fees, sponsorship fees and  promotional
events. We have focused on developing brand awareness through sampling both in
stores and at events. Retailers and distributors may receive rebates,
promotions, point of sale materials and merchandise displays. We seek to use
in-store promotions and in-store placement of point-of-sale materials and racks,
price promotions, sponsorship and product endorsements. The intent of these
marketing expenditures is to enhance distribution and availability of our
products as well as awareness and increase consumer preference for our brand,
greater distribution and availability, awareness and promote long term
growth.





29




Acquisition of Trademarks





The
Company had obtained the exclusive worldwide rights pursuant to a license
agreement with Peace Mountain to bottle and distribute a dietary supplement
called Skinny Water®.   On July 7, 2009, the closing of the
previously announced Asset Purchase Agreement with Peace Mountain occurred and
we acquired from Peace Mountain certain trademarks and other intellectual
property assets, including proprietary trade secrets and domain
names.  The acquired marks include the trademarks “Skinny Water®”,
“Skinny Shake” TM, “Skinny Tea®”, “Skinny BarTM”, “Skinny SmoothieTM’’, and “Skinny
JavaTM”. In consideration of the purchase of such assets, we agreed to pay Peace
Mountain $750,000 in cash payable as follows: (i) $375,000 payable up front and
(ii) $375,000, less an amount equal to the royalties paid by the Company during
the first quarter of 2009 in the amount of $37,440, payable in four
quarterly installments commencing May 1, 2010. In connection with the
acquisition of these assets, we and Peace Mountain also agreed to settle in all
respects a dispute between the parties that was the subject of a pending
arbitration proceeding. Pursuant to the settlement agreement, the Company and
Peace Mountain agreed to the dismissal with prejudice of the pending arbitration
proceeding and to a mutual release of claims. In connection with the foregoing,
the parties also entered into a Trademark Assignment Agreement and Consulting
Agreement. Effective with the closing, the transactions contemplated by these
additional agreements were also consummated. Under the Consulting Agreement,
which is effective as of June 1, 2009, entered into between the Company and Mr.
John David Alden, the principal of Peace Mountain, the Company will pay Mr.
Alden a consulting fee of $100,000 per annum for a two year period. Under this
agreement, Mr. Alden will provide the Company with professional advice
concerning product research, development, formulation, design and manufacturing
of beverages and related packaging. Further, the Consulting Agreement provides
that the Company issue to Mr. Alden warrants to purchase an aggregate of
3,000,000 shares of Common Stock, exercisable for a period of five years at a
price of $0.05 per share.





30




Planned
Products





We intend
to expand our product line to introduce the following products at such times as
management believes that market conditions are appropriate. Products under
development or consideration include new Skinny Water flavors, Skinny Water
Sport drinks, Teas, Shakes, Smoothies and Coffees.





Management
Changes





On July
2, 2009, the Company received notice from Mr. Michael Reis, the Company’s
interim chief operating officer, that he has resigned from such position
effective immediately. Mr. Reis had also previously served as member of the
Company’s board of directors until the Company’s annual meeting of stockholders
held on July 2, 2009. Subsequent to his departure, in October 2009, we agreed to
amend Mr. Reis’s existing stock options so that they remain exercisable for the
duration of their term. At the time of his departure, Mr. Reis held options to
purchase 950,000 options.





Advisory
Board





On March 20, 2008, the Company
established an advisory board to provide advice on matters relating to the
Company’s products. The Company initially appointed the following individuals to
its advisory board: Pat Croce, Ron Wilson and Michael Zuckerman. In December
2008, we appointed Mr. Wilson as our Chief Executive Officer and President. As
described in greater detail below, the Company also entered into a consulting
agreement with Mr. Croce, pursuant to which the Company agreed to issue warrants
to purchase 3,000,000 shares of common stock at $.05 per share consideration of
his agreement to serve on the Company’s Advisory Board and for providing the
marketing services for the Company’s products. In additional consideration for
his agreement to provide endorsement and marketing services, the Company agreed
to pay a royalty with respect to the sale of its products that he endorses for
the duration of his endorsement services. The Company issued each of the other
initial members of its advisory board warrants to purchase 1,500,000 shares of
Common Stock, exercisable for a period of five years at a price of $0.05.
Subsequently, in May 2009, Mr. Croce agreed to waive future royalties under the
endorsement agreement and in consideration thereof, the Company granted him
warrants to purchase 2,500,000 shares of common stock exercisable for a period
of five years at a price of $0.05. In fiscal 2010, the Company expanded the
advisory board and appointed Messrs. Niki Arakelian, Ruben Azrak, Barry
Josephson and John Kilduff to its advisory board. In consideration for their
agreement to serve on our advisory board, the Company granted Mr. Arakelian
warrants to purchase 100,000 shares of common stock and agreed to issue each of
the other new appointees 250,000 restricted shares of common stock. The warrants
granted to Mr. Arakelian are exercisable for a period of five years at an
exercise price of $0.06 per share.





Going
Concern and Management Plans





To date,
we have needed to rely upon selling equity and debt securities in private
placements to generate cash to implement our plan of operations. We have an
immediate need for cash to fund our working capital requirements and business
model objectives and we intend to either undertake private placements of our
securities, either as a self-offering or with the assistance of registered
broker-dealers, or negotiate a private sale of our securities to one or more
institutional investors. However, we currently have no firm agreements with any
third-parties for such transactions and no assurances can be given that we will
be successful in raising sufficient capital from any proposed
financings.




At
December 31, 2009, our cash and cash equivalents was approximately $191,000. We
have been substantially reliant on capital raised from private placements of our
securities to fund our operations. During the 2009 fiscal year, we raised an
aggregate amount of $4,900,203 from the sale of securities to accredited
investors in private transactions pursuant to Rule 506 of Regulation D
under the Securities Act of 1933, as amended. See the discussion below under the
caption “Liquidity and Capital Resources” for additional information regarding
these transactions.





Based on
our current levels of expenditures and our business plan, we believe that our
existing cash and cash equivalents (including the proceeds received from our
recent private placement), will only be sufficient to fund our anticipated
levels of operations for a period of less than twelve months and that without
raising additional capital, the Company will be limited in it’s projected
growth. This will depend, however, on our ability to execute on our 2010
operating plan and to manage our costs in light of developing economic
conditions and the performance of our business. Accordingly, generating sales in
that time period is important to support our business. However, we cannot
guarantee that we will generate such growth. If we do not generate sufficient
cash flow to support our operations during that time frame, we will need to
raise additional capital and may need to do so sooner than currently
anticipated. Our independent auditors have included a “going concern”
explanatory paragraph in their report to our financial statements for the year
ended December 31, 2009, citing recurring losses and negative cash flows from
operations. We cannot assure you that any financing can be obtained or, if
obtained, that it will be on reasonable terms.





If we raise additional funds by
selling shares of common stock or convertible securities, the ownership of our
existing shareholders will be diluted. Further, if additional funds are raised
though the issuance of equity or debt securities, such additional securities may
have powers, designations, preferences or rights senior to our currently
outstanding securities. Further, if expenditures required to achieve our plans
are greater than projected or if revenues are less than, or are generated more
slowly than, projected, we will need to raise a greater amount of funds than
currently expected. Without realization of additional capital, it would be
unlikely for us to continue as a going concern.




31





Critical
Accounting Policies








Basis
of Reporting





The
      Company had one wholly owned subsidiary, Creative Enterprises,
      Inc.  Creative Enterprises, Inc. owned Creative Partners
      International, LLC. Creative Partners LLC was dissolved in fiscal 2009 and
      Creative Enterprises, Inc. was inactive during 2009, accordingly, for 2009
      they are not included in the financial
      statements.  The  Company’s financial statements for
      the years ended December 31, 2008 and 2007  included its
      wholly-owned subsidiary Creative Enterprises, Inc. and its wholly-owned
      subsidiary Creative Partners International, LLC. There was no financial
      activity in the wholly owned subsidiary, Creative Enterprises, Inc. and
      its wholly-owned subsidiary, Creative Partners International, LLC, for the
      year ended December 31, 2008 and 2007.  All intercompany
      accounts and transactions, if any, were eliminated in the financial
      statements for the years ended December 31, 2008 and
  2007.





Cash and Cash
Equivalents





For
      purposes of reporting the statement of cash flows, the Company includes
      all cash accounts, which are not subject to withdrawal restrictions or
      penalties, and all highly liquid debt instruments purchased with a
      maturity of three months or less as cash and cash
      equivalents.  The carrying amount of financial instruments
      included in cash and cash equivalents approximates fair value because of
      the short maturities for the instruments
held.





Property
      and Equipment





Property and equipment are
      recorded at cost and depreciated over the estimated useful lives of the
      related assets, which range from five to seven
      years.  Depreciation is computed on the straight line method for
      financial reporting and income tax purposes. Repair and maintenance costs are
      expensed as they are incurred.Accounts
      Receivable





Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances.  Allowances have been made in the
      financial statements for any accounts management believes to be
      uncollectible.  The allowance for doubtful accounts was $219,675
      and $21,000 at December 31, 2009 and 2008, respectively.  The
      Company factors all of its trade receivables on a full recourse factoring
      arrangement.  The effective cost of the factor’s service is 30%
      of accounts receivable purchased by the factor.  The cost of
      factor collections was approximately $57,000, $41,000 and $0 for the years
      ended December 31, 2009, 2008 and 2007,
      respectively.  Factor costs are included in interest
      expense.




Inventories





Inventories
      are stated at the lower of cost to purchase and/or manufacture the
      inventory or the current estimated market value of the
      inventory.  We regularly review our inventory quantities on hand
      and record a provision for excess and obsolete inventory based primarily
      on our estimated forecast of product demand, production availability and
      /or our ability to sell the product(s) concerned.  Demand for
      our products can fluctuate significantly.  Factors that could
      affect demand for our products include unanticipated changes in consumer
      preferences, general market and economic conditions or other factors that
      may result in cancellations of advance orders or reductions in the rate of
      reorders placed by customers and/or continued weakening of economic
      conditions.  Additionally, management’s estimates of future
      product demand may be inaccurate, which could result in an understated or
      overstated provision required for excess and obsolete inventory. As
      of December 31, 2009 and 2008, the reserve for obsolescence was
      approximately $40,000 and $30,000,
  respectively.





Advertising
costs





Advertising costs are expensed as
incurred. Advertising expense totaled $276,651, $320,078 and $101,103 for the
years ended December 31, 2009, 2008 and 2007 respectively.




Market
development funds and cooperative advertising costs, rebate promotion costs and
slotting fees





Market
development funds and cooperative advertising costs, rebate promotion costs, new
store opening fees and slotting fees are offset against gross sales in
accordance with Financial Accounting Standards Board Accounting Standards
Codification (ASC) 605-50




32





Shipping
and handling costs





Costs for
shipping and handling incurred by the Company for third partyshippers are
included in cost of sales. These expenses for the years ended December 31, 2009,
2008, and 2007, were $260,403, $137,156, and $41,522, respectively.





Trademarks





The
trademarks are carried at cost with an indefinite life.  The
trademarks are tested for impairment annually as of December 31 or whenever
events or changes in circumstances indicate that the carrying amount may no
longer be recoverable.




33




Loss
      Per Share





Basic
      net loss per share is computed by dividing net loss available for common
      stock by the weighted average number of common shares outstanding during
      the period.





Stock
      Based Compensation





The
      Company measures compensation cost to employees from its equity incentive
      plan by measuring the cost of employee services received in exchange for
      an award of equity instruments based on the grant date fair value of the
      award.  Equity compensation issued to employees is expensed over
      the requisite service period (usually the vesting period).  The
      Company uses the Black-Scholes-Merton option pricing formula to estimate
      the fair value of the stock options at the date of grant.  The
      Black-Scholes-Merton option pricing formula was developed for use in
      estimating the fair value of traded options that have no vesting
      restrictions and are fully transferable.  Our employee stock
      options, however, have characteristics significantly different from those
      of traded options.  For example, employee stock options are
      generally subject to vesting restrictions and are generally not
      transferable.  In addition, option valuation models require the
      input of highly subjective assumptions, including the expected stock price
      volatility, the expected life of an option and the number of awards
      ultimately expected to vest.  Changes in subjective input
      assumptions can materially affect the fair value estimates of an
      option.  Furthermore, the estimated fair value of an option does
      not necessarily represent the value that will ultimately be realized by an
      employee.  We use historical data to estimate the expected price
      volatility, and the expected forfeiture rate.  We use the
      simplified method to estimate the expected option life.  The
      risk-free rate is based on the U.S.  Treasury yield curve in
      effect at the time of grant for the estimated life of the
      option.  If actual results are not consistent with our
      assumptions and judgments used in estimating the key assumptions, we may
      be required to increase or decrease compensation expense or income tax
      expense, which could be material to our results of
    operations.





Use
      of Estimates in the Preparation of Financial
  Statements





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.





Revenue
      Recognition





The
      Company sells products through multiple distribution channels including
      resellers and distributors. Revenue is recognized when the product is
      shipped to our retailers and distributors and is recognized net of
      discounts. At present, there are no returns privileges with our products.
      Management believes that adequate provision has been made for cash
      discounts, returns and spoilage based on our historical
      experience.The
      Company recognizes revenues from product sales or services provided when
      the following revenue recognition criteria are met: persuasive evidence of
      an arrangement exists, delivery has occurred or services have been
      rendered, the selling price is fixed or determinable and collectability is
      reasonably assured.  FASB ASC Topic 605, “Revenue Recognition”,
      provides guidance on the application of generally accepted accounting
      principles to selected revenue recognition issues.  The Company
      has concluded that its revenue recognition policy is appropriate and in
      accordance with FASB ASC Topic 605.





34




Fair
Value of Financial instruments approximates carrying amount




The Company’s financial
instruments are cash equivalents, accounts receivable, accounts payable
revolving line of credit and notes payable.  The recorded values of
cash accounts receivable, accounts payable approximate their fair values based
on their short-term nature.  The recorded values of the revolving line
of credit an notes payable approximate their fair values, as interest
approximates market rates.




Management Discussion and Analysis:





Since the
middle of 2006, the company has engaged in significant marketing and sales
activities related to the business plan of selling its enhanced “Skinny
Water”.  For the 2009 fiscal year, the company generated revenues
of  $4,146,066, (net of billbacks of $687,507 and slotting fees of
$453,022) and incurred a net loss of $7,305,831, of which $3,104,316 was
non-cash related.  For our 2008 fiscal year, we generated revenues of 
$2,179,055, after billbacks of $112,717 and incurred a net loss of
$6,232,123, of which $3,080,179 was non-cash related. The net loss includes
general and administrative expenses related to the costs of start-up operations
and a significant amount of marketing and sales expenses related to establishing
our brand in the market through slotting fees, increase payroll for regional
sales managers, in-store advertising and sampling events.  A
significant amount of marketing expenses was related to establishing the Skinny
Water® brand in current markets and opening up new markets and
distribution.   In addition, the net loss includes a significant
amount of public company expenses incurred as a reporting company. Since
the date of the merger and reorganization, we have raised capital through
private sales of common equity and debt securities.





Results of
Operations: Year Ended December 31,
2009 compared to Year
Ended December 31,
2008





For the
twelve months ended December 31, 2009, our revenue was $4,146,066, (net of
billbacks of $687,507 and slotting fees of $453,022) as compared to
revenues of $2,179,055, after billbacks of $112,717 for the same period last
year. This increase in revenues for the twelve months ended December 31, 2009 is
due primarily to the introduction of the six reformulated Skinny flavors and the
increased volume of product shipments resulting from the development of the
Company’s relationship with Target Corp., the overall availability of Skinny
Water in national and independent retail stores and new distribution
relationships established by the Company during the year, and growth from Direct
Store Delivery (“DSD”) to 55 at the end of 2009.  Direct sales to
retailers were $794,152 as compared to $304,809 for the prior year period. Sales
to our “DSD” network increased to $3,351,914 in 2009 compared to $1,589,982
during 2008. Cost of goods sold was $3,515,156 for the year ended December 31,
2009 as compared to $1,873,477 incurred during the same period last year,
directly related to the increase in revenues  Gross profit increased
1.2% points over 2008 due to costs cutting efforts in raw material purchases and
co-packing fees. Gross profit was minized by the reclassification of slotting
fees against gross revenues. Marketing, sales, and advertising costs were
$2,652,063 for the year ended December 31, 2009 as compared to $2,083,646 for
the same period last year. These increases are attributable to product
development, slotting fees, in store advertising along with additional hiring of
sales and marketing employees.





General
and administrative costs (which include salaries, rent, office overhead, and
public company expenses) were $5,212,487 for the twelve months ended December
31, 2009 as compared to $3,421,468 over the same period in 2008. This increase
of 52% is primarily due to non-cash expenses related to grants of options and
warrants.





Interest
expense was $72,191 for the year ended December 31, 2009 as compared to $67,042
for the same period last year.





Net loss
for the twelve month period was $7,305,831, inclusive of  a non-cash
loss of $3,104,316, mostly attributable to expense for employee options and
warrant and compensation expense in addition to stock issued for services, as
compared to $6,232,123, inclusive of non- cash loss of 3,080,179, for the same
period last year.





Results of
Operations: Year Ended December 31,
2008 compared to Year
Ended December 31,
2007





For the
twelve months ended December 31, 2008, our revenues were $2,179,055 as compared
to $752,825 for the same period of the previous year. This increase in revenues
for the twelve months ended December 31, 2008 is due primarily to the
introduction of the five reformulated Skinny flavors and the increased volume of
product shipment resulting from the development of the Company’s relationship
with Target Corp., new distribution relationships established by the Company
during the year, and growth from DSD’s to 15 at the end of
2008.  Direct sales to retailers were $304,809 as compared to $705,742
for the prior year period. Sales to our DSD network increased to $1,589,982 in
2008 compared to $37,195 during 2007. Cost of goods sold was $1,873,477 for the
year ended December 31, 2008 as compared to $532,812 incurred during the same
period last year. The decrease in gross profit percentage was due mainly to the
cost associated with formulating five flavors of Skinny Water for introduction
into the market.  Marketing and advertising costs were $2,083,646 for
the year ended December 31, 2008 as compared to $721,442 for the same period
last year. This increase is attributable to product design and increased
advertising expenses along with additional personal to assist our growth in DSD
and market areas.




35




General
and administrative costs (which include salaries, rent, office overhead, and
public company expenses) were $3,421,468 for the twelve months ended December
31, 2008 as compared to $1,715,218 over the same period in 2007. This increase
of 100% is primarily due to costs associated with private placements of stock
along with non-cash expenses related to grants of options and
warrants.





Interest
expense was $67,042 for the year ended December 31, 2008 as compared to $120,514
for the same period last year.





Net loss
for the twelve month period was $6,232,123 as compared to $5,698,643 for the
same period last year.





Liquidity
and Capital Resources





Cash
Flow




Cash and cash equivalents totaled
$190,869 at December 31, 2009, compared to $236,009 at December 31, 2008. The
change in cash and cash equivalents primarily reflects our use of funds during
the year for operations, partially offset by operating losses.





Operating
Activities




Net cash used in operating activities
totaled $4,218,177 for the year ended December 31, 2009 as compared to
$3,330,624 for December 31, 2008. This is primarily attributable to
operating losses of $7,305,831 and to create additional inventory to service our
increased revenue base, partially offset by non-cash expense of
$3,104,316.





Investing
Activities




Net cash used in investing
activities totaled $476,106 in the year ended December 31, 2009 as compared to
$0 for the prior year period.  Cash used in investing activities
primarily represented net purchases of the Skinny Trademark and other fixed
assets




Financing
Activities




Net cash provided by financing
activities totaled $4,649,143 for the year ended December 31, 2009 and
$3,548,689 for the prior year period. Cash provided by financing activities was
primarily due to our sale of our securities in private placements.





Satisfaction
of Cash Requirements and Financing Activities





We have
historically primarily been funded through the issuance of common stock, debt
securities and external borrowings. We believe that net cash on hand as of the
date of this Annual Report is only sufficient to meet our expected cash
needs for working capital and capital expenditures for a period of less than
twelve months and without raising additional capital, the Company will be
limited in its projected growth. Accordingly, we have an immediate need for
additional capital. To raise additional funds, we intend to either undertake
private placements of our securities, either as a self-offering or with the
assistance of registered broker-dealers, or negotiate a private sale of our
securities to one or more institutional investors. We currently have no firm
agreements with any third-parties for additional transactions and no assurances
can be given that we will be successful in raising sufficient capital from any
of these proposed financings. Further, we cannot be assured that any additional
financing will be available or, even if it is available that it will be on terms
acceptable to us. Any inability to obtain required financing on sufficiently
favorable terms could have a material adverse effect on our business, results of
operations and financial condition. If we are unsuccessful in raising additional
capital and increasing revenues from operations, we will need to reduce costs
and operations substantially. Further, if expenditures required to achieve our
plans are greater than projected or if revenues are less than, or are generated
more slowly than, projected, we will need to raise a greater amount of funds
than currently expected. Without realization of additional capital, it would be
unlikely for us to continue as a going concern.





We have
developed operating plans that project profitability based on known assumptions
of units sold, retail and wholesale pricing, cost of goods sold, operating
expenses as well as the investment in advertising and marketing. These operating
plans are adjusted monthly based on actual results for the current period and
projected into the future and include statement of operations, balance sheets
and sources and uses of cash. If we are able to meet our operating targets,
however, we believe that we will be able to satisfy our working capital
requirements. No assurances can be given that our operating plans are accurate
nor can any assurances be provided that we will attain any such targets that we
may develop.





36





2009
Financing Activities





In fiscal 2009, the Company had
conducted a private offering in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated
thereunder pursuant to which it sought to raise an aggregate amount of
$2,100,000 of shares of Series A Preferred Stock. The shares of Series A
Preferred Stock had an initial conversion rate of $0.06 per share, with
customary adjustments for stock splits, stock dividends and similar events. At
the conclusion of this offering, the Company accepted total subscriptions of
$2,035,000 for an aggregate of 20,350 shares of Series A Preferred Stock. The
Company has been using the net proceeds from this offering of approximately
$1,940,000 for working capital, repayment of debt and general corporate
purposes. The Company agreed to pay commissions to registered broker-dealers
that procured investors in this offering and issue such persons warrants to
purchase such number of shares as equals 10% of the total number of shares
actually sold in the Offering to investors procured by them. Such warrants shall
be exercisable at the per share price of $0.07 for a period of five years from
the date of issuance. The securities offered have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. Based on
the representations made in the transaction documents, the Company believes that
the investors are “accredited investors”, as defined in Rule 501(a) promulgated
under the Securities Act.





Following the approval by the Company’s
stockholders of the proposal to increase the Company’s authorized number of
shares of Common Stock, the Company filed a Certificate of Amendment to its
Articles of Incorporation with the State of Nevada on July 6, 2009. In
accordance with the Certificate of Designation, Preferences, Rights and
Limitations of the Series A Preferred Stock, upon the effectiveness of such
filing, all of the 20,350 shares of Series A Preferred Stock subscribed for by
investors were automatically convertible into an aggregate of 33,916,667 shares
of common stock. As of December 31, 2009, holders of 17,885 shares of Series A
Preferred Stock had received 29,808,333 shares of common stock upon conversion
and the holders of the remaining shares of Series A Preferred Stock have not yet
surrendered such shares for cancellation. The issuance of the foregoing
securities were exempt from registration under the Securities Act of 1933, as
amended, under Section 3(a)(9).





Subsequently, in August 2009, the
Company commenced a private offering of shares of common stock in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder (the “August Offering”) pursuant to which it
offered an aggregate amount of 41,666,667 shares of Common Stock
for  $2,500,000. The shares of Common Stock were offered and sold at a
purchase price of $0.06 per share. At the conclusion of the offering in December
2009, the Company had accepted total subscriptions of $1,766,000 for an
aggregate of 29,433,333 shares of Common Stock. Net proceeds from such sales are
approximately $1,680,000. The Company is using the net proceeds from the August
Offering for working capital, repayment of debt and general corporate purposes.
The Company agreed to pay commissions to registered broker-dealers that procured
investors in the Offering and issue such persons warrants to purchase such
number of shares that equals 10% of the total number of shares actually sold in
the Offering to investors procured by them. Such warrants shall be exercisable
at the per share price of $0.07 for a period of five years from the date of
issuance. In the August Offering, the Company paid commissions of $6,500 to
registered broker-dealers and issued warrants to purchase 92,857 to a selling
agent the procured investors in this offering. The shares being offered have not
been registered under the Securities Act or any state securities laws and will
be offered in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act and Regulation D, promulgated thereunder. Such shares
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.




2008
Financing Activities




37





As
previously reported, we commenced a private offering  of its common
stock in December 2007 for up to a maximum of $3,200,000 of shares at an
offering price of $0.04 per share and the Company had received subscriptions of
approximately $3.1 million. In this offering, we received gross proceeds of
$3,163,000 and sold an aggregate of 79,075,000 shares of common stock to
accredited investors. After giving effect to offering expenses and commissions,
the Company received net proceeds of approximately $3,108,000. The Company
agreed to pay commissions to registered broker-dealers that procured investors
in the offering and issue such persons warrants to purchase such number of
shares as equals 10% of the total number of shares actually sold in the offering
to investors procured by them. Agent warrants shall be exercisable at the per
share price of $0.05 for a period of five years from the date of issuance. Based
on the foregoing, agents have earned an aggregate of $55,000 in commissions and
1,362,500 warrants. In connection with the offering, the Company relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, and Rule 506 promulgated thereunder. Based on the representations made in
the transaction documents, the Company believes that the Investors are
“accredited investors”, as such term is defined in Rule 501(a) promulgated under
the Securities Act.




In addition, as previously reported,
commencing in November 2008, we conducted a private offering in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
and Rule 506 promulgated thereunder pursuant to which we sought to raise an
aggregate amount of $1,875,000 of shares of common stock (the “November
Offering”). On February 5, 2009, the Company completed the November
Offering. Total proceeds in the November Offering for common shares issued
in 2009 was $1,199,203, net of offering costs. Total proceeds received in 2009
and 2008 relating to the November Offering was $1,867,690. There were 21,230,418
common shares issued in 2009. The Company used the net proceeds from the
November Offering for working capital, repayment of debt and general corporate
purposes. In connection with the November Offering, the Company’s Chief
Executive Officer, Chief Financial Officer and Chairman agreed not to exercise a
total of 12,000,000 options and 2,000,000 warrants beneficially owned by them
until such time as the Company’s stockholders adopt an amendment to its Articles
of Incorporation to increase the number of the Company’s authorized shares of
common stock. The Company agreed to pay commissions to registered broker-dealers
that procured investors and issue such persons warrants to purchase such number
of shares as equals 10% of the total number of shares actually sold in the
November Offering to investors procured by them. Agent warrants are exercisable
at the per share price of $0.07 for a period of five years from the date of
issuance. We paid total commissions of $20,959 and issued agent warrants to
purchase 349,317 shares of common stock. The securities offered have not been
registered under the Securities Act and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements. Based on the representations made in the transaction documents,
the Company believes that the Investors are “accredited investors”, as such term
is defined in Rule 501(a) promulgated under the Securities Act.  At
the Company’s annual stockholders meeting held in July 2009, the Company’s
stockholders approved the amendment to its Articles of Incorporation to increase
the number of the Company’s authorized shares of common stock and the
non-exercise agreements entered into by our executives
expired.





In
addition to these transactions, the Company sold an aggregate of $175,000 of
shares of its common stock to three individual accredited investors in private
sales and issued these investors a total of 3,541,667 shares of common stock. In
connection with the offering, the Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Based on the representations made in the transaction documents, the Company
believes that the Investors are “accredited investors”, as such term is defined
in Rule 501(a) promulgated under the Securities Act.





38





Debenture
Conversions/Warrant Exercises





During
fiscal 2008, holders of convertible debentures and warrants previously issued by
the Company converted or exercised such securities into shares of common stock
and warrants as follows. In January 2008, the Company issued 725,000 shares of
common stock upon the conversion of an aggregate amount of $72,500 of
outstanding convertible debentures (inclusive of interest).  The
company also issued 300,000 shares of common stock in exchange for a $15,000
dollar note.  On January 25, 2008, the Company issued 900,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $15,000) of
outstanding convertible debentures. The warrants issued upon conversion of these
debentures are exercisable for a period of three years at an exercise price of
$0.50 per share. On March 3, 2008, the Company issued 300,000 shares of common
stock upon the conversion of an aggregate amount of $15,000 of outstanding
convertible debentures. On March 20, 2008, the Company issued 1,125,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $7,500) of
notes. The warrants issued upon conversion of these debentures are exercisable
for a period of three years at an exercise price of $0.50 per share. On April
11, 2008, the Company issued 1,369,375 shares of common stock upon the
conversion of an aggregate amount of $54,775 (inclusive of accrued interest of
$10,455) of outstanding convertible debentures. In addition, in May 2008, the
Company issued 850,000 shares of common stock upon the conversion of an
aggregate amount of $34,000 (inclusive of accrued interest of $2,392) of notes
and interest and also issued 1,696,272 shares of common stock upon the exercise
of common stock purchase warrants pursuant to a cashless exercise provisions
contained in such warrants. Further, on June 2, 2008, the Company issued
1,155,870 shares of common stock in exchange for a note and interest in the
aggregate amount of $161,822 (inclusive of accrued interest of
$51,822).  Also the Company issued 808,414 shares of common stock upon
conversion of an aggregate principal amount of $113,178 of
debentures.  In addition, on June 16, 2008, the Company issued 531,551
shares of common stock upon the conversion of an aggregate amount of $74,417
(inclusive of accrued interest of $18,417) of outstanding convertible debentures
and on June 18, 2008, the Company issued 100,000 shares of common stock upon the
conversion of an aggregate amount of $10,000 of outstanding convertible
debentures. In August 2008, the Company issued 776,828 shares of common stock
upon the conversion of an aggregate amount of $108,756 (inclusive of accrued
interest of $18,756) to the holders of outstanding convertible debentures upon
the conversion of such securities. The Company also issued an aggregate of
111,084 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provisions contained in such warrants
in June 2008 and in August 2008 issued an aggregate of 87,692 shares of common
stock upon the exercise of common stock purchase warrants pursuant to a cashless
exercise provision contained in such warrants. In November 2008, the Company
issued 129,589 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provision contained in such warrants.
In May 2009, the holder of a convertible debenture in the principal amount of
$4,000 agreed to convert such amount, along with $1,550 in interest, into 92,500
shares of common stock at a conversion rate of $.06 a share. These securities
have not been registered under the Securities Act of 1933, as amended, and were
issued in reliance upon the exemption for registration set forth in Section
3(a)(9) thereof.





In September 2009, we issued 737,805
shares of Common Stock upon the exercise of certain common stock purchase
warrants previously issued. The holder of such warrants exercised a total of
1,500,000 warrants on a “cashless exercise” basis.  In October 2009,
we issued 764,912 shares of Common Stock upon the exercise of certain common
stock purchase warrants previously issued. The holder of such warrants exercised
a total of 1,362,500 warrants on a “cashless exercise” basis. The shares of
common stock issued upon exercise of these warrants were not registered under
the Securities Act of 1933, as amended, and were offered and sold in reliance
upon the exemption from registration set forth in Section 3(a)(9)
thereof.





39




Other
Transactions Impacting our Capital Resources





On April
4, 2007, the Company closed on a secure loan arrangement with Valley Green Bank
pursuant to which it received funds in the amount of $340,000. Interest is
charged on the unpaid principal of this loan arrangement until the full amount
of principal has been paid at the rate of 8.25% per annum and is paid on a
monthly basis. The Company was initially obligated to repay this new loan in
full immediately on the bank’s demand, but in no event later than March 20,
2008. Since that date the bank has extended the term of the loan. The balance at
December 31, 2009 was $45,924.  The loan is secured by collateral
consisting of a perfected first priority pledge of certain marketable securities
held by the Company’s Chairman and entities with which he is affiliated. The
Company also agreed to a confession of judgment in favor of the bank in the
event it defaults under the loan agreements. The loan agreements also require
the consent of the bank for certain actions, including incurring additional debt
and incurring certain liens. The maturity of this loan has been extended to
July, 2010 and this obligation has been paid down by an additional $20,000 since
year end. On January 10, 2008 the Company issued two million shares of stock to
the Chairman in consideration for his personal guarantee of the Valley Green
Loan.





On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”) which provided for an initial
borrowing limit of $300,000.  Currently, this arrangement has been
extended through February 2011 and the borrowing limit has been incrementally
increased to extend our line to 85% of outstanding eligible receivables or
$2,000,000.  As of December 31, 2009, we had $321,825 outstanding
through this arrangement. All accounts submitted for purchase must be approved
by UCF. The applicable factoring fee is 0.30% of the face amount of each
purchased account and the purchase price is 85% of the face amount. UCF will
retain the balance as a reserve, which it holds until the customer pays the
factored invoice to UCF. In the event the reserve account is less than the
required reserve amount, we will be obligated to pay UCF the shortfall. In
addition to the factoring fee, we will also be responsible for certain
additional fees upon the occurrence of certain contractually-specified events.
As collateral securing the obligations, we granted UCF a continuing first
priority security interest in all accounts and related inventory and
intangibles. Upon the occurrence of certain contractually-specified events, UCF
may require us to repurchase a purchased account on demand. In connection with
this arrangement, each of our Chairman and Chief Executive Officer agreed to
personally guarantee our obligations to UCF. The agreement will automatically
renew for successive one year terms until terminated. Either party may terminate
the agreement on three month’s prior written notice. We are liable for an early
termination fee in the event we fail to provide them with the required written
notice.





On
January 10, 2008 the Company issued two million shares of stock to its Chairman
in consideration for his personal guarantee of the Valley Green Loan. On March
24, 2008, the Company’s Board of Directors approved the grant of an aggregate of
2,075,000 restricted shares of common stock to each of Mr. Michael Salaman, its
Chairman and Mr. Donald McDonald, its Chief Executive Officer, in consideration
of their agreement to provide a personal guaranty in connection with the
factoring agreement the Company entered into in November 2007.





In
connection with its establishment of an advisory board in March and April 2008
and execution of a consulting agreement with one advisor, the Company agreed to
issue to such persons a total of 7,000,000 shares of common stock purchase
warrants to the advisors. The warrants are exercisable for a period of five
years at a price of $0.05. In addition, the Company also agreed in March 2008 to
issue 1,000,000 additional warrants to an individual consultant not serving on
the advisory board in consideration of consulting services to be provided to the
Company on the same terms as described above. Further, in March and May 2009,
the Company agreed to issue an additional 3,000,000 warrants to an advisory
board member and a consultant, which warrants are exercisable for five years at
a price of $0.08 per share. The issuance of the foregoing warrants was exempt
from registration under the Securities Act of 1933, as amended, under Section
4(2) thereof inasmuch as the securities were issued without any form of general
solicitation or general advertising and the acquirers were either accredited
investors or otherwise provided with access to material information concerning
the Company.





In May
2009, the Company entered into an agreement with Mr. Pasqual W. Croce, Jr. and
Liquid Mojo, LLC (together, “Croce”), a holder of more than 5% of our
outstanding common stock, pursuant to which the parties agreed, subject to the
conditions of this new agreement, to cancel the ongoing royalty obligation
payable to Croce by the Company under the agreement entered into between the
Company and Croce in February 2008. In consideration of the agreement by Croce
to waive future royalties, the Company agreed to issue to Croce warrants to
purchase an aggregate of 2,500,000 shares of Common Stock, exercisable for a
period of five years at a price of $0.05 per share. Further, on August 14, 2009,
the Company approved a grant of 2,000,000 warrants to Mr. Croce in consideration
for his services on our advisory board and for additional consulting services
rendered. These warrants are exercisable for a period of five years at a per
share exercise price equal of $0.06.





On July
6, 2009, the Company filed a Certificate of Amendment to its Articles of
Incorporation in the State of Nevada to increase the number of its authorized
shares of common stock, $0.001 par value, to 500,000,000 shares.  On
July 2, 2009, at the Company’s 2009 Annual Meeting of Stockholders, the
Company’s stockholders had approved the amendment to the Company’s Articles of
Incorporation to increase the number of authorized shares of common
stock.





Product Research and
Development





We intend
to expand our line of Skinny products, as described in the “Overview” section of
this Management’s Discussion and Analysis, at such time as management believes
that market conditions are appropriate. Management will base this determination
on the rate of market acceptance of the products we currently offer. We do not
engage in material product research and development activities. New products are
formulated based on our license arrangements with our suppliers and
licensors.





40





Marketing
and Sales Strategy





Our
primary marketing objective is to cost-effectively promote our brand and to
build sales of our products through our retailer accounts and distributor
relationships. We will use a combination of sampling, print, online advertising,
public relations and promotional/event strategies to accomplish this objective.
Management believes that proper in-store merchandising is a key element to
providing maximum exposure and to increase sales.





Through
our arrangement with Target Corporation we continue to sell Skinny Water through
approximately 1,700 stores nationally, as well as through retailers that include
convenience stores, supermarkets, drug stores and club stores. As described
below, we are also developing a National Direct Store Delivery (DSD) network of
distributors in local markets. To date, we have arrangements with approximately
56 DSDs in 26 states in the U.S. Currently we have been authorized to sell
Skinny products in ACME Markets, Stop & Shop, Costcos, Giant of Carlisle,
Shop Rite stores and select CVS and Walgreen stores among others.
 Management believes that Skinny Waters are now available in over 5,000
stores.





In
connection with our marketing campaign, we have expended $2,652,063 for the year
ended December 31, 2009 compared to $2,083,646 for the year ended December 31,
2008 to fund various sales, advertising and marketing programs to introduce our
products to numerous distribution channels and retail outlets in the U.S. These
programs have included the development of a team of experienced beverage
salesman in New England, Philadelphia, New York City, Upstate New York,
Balt.-DC, Phoenix, Los Angeles and San Francisco markets, designing and printing
of point of sale material, the leasing and branding of mobile trucks, purchasing
print ads, allocation of free samples of Skinny Water and investing in initial
store placements. We expect to incur significant marketing and advertising
expenditures during 2010 to bring our new line of products to market. We believe
that marketing and advertising are critical to our success, and to our ability
to enhance our distribution network for our products.





Distribution
Strategy





The
Company’s distribution strategy is to build out a national direct store delivery
(DSD) network of local distributors, creating a national distribution system to
sell our products. Distributors include non-alcoholic distributors, beer
wholesalers and energy beverage distributors. To date, we have arrangements with
approximately 56 DSDs in 26 states in the U.S. and 2 distributors outside the
U.S.  We work with the DSD to delivery our products, merchandise them and
assist us to obtain corporate authorization from chain stores in a particular
market. It often takes more than one DSD to deliver to all the stores within a
chain. The company must coordinate promotions and advertising between the chain
stores and the DSD. The company also negotiates any slotting fees that are
required for product placement.





We also
distribute our products directly to select national retail accounts based on
purchase order relationships. DSDs will distribute to grocery, convenience, club
stores, health clubs, retail drug, and health food establishments. We will
contract with independent trucking companies to transport the product from
contract packers to distributors. Distributors will then sell and deliver our
products directly to retail outlets, and such distributors or sub-distributors
stock the retailers’ shelves with the products. Distributors are responsible for
merchandising the product at store level. We are responsible for managing our
network of distributors and the hiring of sales managers, who are responsible
for their respective specific channel of sales distribution.





As
described in greater detail above in Item 1. of this Form 10-K under the caption
“Distribution, Sales and
Marketing – Distribution Strategy”, in July 2009, we entered into a
distribution agreement with Canada Dry Bottling Company of New York under which
we appointed them as our exclusive distributor of Skinny Water and other
products in the New York City metropolitan area. Distributor will use reasonable
efforts to promote the sale of the products in the territory; however, no
performance targets are mandated by the distribution agreement. Under the
Distribution Agreement, we agreed to pay specified amounts to the distributor as
an “invasion fee” and agreed to cover a minimum amount for slotting fees during
the initial term of the agreement. In the event we elect not to renew the
distribution agreement at the end of the initial term or any renewal term and
the distributor is not otherwise in breach of the agreement with the time to
cure having expired, we shall pay them a termination penalty based on a multiple
of its gross profit per case, as calculated pursuant to the terms of the
agreement.





Subsequently,
we expanded our distribution arrangements with Canada Dry-affiliated
distributors and now have agreements with four Canada Dry affiliated
distributors that service the mid-Atlantic region and the New York City
metropolitan area. In addition, in 2009 we also augmented our West Coast
distribution network by entering into distribution agreements with regional
distributors covering portions of southern California and Arizona. Under many of
our distribution agreements, we granted exclusivity within the
contractually-defined territory and agreed to be responsible for the payment of
slotting fees that may be required by retailers. Further, under certain of these
agreements, we also will pay the distributor a termination penalty in the event
we elect not to renew the agreement and the distributor is not in breach of its
obligations.





In
addition, we have and may continue to seek to augment our distribution network
by establishing relationships with larger distributors in markets that are
already served. To the extent that we need to terminate an agreement with an
existing distributor in order to accomplish this, we may be required to pay a
termination fee unless we have grounds to terminate a distributor for cause.
Although our payment of such fees have not been material to date, such amounts
may increase in subsequent quarters.




41





Purchase or sale of plant or
significant equipment





As of the
date of this Report, we do not have any plans to purchase plant or significant
equipment.





Expected changes in the number of
employees





As of
December 31, 2009 we have 21 employees including, our executive
officers.





Off-Balance
Sheet Arrangements





We have
not created, and are not party to, any special-purpose or off-balance sheet
entities for the purpose of raising capital, incurring debt or operating parts
of our business that are not consolidated into our financial statements and do
not have any arrangements or relationships with entities that are not
consolidated into our financial statements that are reasonably likely to
materially affect our liquidity or the availability of our capital
resources.





We have
entered into various agreements by which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification
provisions are included in contracts arising in the normal course of business
under which we customarily agree to hold the indemnified party harmless against
losses arising from a breach of the contract terms. Payments by us under such
indemnification clauses are generally conditioned on the other party making a
claim. Such claims are generally subject to challenge by us and to dispute
resolution procedures specified in the particular contract. Further, our
obligations under these arrangements may be limited in terms of time and/or
amount and, in some instances, we may have recourse against third parties for
certain payments made by us. It is not possible to predict the maximum potential
amount of future payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of each particular
agreement. Historically, we have not made any payments under these agreements
that have been material individually or in the aggregate. As of December 31,
2009, we were not aware of any obligations under such indemnification agreements
that would require material payments.





42




Recent
Accounting Pronouncements





In June
2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally
Accepted Accounting Principles,” as the single source of authoritative
nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP,
but is intended to simplify user access to all authoritative U.S. GAAP by
providing all authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the FASB Codification will be
considered non-authoritative. These provisions of FASB ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009 and,
accordingly, are effective for the Company for the current fiscal reporting
period. The adoption of this pronouncement did not have an impact on the
Company’s financial condition or results of operations, but will impact the
Company’s financial reporting process by eliminating all references to
pre-codification standards. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.





In June
2009, the FASB issued ASC Topic 860-20 "Sale of Financial
Assets".  The new standard eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and
an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets.  ASC Topic 860-20 "Sale of Financial
Assets" is effective for fiscal years beginning after November 15,
2009.  The adoption of the provisions of ASC Topic 860-20 "Sale of
Financial Assets" is not expected to have a material effect on the Company’s
financial position, results of operations, or cash flow. This standard has not
yet been integrated into the Accounting Standard Codification.





In May
2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent
Events,” which establishes general standards of accounting for, and disclosures
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This pronouncement is
effective for interim or fiscal periods ending after June 15, 2009. Accordingly,
the Company adopted these provisions of FASB ASC Topic 855 on April 1, 2009. The
adoption of this pronouncement did not have a material impact on the Company’s
consolidated financial position, results of operations or cash flows. However,
the provisions of FASB ASC Topic 855 resulted in additional disclosures with
respect to subsequent events. See Note 20 Subsequent Events, for this additional
disclosure.





In April
2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value
Measurements and Disclosures”, which is intended to provide additional
application guidance and enhanced disclosures regarding fair value measurements
and impairments of securities and additional guidelines for estimating fair
value in accordance with additional guidance related to the disclosure of
impairment losses on securities and the accounting for impairment losses on debt
securities. This guidance is effective for fiscal years and interim periods
ended after June 15, 2009. The adoption of this pronouncement did not have a
material effect on the Company’s financial position, results of operations, or
cash flows.





In March
2008, the FASB issued guidance now codified as FASB ASC Topic 815, “Derivatives
and Hedging”, which requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. This pronouncement is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of this pronouncement did not
have a material effect on the Company’s financial position, results of
operations, or cash flows.





In
December 2007, the FASB issued guidance now codified as FASB ASC Topic 805,
“Business Combinations”, which significantly changes the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, research and development assets
and restructuring costs. In addition, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income taxes. This pronouncement is effective
for fiscal years beginning after December 15, 2008. The adoption of these
provisions did not have a material effect on the Company’s financial position,
results of operations, or cash flows.





In
December 2007, the FASB issued guidance now codified as FASB ASC Topic 805,
“Business Combinations”, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This pronouncement is effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008 and shall be
applied prospectively as of the beginning of the fiscal year in which the
guidance is initially adopted. The adoption of the provisions in this
pronouncement would have an impact on the presentation and disclosure of the
noncontrolling interest of any non wholly-owned businesses acquired in the
future.





43




Item 7a. Quantitative and Qualitative Disclosure about
Market Risk.





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.





Item
8.  Financial Statements and Supplementary Data.




Our
audited financial statements for the fiscal year ended December 31, 2009 follows
Item 15 of this Annual Report on Form 10-K.




Item
9:  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.




On
October 22, 2009, we  dismissed Connolly, Grady & Cha, P.C.
(“CGC”) as the
our independent registered public accounting firm and engaged Marcum, LLP
(“Marcum”) as
its new independent registered public accounting firm for the fiscal year ending
December 31, 2009. The Company’s decision to change its independent registered
public accounting firm was the result of a competitive bidding process. The
decision to dismiss CGC and engage Marcum, on October 23, 2009,  was
made and approved by the Board of Directors of the Company. As the Company’s
Board of Directors currently consists of four persons, it has not formally
constituted an audit committee. Accordingly, the Board of Directors acts as a
whole with respect to matters which might otherwise be acted upon by an audit
committee.




The
reports of CGC on the financial statements of the Company for each of the past
two fiscal years, contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting principle
other than (i) to contain an explanatory paragraph as to the Company’s ability
to continue as a going concern and (ii) the report of CGC on the Company’s
financial statements for the year ended December 31, 2007, dated April 14, 2008,
included an explanatory paragraph stating that the Company did not value its
stock options and warrants as described by generally accepted accounting
principles.  Subsequently, as reported on a Current Report on Form 8-K
filed on March 31, 2009, the Company determined that a restatement of its annual
report on Form 10-KSB for the year ended December 31, 2007 was necessary in
order to properly report, among other matters, the stock compensation expense
that the Company incurred in fiscal 2007 relating to employee stock options and
other warrants. On April 1, 2009, the Company filed an amendment to its annual
report on Form 10-KSB for the year ended December 31, 2007 to restate its
consolidated financial statements and related financial information to address
this issue.




During
the Company’s two most recent fiscal years and through October 22, 2009, there
have been no disagreements with CGC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of CGC would have caused them
to make reference thereto in their reports on the financial statements of the
Company for such years. During the Company’s two most recent fiscal years and
through October 22, 2009, there have been no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S-K).




Prior to
the engagement of Marcum, neither the Company nor someone on behalf of the
Company had consulted with Marcum during the Company’s two most recent fiscal
years and through the date of this report in any matter regarding:
(A) either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company’s financial statements, and neither was a
written report provided to the Company nor was oral advice provided that Marcum
concluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing or financial reporting issue, or (B) the
subject of either a disagreement or a reportable event defined in Item
304(a)(1)(iv) and (v) of Regulation S-K.




The
Company requested that CGC furnish it with a letter addressed to the Securities
and Exchange Commission stating whether or not it agrees with the statements
made above. A copy of such letter, dated October 30, 2009, was filed as
Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on
November 2, 2009.





Item
9A(T). Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including the
chief executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). In
designing and evaluating the disclosure controls and procedures, management
recognized 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 the
cost-benefit relationship of possible controls and procedures.
 
 Based on
that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures, for the reasons discussed
below, were not effective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is accurately recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms, 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.




44





Management’s Report on Internal
Control over Financial Reporting




The
Company’s management is responsible for establishing and maintaining adequate
internal controls over financial reporting and disclosure controls and
procedures. Internal controls over financial reporting are designed to provide
reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with generally accepted
accounting principles.
  A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
  Management
has conducted an evaluation of the Company’s internal control over financial
reporting using the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission as a basis to
evaluate effectiveness and determined that due to the material weaknesses
indentified below, the Company’s internal control over financial reporting was
not effective as of the end of the fiscal year ended December 31,
2009.
  This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting. The
Company’s internal control over financial reporting was not subject to
attestation by the company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
company to provide only management’s report in this annual report.
 
 In
conducting its evaluation, management identified the following material
weaknesses in its internal control over financial reporting:
 
 ●          Application of US Generally
Accepted Accounting Principles: The
Company lacked sufficient US GAAP expertise to ensure that certain complex
material transactions relating to equity are properly reflected in the financial
statements. Consequently, the Company may not anticipate and identify accounting
issues relating to equity, or other risks critical to financial reporting, that
could materially impact the financial statements. Accordingly, management has
determined that this control deficiency constitutes a material
weakness.
 
 ●          Inadequate Closing
Procedures: The Company did not
properly perform the necessary year end closing procedures to accurately
estimate the allowance for doubtful accounts and accrued expenses. This resulted
in material adjustments to the financial statements. Accordingly, this control
deficiency constitutes a material weakness.
 
 ●          Assessment of
ICFR: The Company did not timely
perform a formal assessment of its controls over financial reporting, including
tests that confirm the design and operating effectiveness of the controls. This assessment
did not commence until subsequent to year end. Accordingly, this control
deficiency constitutes a material weakness.
 
 Remediation
of Material Weaknesses
 
 In April
2009, we restated our financial statements for the year ended December 31, 2007.
The restatements were to correct the Company’s accounting for its convertible
debentures, options and warrants. In its amended Annual Report on Form 10-KSB
for the year ended December 31, 2007, the Company’s management revised its
original report on internal control over financial reporting and concluded that
due to the failure to properly account for these securities, there was a
material weakness in our internal control over financial reporting as of
December 31, 2007.
 
 As a
result of the material weakness in our internal control over financial
reporting, during fiscal 2008 and 2009, the Company engaged outside consultants
to ensure that its reported results are in compliance with accounting principles
generally accepted in the United States. More specifically, as previously
reported, the Company took the following measures to remediate the
aforementioned weakness in its internal controls:
 
 ●    Engaged
a full-time controller with requisite experience to perform month-end reviews
and closing processes as well as provide additional oversight and supervision
within the accounting department;
 
 ●    With
the assistance of outside consultants, implemented the necessary training and
education to ensure that all relevant employees involved in accounting for
convertible securities as well as stock options and warrants understand and
apply the appropriate accounting treatment in accordance with the requirements
of ASC Topic
470-20-25 “Debt with Conversion Option Recognition” and ASC Topic 718
“Compensation - Stock Compensation” and related accounting
guidance;
 
 ●   With the assistance of outside consultants, established
written policies and procedures along with control matrices to ensure that
account reconciliation and amounts recorded, as well as the review of these
areas, are substantiated by detailed and contemporaneous documentary support and
that reconciling items are investigated, resolved and recorded in a timely
manner; and
 
 ●    Separated
the functions of our Chief Executive and Chief Financial Officers by appointing
a new Chief Executive Officer which enabled our former CEO/CFO to serve solely
as our Chief Financial Officer, which provides for improved separation of
responsibilities and oversight with respect to our internal accounting
function.
 
 Due to
the identification of additional material weaknesses in its internal control
over financial reporting related to the company’s accounting for material equity
transactions, the company intends to engage additional outside consultants to
assist management in further enhancing its ability to identify and report on
issues related to equity transactions.
 
 With
respect to the identified material weakness pertaining to the company’s closing
procedures to allow it to estimate its allowance for doubtful accounts and
accrued expenses, the company will evaluate its policies and procedures and
matrices to improve monitoring of potentially doubtful accounts and if necessary
engage external consultants or hire employees to assist in that processes. In
addition, with respect to the material weakness identified regarding its
inability to timely perform a formal assessment of its controls over financial
reporting, the company intends to engage an external consultant to assist the
company in undertaking its assessment in a timely manner.
  Changes in Internal Control over
Financial Reporting
  Other
than as described above, there was no change in our system of internal control
over financial reporting (as defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934) during the quarterly period ended December 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.





45




Inherent
Limitations on Effectiveness of Controls
  We
do not expect that disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within its company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.




46




Item
9B.  Other Information




The information set forth under the
caption “Recent Sales of Unregistered Securities” in Item 5 of this Annual
Report on Form 10-K regarding issuances of equity securities during the fiscal
quarter ending March 31, 2010 is incorporated herein by
reference.





PART
III




Item
10.  Directors and Executive Officers and Corporate Governance





The
following table summarizes the name, age and title of each of our current
directors and executive officers. Directors are elected annually by our
stockholders and hold office until their successors are elected and qualified,
or until their earlier resignation or removal. Our Board of Directors currently
consists of four members.  There are no arrangements between our directors
and any other person pursuant to which our directors were nominated or elected
for their positions. There are no family relationships between any of our
directors or executive officers. Officers are elected by and serve at the
discretion of the Board of Directors.





Our
directors and officers are currently as follows:





Name
            
            Age
            
            PositionRonald
      Wilson
            
            60
            
            Chief
      Executive Officer, President and DirectorDonald
      J. McDonald
            
            57
            
            Chief
      Financial Officer and DirectorMichael
      Salaman
            
            47
            
            Chairman
      of the BoardWilliam
      R. Sasso
            
            62
            
            Director





47




Business Experience





Ronald Wilson. Mr. Wilson
became our President and Chief Executive Officer in December 2008. Mr. Wilson
has worked in the soft drink industry for over 38 years, spending the majority
of his career with the Philadelphia Coca-Cola Bottling Company. He began his
career with Coca-Cola in 1977 as a Financial Analyst with Coca-Cola Bottling Co.
of N.Y. During the succeeding years, Mr. Wilson was promoted within Coke New
York to a number of positions, including Vice President/General Manager for Coke
New York’s Northern New England operation and Vice President/General Manager for
the New Jersey division. In 1985, Mr. Wilson was appointed the President and
Chief Operating Officer for The Philadelphia Coca-Cola Bottling Company and held
this office until his retirement in November 2006. He began his career in 1969
at a PepsiCo Inc. owned plant in various capacities in production, warehousing,
and sales. Mr. Wilson serves on numerous charitable and industry boards and
currently is the Vice Chair for the Board of Overseers at Rutgers University,
and is as an advisor to Rutgers School of Business. Mr. Wilson has also served
as the President of The Coca-Cola Bottlers’ Association, a board member of The
Dr Pepper Bottlers’ Association, and a board member of the Free Library of
Philadelphia. Mr. Wilson graduated from Rutgers University in 1971 with a
Bachelor’s degree in history.  Through his leadership roles in our
industry, Mr. Wilson has gained extensive experience in the management and
operation of beverage companies. As our Chief Executive Officer, he has
significant knowledge of all facets of our company. Mr. Wilson’s experience
with our company, combined with his leadership skills and operating experience,
makes him particularly well suited to be our Chief Executive Officer and a
member of our Board of Directors.





Donald J. McDonald. Donald J.
McDonald joined us as President and Chief Executive Officer, and a director, in
October 2006. Subsequently, he became our Chief Financial Officer in July, 2007.
Mr. McDonald was replaced by Mr. Wilson as the Company’s President and Chief
Executive Officer in December 2008. Mr. McDonald has over 25 years of experience
as a senior executive and 19 years experience in the cable television, broadcast
and video production industries with expertise in financial management, sales,
marketing and corporate governance. Since April 2002, Mr. McDonald has served as
the President of Summit Corporate Group, Inc., providing executive management
and corporate advisory services to a number of companies. Prior to that, from
March 1999 to March 2002, Mr. McDonald was the President of Directrix, Inc., a
publicly-traded company providing media production and distribution services.
Prior to that, Mr. McDonald was in an executive capacity for a number of
companies including National Media Corp., LSI Communications, Inc. and Spice
Direct Entertainment Co. Mr. McDonald graduated with a B.S. from Villanova
University in 1974. Through his extensive experience as a senior executive with
public and provide companies with decades of experience in financial management,
Mr. McDonald has accrued extensive business knowledge and financial management
experience. In addition, as Mr. McDonald has served our company for four years
as a director as well as an executive officer, he has significant knowledge of
all facets of our company. For these reasons, the Company believes that Mr.
McDonald is well suited to serve as our Chief Financial Officer and a member of
our Board of Directors.




Michael Salaman.  Michael
Salaman has served as our Chairman since January 2002 and was our Chief
Executive Officer from that date until March 8, 2006. Mr. Salaman has over 20
years experience in the area of new product development and mass marketing. Mr.
Salaman began his business career as Vice President of Business Development for
National Media Corp., an infomercial marketing Company in the United States from
1985-1993. From 1995-2001, Mr. Salaman started an Internet company called
American Interactive Media, Inc., a developer of Web TV set-top boxes and ISP
services. In 2002, Mr. Salaman became the principal officer of the Company and
directed its operations as a marketing and distribution company and in 2005
focused the Company’s efforts in the enhanced water business. Through his
extensive experience in marketing and distributing consumer products, and in
light of his long service to our company as a founder and prior chief executive
officer, Mr. Salaman has extensive experience and knowledge of both the beverage
industry as well as the operations of our Company. For these reasons, the
Company believes that Mr. Salaman is well suited to serve as the Chairman of our
Board of Directors.





William R.
Sasso.William R. Sasso was elected to our Board of Directors
in July 2009 and is the Chairman of Stradley Ronon Stevens & Young, a
regional law firm based in Philadelphia. He is also a partner in the Business
Practice Group where he counsels privately and publicly held companies and
religious and nonprofit organizations in various matters, including general
corporate and securities law, mergers and acquisitions, health care, tax and
real estate. He has served as chairman of the firm’s management committee and
board of directors since 1994. In addition to his legal practice, he is widely
recognized as a community leader in the Delaware Valley. He served as chairman
of the board of directors of the Greater Philadelphia Chamber of Commerce
(2003-2004). He continues to serve on the Chamber’s board and executive
committee.  He also chairs the board of Holy Redeemer Health System,
is President of the board of the Cancer Treatment Center of America and is
Chairman of the board of directors of the Free Library of Philadelphia. Mr.
Sasso received a J.D. from Harvard Law School and a B.A. from LaSalle
University.  Mr. Sasso brings to the Company his broad legal
experience and leadership skills as Chairman of Stradley Ronon Stevens &
Young, LLP, a large regional law firm, as well as his current and prior
directorships and affiliations. For these reasons, in addition to his past
service as a director of the Company and the fact that he is a non-employee
director, Mr. Sasso  is well-suited to serve on our Board of
Directors.





None of
the Company’s directors or executive officers have been involved, in the past
ten years, in a manner material to an evaluation of such director’s or officer’s
ability or integrity to serve as a director or executive officer, in any legal
proceedings more fully detailed in Item 401(f) of Regulation S-K, which
include but are not limited to, bankruptcies, criminal convictions and an
adjudication finding that an individual violated federal or state securities
laws.





48





Director
Independence; Meetings of Directors; Committees of the Board; Audit Committee
Financial Expert





Our Board
of Directors currently consists of four individuals. None of our current
directors is independent as defined in the Marketplace Rules of The NASDAQ Stock
Market. During the fiscal year ended December 31, 2009, our board of directors
held three meetings during which it took action and acted by unanimous written
consent on 21 occasions. No member of the Board of Directors attended less than
75% of the aggregate number of the total number of meetings of the Board of
Directors.


Due to
the fact that our Board currently consists of four persons, none of whom are
independent, we have not formally constituted any Board committees, including an
audit committee. None of our current directors qualifies as an “audit committee
financial expert” as defined in Item 401 under Regulation S-K of the Securities
Act of 1933. We are actively seeking to expand our Board membership to include
independent directors, including at least one person that satisfies the
definition of “financial expert.”





The board
did not adopt any modifications to the procedures by which security holders may
recommend nominees to its board of directors.




Compliance
with Section 16(a) of the Securities Exchange Act




Section
16(a) of the Securities Exchange Act of 1933, as amended, requires our directors
and executive officers, and persons who own more than 10% of our outstanding
Common Stock (collectively, “Reporting Persons”) to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our Common Stock. Reporting Persons are also required by SEC
regulations to furnish us with copies of all such ownership reports they file.
Based solely on our review of the copies of such reports received or written
communications from certain Reporting Persons, we believe that, during the 2009
fiscal year, all Reporting Persons complied with all Section 16(a) filing
requirements.




Code
of Ethics




Our Board
of Directors adopted a Code of Ethics, as defined by Rule 406 of Regulation S-K
on March 30, 2009. A copy of this Code of Ethics has been filed as Exhibit 14.1
to our Annual Report on Form 10-K for the year ended December 31,
2008.  Our Code of Ethics and Business Conduct covers all our
employees and directors, including our named executive officers.





Board
of Advisors





On March
20, 2008, the Company established an advisory board to provide advice on matters
relating to the Company’s products. The Company will seek to appoint up to five
individuals to its advisory board. On March 20, 2008, the Company appointed the
following individuals to its advisory board: Pat Croce, Ron Wilson and Michael
Zuckerman. We subsequently appointed Mr. Wilson as our Chief Executive Officer
and elected him to serve on our Board of Directors.





The
Company also entered into a consulting agreement with Mr. Croce, pursuant to
which the Company agreed to issue warrants to purchase 3,000,000 shares of
common stock at $.05 per share consideration of his agreement to serve on the
Company’s Advisory Board and for providing the marketing services for the
Company’s products. In addition to serving on the Advisory Board, Croce agreed
to endorse and advertise, through an affiliate, the Company’s
products. In additional consideration for his agreement to provide the
endorsement and marketing services, the Company agreed to pay a royalty with
respect to the sale of its products that he endorses for the duration of his
endorsement services. Subsequently, in May 2009, Mr. Croce agreed to waive
future royalties under the endorsement agreement and in consideration thereof,
the Company granted him warrants to purchase 2,500,000 shares of common stock
exercisable for a period of five years at a price of $0.05. In March 2008, the
Company issued each of the other initial members of its advisory board warrants
to purchase 1,500,000 shares of Common Stock, exercisable for a period of five
years at a price of $0.05.





In fiscal 2010, the Company expanded
the advisory board and appointed Messrs. Niki Arakelian, Ruben Azrak, Barry
Josephson and John Kilduff to its advisory board. In consideration for their
agreement to serve on our advisory board, the Company granted Mr. Arakelian
warrants to purchase 100,000 shares of common stock and we agreed to grant each
of the other new appointees 250,000 restricted shares of common stock. The
warrants granted to Mr. Arakelian are exercisable for a period of five years at
an exercise price of $0.06 per share.





49




Item 11.  Executive Compensation




Summary
of Cash and Certain Other Compensation





The
following table sets forth all annualized compensation paid to our named
executive officers at the end of the fiscal years ended December 31, 2009
and 2008. Individuals we refer to as our “named executive officers” include our
Chief Executive Officer, Chief Financial Officer and our most highly compensated
executive officers whose salary and bonus for services rendered in all
capacities exceeded $100,000 during the fiscal year ended December 31,
2009.





Summary
Compensation Table




Name
      and Principal
              Position
            
            Year
            
            Salary
              ($)
            
            
            Bonus
              ($)
            
            
            Stock
              Awards
              ($)(4)
            
            
            Option
              Awards
              ($)(4)
            
            
            All
      Other
              Compensation
              ($)
            
            
            Total
      ($)(a)
            
            (b)
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (i)
            
            
            (j)Ronald
      Wilson
            
            2009
            
            $
            165,775
            
            
            $
            
            
            
            $
            
            
            
            $
            116,849
            
            
            $
            15,600(5)
            
            $
            
            298,224Chief
      Executive Officer and President(1)
            
            2008
            
            $
            12,500
            
            
            $
            0
            
            
            $
            180,000
            
            
            $
            143,500
            (2)
            
            $
            1,700
            
            $
            
            337,700Donald
      J. McDonald
            
            2009
            
            $
            109,684
            
            
            $
            0
            
            
            $
            31,127
            
            
            $
            382,168
            
            
            $
            0
            
            $
            
            413,295Chief
      Financial Officer (3)
            
            2008
            
            $
            115,777
            
            
            $
            0
            
            
            $
            37,350
            
            
            $
            837,000
            
            
            $
            1,400
            
            $
            
            991,527Michael
      Salaman
            
            2009
            
            $
            157,604
            
            
            $
            0
            
            
            $
            3,055
            
            
            $
            459,368
            
            
            $
            0
            
            $
            
            620,027Chairman
            
            2008
            
            $
            126,962
            
            
            $
            0
            
            
            $
            137,350
            
            
            $
            837,000
            
            
            $
            1,400
            
            $
            
            1,102,712







(1) Mr.
Wilson became our Chief Executive Officer and President on December 1, 2008.
Upon joining the Company, Mr. Wilson was awarded 2,000,000 shares of restricted
common stock, warrants to purchase 2,000,000 shares of common stock and, subject
to the approval of the Company’s stockholders of a new equity compensation plan,
options to purchase 2,000,000 shares of common stock.




(2)
Expense relating to the grant of 2,000,000 warrants has been included in this
column and calculated in accordance with FASB ASC Topic 718.  Excludes
an aggregate of 2,500,000 warrants issued to Mr. Wilson in fiscal 2008 prior to
his becoming an officer of the Company in consideration for services
rendered.




(3) Mr.
McDonald became our Chief Executive Officer and President on October 6, 2006 and
assumed the position of Chief Financial Officer as of June 30, 2007. Mr.
McDonald was replaced as our Chief Executive Officer and President by Mr. Wilson
on December 1, 2008.




(4) This
column represents the dollar amount recognized for financial statement reporting
purposes for fiscal 2009 and 2008, as applicable, in accordance with FASB ASC
Topic 718. Pursuant to SEC rules, the amounts shown exclude the impact of
estimated forfeitures related to service-based vesting conditions. See notes to
our audited consolidated financial statements in our Annual Report on Form 10-K
for the year ended December 31, 2009 for details as to the assumptions used
to determine the fair value of the awards.




(5)
Consists of amounts paid for rental premises utilized by our CEO.





Narrative
Disclosure to Summary Compensation Table





The
Summary Compensation Table above quantifies the amount or value of the different
forms of compensation earned by or awarded to our Named Executive Officers in
fiscal 2009 and 2008 and provides a dollar amount for total compensation.
Descriptions of the material terms of each Named Executive Officer’s employment
agreement and/or arrangements and related information is provided in this
section and also under “Employment Agreements with Named Executive Officers”
below. The agreements provide the general framework and some of the specific
terms for the compensation of the Named Executive Officers. Approval of the
Board of Directors is required prior to our entering into employment agreements
with our executive officers or amendments to those agreements.





During
the 2009 fiscal year, the Company granted restricted stock and option awards to
its Named Executive Officers as described below. The grants of options described
below during the 2009 fiscal year were made pursuant to our 2009 Equity Plan,
which is currently administered by the Board of Directors. Grants in prior
periods were made under our 1998 Plan. The Board, as administrator, has
authority to interpret the plan provisions and make all required determinations
under those plans. This authority includes making required proportionate
adjustments to outstanding awards upon the occurrence of certain corporate
events such as reorganizations, mergers and stock splits. Awards granted under
the 2009 Equity Plan are generally only transferable to a beneficiary of a
participant upon his or her death.




50





In
December 2008, the Company’s Board of Directors approved the grant of 2,000,000
options to its new Chief Executive Officer, subject to the approval by the
Company’s stockholders of the 2009 Equity Plan. Following the approval of the
Company’s stockholders of the 2009 Equity Plan on July 2, 2009, this grant
became effective. The exercise price of this option is equal to the fair market
value of the Company’s Common stock on the date of stockholder approval of the
2009 Equity Plan, as determined in accordance with the 2009 Equity Plan. Per the
terms of the option grant to Mr. Wilson, if he ceases to provide services to the
Company or any parent, subsidiary or affiliate of the Company for any reason
except death or disability, he may exercise the option to the extent (and only
to the extent) that it would have been exercisable upon the termination date,
within three months thereafter, but no later than the expiration date of the
option. If he ceases to provide services to the Company because of his death or
disability (or if Mr. Wilson dies within three months after he ceases to provide
services other than because of death or disability) the option may be exercised
to the extent (and only to the extent) that it would have been exercisable on
the termination date, by him or his legal representative within twelve months
after the termination date, but in not later than the expiration date. Finally,
if he ceases to provide services to the Company because of “cause” (as defined
in the 2009 Equity Plan) or his actual or alleged commitment of a criminal act
or an intentional tort and the Company is the victim or object of such criminal
act or intentional tort or such criminal act or intentional tort results, in the
reasonable opinion of the Company, in liability, loss, damage or injury to the
Company, then, at the Company’s election, the option shall not be exercisable
and shall terminate upon the his termination date. On August 14, 2009, the
Company’s Board of Directors agreed to amend the option award granted to the
Company’s Chief Executive Officer in order to provide that such options shall,
following any termination of his employment with the Company, other than for
cause (as such term is defined in the Company’s 2009 Equity Plan), be deemed
immediately vested in full and exercisable for the duration of the original
stated term of such options.





Further,
on July 2, 2009, the Company approved the issuance of shares of restricted stock
to certain of its officers and directors as follows. The Company granted its
Chairman 50,917 shares of restricted stock in lieu of an amount of approximately
$3,000 owed for accrued benefits. The Company granted its Chief Financial
Officer 295,551 shares of restricted stock in lieu of an amount of approximately
$31,000 owed for accrued benefits and compensation.  On August
14, 2009, the Board agreed to amend outstanding warrant agreements held by our
Chief Executive Officer to include a provision permitting the cashless exercise
of such warrants in the event that there is not effective a registration
statement covering the resale of the underlying warrant shares. Mr. Wilson holds
4,500,000 warrants.




In
addition, on August 14, 2009, the Board of Directors approved option grants
under the 2009 Equity Plan to Messrs. Wilson, McDonald and Salaman on the
following terms: options to purchase 2,000,000 shares of common stock,
exercisable at the closing price on the date of grant ($0.095) for a period of
five years and which vest as follows: 25% on the date of grant and 25% on each
of the subsequent three anniversary dates thereafter; provided, however, in the
event that the gross sales reported by the Company for the 2009 fiscal year is
less than $10,000,000, the total amount granted to each person will be reduced
by 25% and the unvested portion of such awards shall be reduced in such an
amount so as to give effect to such reduction. Based on the Company’s results
for 2009, each of the foregoing option awards were reduced to 1,500,000
shares.





With
respect to the options granted to Mr. Wilson in August 2009, upon the
termination of his service to us an employee, director, consultant, independent
contractor or advisor for any reason except “cause”, then such option shall be
deemed fully vested on the date of such termination and any restrictions thereon
shall lapse and it shall remain outstanding and exercisable in full through the
expiration of its the original term. In the event Mr. Wilson’s service to the
Company ceases due to “cause” (as defined in the 2009 Equity Plan) or his actual
or alleged commitment of a criminal act or an intentional tort and the Company
is the victim or object of such criminal act or intentional tort or such
criminal act or intentional tort results, in the reasonable opinion of the
Company, in liability, loss, damage or injury to the Company, then, at the
Company’s election, the option shall not be exercisable and shall terminate upon
the his termination date.





With
respect to the options granted to our other Named Executive Officers in August
2009, if such person ceases to provide services to the Company or any parent,
subsidiary or affiliate of the Company for any reason except death or
disability, he may exercise the option to the extent (and only to the extent)
that it would have been exercisable upon the termination date, within three
months thereafter, but no later than the expiration date of the option. If such
an officer ceases to provide services to the Company because of death or
disability (or if such officer dies within three months after he ceases to
provide services other than because of death or disability) the option may be
exercised to the extent (and only to the extent) that it would have been
exercisable on the termination date, by him or his legal representative within
twelve months after the termination date, but in not later than the expiration
date. Finally, if such officer ceases to provide services to the Company because
of “cause” (as defined in the 2009 Equity Plan) or his actual or alleged
commitment of a criminal act or an intentional tort and the Company is the
victim or object of such criminal act or intentional tort or such criminal act
or intentional tort results, in the reasonable opinion of the Company, in
liability, loss, damage or injury to the Company, then, at the Company’s
election, the option shall not be exercisable and shall terminate upon the his
termination date.





The
options granted to our Chairman and Chief Financial Officer in July 2008 are
subject to vesting requirements. These options vested 25% on the date of grant
and thereafter will vest in equal annual installments of 25% on each anniversary
of the grant date until vested in full. These options are exercisable for a five
year term at an exercise price of $.33 per share.





Each of
the foregoing option awards provide that in the event of a Change in Control
Transaction, as defined in the 2009 Equity Plan, the treatment of such option
shall be subject to the applicable terms and conditions of the 2009 Equity Plan.
With respect to the options granted by us to our Named Executive Officers in
years prior to fiscal 2009, the effect on vesting of options on the death,
disability or termination of employment of a Named Executive Officer or a change
in control of our company, is generally consistent with the impact of such event
on options granted under the 2009 Equity Plan.





51






Outstanding Equity Awards at Fiscal
Year-End





The
following table sets forth certain information concerning outstanding equity
awards held by our named executive officers:




Option
      Awards
            
            
            Stock
      Awards(1)Name
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Exercisable
            
            
            Number
              of
              Securities
              Underlying
              Unexercised
              Options
              (#)
              Unexercisable
            
            
            Equity
      Incentive
              Plan
      Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
              (#)
            
            
            Option
              Exercise
              Price
              ($)
            
            
            Option
              Expiration
              Date
            
            
            Number
      of
              Shares
      or
              Units
      of
              Stock
      That
              Have
      Not
              Vested
              (#)
            
            
            Market
              Value
      of
              Shares
      or
              Units
      of
              Stock
      That
              Have
      Not
              Vested
              ($)
            
            
            Equity
              Incentive
              Plan
      Awards:
              Number
      of
              Unearned
              Shares,
      Units
              or
      Other
              Rights
      That
              Have
      Not
              Vested
              (#)
            
            
            Equity
              Incentive
              Plan
      Awards:
              Market
      or
              Payout
      Value
              of
      Unearned
              Shares,
      Units
              or
      Other
              Rights
      That
              Have
      Not
              Vested
              ($)(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)
            
            
            (i)
            
            
            (j)Ronald
      Wilson(2)
            
            
            500,000
            
            
            
            1,000,000
            (3)
            
            
            __
            
            
            
            .095
            
            
            
            8/14/14
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __2,000,000
            
            
            
            2,000,000
            (8)
            
            
            
            
            
            
            .10
            
            
            
            7/2/14
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __Donald
      J. McDonald
            
            
            500,000
            
            
            
            1,000,000
            (3)
            
            
            __
            
            
            
            .095
            
            
            8/14/14
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __1,500,000
            
            
            
            1,500,000
            (4)
            
            
            __
            
            
            
            .33
            
            
            7/30/13
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __2,000,000
            
            
            
            500,000
            (5)
            
            
            __
            
            
            
            .17
            
            
            10/6/11
            
            
            
            __
            
            
            __
            
            
            
            __
            
            
            
            __1,875,000
            
            
            
            625,000
            (6)
            
            
            __
            
            
            
            .07
            
            
            11/28/12
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __Michael
      Salaman
            
            
            500,000
            
            
            
            1,000,000
            (3)
            
            
            __
            
            
            
            .095
            
            
            8/14/14
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __1,500,000
            
            
            
            1,500,000
            (4)
            
            
            __
            
            
            
            .33
            
            
            7/30/13
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __2,250,000
            
            
            
            750,000
            (4)
            
            
            __
            
            
            
            .07
            
            
            11/28/12
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __1,800,000
            
            
            
            1,200,000
            (7)
            
            
            __
            
            
            
            .25
            
            
            1/12/12
            
            
            
            __
            
            
            
            __
            
            
            
            __
            
            
            
            __







(1)
                Excludes
      (a) 2,075,000 shares of restricted stock granted to each of Mr. McDonald
      and Mr. Salaman on March 24, 2008; (b) 2,000,000 shares of restricted
      stock granted to Mr. Salaman on November 28, 2007; (c) 2,000,000 shares of
      restricted stock granted to Mr. Wilson on December 1, 2008; (d) 50,917
      shares of restricted stock granted to Mr. Salaman on July 2, 2009; and (e)
      295,551 shares of restricted stock granted to Mr. McDonald on July 2,
      2009, as each of the foregoing awards were immediately
    vested.(2)
                Excludes
      the grant of 2,000,000 common stock purchase warrants granted to Mr.
      Wilson on December 1, 2008 and 2,500,000 other warrants granted to Mr.
      Wilson prior to his employment by the Company.(3)
                Options
      vest as follows: 25% vested on grant date of August 14, 2009. Thereafter
      option vests in equal annual increments of 25% on each anniversary of the
      grant date.(4)
                Options
      vest as follows: 25% vested on grant date of July 30, 2008. Thereafter
      option vests in equal annual increments of 25% on each anniversary of the
      grant date.(5)
                Options
      vest as follows: 20% vested on grant date of October 6, 2006. Thereafter
      option vests in equal annual increments of 20% on each anniversary of the
      grant date.(6)
                Options
      vest as follows: 25% vested on grant date of November 28, 2007. Thereafter
      option vests in equal annual increments of 25% on each anniversary of the
      grant date.(7)
                Options
      vest as follows: 20% vested on grant date of January 12, 2007. Thereafter
      option vests in equal annual increments of 20% on each anniversary of the
      grant date.(8)
                Options
      vest in full July 2,
2010.





52




Outstanding
Equity Awards Narrative Disclosure





The
options granted to our named executive officers on August 14, 2009 provided that
in the event that the gross sales reported by the Company for the 2009 fiscal
year is less than $10,000,000, the total amount granted to each person will be
reduced by 25% and the unvested portion of such awards shall be reduced in such
an amount so as to give effect to such reduction. As the Company did not achieve
such milestone, each option granted to our named executive officers was reduced
to 1,500,000 from 2,000,000.





The
option expiration date shown above is the normal expiration date, and the last
date that the options may be exercised. For each Named Executive Officer, the
unexercisable options shown above are also unvested. For information regarding
the effect on vesting of options on the death, disability or termination of
employment of a Named Executive Officer or a change in control of our company,
see the disclosure under the caption “Narrative Disclosure to Summary
Compensation Table” following the Summary Compensation Table, above. If a Named
Executive Officer’s employment is terminated by us for cause, options (including
the vested portion) are generally forfeited. The exercisable options shown
above, and any unexercisable options shown above that subsequently become
exercisable, will generally expire earlier than the normal expiration date if
the Named Executive Officer’s employment terminates, except as otherwise
specifically provided in the Named Executive Officer’s employment agreement, if
any. For a description of the material terms of the Named Executive Officer’s
employment arrangements see “Employment Agreements with Named Executive
Officers” below.




Employment
Agreements with Named Executive Officers





On
December 1, 2008, we entered into an employment relationship with Mr. Ronald D.
Wilson, who will serve as the President and Chief Executive Officer of the
Company effective immediately. Pursuant to an offer letter Mr. Wilson entered
into with the Company, the Company will pay and provide the following
compensation to Mr. Wilson: (a) base salary of $150,000 per annum; (b) grant of
2,000,000 shares of restricted common stock; (c) grant of warrants to purchase
2,000,000 shares of common stock which shall be immediately exercisable on the
date of grant for a period of five years at an exercise price equal to the
closing price of the Company’s common stock on the date of grant; (d) subject to
the approval of the Company’s stockholders of a new equity compensation plan,
options to purchase 2,000,000 shares of common stock, exercisable for a period
of five years and which options will vest in full on the first anniversary of
the grant date and have an exercise price equal to the fair market value of the
Company’s common stock, as determined in accordance with the new equity
compensation plan, on the date that such plan is approved by the Company’s
stockholders; (e) a car allowance of $700 per month; (f) reimbursement of health
benefits or cash equivalent in an amount not to exceed $1,000 per month; and (g)
$2,000 per month for a rental lease for housing for 1 year
period.





We have
not entered into written employment agreements with any of our other named
executive officers. On November 28, 2007, the Board of Directors of the Company
approved the following compensation arrangements for Messrs. McDonald and
Salaman, effective as of November 2007. Mr. Salaman receives compensation of
$12,500 per month and a $700 dollar monthly automobile allowance and Mr.
McDonald receives compensation of $11,667 dollars per month and a $700 monthly
automobile allowance.





Director
Compensation





We do not pay any fees or other
compensation to our directors for service as a director or attendance at board
meetings. We have not adopted any retirement, pension, profit sharing, or other
similar programs. Following his election to our board of directors on July 2,
2009, the Board of Directors granted Mr. Sasso 250,000 shares of restricted
stock, which shares were vested on the date of grant.





Summary
of Non-Executive Director Compensation





A summary
of non-executive director compensation for the year ended December 31, 2009 is
as follows:





Name
            
            Fees
      Earned or Paid in Cash ($)
            
            Stock
      Awards
              ($)
      (1)
            
            Option
      Awards ($)
            
            All
      Other Compensation ($)
            
            Total
      ($)William
      R. Sasso
            
            
            
            $
            22,500
            
            
            
            
            
            $
            22,500







(1) On
July 2, 2009, the Board of Directors granted Mr. Sasso 250,000 shares of
restricted stock. Grant date fair value of restricted stock awards on the date
of grant was based on a fair market value of our common stock as reported on the
OTC Bulletin Board.




53





Stock
Option Plans





1998
Plan





Our Board
of Directors initially adopted our Employee Stock Option Plan (the “1998 Plan”)
on November 16, 1998 and it was approved by our stockholders on December 21,
2001. The 1998 Plan terminated ten years from the date of its adoption by the
Board. Our Board of Directors, on October 6, 2006, had unanimously approved and
recommended for shareholder approval the amendment of the 1998 Plan to increase
the number of shares authorized for issuance there under from 1,000,000 shares
to 20,000,000 shares. The requisite vote of our shareholders was obtained on
November 15, 2006. Under the 1998 Plan, we may grant incentive (“ISOs”) and
non-statutory (“Non-ISOs”) options to employees, non employee members of the
Board of Directors and consultants and other independent advisors who provide
services to us. The maximum shares of common stock which may be issued over the
term of the plan shall not exceed 20,000,000 shares. As of December 31, 2009,
19,400,000 options remain issued and outstanding under the 1998
Plan.





Administration: The 1998 Plan
is administered by a committee delegated by the Board of Directors, or by the
Board of Directors itself (the “Committee”). Subject to the provisions of the
1998 Plan, the Committee has discretion to determine the employee, consultant or
director to receive an award, the form of award and any acceleration or
extension of an award. Further, the Committee has complete authority to
interpret the 1998 Plan, to prescribe, amend and rescind rules and regulations
relating to it, to determine the terms and provisions of the respective award
agreements (which need not be identical), and to make all other determinations
necessary or advisable for the administration of the 1998 Plan.





Eligibility: Awards may be
granted to any of our employees or consultants or to non-employee members of the
Board of Directors or of any board of directors (or similar governing authority)
of any of our affiliates.





Types of Awards: Awards under
the 1998 Plan include incentive stock options and non-statutory stock options.
Each award will be evidenced by an instrument in such form as the Committee may
prescribe, setting forth applicable terms such as the exercise price and term of
any option or applicable forfeiture conditions or performance requirements for
any restricted stock grant. Except as noted below, all relevant terms of any
award will be set by the Committee in its discretion. Incentive stock options
may be granted only to eligible employees of the Company or any parent or
subsidiary corporation and must have an exercise price of not less than one
hundred percent (100%) of the fair market value of the Common Stock on the
date of grant (one hundred ten percent (110%) for incentive stock options
granted to any ten-percent (10%) shareholder). In addition, the term of an
incentive stock option may not exceed ten (10) years. Non-statutory stock
options must have an exercise price of not less than one hundred percent
(100%) of the fair market value of the Common Stock on the date of grant
and the term of any Non-statutory Stock Option may not exceed ten
(10) years. In the case of an incentive stock option, the amount of the
aggregate fair market value of Common Stock (determined at the time of grant)
with respect to which incentive stock options are exercisable for the first time
by an employee during any calendar year (under all such plans of his or her
employer corporation and its parent and subsidiary corporations) may not exceed
$100,000.





Effect of Significant Corporate
Events: In the event of a change in control, the Board shall have the
discretion to provide for any or all of the following: (i) the
acceleration, in whole or in part, of outstanding Stock Options, (ii) the
assumption of outstanding Stock Options, or substitution thereof, by the
acquiring entity and (iii) the termination of all Stock Options that
remaining outstanding at the time of the change of control. In the event of any
change in the outstanding shares of Common Stock through merger, consolidation,
sale of all or substantially all our property, or organization, an appropriate
and proportionate adjustment will be made in (i) the maximum numbers and
kinds of shares subject to the Plan, (ii) the numbers and kinds of shares
or other securities subject to the then outstanding awards, and (iii) the
exercise price for each share subject to then outstanding Stock Options. Should
any change be made to the common stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding common stock as a class, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
that can be issued under the Plan, and (ii) the number and/or class of
securities and the exercise price in effect under each outstanding
option.





Amendments to the1998 Plan:
The Board of Directors may amend or modify the 1998 Plan at any time subject to
the rights of holders of outstanding awards on the date of amendment or
modification; provided, however, that the Board may not, without the consent of
the participant, reduce the number of shares subject to the award, change the
price of outstanding awards or adversely effect the provisions relating to an
award’s vesting and exercise rights.





2009
Plan





At
our annual meeting of stockholders held on July 2, 2009, our stockholders
approved the adoption of our 2009 Equity Incentive Compensation Plan (the “2009 Equity Plan”)
which permits us to provide a broad range of stock awards to our employees,
directors and consultants. The Board of Directors unanimously approved the 2009
Equity Plan on May 12, 2009, subject to stockholder approval. The following is a
summary of the principal provisions of the 2009 Equity Plan.  As of
December 31, 2009, 10,150,000 shares underlying awards have been issued and
8,237,500 shares are outstanding under the 2009 Equity
Plan.  The options granted to our employees on August 14, 2009
provided that in the event that the gross sales reported by the Company for the
2009 fiscal year is less than $10,000,000, the total amount granted to each
person will be reduced by 25% and the unvested portion of such awards shall be
reduced in such an amount so as to give effect to such reduction. As the Company
did not achieve such milestone, options granted to our employees and officers
were reduced.




54





Shares Reserved for Issuance.
The 2009 Equity Plan includes an initial reserve of 25,000,000 shares of
our Common Stock that will be available for issuance under the plan, subject to
adjustment to reflect stock splits and similar events. Shares that are subject
to issuance upon exercise of an option but cease to be subject to such option
for any reason (other than exercise of such option), and shares that are subject
to an award that is granted but is subsequently forfeited, or that are subject
to an award that terminates without shares being issued, will again be available
for grant and issuance under the 2009 Equity Plan. The 2009 Equity Plan provides
for the grant of stock options, stock appreciation rights, restricted stock
units, restricted stock and performance stock grants.




Administration. Our Board
will initially administer the 2009 Equity Plan, until such time as we establish
a compensation committee of our Board, which will administer the 2009 Equity
Plan (either being referred to as the “Committee”). The
Committee determines the persons who are to receive awards, the number of shares
subject to each such award and the other terms and conditions of such awards.
The Committee also has the authority to interpret the provisions of the 2009
Equity Plan and of any awards granted thereunder and to modify awards granted
under the 2009 Equity Plan. A compensation committee of the Board must consist
of at least two or more members of the Board, all of whom, may qualify as
“outside directors” as defined for purposes of the regulations under Section
162(m) of the Internal Revenue Code of 1986 and as “non-employee directors”
under Section (b)(3)(i) of Rule 16b-3, under the Exchange Act.





Duration, Amendment and Termination.The 2009 Equity Plan was initially approved by our board on May 12, 2009
and will expire on May 12, 2019, unless sooner terminated by the Board of
Directors. In addition to the power to terminate the 2009 Equity Plan at any
time, the Board of Directors also has the power to amend the 2009 Equity Plan;
provided, no amendment to the 2009 Equity Plan may be made without stockholder
approval if the amendment would (i) change the minimum option prices set
forth in the 2009 Equity Plan, (ii) increase the maximum term of options,
(iii) materially increase the benefits accruing to the participants under
the 2009 Equity Plan, or (iv) materially modify the requirements as to
eligibility under the 2009 Equity Plan.





Eligibility. The 2009 Equity
Plan provides that awards may be granted to employees, officers, directors,
consultants and independent contractors of Skinny Nutritional as the Committee
may determine. The actual number of individuals who will receive awards cannot
be determined in advance because the Committee has discretion to select the
participants.




Terms of Options. As
discussed above, the Committee determines many of the terms and conditions of
awards granted under the 2009 Equity Plan, including whether an option will be
an “incentive stock option” (“ISO”) or a
non-qualified stock option (“NQSO”).  An
option designated as an ISO is intended to qualify as such under Section 422 of
the Code. Thus, the aggregate fair market value, determined at the time of
grant, of the shares with respect to which ISO’s are exercisable for the first
time by an individual during any calendar year may not exceed $100,000. NQSOs
are not subject to this requirement. Each option is evidenced by an agreement in
such form as the Committee approves and is subject to the following conditions
(as described in further detail in the 2009 Equity Plan):





Options
become vested and exercisable, as applicable, within such periods, or upon such
events, as determined by the Committee and as set forth in the related stock
option agreement. The maximum term of each option is ten years from the date of
grant. Each stock option agreement states the exercise price, which may not be
less than 100% of the fair market value of one share of our common stock on the
date of the grant (and not less than 110% with respect to an ISO granted to a
10% or greater stockholder). Options cease vesting on the date of termination of
service or the death or disability of the participant. Unless otherwise approved
by the Committee, options granted under the 2009 Equity Plan generally expire
3 months after the termination of the participant’s service to Skinny
Nutritional, except in the case of death or disability, in which case the awards
generally may be exercised up to 12 months following the date of death or
termination of service. However, if the participant is terminated for cause
(e.g. for committing an alleged criminal act or intentional tort against
us), the participant’s options will expire upon termination.





Terms of Restricted Stock
Awards. Each restricted stock award is evidenced by a restricted stock
purchase agreement in such form as the committee approves and is subject to
conditions as described in the 2009 Equity Plan).  Shares subject to a
restricted stock award may become vested over time or upon completion of
performance goals set out in advance. Aside from the risk of forfeiture and
non-transferability, an award of restricted stock entitles the participant to
the rights of a stockholder of the Company, including the right to vote the
shares and to receive dividends, unless otherwise determined by the
Committee.  Each restricted stock purchase agreement states the
purchase price, if any, which may not be less than the par value of our common
stock on the date of the award (and not less than 110% of fair market value with
respect to an award to a 10% of greater stockholder). Restricted stock awards
shall cease to vest immediately if a participant is terminated for any reason,
unless provided otherwise in the applicable restricted stock award agreement or
unless otherwise determined by the Committee.





Stock Appreciation Rights.
Stock appreciation rights (“SARs”) are awards in
which the participant is deemed granted a number of shares subject to vesting.
When the SARs vest, then the participant can exercise the SARs. Exercise,
however, does not mean the number of shares deemed granted are issued. Rather,
the participant will receive cash (or shares, if so determined by the Committee)
having a value at the time of exercise equal to (1) the number of shares
deemed exercised, times (2) the amount by which our stock price on the date
of exercise exceeds our stock price on the date of grant. SARs expire under the
same rules that apply to options.




Restricted Stock Units.
Restricted stock units (“RSUs”) are awards
that result in a payment to the participant in cash or shares if the performance
goals established by the Committee are achieved. The applicable performance
goals will be determined by the Committee and may be applied on a company-wide,
departmental or individual basis. RSUs give a participant the right to receive
shares at the end of a specified deferral period. The Committee establishes any
vesting requirements for RSUs granted for continuing services. Prior to
settlement, RSUs, carry no voting or dividend rights or other rights associated
with stock ownership, but dividend equivalents may be paid or accrue if
authorized by the Committee.




55




Performance-Based Awards.The
Committee may grant performance awards, which may be cash-denominated awards or
share-based awards. Generally, performance awards require satisfaction of
pre-established performance goals, consisting of one or more business criteria
and a targeted performance level with respect to such criteria as a condition of
awards being granted or becoming exercisable, or as a condition to accelerating
the timing of such events. Performance may be measured over a period of any
length specified by the Committee.




Other Stock-Based Awards, Stock
Bonus Awards, and Awards in Lieu of Other Obligations.The 2009 Equity
Plan authorizes the Committee to grant awards that are denominated or payable
in, valued in whole or in part by reference to, or otherwise based on or related
to our common stock. The Committee determines the terms and conditions of such
awards, including the consideration to be paid to exercise awards in the nature
of purchase rights, the periods during which awards are outstanding, and any
forfeiture conditions and restrictions on awards. In addition, the Committee is
authorized to grant shares as a bonus, free of restrictions, or to grant shares
or other awards in lieu of obligations under other plans or compensatory
arrangements, subject to such terms as the Committee may specify.





Change of Control: In the
event of a change of control of the Company (as defined in the plan), the buyer
may either assume the outstanding awards or substitute equivalent awards.
Alternatively, our Committee may determine to permit all unvested awards to
immediately vest upon the change of control. If our Committee does not make such
a determination, all awards will expire upon the closing of the transaction
unless the particular award agreement provides otherwise.





Transferability. The 2009
Equity Plan provides that Awards other than NQSOs (i) will not be transferable
or assignable otherwise than by will or by the laws of descent and distribution
or as consistent with the specific Award Agreement and (ii) shall be
exercisable during the participant’s lifetime, only by the participant or
his or her legal representative and after participant’s death, by the legal
representative of the participant’s heirs or legatees. An NQSO will also be
transferable (i) by instrument to certain trusts, including testamentary
trusts and trusts for the benefit of the participant and/or his or her immediate
family; (ii) entities wholly-owned by the participant and/or his or her
immediate family; and (iii) by gift to a member of his or her immediate
family.





Modification and Termination of the
Plan. The Committee may from time to time, in its discretion, amend the
2009 Equity Plan without the approval of stockholders, except (a) as such
stockholder approval may be required under the listing requirements of any
securities exchange or national market system on which our equity securities are
listed and (b) that the Committee may not without the approval of the Company’s
stockholders amend the 2009 Equity Plan to increase the total number of shares
reserved for the purposes of the 2009 Equity Plan. The 2009 Equity Plan shall
continue in effect until the earlier of its termination by the Committee or the
date on which all of the shares of common stock available for issuance
thereunder have been issued and all restrictions on such shares under the terms
of the 2009 Equity Plan and the agreements evidencing options granted under the
2009 Equity Plan have lapsed.





56




Item
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.




The
following table sets forth the beneficial ownership of our Common Stock as of
March 25, 2010, by (i) each director and each executive officer, (ii) and all
directors and executive officers as a group, and (iii) persons (including any
“group” as that term is used in Section 13(d)(3) of the Securities Exchange Act
of l934), known by us to be the beneficial owner of more than five percent of
its common stock. Shares of Common Stock subject to options exercisable within
60 days from the date of this table are deemed to be outstanding and
beneficially owned for purposes of computing the percentage ownership of such
person but are not treated as outstanding for purposes of computing the
percentage ownership of others. As of  March 25, 2010, there were
292,668,294 shares issued and outstanding.





Shares
      of Common Stock
              Beneficially
      OwnedName
      and Address of Owner
            
            Number
            
            
            Percent (%)Officers
      and DirectorsRonald
      Wilson (1)
              c/o
      Skinny Nutritional Corp.
              3
      Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004
            
            
            9,500,000
            
            
            
            3.2
            %Michael
      Salaman (2)
              c/o
      Skinny Nutritional Corp.
              3
      Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004
            
            
            15,688,574
            
            
            
            5.4
            %Donald
      McDonald (3)c/o
      Skinny Nutritional Corporation3
      Bala Plaza East Suite 101, Bala Cynwyd PA 19004
            
            
            7,745,946
            
            
            
            2.6
            %William
      R. Sasso  (4)
              c/o Stradley Ronon Stevens &
      Young, LLP
              2600 One Commerce Square, Philadelphia, PA 19103
            
            
            2,862,958
            
            
            
            0.9
            %All
      Directors and Officers as a Group (4 Persons) (1) (2) (3)
    (4)
            
            
            35,797,478
            
            
            
            12.2
            %5%
      StockholdersPasquale
      W. Croce, Jr. (5)
              835
      Mt. Moro Road, Villanova, PA 19085
            
            
            18,950,000
            
            
            
            6.5
            %







*
            Denotes
      ownership percentage of less than 1%.(1)
            Includes
      500,000 shares of common stock held by a family trust for which Mr. Wilson
      retains indirect beneficial ownership. Includes warrants to purchase
      4,500,000 shares of common stock that are vested and vested options to
      purchase 500,000 shares of common stock. Excludes unvested
      options  to purchase an aggregate of 3,000,000  shares
      of common stock.(2)
            Includes
      vested options to purchase 6,650,000 shares of common stock and
      excludes  3,850,000  unvested
  options.(3)
            Includes
      vested options to purchase 5,875,000 shares of Common Stock and excludes
      3,625,000 unvested options.(4)
            Includes
      529,625 shares of common stock owned directly by the law firm of Stradley
      Ronon Stevens & Young, LLP (“SRSY”)The reporting person is Chairman of
      SRSY and also a partner serving on SRSY's board of directors and
      management committee. The reporting person disclaims beneficial ownership
      of the reported securities except to the extent of his pecuniary interest
      therein.(5)
            Consists
      of 11,450,000 shares of Common Stock held by Liquid Mojo, LLC and warrants
      to purchase an aggregate of 7,500,000 shares of common stock held by
      Liquid Mojo, LLC.  Mr. Croce is the beneficial owner of a
      majority of the membership interests of Liquid Mojo. As such, Mr. Croce
      has the power to vote and dispose of the shares of common stock
      beneficially owned by Liquid Mojo.





57




Item
13:  Certain Relationships and Related Transactions; Director
Independence.




Except as
disclosed herein, we have not entered into any material transactions or series
of similar transactions with any director, executive officer or any security
holder owning 5% or more of our common stock. For information concerning
employment arrangements with, and compensation of, our executive officers and
directors, see the disclosure in the section of this Annual Report on Form 10-K
captioned “Executive Compensation.”





The
Company entered into a fully secured, short term loan agreement with Valley
Green Bank  in the amount of $340,000, which is due on
demand  Interest is payable monthly at the rate of 8.25% per annum.
The loan matured March 20, 2008, at which time the bank extended the term of the
loan to July 2010. The current balance outstanding as of December 31, 2009 and
2008, was $45,924 and $200,000, respectively. The note payable is secured by
collateral consisting of a perfected first priority pledge of certain marketable
securities held by the Company’s Chairman and entities with which he is
affiliated. The Company also agreed to a confession of judgment in favor of the
bank in the event it defaults under the loan agreements. The loan agreements
also require the consent of the bank for certain actions, including incurring
additional debt and incurring certain liens.  Our Board authorized an
issuance of 2,000,000 restricted shares of common stock to Michael Salaman in
consideration for his agreement to personally guarantee the Company’s loan
facility from Valley Green Bank.





On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”). The agreement
provides for an initial funding limit of $300,000. Currently, this arrangement
has been extended through February 2011 and the borrowing limit has been
incrementally increased to extend our line to 85% of the face of eligible
receivables subject to a maximum of $2,000,000.  As of December 31,
2009, an amount of $321,815 was outstanding under this arrangement. All accounts
submitted for purchase must be approved by UCF. Presently, the applicable
factoring fee is 0.30% of the face amount of each purchased account and the
purchase price is 85% of the face amount. UCF will retain the balance as a
reserve, which it holds until the customer pays the factored invoice to UCF. In
the event the reserve account is less than the required reserve amount, we will
be obligated to pay UCF the shortfall. In addition to the factoring fee, we will
also be responsible for certain additional fees upon the occurrence of certain
contractually-specified events. As collateral securing the obligations, we
granted UCF a continuing first priority security interest in all accounts and
related inventory and intangibles. Upon the occurrence of certain
contractually-specified events, UCF may require us to repurchase a purchased
account on demand. In connection with this arrangement, each of our Chairman and
Chief Financial Officer agreed to personally guarantee our obligations to UCF.
The agreement will automatically renew for successive one year terms until
terminated. Either party may terminate the agreement on three month’s prior
written notice. We are liable for an early termination fee in the event we fail
to provide them with the required written notice. On March 24, 2008, the
Company’s Board of Directors approved the grant of an aggregate of 2,075,000
restricted shares of common stock to each of our Chairman and Chief Financial
Officer, in consideration of their agreement to provide a personal guaranty in
connection with this arrangement.





In connection with the Company’s private placement in 2008 of
$1,875,000 shares of its common stock, the Company’s Chief Executive Officer,
Chief Financial Officer and Chairman agreed not to exercise a total of
12,000,000 options and 2,000,000 warrants beneficially owned by them until such
time as the Company’s stockholders adopt an amendment to its Articles of
Incorporation to increase the number of the Company’s authorized shares of
common stock. The Company’s shareholders approved this amendment at the
Company’s annual meeting of shareholders held on July 2, 2009 and the
non-exercise agreements expired automatically following such
approval.





Prior to becoming our Chief Executive
Officer, Mr. Ronald Wilson was appointed to our Advisory Board in March 2008 and
in connection with that appointment was granted warrants to purchase 1,500,000
shares of Common Stock exercisable at $.05 per share. Mr. Wilson had
participated in a private placement of our common stock in April 2008 and
purchased 2,500,000 shares of Common Stock in that transaction. Subsequently, we
granted Mr. Wilson an additional warrant to purchase 1,000,000 shares of Common
Stock in April 2008, in consideration for additional consulting services
provided by Mr. Wilson to us. These warrants are also exercisable for a period
of five years at a price of $0.05 per share. On April 29, 2009, the Company’s
Chief Executive Officer purchased 600 shares of Series A Preferred Stock in the
Company’s private offering of such securities, which shares automatically
converted into 1,000,000 shares of common stock upon the approval of our
shareholders of the amendment to our Articles of Incorporation to increase our
authorized number of shares of common stock in July 2009.





Mr. William R. Sasso, a member of our
Board of Directors, has participated as an investor in certain private
placements conducted by Skinny Nutritional Corp. In January 2009, the Company
issued to Mr. Sasso an aggregate of 1,250,000 shares of common stock of the
Company, which shares were issued at a per share price of $0.04. In addition, in
May 2009, Mr. Sasso purchased an aggregate of 500 shares of the Company’s Series
A Preferred Stock which shares automatically converted into 833,333 shares of
common stock upon the approval of our shareholders of the amendment to our
Articles of Incorporation to increase our authorized number of shares of common
stock in July 2009. Mr. Sasso is a partner at the law firm of Stradley, Ronon,
Stevens & Young, LLP (“SRSY”), which provides legal services to us from time
to time as outside counsel. During the 2009 and 2008 fiscal years, we incurred
fees for legal services to this firm in the aggregate amount of $147,815 and
$72,157.22, respectively. In March 2010, we issued 529,625 shares of common
stock to SRSY in lieu of payment of approximately $99,000 in outstanding fees
owed to such firm. The reporting person is Chairman of SRSY and also a partner
serving on SRSY's board of directors and management committee.  In
management’s opinion, the terms of such services were substantially equivalent
to those which would have been obtained from unaffiliated parties. The Company
also granted Mr. William R. Sasso, a newly elected director, an award of 250,000
shares of restricted stock.




58




On July 16, 2009, the Company entered
into a distribution agreement (the “Distribution Agreement”) with Canada Dry
Bottling Company of New York (the “Distributor”) pursuant to which the
Distributor has been appointed as the Company’s exclusive distributor of Skinny
Water and other products bearing the Company’s trademarks covered by the
Distribution Agreement in the New York City metropolitan area. The Chief
Executive Officer of the Distributor, Mr. William Wilson, is the brother of the
Company’s Chief Executive Officer. The entire board of directors of the Company,
in considering the Distribution Agreement, was aware of and considered this
relationship and in determining to approve the Distribution Agreement, analyzed
the benefits to the Company of the Distribution Agreement and determined that
the terms of the Distribution Agreement are commercially reasonable and fair to
the Company and materially comparable to the terms and conditions generally
available to the Company in a similar agreement with an unrelated third party.
Additional information about the Distribution Agreement is set forth in greater
detail at Note 11 to these financial statements.





Since March 2008, Mr. Pasquale W.
Croce, Jr., a beneficial owner of more than 5% of our outstanding Common
Stock, has served on the Company’s board of advisors and through an affiliated
entity entered into a consulting agreement the Company pursuant to which he
agreed to endorse and advertise the Company’s products. In consideration
for these services, the Company agreed to pay a royalty equivalent to $1.00 for
each case of endorsed product sold by the Company for the duration of his
endorsement services. In March 2008, the Company granted Mr. Croce warrants to
purchase 3,000,000 shares of Common Stock exercisable at $.05 per share in
consideration of his agreement to serve on the Company’s Advisory Board and for
providing marketing services for the Company’s products. In addition, in May
2009, Mr. Croce agreed to waive future royalties under the consulting agreement
and in consideration thereof we granted him 2,500,000 common stock purchase
warrants exercisable at $.05 per share. Mr. Croce, through an affiliated entity,
participated as an investor in certain private placements conducted by Skinny
Nutritional Corp. In March 2008, he purchased 8,750,000 shares of the Company’s
Common Stock at a purchase price of $.04 per share as a participant in a private
placement of securities by the Company. Subsequently, in August 2008 the Company
issued Mr. Croce’s affiliate 200,000 shares of common stock in additional
consideration of its consulting services. Thereafter, in December 2008, he
purchased an additional 2,500,000 shares of the Common Stock of the Company at a
purchase price of $.06 per share in a subsequent private placement conducted by
the Company. Further, on August 14, 2009, the Board approved a grant of
2,000,000 warrants to Mr. Croce in consideration for his services on our
advisory board and for additional consulting services rendered. These warrants
are exercisable for a period of five years at a per share exercise price equal
of $0.06.





On July 2, 2009 the Company approved
the issuance of shares of restricted stock to certain of its officers and
directors. The Company granted its Chairman 50,917 shares of restricted stock in
lieu of approximately $3,000 owed for accrued benefits. The Company granted its
Chief Financial Officer 295,551 shares of restricted stock in lieu of an amount
of approximately $26,000 owed for accrued benefits and
compensation.





On August 14, 2009, the Company’s
Board of Directors agreed to amend all option awards granted to the Company’s
Chief Executive Officer in order to provide that such options shall, following
any termination of his employment with the Company, other than for cause (as
such term is defined in the Company’s 2009 Equity Plan), be deemed immediately
vested in full and exercisable for the duration of the original stated term of
such options. In addition, on such date, the Board also agreed to amend certain
outstanding warrant agreements to include a provision permitting the cashless
exercise of such warrants in the event that there is not effective a
registration statement covering the resale of the underlying warrant shares.
Consistent with this agreement, the Company amended the warrant agreements
previously issued to the Company’s Chief Executive Officer, Mr. Croce and Liquid
Mojo LLC.  Liquid Mojo holds warrants to purchase 5,500,000 shares of
common stock which were covered by this amendment. Mr. Wilson presently holds
warrants to purchase an aggregate of 4,500,000 shares of common stock which were
covered by this amendment.  The warrants held by consultants covered
by this amendment are exercisable for 2,500,000 shares of common
stock.





As of December 31, 2009, we did not
have any independent directors.





Approval
for Related Party Transactions





Although we have not adopted a formal
policy relating to the approval of proposed transactions that we may enter into
with any of our executive officers, directors and principal stockholders,
including their immediate family members and affiliates, our Board reviews the
terms of any and all such proposed material related party transactions and has
the ultimate authority as to whether or not we enter into such transactions. We
will not enter into any material related party transaction without the prior
consent of our Board of Directors. In approving or rejecting the proposed
related party transaction, our Board of Directors shall consider the relevant
facts and circumstances available and deemed relevant to them, including, but
not limited to the risks, costs and benefits to us, the terms of the
transaction, the availability of other sources for comparable services or
products, and, if applicable, the impact on a director’s interest to the Company
and our stockholders. We shall approve only those agreements that, in light of
known circumstances, are in, or are not inconsistent with, our best interests,
as our Board of Directors determines in the good faith exercise of its
discretion.




59




Item
14.  Principal Accountant Fees and Services.




We have
selected Marcum llp, as our independent accountants for the year ended December
31, 2009. The audit services to be provided by Marcum llp consist of examination
of financial statements, services relative to filings with the Securities and
Exchange Commission, and consultation in regard to various accounting matters.
The financial statements included with this Annual Report for the year ended
December 31, 2009 have been audited by Marcum llp  and for the year
ended December 31, 2008 and 2007 were audited by Connolly, Grady &
Cha.  The following table presents fees for professional audit
services rendered by our registered independent public accountants for each of
the two fiscal years set forth below, and fees billed for other services
performed for the years ended December 31, 2009 and 2008.




Year
      Ended
              December
      31,
              2009
            
            
            Year
      Ended
              December
      31,
              2008Audit
      Fees (1)
            
            $
            38,500
            
            
            $
            35,000Audit-Related
      Fees (2)
            
            
            —
            
            
            
            —Tax
      Fees (3)
            
            
            7,500
            
            
            
            7,500All
      Other Fees (4)
            
            
            —
            
            
            
            —Total
            
            $
            46,000
            
            
            $
            42,500







(1)
            Audit services consist of audit work performed in the preparation of
      financial statements for the fiscal year and for the review of financial
      statements included in Quarterly Reports on Form 10-Q during the fiscal
      year, as well as work that generally only the independent auditor can
      reasonably be expected to provide, including consents for registration
      statement flings and responding to SEC comment letters on annual and
      quarterly filings.




(2)
            Audit-related services consist of assurance and related services that are
      traditionally performed by the independent auditor, including due
      diligence related to mergers and acquisitions, agreed upon procedures
      report and accounting and regulatory
  consultations.




(3)
            Tax services consist of all services performed by the independent
      auditor’s tax personnel, except those services specifically related to the
      audit of the financial statements, and includes fees in the areas of tax
      compliance, tax planning, and tax
advice.




(4)
            Other services consist of those service not captured in the other
      categories.




We have
determined that the services provided by our independent auditors and the fees
paid to them for such services has not compromised the independence of our
independent auditors.




As our
Board of Directors currently consists solely of four individuals, none of whom
is independent, the engagement of our independent accountants and auditors is
approved by our Board of Directors acting as the audit committee. Accordingly,
our entire Board, he has responsibility for appointing, setting compensation and
overseeing the work of the independent auditor.





Pursuant
to Section 10A(i)(2) of the Securities Exchange Act of 1934, we are
responsible for listing the non-audit services approved by our Board (acting as
the Audit Committee) to be performed by our independent registered public
accounting firm. During the fourth quarter of fiscal 2009, we did not
pre-approve the performance of any non-audit services by our independent
registered public accounting firm.




60




Part
IV





Item
15.  Exhibits and Financial Statement Schedules.




Item
      15.
              
              Exhibits
      and Financial Statement Schedules.(A)
              
              Financial
      StatementsThe
      following financial statements of the Company and the related reports of
      Independent Public Accounting Firms thereon are set forth immediately
      following the Index of Financial Statements which appears on page F-1 of
      this report:Independent
      Registered Public Accounting Firms ReportsBalance
      Sheets as of December 31, 2009 and 2008Statements
      of Operations for the years ended December 31, 2009, 2008 and
      2007Statements
      of Stockholders' Equity for the years ended December 31, 2009, 2008 and
      2007Statements
      of Cash Flows for the years ended December 31, 2009, 2008 and
      2007Notes
      to Financial Statements(B)
              
              Financial
      Statement SchedulesAll
      other schedules for which provision is made in the applicable accounting
      regulations of the Securities and Exchange Commission are not required
      under the related instructions or are inapplicable and therefore have been
      omitted.(C)
              
              ExhibitsThe
      exhibits listed under the Exhibit Index are filed as part of this Annual
      Report on Form 10-K. The exhibits designated with an asterisk (*) are
      filed herewith. Certain portions of exhibits marked with the symbol (#)
      have been granted confidential treatment by the Securities and Exchange
      Commission or are subject to requests for confidential treatment filed
      with the Securities and Exchange Commission. Such portions have been
      omitted and filed separately with the Commission. All other exhibits have
      been previously filed with the Commission and, pursuant to 17 C.F.R.
      Sec.230.411, are incorporated by reference to the document referenced in
      brackets following the descriptions of such
  exhibits.





61





Exhibit No.
            
            Description2.1
            
            Intellectual
      Property Assets Purchase Agreement between the Company and Peace Mountain
      Natural Beverages Corp. (filed as Exhibit 2.1 to Quarterly Report on Form
      10-Q for the quarter ended June 30, 2009).2.2
            
            Amendment
      to Intellectual Property Assets Purchase Agreement between the Company and
      Peace Mountain Natural Beverages Corp. (filed as Exhibit 2.1 to Quarterly
      Report on Form 10-Q for the quarter ended June 30,
  2009).3.1
            
            Certificate
      of Incorporation, as amended (filed as Exhibit 3.1 to Registration
      Statement on Form SB-2 filed with the Commission on September 18,
      2002)3.1.1
            
            Certificate
      of Amendment to Articles of Incorporation (filed as Exhibit 3.1 to Current
      Report on Form 8-K filed on December 28, 2006).3.1.2
            
            Certificate
      of Designation, Rights, Preferences and Limitations of Series A
      Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 of
      the Company’s Current Report on form 8-K filed on May 4,
      2009).3.1.3
            
            Certificate of Amendment to
      Articles of Incorporation. (filed as Exhibit 3.1 to Current Report on Form
      8-K filed on July 7, 2009).3.2
            
            Amended
      By-laws (filed as Exhibit 3.2 to Current Report on Form 8-K filed on
      November 13, 2006).4.1
            
            Specimen
      of Common Stock Certificate (filed as Exhibit 4.1 to Registration
      Statement on Form SB-2 filed with the Commission on September 18,
      2002).4.2
            
            Form
      of Warrant granted upon conversion of Convertible Debentures (filed as
      Exhibit 4.4 to Registration Statement on Form 10-SB filed with the
      Commission on October 19, 2005).4.3
            
            Form
      of Warrant issued in Private Sales of Securities (filed as Exhibit 4.5 to
      Registration Statement on Form 10-SB/A filed with the Commission on
      February 8, 2006).4.4
            
            Form
      of Warrant issued in February 2007 pursuant to Distribution Agreement
      (filed as Exhibit 4.10 to Annual Report on Form 10-KSB for the year ended
      December 31, 2006.4.5
            
            Secured
      Note payable to Valley Green Bank (filed as Exhibit 4.11 to Quarterly
      Report on Form 10-QSB for the quarter ended March 31,
    2007).4.6
            
            Form
      of Agent Warrant issued in connection with 2008 private placements (filed
      as Exhibit 4.12 to Annual Report on Form 10-K for the year ended December
      31, 2008).4.7
            
            Form
      of Warrant issued to Members of Advisory Board (filed as Exhibit 4.13 to
      Annual Report on Form 10-K for the year ended December 31,
      2008).4.8
            
            Form
      of Warrant issued to Ronald Wilson in April 2008 (filed as Exhibit 4.14 to
      Annual Report on Form 10-K for the year ended December 31,
      2008).4.9(1)
            
            Form
      of Warrant issued to Ronald Wilson in December 2008 (filed as Exhibit 4.15
      to Annual Report on Form 10-K for the year ended December 31,
      2008).4.10
            
            Form
      of Warrant issued to Mr. John David Alden (filed as Exhibit 4.1 to
      Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009).4.11
            
            Form
      of Warrant issued to Advisory Board Member (filed as Exhibit 4.2 to
      Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009).4.12
            
            Form
      of Warrant issued to Liquid Mojo LLC (filed as Exhibit 4.3 to Quarterly
      Report on Form 10-Q for the quarter ended June 30,
  2009).4.13
            
            Form
      of Agent Warrant issued in connection with private placements of common
      stock (filed as Exhibit 4.1 to Current Report on Form 8-K filed on January
      5, 2010).





10.1
            
            Agreement
      and Plan of Reorganization with Inland Pacific Resources, Inc. (filed as
      Exhibit 10.2 to Registration Statement on Form SB-2/A filed with the
      Commission on January 29, 2003).




62




10.2#
            
            Agreement
      with Peace Mountain Natural Beverages Corporation, dated August 1, 2004
      (filed as Exhibit 10.3 to Registration Statement on Form 10-SB/A filed
      with the Commission on February 8,
2006).





10.3#
            
            Agreement
      with Interhealth Nutraceuticals, Inc., dated June 9, 2004 (filed as
      Exhibit 10.4 to Registration Statement on Form 10-SB/A filed with the
      Commission on February 8, 2006).10.4
      (1)
            
            Amended
      Stock Option Plan and Form of Option Award (filed as Exhibit B to
      definitive Information Statement dated December 5,
  2006).10.5
            
            Demand
      Note held by Madison Bank (filed as Exhibit 10.7 to Registration Statement
      on Form 10-SB/A filed with the Commission on December 16,
      2005).10.6#
            
            Amendment
      Agreement between the Company and Peace Mountain Natural Beverages Corp.
      (filed as an Exhibit to Annual Report on Form 10-KSB for
      the year ended December 31, 2006).10.7
            
            Forbearance
      Agreement between the Company and Madison Bank (filed as Exhibit 10.1 to
      Current Report on Form 8-K filed on January 10, 2007).10.8#
            
            Letter
      Agreement with Pasqual Croce (filed as Exhibit 10.15 to Annual Report on
      Form 10-K for the year ended December 31, 2008)10.9
            
            Form
      of subscription agreement entered into in connection with private
      placements of common stock in 2008(filed as Exhibit 10.16 to Annual Report
      on Form 10-K for the year ended December 31, 2008).10.10(1)
            
            Employment
      Letter with Ronald Wilson dated as of December 1, 2008 (filed as Exhibit
      10.17 to Annual Report on Form 10-K for the year ended December 31,
      2008).10.11
            
            Sublease
      with Hallinan Capital Corp. for Three Bala Plaza, Suite 101 (filed as
      Exhibit 10.18 to Annual Report on Form 10-K for the year ended December
      31, 2008).10.12*
            
            Agreement
      with United Capital Funding, as amended at September 22,
    2009.10.13
            
            Form
      of subscription agreement entered into in connection with private
      placements of common stock in 2009 (filed as Exhibit 10.1 to Current
      Report on Form 8-K filed on May 4, 2009).10.14
      (1)
            
            2009
      Equity Incentive Compensation Plan and form of Stock Option Agreement
      (filed as Annex B to the Company’s Proxy Statement dated May 28,
      2009).10.15
            
            Settlement
      Agreement between the Company and Peace Mountain Natural Beverages Corp.
      (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
      the quarter ended June 30, 2009).10.16
            
            Consulting
      Agreement between the Company and Mr. John David Alden (filed as Exhibit
      10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009).10.17
            
            Trademark
      Assignment between the Company and Peace Mountain Natural Beverages Corp.
      (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for
      the quarter ended June 30, 2009).10.18
      #
            
            Distribution
      Agreement with Canada Dry Bottling Company of New York (filed as Exhibit
      10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      June 30, 2009).10.19
            
            Form
      of subscription agreement entered into in connection with private
      placements of common stock in 2009 (filed as Exhibit 10.1 to Current
      Report on Form 8-K filed on January 5, 2010).14.1
            
            Code
      of Ethics (filed as Exhibit 14.1 to Annual Report on Form 10-K for the
      year ended December 31, 2008)23.1*
            
            Consent
      of Registrant’s independent registered public accounting
    firm.23.2*
            
            Consent
      Registrant’s former independent registered public accounting
      firm.31.1*
            
            Certification
      of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)
      and 15(d) -14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002




63




31.2*
            
            Certification
      of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)
      and 15(d) -14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2*
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.







(1) 
Compensation plans and arrangements for executives and others.




64





Index to Financial
Statements





PageReport
      on Independent Registered Public Accounting Firm for the year ended
      December 31, 2009
            
            
            F-1Report
      on Independent Registered Public Accounting Firm for the year ended
      December 31, 2008 and 2007
            
            
            F-2Financial
      StatementsBalance
      Sheets
            
            
            F-3
      - F-4Statements
      of Operations
            
            
            F-5Statements
      of Stockholders' Equity (Deficit)
            
            
            F-6
      - F-9Statements
      of Cash Flows
            
            
            F-10
      - F-11Notes
      to Financial Statements
            
            F-10
      - F-31




65




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Shareholders


of Skinny Nutritional
Corp.




We have
audited the accompanying balance sheet of Skinny Nutritional Corp. (the
“Company”) as of December 31, 2009, and the related statements of operations,
stockholders’ equity and cash flows for the year then ended.  These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Skinny Nutritional Corp., as of
December 31, 2009, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  As discussed in Note 2 to the financial
statements, the Company has incurred losses since inception and has not yet been
successful in establishing profitable operations.  Further, the
Company has current liabilities in excess of current assets.  These
factors raise substantial doubt about the ability of the Company to continue as
a going concern.  Management’s plans in regards to these matters are
also described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.







/s/
Marcum llp


Bala
Cynwyd, PA


April 1,
2010




F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


Skinny
Nutritional Corp.


3 Bala
Plaza, Suite 101


Bala
Cynwyd, PA 19004





We have
audited the accompanying balance sheets of Skinny Nutritional Corp. (a Nevada
Corporation) as of December 31, 2008 and the related statements of operations,
stockholders’ equity (deficit) and cash flows for each of the years in the two
year period ended December 31, 2008.  These financial statements are
the responsibility of the Company’s management.  Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s
internal control over financial reporting. Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Skinny Nutritional Corp. as of
December 31, 2008 and the results of their operations and their cash flows for
each of the years in the two year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United States of
America.




The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern.  As discussed in Note 2 to the financial
statements, the Company has incurred losses since inception and has not yet been
successful in establishing profitable operations.  Further, the
Company has current liabilities in excess of current assets.  These
factors raise substantial doubt about the ability of the Company to continue as
a going concern.  Management’s plans in regards to these matters are
also described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.




/s/ Connolly, Grady & Cha,
P.C.




Certified
Public Accountants




Philadelphia,
Pennsylvania




April 6,
2009




F-2




SKINNY
NUTRITIONAL CORP.





BALANCE
SHEETS





DECEMBER
31, 2009 AND 2008




2009
            
            
            2008AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            190,869
            
            
            $
            236,009Accounts
      receivable, net
            
            
            568,135
            
            
            
            489,944Inventory
            
            
            323,435
            
            
            
            231,405Prepaid
      expenses
            
            
            120,392
            
            
            
            64,920Total
      Current Assets
            
            
            1,202,831
            
            
            
            1,022,278Property
      and Equipment, net
            
            
            24,792
            
            
            
            --Deposits
            
            
            49,192
            
            
            
            45,346Trademarks
            
            
            783,101
            
            
            
            --Total
      Assets
            
            $
            2,059,916
            
            
            $
            1,067,624




The
accompanying notes are an integral part of these financial
statements.




F-3




SKINNY
NUTRITIONAL CORP.





BALANCE
SHEETS





DECEMBER
31, 2009 AND 2008





2009
              
              
              2008Liabilities
      and Stockholders’ Equity (Deficit)Current
      LiabilitiesRevolving
      line of credit
              
              $
              321,815
              
              
              $
              3,199Note
      payable
              
              
              45,924
              
              
              
              200,000Accounts
      payable
              
              
              906,030
              
              
              
              873,315Accrued
      expenses
              
              
              814,518
              
              
              
              102,796Current
      portion of convertible notes
              
              
              
              
              
              
              44,000Settlements
      payable
              
              
              
              
              
              
              75,000Advances
      on purchase of common stock
              
              
              
              
              
              
              375,600Total
      Current Liabilities
              
              
              2,088,287
              
              
              
              1,673,910Commitments
      and ContingenciesStockholders'
      Equity (Deficit)Series
      A Convertible, preferred stock, $.001 par value, 1,000,000 sharesauthorized,
      2,465 shares issued and outstanding
              
              
              2Common
      stock, $.001 par value, 500,000,000 sharesauthorized,
      289,921,081 shares issued and outstandingat
      December 31, 2009 and 195,503,317 issued andoutstanding
      at December 31, 2008
              
              
              289,921
              
              
              
              195,503Deferred
      financing costs
              
              
              (157,832
              )
              
              
              (473,500
              )Additional
      paid-in capital
              
              
              30,752,359
              
              
              
              21,901,368Accumulated
      deficit
              
              
              (30,912,821
              )
              
              
              (22,229,657
              )Stockholders’
      Equity (Deficit)
              
              
              (28,371
              )
              
              
              (
      606,286
              )Total
      Liabilities and Stockholders’ Equity (Deficit)
              
              $
              2,059,916
              
              
              $
              1,067,624




The
accompanying notes are an integral part of these financial
statements.




F-4




SKINNY
NUTRITIONAL CORP.





STATEMENTS
OF OPERATIONS
 
 FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007





2009
            
            
            2008
            
            
            2007Revenue,
      Net
            
            $
            4,146,066
            
            
            $
            2,179,055
            
            
            $
            752,825Cost
      of Goods Sold
            
            
            3,515,156
            
            
            
            1,873,477
            
            
            
            532,812Gross
      Profit
            
            
            630,910
            
            
            
            305,578
            
            
            
            220,013Operating
      ExpensesMarketing
      and advertising
            
            
            2,652,063
            
            
            
            2,083,646
            
            
            
            721,442General
      and administrative
            
            
            5,212,487
            
            
            
            3,421,468
            
            
            
            1,715,218Total
      Operating Expenses
            
            
            7,864,550
            
            
            
            5,505,114
            
            
            
            2,436,660Net
      Loss from Operations
            
            
            (7,233,640
            )
            
            
            (5,199,536
            )
            
            
            (2,216,647
            )Other
      Income (Expense)Loss
      from disposition of assets
            
            
            
            
            
            
            
            
            
            
            (9,690
            )Interest
      expense
            
            
            (72,191
            )
            
            
            (67,042
            )
            
            
            (120,514
            )Other
      income
            
            
            
            
            
            
            2,081
            
            
            
            20,172Debt
      conversion costs
            
            
            
            
            
            
            (967,626
            )
            
            
            (3,371,964
            )Total
      Other Income (Expense)
            
            
            (72,191
            )
            
            
            (1,032,587
            )
            
            
            (3,481,996
            )Net
      Loss
            
            $
            (7,305,831
            )
            
            $
            (6,232,123
            )
            
            $
            (5,698,643
            )Deemed
      Dividends on Preferred Stock
            
            
            (1,377,333
            )
            
            
            --
            
            
            
            --Net
      Loss Attributable to Common Stockholders
            
            $
            (8,683,164
            )
            
            $
            (6,232,123
            )
            
            $
            (5,698,643
            )Weighted
      average common shares outstanding, basis and diluted
            
            
            206,192,127
            
            
            
            135,773,615
            
            
            
            82,706,893Net
      loss per share attributable to common stockholders, basic and
      diluted
            
            
            (.03)
            
            
            
            (.05)
            
            
            
            (.07)




The
accompanying notes are an integral part of these financial
statements.




F-5


SKINNY
NUTRITIONAL CORP.





STATEMENTS
OF STOCKHOLDERS’ DEFICIENCY





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


Additional
              
              
              DeferredPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-In
              
              
              Financing
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Costs
              
              
              Deficit
              
              
              TotalBalance - December 31,
      2006
              
              
              
              
              
              
              
              
              
              
              41,473,328
              
              
              $
              41,473
              
              
              $
              6,733,408
              
              
              
              
              
              
              $
              (10,298,891
              )
              
              $
              (3,524,010
              )Common
      stock, $.075 per share, net of $365,602 costs to issue
              
              
              
              
              
              
              
              
              
              
              15,848,179
              
              
              
              15,849
              
              
              
              816,162
              
              
              
              
              
              
              
              
              
              
              
              832,011Convertible
      debt conversion, $.50 per share
              
              
              
              
              
              
              
              
              
              
              40,000
              
              
              
              40
              
              
              
              19,960
              
              
              
              
              
              
              
              
              
              
              
              20,000Convertible
      debt conversion, $.10 per share plus costs of $3,042,525
              
              
              
              
              
              
              
              
              
              
              17,950,000
              
              
              
              17,950
              
              
              
              4,819,575
              
              
              
              
              
              
              
              
              
              
              
              4,837,525Convertible
      debt conversion, $.10 per share plus costs of $227,939
              
              
              
              
              
              
              
              
              
              
              3,013,333
              
              
              
              3,013
              
              
              
              450,926
              
              
              
              
              
              
              
              
              
              
              
              453,939Convertible
      debt conversion, $.05 per share plus costs of $101,500
              
              
              
              
              
              
              
              
              
              
              1,600,000
              
              
              
              1,600
              
              
              
              179,900
              
              
              
              
              
              
              
              
              
              
              
              181,500Common
      stock in exchange for note and interest
              
              
              
              
              
              
              
              
              
              
              2,629,720
              
              
              
              2,630
              
              
              
              133,314
              
              
              
              
              
              
              
              
              
              
              
              135,944Common
      stock in exchange for services, $.075 per share
              
              
              
              
              
              
              
              
              
              
              1,333,333
              
              
              
              1,333
              
              
              
              98,670
              
              
              
              
              
              
              
              
              
              
              
              100,003Common
      stock in exchange for services, $.006 per share
              
              
              
              
              
              
              
              
              
              
              125,000
              
              
              
              125
              
              
              
              9,250
              
              
              
              
              
              
              
              
              
              
              
              9,375Common
      stock per reset agreement
              
              
              
              
              
              
              
              
              
              
              9,809,332
              
              
              
              9,809
              
              
              
              (9,809
              )
              
              
              
              
              
              
              
              
              
              
              --Options
      issued in exchange for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              232,550
              
              
              
              
              
              
              
              
              
              
              
              232,550Capitalize
      inventory balances
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,604
              
              
              
              
              
              
              
              
              
              
              
              18,604Warrants
      issued in exchange for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              832,473
              
              
              
              
              
              
              
              
              
              
              
              832,473Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,698,643
              )
              
              
              (5,698,643
              )Balance - December 31,
      2007
              
              
              
              
              
              
              
              
              
              
              93,822,225
              
              
              $
              93,822
              
              
              $
              14,334,983
              
              
              
              
              
              
              $
              (15,997,534
              )
              
              $
              (1,568,729
              )




The
accompanying notes are an integral part of these financial
statements.




F-6





SKINNY NUTRITIONAL CORP.





STATEMENTS
OF STOCKHOLDERS’ DEFICIENCY (CONTINUED)





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


Additional
              
              
              DeferredPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-In
              
              
              Financing
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Costs
              
              
              Deficit
              
              
              TotalBalance - December 31,
      2007, forward
              
              
              
              
              
              
              
              
              
              
              93,822,225
              
              
              $
              93,822
              
              
              $
              14,334,983
              
              
              
              
              
              
              $
              (15,997,534
              )
              
              $
              (1,568,729
              )Common
      stock, $.04 per share, net of $255,926 costs to issue
              
              
              
              
              
              
              
              
              
              
              70,700,000
              
              
              
              70,700
              
              
              
              2,501,374
              
              
              
              
              
              
              
              
              
              
              
              2,572,074Convertible
      debt conversion, $.14 per share plus debt conversion costs of
      $454,052
              
              
              
              
              
              
              
              
              
              
              2,116,793
              
              
              
              2,117
              
              
              
              748,286
              
              
              
              
              
              
              
              
              
              
              
              750,403Convertible
      debt conversion, $.10 per share plus debt conversion costs of
      $179,437
              
              
              
              
              
              
              
              
              
              
              825,000
              
              
              
              825
              
              
              
              261,112
              
              
              
              
              
              
              
              
              
              
              
              261,937Convertible
      debt conversion, $.05 per share plus debt conversion costs of
      $63,000
              
              
              
              
              
              
              
              
              
              
              1,200,000
              
              
              
              1,200
              
              
              
              121,800
              
              
              
              
              
              
              
              
              
              
              
              123,000Convertible
      debt conversion, $.04 per share plus debt conversion costs of
      $271,137
              
              
              
              
              
              
              
              
              
              
              1,369,375
              
              
              
              1,369
              
              
              
              324,543
              
              
              
              
              
              
              
              
              
              
              
              325,912Common
      stock in exchange for note and interest, $.14 per share
              
              
              
              
              
              
              
              
              
              
              1,155,870
              
              
              
              1,156
              
              
              
              160,666
              
              
              
              
              
              
              
              
              
              
              
              161,822Common
      stock in exchange for note and interest, $.05 per share
              
              
              
              
              
              
              
              
              
              
              300,000
              
              
              
              300
              
              
              
              14,700
              
              
              
              
              
              
              
              
              
              
              
              15,000Common
      stock in exchange for note and interest, $.04 per share
              
              
              
              
              
              
              
              
              
              
              1,975,000
              
              
              
              1,975
              
              
              
              77,025
              
              
              
              
              
              
              
              
              
              
              
              79,000Common
      stock in exchange for services rendered, $.33 per share
              
              
              
              
              
              
              
              
              
              
              300,000
              
              
              
              300
              
              
              
              98,700
              
              
              
              
              
              
              
              
              
              
              
              99,000




The
accompanying notes are an integral part of these financial statements.




F-7





SKINNY NUTRITIONAL CORP.





STATEMENTS
OF STOCKHOLDERS’ DEFICIENCY (CONTINUED)





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


Additional
                  
                  
                  DeferredPreferred
      Stock
                  
                  
                  Common
      Stock
                  
                  
                  Paid-In
                  
                  
                  Financing
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Shares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Costs
                  
                  
                  Deficit
                  
                  
                  TotalCommon
      stock to officers for guarantees
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,150,000
                  
                  
                  $
                  6,150
                  
                  
                  $
                  467,350
                  
                  
                  $
                  (473,500
                  )
                  
                  
                  
                  
                  
                  $
                  —Common
      stock, $.06 per share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,564,417
                  
                  
                  
                  11,564
                  
                  
                  
                  682,301
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  693,865Common
      stock in exchange for warrant cancellation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,024,637
                  
                  
                  
                  2,025
                  
                  
                  
                  (2,025
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —Options
      issued in exchange for services
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  448,939
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  448,939Warrants
      issued in exchange for services,
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,483,614
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,483,614Common
      stock for compensation, $.09 per share
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,000,000
                  
                  
                  
                  2,000
                  
                  
                  
                  178,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  180,000Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (6,232,123
                  )
                  
                  
                  (6,232,123
                  )Balance - December 31,
      2008
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  195,503,317
                  
                  
                  $
                  195,503
                  
                  
                  $
                  21,901,368
                  
                  
                  $
                  (473,500
                  )
                  
                  $
                  (22,229,657
                  )
                  
                  $
                  (606,286
                  )




The
accompanying notes are an integral part of these financial statements.




F-8




SKINNY
NUTRITIONAL CORP.





STATEMENTS
OF STOCKHOLDERS’ DEFICIENCY (CONTINUED)





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007




Additional
              
              
              DeferredPreferred
      Stock
              
              
              Common
      Stock
              
              
              Paid-In
              
              
              Financing
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Costs
              
              
              Deficit
              
              
              TotalBalance - December 31,
      2008
              
              
              
              
              
              
              
              
              
              
              195,503,317
              
              
              $
              195,503
              
              
              $
              21,901,368
              
              
              $
              (473,500
              )
              
              $
              (22,229,657
              )
              
              $
              (606,286
              )Common
      stock, $.04 per share, net of proceeds of $253,500 received in
      2008
              
              
              
              
              
              
              
              
              
              
              8,375,000
              
              
              
              8,375
              
              
              
              73,125
              
              
              
              
              
              
              
              
              
              
              
              81,500Options
      issued in exchange for services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,131,351
              
              
              
              
              
              
              
              
              
              
              
              1,131,351Deferred
      financing costs
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              315,668
              
              
              
              
              
              
              
              315,668Common
      stock, $.06 per share, net of offering costs of $86,500
              
              
              
              
              
              
              
              
              
              
              29,433,335
              
              
              
              29,433
              
              
              
              1,650,067
              
              
              
              
              
              
              
              
              
              
              
              1,679,500Common
      stock, $.06 per share, net of offering costs of $74,622
              
              
              
              
              
              
              
              
              
              
              21,230,418
              
              
              
              21,230
              
              
              
              1,177,973
              
              
              
              
              
              
              
              
              
              
              
              1,199,203Convertible
      debt conversion, $.06 per share
              
              
              
              
              
              
              
              
              
              
              92,500
              
              
              
              93
              
              
              
              3,907
              
              
              
              
              
              
              
              
              
              
              
              4,000Warrants
      issued in exchange for service
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,194,450
              
              
              
              
              
              
              
              
              
              
              
              1,194,450Preferred
      stock, $100 per share, net of offering costs of $70,000
              
              
              15,000
              
              
              $
              15
              
              
              
              
              
              
              
              
              
              
              
              1,429,985
              
              
              
              
              
              
              
              
              
              
              
              1,430,000Conversion
      of preferred stock into common stock
              
              
              (12,535
              )
              
              
              (13
              )
              
              
              20,891,666
              
              
              
              20,891
              
              
              
              (20,878
              )Common
      stock issued in lieu of preferred stock, $.06 per share, net of offering
      costs of $25,000
              
              
              
              
              
              
              
              
              
              
              8,916,667
              
              
              
              8,917
              
              
              
              501,083
              
              
              
              
              
              
              
              
              
              
              
              510,000Common
      stock in exchange for rent and services
              
              
              
              
              
              
              
              
              
              
              3,725,461
              
              
              
              3,726
              
              
              
              311,848
              
              
              
              
              
              
              
              
              
              
              
              315,574Common
      stock in exchange for board services
              
              
              
              
              
              
              
              
              
              
              250,000
              
              
              
              250
              
              
              
              22,250
              
              
              
              
              
              
              
              
              
              
              
              22,500Warrant
      conversion to common stock
              
              
              
              
              
              
              
              
              
              
              1,502,717
              
              
              
              1,503
              
              
              
              (1,503
              )
              
              
              
              
              
              
              
              
              
              
              --Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (7,305,831
              )
              
              
              (7,305,831
              )Deemed
      dividends on preferred stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,377,333
              
              
              
              
              
              
              
              (1,377,333
              )Balance - December 31,
      2009
              
              
              2,465
              
              
              $
              2
              
              
              
              289,921,081
              
              
              $
              289,921
              
              
              $
              30,752,359
              
              
              $
              (157,832
              )
              
              $
              (30,912,821
              )
              
              $
              28,371




The
accompanying notes are an integral part of these financial statements.




F-9






SKINNY
NUTRITIONAL CORP.





STATEMENTS
OF CASH FLOWS





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007





2009
            
            
            2008
            
            
            2007Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (7,305,831
            )
            
            $
            (
      6,232,123
            )
            
            $
            (
      5,698,643
            )Adjustments
      to reconcile net loss to netcash used in operating activities:Allowance
      for doubtful accounts
            
            
            198,781Depreciation
            
            
            5,773Loss
      on disposal of property and equipment
            
            
            
            
            
            
            
            
            
            
            6,274Common
      stock issued for compensation
            
            
            
            
            
            
            180,000Stock
      issued for service
            
            
            653,742
            
            
            
            
            
            
            
            109,378Warrants
      issued for services
            
            
            1,194,450
            
            
            
            1,483,614
            
            
            
            832,473Options
      issued for services
            
            
            1,131,351
            
            
            
            448,939
            
            
            
            232,550Debt
      conversion costs
            
            
            
            
            
            
            967,626
            
            
            
            3,371,964Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (276,972
            )
            
            
            (88,457
            )
            
            
            (398,081
            )Inventories
            
            
            (92,030
            )
            
            
            (144,830
            )
            
            
            (67,971
            )Prepaid
      expenses
            
            
            (55,472
            )
            
            
            (61,740
            )
            
            
            43,280Deposits
            
            
            (3,846
            )
            
            
            (45,346
            )Accounts
      payable
            
            
            32,715
            
            
            
            231,018
            
            
            
            345,701Accrued
      expenses
            
            
            374,162
            
            
            
            45,296
            
            
            
            27,500Accrued
      interest
            
            
            
            
            
            
            (85,271
            )
            
            
            (33,635
            )Settlements
      payable
            
            
            (75,000)
            
            
            
            (29,350
            )
            
            
            (75,650
            )Total
      Adjustments
            
            
            3,087,654
            
            
            
            2,901,499
            
            
            
            4,393,783Net
      Cash Used in Operating Activities
            
            
            (4,218,177
            )
            
            
            (3,330,624
            )
            
            
            (1,304,860
            )Cash
      Flows from Investing ActivitiesPurchase
      of property and equipment
            
            
            (30,565)Purchase
      of trademarks
            
            
            (445,541)Net
      Cash Used in Investing Activities
            
            
            (476,106)





The
accompanying notes are an integral part of these financial
statements.




F-10


SKINNY
NUTRITIONAL CORP.





STATEMENTS
OF CASH FLOWS (CONTINUED)





FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007




2009
                        
                        
                        
                        2008
                        
                        
                        
                        2007Cash
      Flows from Financing ActivitiesCommon
      stock issued for note and interest
                        
                        
                        
                        
                        
                        $
                        255,822
                        
                        
                        $
                        135,944Advances
      on purchase of common stock
                        
                        $
                        (375,600
                        )
                        
                        
                        375,600Proceeds
      from (repayments of) convertible debenture, net
                        
                        
                        
                        
                        
                        
                        70,699
                        
                        
                        
                        (83,999)Proceeds
      from revolving line of credit
                        
                        
                        318,616
                        
                        
                        
                        (314,361
                        )
                        
                        
                        317,560Proceeds
      from (repayment of) note payable
                        
                        
                        (154,076
                        )
                        
                        
                        (140,000
                        )
                        
                        
                        25,467Proceeds
      from (repayment of) convertible notes
                        
                        
                        (  40,000
                        )
                        
                        
                        (220,936
                        )
                        
                        
                        220,936Proceeds
      from (repayment of) long-term debt
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (300,283
                        )Common
      stock issued, net of offering costs
                        
                        
                        3,470,203
                        
                        
                        
                        3,521,865
                        
                        
                        
                        832,011Preferred
      stock issued,  net of offering costs
                        
                        
                        1,430,000Net
      Cash Provided by Financing Activities
                        
                        
                        4,649,143
                        
                        
                        
                        3,548,689
                        
                        
                        
                        1,147,636Net
      (Decrease) Increase in Cash
                        
                        
                        (45,140
                        )
                        
                        
                        218,065
                        
                        
                        
                        (157,224
                        )Cash
      and Cash Equivalents - Beginning
                        
                        
                        236,009
                        
                        
                        
                        17,944
                        
                        
                        
                        175,168Cash
      and Cash Equivalents - Ending
                        
                        $
                        190,869
                        
                        
                        $
                        236,009
                        
                        
                        $
                        17,944SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONCash
      paid during the years for:Interest
                        
                        $
                        72,191
                        
                        
                        $
                        67,042
                        
                        
                        $
                        20,035Non-cash
      financing activity for deemed dividend or preferred stock
                        
                        $
                        1,377,333
                        
                        
                        $
                        —
                        
                        
                        $
                        —Non-cash
      financing activity for convertible debt
                        
                        $
                        4,000
                        
                        
                        $
                        —
                        
                        
                        $
                        —




The
accompanying notes are an integral part of these financial
statements.




F-11




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS




Note
1 - Organization and Operations





Skinny
Nutritional Corp (the “Company”), is incorporated  in Nevada and its
operations are located in Pennsylvania.





The
Company is the exclusive worldwide owner of several trademarks for the use of
the term “Skinny.” The Company develops and markets a line of functional
beverages, all branded with the name “Skinny” that are marketed and distributed
primarily to calorie and weight conscious consumers.





Note 2 - Going Concern AND mANAGEMENT pLANS





The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going
      concern.  However, the Company has incurred losses since its
      inception and has not yet been successful in establishing profitable
      operations. These factors raise substantial doubt about the ability of the
      Company to continue as a going concern.  In this regard,
      management is dependent on raising additional funds through sales of its
      common stock or through loans from shareholders.  There is no
      assurance that the Company will be successful in raising additional
      capital or achieving profitable operations.  The financial
      statements do not include any adjustments that might result from the
      outcome of these uncertainties.
              
              To
      date, the company has needed to rely upon selling equity and debt
      securities in private placements to generate cash to implement our plan of
      operations. We have an immediate need for cash to fund our working capital
      requirements and business model objectives and we intend to either
      undertake private placements of our securities, either as a self-offering
      or with the assistance of registered broker-dealers, or negotiate a
      private sale of our securities to one or more institutional investors.
      However, the company currently has no firm agreements with any
      third-parties for such transactions and no assurances can be given that we
      will be successful in raising sufficient capital from any proposed
      financings.
              
              At
      December 31, 2009, our cash and cash equivalents was approximately
      $191,000. The company has been substantially reliant on capital raised
      from private placements of our securities, in addition to our revolving
      line of credit from United Capital Funding, to fund our operations. During
      2009, we raised an aggregate amount of $4,900,203 from the sale of
      securities to accredited investors in private placements.
              
              Based
      on our current levels of expenditures and our business plan, we believe
      that our existing cash and cash equivalents (including the proceeds
      received from our recent private placement), will only be sufficient to
      fund our anticipated levels of operations for a minimal
      period  and without raising additional capital, the Company will
      be limited in it’s projected growth. This will depend, however, on our
      ability to execute on our 2010 operating plan and to manage our costs in
      light of developing economic conditions and the performance of our
      business. Accordingly, generating sales in that time period is important
      to support our business. However, we cannot guarantee that we will
      generate such growth. If we do not generate sufficient cash flow to
      support our operations during that time frame, we will need to raise
      additional capital and may need to do so sooner than currently
      anticipated. We cannot assure you that any financing can be obtained or,
      if obtained, that it will be on reasonable terms.
              
              If
      we raise additional funds by selling shares of common stock or convertible
      securities, the ownership of our existing shareholders will be diluted.
      Further, if additional funds are raised though the issuance of equity or
      debt securities, such additional securities may have powers, designations,
      preferences or rights senior to our currently outstanding securities.
      Further, if expenditures required to achieve our plans are greater than
      projected or if revenues are less than, or are generated more slowly than,
      projected, we will need to raise a greater amount of funds than currently
      expected. Without realization of additional capital, it would be unlikely
      for us to continue as a going
concern.





F-12





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS




Note
3 - Summary of Significant Accounting Policies





Basis of Reporting





The
      Company had one wholly owned subsidiary, Creative Enterprises,
      Inc.  Creative Enterprises, Inc. owned Creative Partners
      International, LLC. Creative Partners LLC was dissolved in fiscal 2009 and
      Creative Enterprises, Inc. was inactive during 2009, accordingly, for 2009
      they are not included in the financial
      statements.  The  Company’s financial statements for
      the years ended December 31, 2008 and 2007  included its
      wholly-owned subsidiary Creative Enterprises, Inc. and its wholly-owned
      subsidiary Creative Partners International, LLC. There was no financial
      activity in the wholly owned subsidiary, Creative Enterprises, Inc. and
      its wholly-owned subsidiary, Creative Partners International, LLC, for the
      year ended December 31, 2008 and 2007.  All intercompany
      accounts and transactions, if any, were eliminated in the financial
      statements for the years ended December 31, 2008 and
  2007.





Cash
and Cash Equivalents





For
      purposes of reporting the statement of cash flows, the Company includes
      all cash accounts, which are not subject to withdrawal restrictions or
      penalties, and all highly liquid debt instruments purchased with a
      maturity of three months or less as cash and cash
      equivalents.  The carrying amount of financial instruments
      included in cash and cash equivalents approximates fair value because of
      the short maturities for the instruments
held.





Property
      and Equipment





Property and equipment are
      recorded at cost and depreciated over the estimated useful lives of the
      related assets, which range from five to seven
      years.  Depreciation is computed on the straight line method for
      financial reporting and income tax purposes. Repair and maintenance costs are
      expensed as they are incurred.Accounts
      Receivable





Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances.  Allowances have been made in the
      financial statements for any accounts management believes to be
      uncollectible.  The allowance for doubtful accounts was $219,675
      and $21,000 at December 31, 2009 and 2008, respectively.  The
      Company factors all of its trade receivables on a full recourse factoring
      arrangement.  The effective cost of the factor’s service is 30%
      of accounts receivable purchased by the factor.  The cost of
      factor collections was approximately $57,000, $41,000 and $0 for the years
      ended December 31, 2009, 2008 and 2007,
      respectively.  Factor costs are included in interest
      expense.




Inventories





Inventories
      are stated at the lower of cost to purchase and/or manufacture the
      inventory or the current estimated market value of the
      inventory.  We regularly review our inventory quantities on hand
      and record a provision for excess and obsolete inventory based primarily
      on our estimated forecast of product demand, production availability and
      /or our ability to sell the product(s) concerned.  Demand for
      our products can fluctuate significantly.  Factors that could
      affect demand for our products include unanticipated changes in consumer
      preferences, general market and economic conditions or other factors that
      may result in cancellations of advance orders or reductions in the rate of
      reorders placed by customers and/or continued weakening of economic
      conditions.  Additionally, management’s estimates of future
      product demand may be inaccurate, which could result in an understated or
      overstated provision required for excess and obsolete inventory. As of
      December 31, 2009 and 2008, the reserve for obsolescense was approximately
      $40,000 and $30,000, respectively.





Advertising
costs





Advertising costs are expensed as
incurred. Advertising expense totaled $276,651, $320,078 and $101,103 for the
years ended December 31, 2009, 2008 and 2007, respectively.




F-13




MARKET
DEVELOPMENT FUNDS AND COOPERATIVE ADVERTISING COSTS, REBATE PROMOTION COSTS AND
SLOTTING FEES





Market
development funds and cooperative advertising costs, rebate promotion costs, new
store opening fees and slotting fees are offset against gross sales in
accordance with Financial Accounting Standards Board Accounting Standards
Codification (ASC) 605-50





SHIPPING
AND HANDLING COSTS





Costs for
shipping and handling incurred by the Company for third partyshippers are
included in cost of sales. These expenses for the years ended December 31, 2009,
2008, and 2007, were $260,403, $137,156, and $41,522, respectively.





TRADEMARKS





The
trademarks are carried at cost with an indefinite life.  The
trademarks are tested for impairment annually as of December 31 or whenever
events or changes in circumstances indicate that the carrying amount may no
longer be recoverable.




F-14





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
3 - Summary of Significant Accounting Policies (continued)





Loss
      Per Share





Basic
      net loss per share is computed by dividing net loss available for common
      stock by the weighted average number of common shares outstanding during
      the period.





Stock
      Based Compensation





The
      Company measures compensation cost to employees from its equity incentive
      plan by measuring the cost of employee services received in exchange for
      an award of equity instruments based on the grant date fair value of the
      award.  Equity compensation issued to employees is expensed over
      the requisite service period (usually the vesting period).  The
      Company uses the Black-Scholes-Merton option pricing formula to estimate
      the fair value of the stock options at the date of grant.  The
      Black-Scholes-Merton option pricing formula was developed for use in
      estimating the fair value of traded options that have no vesting
      restrictions and are fully transferable.  Our employee stock
      options, however, have characteristics significantly different from those
      of traded options.  For example, employee stock options are
      generally subject to vesting restrictions and are generally not
      transferable.  In addition, option valuation models require the
      input of highly subjective assumptions, including the expected stock price
      volatility, the expected life of an option and the number of awards
      ultimately expected to vest.  Changes in subjective input
      assumptions can materially affect the fair value estimates of an
      option.  Furthermore, the estimated fair value of an option does
      not necessarily represent the value that will ultimately be realized by an
      employee.  We use historical data to estimate the expected price
      volatility, and the expected forfeiture rate.  We use the
      simplified method to estimate the expected option life.  The
      risk-free rate is based on the U.S.  Treasury yield curve in
      effect at the time of grant for the estimated life of the
      option.  If actual results are not consistent with our
      assumptions and judgments used in estimating the key assumptions, we may
      be required to increase or decrease compensation expense or income tax
      expense, which could be material to our results of
    operations.





Use
      of Estimates in the Preparation of Financial
  Statements





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.




Revenue
      Recognition




The
      Company sells products through multiple distribution channels including
      resellers and distributors. Revenue is recognized when the product is
      shipped to our retailers and distributors and is recognized net of
      discounts. At present, there are no returns privileges with our products.
      Management believes that adequate provision has been made for cash
      discounts, returns and spoilage based on our historical
      experience.The
      Company recognizes revenues from product sales or services provided when
      the following revenue recognition criteria are met: persuasive evidence of
      an arrangement exists, delivery has occurred or services have been
      rendered, the selling price is fixed or determinable and collectability is
      reasonably assured.  FASB ASC Topic 605, “Revenue Recognition”,
      provides guidance on the application of generally accepted accounting
      principles to selected revenue recognition issues.  The Company
      has concluded that its revenue recognition policy is appropriate and in
      accordance with FASB ASC Topic
605.





F-15





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
3 - Summary of Significant Accounting Policies (continued)





Fair
Value of Financial instruments approximates carrying amount




The Company’s financial instruments are cash
equivalents, accounts receivable, accounts payable revolving line of credit and
notes payable.  The recorded values of cash, accounts receivable,
accounts payable approximate their fair values based on their short-term
nature.  The recorded values of the revolving line of credit an notes
payable approximate their fair values, as interest approximates market
rates.





Note
4- Recent Accounting Pronouncements





In June
2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally
Accepted Accounting Principles,” as the single source of authoritative
nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP,
but is intended to simplify user access to all authoritative U.S. GAAP by
providing all authoritative literature related to a particular topic in one
place. All existing accounting standard documents will be superseded and all
other accounting literature not included in the FASB Codification will be
considered non-authoritative. These provisions of FASB ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009 and,
accordingly, are effective for the Company for the current fiscal reporting
period. The adoption of this pronouncement did not have an impact on the
Company’s financial condition or results of operations, but will impact the
Company’s financial reporting process by eliminating all references to
pre-codification standards. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards, and all other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative.




F-16





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
4 - Recent Accounting Pronouncements (continued)





In June
2009, the FASB issued ASC Topic 860-20 "Sale of Financial
Assets".  The new standard eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures in order to enhance information
reported to users of financial statements by providing greater transparency
about transfers of financial assets, including securitization transactions, and
an entity’s continuing involvement in and exposure to the risks related to
transferred financial assets.  ASC Topic 860-20 "Sale of Financial
Assets" is effective for fiscal years beginning after November 15,
2009.  The adoption of the provisions of ASC Topic 860-20 "Sale of
Financial Assets" is not expected to have a material effect on the Company’s
financial position, results of operations, or cash flow. This standard has not
yet been integrated into the Accounting Standard Codification.





In May
2009, the FASB issued guidance now codified as FASB ASC Topic 855, “Subsequent
Events,” which establishes general standards of accounting for, and disclosures
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This pronouncement is
effective for interim or fiscal periods ending after June 15, 2009. Accordingly,
the Company adopted these provisions of FASB ASC Topic 855 on April 1, 2009. The
adoption of this pronouncement did not have a material impact on the Company’s
consolidated financial position, results of operations or cash flows. However,
the provisions of FASB ASC Topic 855 resulted in additional disclosures with
respect to subsequent events. See Note 20 Subsequent Events, for this additional
disclosure.





In April
2009, the FASB issued guidance now codified as FASB ASC Topic 820, “Fair Value
Measurements and Disclosures”, which is intended to provide additional
application guidance and enhanced disclosures regarding fair value measurements
and impairments of securities and additional guidelines for estimating fair
value in accordance with additional guidance related to the disclosure of
impairment losses on securities and the accounting for impairment losses on debt
securities. This guidance is effective for fiscal years and interim periods
ended after June 15, 2009. The adoption of this pronouncement did not have a
material effect on the Company’s financial position, results of operations, or
cash flows.





In March
2008, the FASB issued guidance now codified as FASB ASC Topic 815, “Derivatives
and Hedging”, which requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. This pronouncement is effective for fiscal years and interim periods
beginning after November 15, 2008. The adoption of this pronouncement did not
have a material effect on the Company’s financial position, results of
operations, or cash flows.





In
December 2007, the FASB issued guidance now codified as FASB ASC Topic 805,
“Business Combinations”, which significantly changes the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, research and development assets
and restructuring costs. In addition, changes in deferred tax asset valuation
allowances and acquired income tax uncertainties in a business combination after
the measurement period will impact income taxes. This pronouncement is effective
for fiscal years beginning after December 15, 2008. The adoption of these
provisions will have an effect on the accounting for any businesses acquired in
the future.





In
December 2007, the FASB issued guidance now codified as FASB ASC Topic 805,
“Business Combinations”, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This pronouncement is effective for fiscal years and interim periods
within those fiscal years, beginning on or after December 15, 2008 and shall be
applied prospectively as of the beginning of the fiscal year in which the
guidance is initially adopted. The adoption of the provisions in this
pronouncement would have an impact on the presentation and disclosure of the
noncontrolling interest of any non wholly-owned businesses acquired in the
future.





Note
5 – Inventory






Inventories
at December 31 consisted of the following:




2009
                
                
                2008Raw
      materials
                
                $
                94,688
                
                
                $
                88,140Work
      in Process
                
                
                38,258
                
                
                
                —Finished
      Goods
                
                
                190,489
                
                
                
                143,265Total
                
                $
                323,435
                
                
                $
                231,405





F-17





NOTE
      6
            PROPERTY
      AND EQUIPMENT





Property
and equipment was composed of the following at December 31:





2009
            
            
            2008Office
      Equipment
            
            $
            10,131
            
            
            $
            0Furniture
      and Fixtures
            
            
            20,434
            
            
            
            030,565
            
            
            
            0Less:
      accumulated depreciation
            
            
            (5,773
            )
            
            
            0$
            24,792
            
            
            $
            0





Depreciation
expense of property and equipment was $5,773 year ended December 31,
2009.  There was no depreciation expense in 2008 and
2007.





Note 7 - Related Party Transactions





On
January 10, 2008 the Company issued two million shares of stock to its Chairman
in consideration for his personal guarantee of the Valley Green Loan. On March
24, 2008, the Company’s Board of Directors approved the grant of an aggregate of
2,075,000 restricted shares of common stock to each of Mr. Michael Salaman, its
Chairman and Mr. Donald McDonald, its Chief Executive Officer, in consideration
of their agreement to provide a personal guaranty in connection with the
factoring agreement the Company entered into in November 2007.  For
more information regarding this transaction see Note 11 to these financial
statements.




F-18






SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
7 - Related Party Transactions (continued)





In
connection with the Company’s private placement in 2008 of $1,875,000 shares of
its common stock, the Company’s Chief Executive Officer, Chief Financial Officer
and Chairman agreed not to exercise a total of 12,000,000 options and 2,000,000
warrants beneficially owned by them until such time as the Company’s
stockholders adopt an amendment to its Articles of Incorporation to increase the
number of the Company’s authorized shares of common stock.





Prior to
becoming its Chief Executive Officer, Mr. Ronald Wilson was appointed to the
company’s Advisory Board in March 2008 and in connection with that appointment
was granted warrants to purchase 1,500,000 shares of Common Stock exercisable at
$.05 per share for a stock based compensation expense to the company
of $183,000. Mr. Wilson had participated in a private placement of common stock
in April 2008 and purchased 2,500,000 shares of Common Stock in that
transaction. Subsequently, the company granted Mr. Wilson an additional warrant
to purchase 1,000,000 shares of Common Stock in April 2008, in consideration for
additional consulting services provided by Mr. Wilson. These warrants are also
exercisable for a period of five years at a price of $0.05 per share for
a stock based compensation expense to the company of $359,000. On
December
1, 2008 we entered into an employment relationship with Ronald D.
Wilson.  For more information regarding this transaction see Note 20
to these financial statements. On April 29, 2009, the Company’s Chief
Executive Officer purchased 600 shares of Series A Preferred Stock in the
Company’s private offering of such securities, which shares of preferred stock
were converted into an aggregate of 1,000,000 shares of Common Stock in July
2009.





On July
16, 2009, the Company entered into a distribution agreement (the “Distribution
Agreement”) with Canada Dry Bottling Company of New York (the “Distributor”)
pursuant to which the Distributor has been appointed as the Company’s exclusive
distributor of Skinny Water and other products bearing the Company’s trademarks
covered by the Distribution Agreement in the New York City metropolitan area.
The Chief Executive Officer of the Distributor, Mr. William Wilson, is the
brother of the Company’s Chief Executive Officer. The entire board of directors
of the Company, in considering the Distribution Agreement, was aware of and
considered this relationship and in determining to approve the Distribution
Agreement. Additional information about the Distribution Agreement is set forth
in greater detail at Note 12 on these financial statements.





Mr.
William R. Sasso, a member of our Board of Directors, has participated as an
investor in certain private placements conducted by Skinny Nutritional Corp. In
January 2009, the Company issued to Mr. Sasso an aggregate of 1,250,000 shares
of common stock of the Company, which shares were issued at a per share price of
$0.04. In addition, in May 2009, Mr. Sasso purchased an aggregate of 500 shares
of the Company’s Series A Preferred Stock which shares automatically converted
into 833,333 shares of common stock upon the approval of our shareholders of the
amendment to our Articles of Incorporation to increase our authorized number of
shares of common stock in July 2009. Mr. Sasso is a partner at the law firm of
Stradley, Ronon, Stevens & Young, LLP (“SRSY”), which provides legal
services to us from time to time as outside counsel. During the 2009 and 2008
fiscal years, we paid fees for legal services to this firm in the aggregate
amount of $251,965 and $72,157.22, respectively. In March 2010, we issued
529,625 shares of common stock to SRSY in lieu of payment of approximately
$99,000 in outstanding fees owed to such firm. The reporting person is Chairman
of SRSY and also a partner serving on SRSY's board of directors and management
committee.





Since
March 2008, Mr. Pasquale W. Croce, Jr., a beneficial owner of more than 5%
of our outstanding Common Stock, has served on the Company’s board of advisors
and through an affiliated entity entered into a consulting agreement with the
Company pursuant to which he agreed to endorse and advertise the Company’s
products. In consideration for these services, the Company agreed to pay a
royalty equivalent to $1.00 for each case of endorsed product sold by the
Company for the duration of his endorsement services. In March 2008, the Company
granted Mr. Croce warrants to purchase 3,000,000 shares of Common Stock
exercisable at $.05 per share, for a non cash expense of $366,000 in
consideration of his agreement to serve on the Company’s Advisory Board and for
providing marketing services for the Company’s products. In addition, in May
2009, Mr. Croce agreed to waive future royalties under the consulting agreement
and in consideration thereof we granted him 2,500,000 common stock purchase
warrants exercisable at $.05 per share for a stock based compensation expense to
the company of $288,070. Mr. Croce, through an affiliated entity, participated
as an investor in certain private placements conducted by Skinny Nutritional
Corp. In March 2008, he purchased 8,750,000 shares of the Company’s Common Stock
at a purchase price of $.04 per share as a participant in a private placement of
securities by the Company. Subsequently, in August 2008 the Company issued Mr.
Croce’s affiliate 200,000 shares of common stock in additional consideration of
its consulting services resulting in an expense to the company for $66,000.
Thereafter, in December 2008, he purchased an additional 2,500,000 shares of the
Common Stock of the Company at a purchase price of $.06 per share in a
subsequent private placement conducted by the Company. Further, on August 14,
2009, the Board approved a grant of 2,000,000 warrants to Mr. Croce in
consideration for his services on our advisory board and for additional
consulting services rendered. These warrants are exercisable for a period of
five years at a per share exercise price equal of $0.06 for a stock based
compensation expense to the company of $179,648.




F-19




On July
2, 2009 the Company approved the issuance of shares of restricted stock to
certain of its officers and directors. The Company granted its Chairman 50,917
shares of restricted stock in lieu of approximately $3,000 owed for accrued
benefits. The Company granted its Chief Financial Officer 295,551 shares of
restricted stock in lieu of an amount of approximately $31,000 owed for
accrued benefits and compensation.




On August
14, 2009, the Company’s Board of Directors agreed to amend all option awards
granted to the Company’s Chief Executive Officer in order to provide that such
options shall, following any termination of his employment with the Company,
other than for cause (as such term is defined in the Company’s 2009 Equity
Incentive Compensation Plan), be deemed immediately vested in full and
exercisable for the duration of the original stated term of such options. In
addition, on such date, the Board also agreed to amend certain outstanding
warrant agreements to include a provision permitting the cashless exercise of
such warrants in the event that there is not  an effective
registration statement covering the resale of the underlying warrant shares.
Consistent with this agreement, the Company amended the warrant agreements
previously issued to the Company’s Chief Executive Officer, Pasqual Croce
(together with Liquid Mojo LLC, a holder of more than 5% of the Company’s common
stock) and two consultants. Mr. Croce and Liquid Mojo collectively hold warrants
to purchase 5,500,000 shares of common stock which were covered by this
amendment. Mr. Wilson presently holds warrants to purchase an aggregate of
4,500,000 shares of common stock which were covered by this amendment. The
warrants held by the consultants covered by this amendment are exercisable for
2,500,000 shares of common stock.




F-20




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
7 - Related Party Transactions (continued)





In
addition, on August 14, 2009, the Board of Directors approved option grants
under the 2009 Equity Incentive Compensation Plan to each of its Chief Executive
Officer, Chief Financial Officer and Chairman on the following terms: options to
purchase 2,000,000 shares of common stock, exercisable at the closing price on
the date of grant for a period of five years and which vest as follows: 25% on
the date of grant and 25% on each of the subsequent three anniversary dates
thereafter; provided, however, in the event that the gross sales reported by the
Company for the 2009 fiscal year is less than $10,000,000, the total amount
granted to each person will be reduced by 25% and the unvested portion of such
awards shall be reduced in such an amount so as to give effect to such
reduction.  Based on the Company’s results for 2009, the foregoing
option awards were reduced by 1,887,500 options to reduce the number by
25%.





Note
8- Convertible Debentures





During
the 2007 calendar year there was $2,070,000 of convertible debentures that were
converted into common shares of stock.  On March 8, 2007, principal of
$1,755,000 was converted into 17,550,000 shares of common stock.  Also
in the first quarter 2007, one debt holder converted $20,000 in debt to 40,000
shares of common stock.  In the second quarter two debt holders
converted their debt into 400,000 common shares reducing the principal balance
by $40,000.  During the fourth quarter an additional conversion of
$188,333 of principal and $37,667 in interest were converted into 3,013,333
shares of common stock at a conversion rate of $.075 per
share.  During December 2007, in a fourth conversion, 1,600,000 shares
of common stock were issued upon conversion of $66,667 in principal and $13,333
in interest at a conversion rate of $.05 per share.  One investor was
paid $20,000 in principal and $4,000 in interest to retire his
debenture.  Upon conversion of the convertible debentures, in
accordance with  ASC Topic 470-20-25 "Debt with Conversion Option
Recognition", there were debt conversion costs of $3,421,965 which was realized
as an expense to the 2007 Statement of Operations.





During
fiscal 2008, holders of convertible debentures and warrants previously issued by
the Company converted or exercised such securities into shares of common stock
and warrants as follows. In January 2008, the Company issued 725,000 shares of
common stock upon the conversion of an aggregate amount of $72,500 of
outstanding convertible debentures (inclusive of interest).  The
company also issued 300,000 shares of common stock in exchange for a $15,000
dollar note.  On January 25, 2008, the Company issued 900,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $15,000) of
outstanding convertible debentures. The warrants issued upon conversion of these
debentures are exercisable for a period of three years at an exercise price of
$0.50 per share. On March 3, 2008, the Company issued 300,000 shares of common
stock upon the conversion of an aggregate amount of $15,000 of outstanding
convertible debentures. On March 20, 2008, the Company issued 1,125,000 shares
of common stock and 112,500 common stock purchase warrants upon the conversion
of an aggregate amount of $45,000 (inclusive of accrued interest of $7,500) of
notes and interest. The warrants issued upon conversion of these debentures are
exercisable for a period of three years at an exercise price of $0.50 per share.
On April 11, 2008, the Company issued 1,369,375 shares of common stock upon the
conversion of an aggregate amount of $54,775 (inclusive of accrued interest of
$10,455) of outstanding convertible debentures. In addition, in May 2008, the
Company issued 850,000 shares of common stock upon the conversion of an
aggregate amount of $34,000 (inclusive of accrued interest of $2,392) of notes
and interest and also issued 1,696,272 shares of common stock upon the exercise
of common stock purchase warrants pursuant to a cashless exercise provisions
contained in such warrants. Further, on June 2, 2008, the Company issued
1,155,870 shares of common stock in exchange for a note and interest in the
aggregate amount of $161,822 (inclusive of accrued interest of
$51,822).  Also the Company issued 808,414 shares of common stock upon
conversion of an aggregate principal amount of $113,178 of
debentures.  In addition, on June 16, 2008, the Company issued 531,551
shares of common stock upon the conversion of an aggregate amount of $74,417
(inclusive of accrued interest of $18,417) of outstanding convertible debentures
and on June 18, 2008, the Company issued 100,000 shares of common stock upon the
conversion of an aggregate amount of $10,000 of outstanding convertible
debentures. In August 2008, the Company issued 776,828 shares of common stock
upon the conversion of an aggregate amount of $108,756 (inclusive of accrued
interest of $18,756) to the holders of outstanding convertible debentures upon
the conversion of such securities. The Company also issued an aggregate of
111,084 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provisions contained in such warrants
in June 2008 and in August 2008 issued an aggregate of 87,692 shares of common
stock upon the exercise of common stock purchase warrants pursuant to a cashless
exercise provision contained in such warrants. In November 2008, the Company
issued 129,589 shares of common stock upon the exercise of common stock purchase
warrants pursuant to a cashless exercise provision contained in such warrants.
In May 2009, an additional convertible debenture in the aggregate principal
amount of $4,000, and $1,550 in interest, was converted into 92,500 shares of
common stock at a conversion rate of $.06 a share.




F-21




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS


Note
9- SALE OF EQUITY SECURITIES





We have
historically primarily been funded through the issuance of common stock, debt
securities and external borrowings.  During the calendar year 2007,
the Company's primary means of raising capital was through the sale of common
stock through private placements.  There were three private offerings
made during the year.  The first offering commenced in December 2006
and expired in March 2007, with 10,000,000 shares being offered and an aggregate
offering amount of $750,000.  The offering raised net proceeds of
$482,625 during calendar year 2007 with 6,435,004 shares of common stock being
issued.  The second offering commenced in March 2007 and expired in
September 2007; with 13,333,333 shares being offered for an aggregate offering
amount of $1,000,000.  We received net proceeds of $502,238 in this
offering with 6,696,509 shares being issued.  The third offering
commenced in September 2007 and ended November 2007 with 13,333,333 shares being
offered for an aggregate amount of $1,000,000.  We received net
proceeds of $203,750 in this offering with 2,716,666 shares being
offered.  There were 2,759,390 warrants issued to "Selling Agents" for
the private placements of common stock during calendar year
2007.  Selling agents received $106,954 in commissions for private
placement of common shares leaving the Company with $1,081,659 in net proceeds
from private placements.  A total of 9,809,332 shares of common stock
were also issued to shareholders from prior subscriptions in the form of reset
shares required by the convents established in the previous subscription
agreements.





The
Company commenced a private offering of its common stock in December 2007 for up
to a maximum of $3,200,000 of shares at an offering price of $0.04 per share and
received subscriptions of approximately $3.1 million. In this offering, the
company received gross proceeds of $3,163,000 and sold an aggregate of
79,075,000 shares of common stock to accredited investors. After giving effect
to offering expenses and commissions, the Company received net proceeds of
approximately $3,108,000. The Company agreed to pay commissions to registered
broker-dealers that procured investors in the offering and issue such persons
warrants to purchase such number of shares that equals 10% of the total number
of shares actually sold in the offering to investors procured by them. Agent
warrants shall be exercisable at the per share price of $0.05 for a period of
five years from the date of issuance. Based on the foregoing, agents have earned
an aggregate of $55,000 in commissions and 1,362,500 warrants.





In 2008,
the Company sold an aggregate of $175,000 of shares of its common stock to three
individual accredited investors in private sales and issued these investors a
total of 3,541,667 shares of common stock.





Commencing
in November 2008, a private offering was conducted pursuant to which the company
sought to raise an aggregate amount of $1,875,000 of shares of common stock (the
“November Offering”). On February 5, 2009, the Company completed the November
Offering. Total
proceeds in the November offering for common shares issued in 2009 was
$1,199,203, net of offering costs. Total proceeds received in 2009 and
2008 relating to the November offering was $1,867,690. There were
21,230,418 common shares issued in 2009. The Company used the net
proceeds from the November Offering for working capital, repayment of debt and
general corporate purposes. In connection with the November Offering, the
Company’s Chief Executive Officer, Chief Financial Officer and Chairman agreed
not to exercise a total of 12,000,000 options and 2,000,000 warrants
beneficially owned by them until such time as the Company’s stockholders adopt
an amendment to its Articles of Incorporation to increase the number of the
Company’s authorized shares of common stock. The Company agreed to pay
commissions to registered broker-dealers that procured investors and issue such
persons warrants to purchase such number of shares that equals 10% of the total
number of shares actually sold in the November Offering to investors procured by
them. Agent warrants are exercisable at the per share price of $0.07 for a
period of five years from the date of issuance. We paid total commissions of
$20,959 and issued agent warrants to purchase 349,317 shares of common
stock.





In August
2009, the Company commenced a private offering of shares of common stock (the
“August Offering”) pursuant to which it offered an aggregate amount of
$2,500,000 of shares of Common Stock. The shares of Common Stock were offered
and sold at a purchase price of $0.06 per share. At the conclusion of the
offering in December 2009, the Company had accepted total subscriptions of
$1,766,000 for an aggregate of 29,433,333 shares of Common Stock. Net proceeds
from such sales are approximately $1,680,000. The Company is using the net
proceeds from the August Offering for working capital, repayment of debt and
general corporate purposes. The Company agreed to pay commissions to registered
broker-dealers that procured investors in the Offering and issue such persons
warrants to purchase such number of shares that equals 10% of the total number
of shares actually sold in the Offering to investors procured by them. Such
warrants shall be exercisable at the per share price of $0.07 for a period of
five years from the date of issuance. In the August Offering, the Company paid
commissions of $6,500 to registered broker-dealers and issued warrants to
purchase 92,857 to a selling agent that procured investors in this
offering.





F-22




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS


Note
9 - SALE OF EQUITY SECURITIES (continued)





During
the first two quarters of fiscal 2009, the Company conducted a private offering
in (the "Offering") pursuant to which it sought to raise an additional aggregate
amount of $2,100,000 of shares of Series A Preferred Stock. The shares of Series
A Preferred Stock have a conversion rate of $0.06 per share, with customary
adjustments for stock splits, stock dividends and similar events. In the
Offering the Company accepted total subscriptions of $2,035,000 for an aggregate
of 20,350 shares of Series A Preferred Stock. The Company's consolidated
statement of cash flow reflects the issuance of preferred stock in the Offering
of $1,430,000, net of offering costs, since subscriptions for $510,000, net of
offering costs, were released to the Company from escrow in July 2009,
subsequent to the Company increasing the number of authorized shares of common
stock on July 6, 2009, which triggered the automatic conversion of preferred
shares to common. Therefore, the Company issued 8,916,667 common shares in lieu
of 5,350 preferred shares. The Company is using the proceeds from the Offering
for working capital, repayment of debt and general corporate purposes. Following
the approval by the Company's stockholders of the proposal to increase the
Company's authorized number of shares of Common Stock on July 2, 2009, the
Company filed a Certificate of Amendment to its Articles of Incorporation with
the State of Nevada on July 6, 2009. In accordance with the Certificate of
Designation, Preferences, Rights and Limitations of the Series A Preferred
Stock, upon the effectiveness of such filing, all of the 20,350 shares of Series
A Preferred Stock subscribed for by investors were automatically convertible
into an aggregate of 33,916,667 shares of common stock. As of December 31, 2009,
holders of 17,885 shares of Series A Preferred Stock had received 29,808,333
shares of common stock upon conversion and the holders of the remaining shares
of Series A Preferred Stock have not yet surrendered such shares for
cancellation.





In 2009,
the Company issued 8,375,000 shares of common stock to various investors and
were sold at a purchase price of $0.04 price per share.  Total
proceeds from these issuances were $81,500, net of proceeds received in 2008 of
$253,500.





Note
10 Other Common Stock Transactions





The
      Company in May, June, July, August and November 2008 issued 1,696,272
      shares, 111,084 shares, 87,692 shares and 129,589 shares of stock to
      selling agents, respectively upon the exercise of common stock purchase
      warrants pursuant to a cashless exercise provision contained in such
      warrants.  In September 2009 the Company issued 737,805 shares
      of common stock to one of our advisors and 764,912 to a selling agent in
      October 2009 upon the exercise of common stock purchase warrants pursuant
      to the cashless exercise provision contained in such
    warrants.





In 2009,
the Company issued 3,975,461 shares of common stock to related and unrelated
parties for services rendered.  The Company incurred related non-cash
expense of $338,074.




Note
11 - Debt Obligations





In April
2007, the Company entered into a fully secured, short-term loan arrangement with
Valley Green Bank in the amount of $340,000. Interest is payable monthly at the
rate of 8.25% per annum. The loan matured March 20, 2008, at which time the bank
extended the term of the loan to July 2010. The current balance outstanding as
of December 31, 2009 and 2008 was $45,924 and $200,000,
respectively.  The note payable is secured by collateral consisting of
a perfected first priority pledge of certain marketable securities held by the
Company’s Chairman and entities with which he is affiliated. The Company also
agreed to a confession of judgment in favor of the bank in the event it defaults
under the loan agreements. The loan agreements also require the consent of the
bank for certain actions, including incurring additional debt and incurring
certain liens.





F-23





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
11 - Debt Obligations (continued)





On
November 23, 2007, the Company entered into a one-year factoring agreement with
United Capital Funding of Florida (“UCF”) which provided for an initial
borrowing limit of $300,000. Currently, this arrangement has been extended
through February 2011 and the borrowing limit has been incrementally increased
to extend our line to 85% of the face value of eligible receivables subject to a
maximum of $2,000,000. As of December 31, 2009 and 2008, $321,815 and
$3,199 was outstanding, respectively.  All accounts submitted for
purchase must be approved by UCF. The applicable factoring fee is 0.30% of the
face amount of each purchased account and the purchase price is 85% of the face
amount. UCF will retain the balance as reserve, which it holds until the
customer pays the factored invoice to UCF. In the event the reserve account is
less than the required reserve amount, the company will be obligated to pay UCF
the shortfall. In addition to the factoring fee, the company will also be
responsible for certain additional fees upon the occurrence of certain
contractually-specified events. As collateral securing the obligations,
the  company granted UCF a continuing first priority security interest
in all accounts and related inventory and intangibles. Upon the occurrence of
certain contractually-specified events, UCF may require the company to
repurchase a purchased account on demand. In connection with this arrangement,
the Chairman and Chief Executive Officer agreed to personally guarantee the
obligations to UCF. The agreement will automatically renew for successive one
year terms until terminated. Either party may terminate the agreement on three
month’s prior written notice. We are liable for an early termination fee in the
event we fail to provide them with the required notice.




Note
12- Licensing and Agreements





On
October 4, 2006, the Company entered into an amendment to its License and
Distribution Agreement with Peace Mountain Natural Beverages Corporation.
Pursuant to this amendment, the Company agreed to pay Peace Mountain an amount
of $30,000 in two equal monthly installments commencing on the date of the
amendment in satisfaction of allegations of non-performance by Peace Mountain.
In addition, the parties further agreed to amend and restate the Company's
royalty obligation to Peace Mountain, pursuant to which amendment, the Company
had a minimum royalty obligation to Peace Mountain based on a percentage of
wholesale sales with a quarterly minimum of $15,000.




The
company had obtained the exclusive worldwide rights pursuant to a license
agreement with Peace Mountain  to bottle and distribute a dietary
supplement called Skinny Water®.  On July 7, 2009, the closing of the
previously announced Asset Purchase Agreement with Peace Mountain occurred and
we acquired from Peace Mountain certain trademarks and other intellectual
property assets. The acquired marks include the trademarks “Skinny Water®”,
“Skinny Shake” TM, “Skinny Tea®”, “Skinny BarTM”, “Skinny SmoothieTM’’, “Skinny
JavaTM”, Skinny Shot, Skinny Snacks and Skinny Juice. In consideration of the
purchase of such assets, we agreed to pay Peace Mountain $750,000 in cash
payable as follows: (i) $375,000 payable up front and (ii) $375,000, less an
amount equal to the royalties paid by the Company during the first quarter of
2009 in the amount of $37,440, payable in four quarterly installments
commencing May 1, 2010. In connection with the acquisition of these assets,
we and Peace Mountain also agreed to settle in all respects a dispute between
the parties that was the subject of a pending arbitration proceeding. Pursuant
to the settlement agreement, the Company and Peace Mountain agreed to the
dismissal with prejudice of the pending arbitration proceeding and to a mutual
release of claims. In connection with the foregoing, the parties also entered
into a Trademark Assignment Agreement and Consulting Agreement. Effective with
the closing, the transactions contemplated by these additional agreements were
also consummated. Under the Consulting Agreement, which is effective as of June
1, 2009, entered into between the Company and Mr. John David Alden, the
principal of Peace Mountain, the Company will pay Mr. Alden a consulting fee of
$100,000 per annum for a two year period. Under this agreement, Mr. Alden will
provide the Company with professional advice concerning product research,
development, formulation, design and manufacturing of beverages and related
packaging. Further, the Consulting Agreement provides that the Company issue to
Mr. Alden warrants to purchase an aggregate of 3,000,000 shares of Common Stock,
exercisable for a period of five years at a price of $0.05 per
share.




On July
16, 2009, we entered into a distribution agreement (the “Distribution
Agreement”) with Canada Dry Bottling Company of New York (the “Distributor”)
under which the Distributor has been appointed as the Company’s exclusive
distributor of Skinny Water and other products in the New York City metropolitan
area (the “Territory”). The Company also granted the Distributor a right of
first refusal to serve as the Company’s exclusive distributor in the Territory
for new or additional beverages that it wishes to introduce in the Territory.
Distributor will use reasonable efforts to promote the sale of the Products in
the Territory; however, no performance targets are mandated by the Distribution
Agreement. Under the Distribution Agreement, the Company agreed to pay a
specified amount to the Distributor for any sales of Products made by the
Company in the Territory to customers that do not purchase Products from outside
distributors.  In addition, the Company agreed to cover a minimum
amount for slotting fees during the initial term of the Distribution Agreement.
The Distribution Agreement may be terminated by the Company due to a material
breach of the agreement by or the insolvency of the Distributor, subject to
notice and cure provisions. The Distributor may terminate the Distribution
Agreement at any time upon written notice. Following any termination, the
Company will purchase or cause a third party to purchase all inventory and
materials that are in good and merchantable condition and are not otherwise
obsolete or unusable. The price to be paid for such materials shall be equal to
the Distributor’s laid-in cost of all such inventory and materials. In the event
the Company elects not to renew the Distribution Agreement at the end of the
initial term or any renewal term and Distributor is not otherwise in breach of
the Agreement with the time to cure such breach having expired, the Company
shall pay Distributor, a termination penalty based on a multiple of its gross
profit per case, as calculated pursuant to the terms of the Distribution
Agreement. The Agreement is a multi-year contract with automatic renewal
provisions, unless either party provides notice of non-
renewal.   The agreement also provides for customary covenants by
the parties regarding insurance and indemnification.





Note
13 - Cash Deposited in Financial Institutions





The
      Company maintains its cash in bank deposit accounts and financial
      institutions.  Accounts at each institution are insured by the
      Federal Deposit Insurance Corporation up to $250,000.  The bank
      accounts at times exceed federally insured limits.  The Company
      has not experienced any losses on such
accounts.




Note
14 – CONCENTRATIONS OF CREDIT RISK




Two
customers accounted for approximately 27% of the Company’s total revenue in 2009
and three customer’s accounted for approximately 69% of the Company’s total
revenue in 2008, representing 16% and 88% of the Company’s total accounts
receivable as of and for the years ended December 31, 2009 and
2008.
  One
supplier accounted for 18% of the Company’s purchases in 2009. There
were no major suppliers in 2008. The one supplier represented 10% of
the Company’s total accounts payable as of the and for the year ended December
31, 2009.




F-24





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
15 - Income Taxes




ASC
Topic 740-10, Income Taxes
  The
Company accounts for income taxes in accordance with ASC Topic 740-10. This
guidance requires the Company to provide a net deferred tax asset/liability
equal to the expected future tax benefit/expense of temporary reporting
differences between book and tax accounting methods and any available operating
loss or tax credit carryforwards. At December 31, 2009, the Company has
available unused operating loss carryforwards of approximately $9,209,000 which
may be applied against future taxable income and which expire in various years
between 2021 and 2030.
  The
amount of and ultimate realization of the benefits from the operating loss
carryforwards for income tax purposes is dependent, in part, upon the tax laws
in effect, the future earnings of the Company, and other future events, the
effects of which cannot be determined because of the uncertainty surrounding the
realization of the loss carryforwards. The Company has established a valuation
allowance equal to the tax effect of the loss carryforwards and, therefore, no
deferred tax asset has been recognized for the loss carryforwards.
  A
reconciliation of expected income tax at the statutory rate with the actual
income tax provision is as follows for the years ended December 31,
  2009Expected
      income tax benefit at statutory rate (34%)
                
                
                835,000State
      taxes, net of federal benefit
                
                
                137,000Effect
      of change in valuation allowance
                
                
                (972,000
                )Total
                
                
                -
 
 Significant
      components of the net deferred tax asset (liability) at December 31 were
      as follows:
 
 2009
                  
                  
                  2008Stock
      Warrants
                  
                  
                  1,455,000
                  
                  
                  
                  947,000Reserve
      Accounting
                  
                  
                  120,000
                  
                  
                  
                  53,000Depreciation
      and Amortization
                  
                  
                  4,000
                  
                  
                  
                  4,000Accrued
      Expenses and Other
                  
                  
                  458,000
                  
                  
                  
                  458,000Loss
      Carryforwards
                  
                  
                  3,648,000
                  
                  
                  
                  4,620,0005,685,000
                  
                  
                  
                  6,082,000Less:
      Valuation Allowance
                  
                  
                  (5,685,000
                  )
                  
                  
                  (6,082,000
                  )0
                  
                  
                  
                  0
  F-25
  The
      Company provided a full valuation allowance on the total amount of its
      deferred tax assets at December
      31, 2009 and 2008 since management does not believe that it is more likely
      than not that these
      assets will be
realized.
  Deferred
income taxes are provided based on the provisions of ASC 740, “Accounting for
Income Taxes”, to reflect the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.  The Company did not
have any tax positions for which it is reasonably possible that the total amount
of unrecognized tax benefits will significantly increase or decrease within the
next 12 months. The tax years that remain subject to examination by major taxing
jurisdictions are those for the years ended December 31, 2008, 2007 and
2006.  The Company classifies interest and penalties arising from
underpayment of income taxes in the consolidated statements of operations as
general and administrative expenses. As of December 31, 2009, the Company had no
accrued interest or penalties related to uncertain tax
provisions.




Note
16 - STOCKHOLDERS' EQUITY





At
      December 31, 2009 the Company had 500,000,000 shares of common stock
      authorized par value $.001.  Shares outstanding at December 31,
      2009 were 289,921,081.  In addition, the company also had
      1,000,000 shares of preferred stock authorized at a par value of
      $.001.  Shares of preferred stock outstanding at December 31,
      2009 were 2,465 shares of Series A Convertible Preferred Stock. Pursuant
      to the Certificate of Designation, Preferences, Rights and Limitations of
      the Series A Convertible Preferred Stock, all shares of Series A Preferred
      Stock were subject to mandatory conversion upon the filing by the Company
      of a Certificate of Amendment with the Secretary of State of Nevada
      increasing the number of authorized shares of Common Stock of the Company,
      which occurred on July 6, 2009. Accordingly, any certificates representing
      shares of Series A Preferred Stock which remain outstanding solely
      represent the right to receive the number of shares of Common Stock into
      which they are convertible.During
      May and June 2009, the company issued shares of Series A Preferred Stock
      (“Series A”). The Series A conversion price represented a discount from
      the estimated fair value of the Common Stock at the time of issuance.
      Accordingly, the discount amount is considered incremental yield ("the
      beneficial conversion feature") to the preferred stockholders and has been
      accounted for a deemed dividend of approximately $1.37 million has been
      included in the calculation of net loss applicable to common
      stockholders.





Note
17 - Stock Options





Our
      Board of Directors initially adopted an Employee Stock Option Plan (the
      “1998 Plan”) on November 16, 1998 and it was approved by the stockholders
      on December 21, 2001. The Old Plan terminated ten years from the date of
      its adoption by the Board. The Board of Directors, on October 6, 2006, had
      unanimously approved and recommended for shareholder approval for the
      amendment of the Plan to increase the number of shares authorized for
      issuance from 1,000,000 shares to 20,000,000 shares. The requisite vote of
      our shareholders was obtained on November 15, 2006.  The company
      may grant incentive (“ISOs”) and non-statutory (“Non-ISOs”) options to
      employees, non employee members of the Board of Directors and consultants
      and other independent advisors who provide services to us. The maximum
      shares of common stock which may be issued over the term of the plan shall
      not exceed 20,000,000 shares. As of December  31, 2009, 19,400,000
      options were issued and outstanding under the 1998 plan. Awards under this
      plan are made by the Board of Directors or a committee of the
      Board.





Under
      the 1998 plan, options are granted at the market price of the stock on the
      day of the grant. Options granted  to persons owning more than 10% or
      more of the outstanding voting stock are granted at 110% of the fair
      market price on the day of the grant. Each option exercisable at such time
      or times, during such period and for such numbers of shares shall be
      determined by the Plan Administrator. However, no option
      shall have a term in excess of 10 years from the date of the
      grant.
              
              On
      January 12, 2007, the Board approved the grant of an additional 3,000,000
      options to the Company's Chairman where 20% of the options vest
      immediately and 20% on each anniversary date for the next 4
      years.  The exercise price of these options is .25 cents a
      shares.
              The stock
      based compensation expense related to these options is $139,200 in
      2009, $139,200 in 2008 and $278,400 in 2007.
              
              On
      November 28, 2007, the Company granted 6,325,000 stock options to
      employees and officers of the Company under the 2006 Plan.  The
      options granted have a 5 year contractual life.  1,581,250 of
      the options were granted for prior services and vested
      immediately.  The remaining 4,743,750 options were issued for
      future services and will vest 25% on each anniversary date of the grant
      until fully vested.  As of December 31, 2009, 100,000 options
      were returned to the Company and cancelled. The stock based
      compensation expense related to these options is $112,050 in 2009,
      $77,199 in 2008 and $110,045 in 2007
              
              On
      July 30, 2008 the Company granted 7,275,000 stock options to employees and
      officers of the Company under the 2006 Plan. The options granted have
      a 5 year contractual life and are exercisable at a price equal to
      $0.33 per share. 1,818,750 of the options were granted for prior services
      and vested immediately. The remaining 5,456,250 options were issued for
      future services and will vest 25% on each anniversary date of the grant
      until fully vested.  As of December 31, 2009, 100,000 options
      were returned to the Company and cancelled.  The stock
      based compensation expense related to these options is $517,875 in
      2009 and $148,081 in 2008.




F-26




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS


Note
17 - Stock Options (continued)





2009
Plan





On May
12, 2009, the Company’s Board of Directors adopted, subject to shareholder
approval, the 2009 Equity Incentive Compensation Plan (the “2009 Plan”) and
reserved 25,000,000 shares of common stock for issuance pursuant to awards
granted thereunder. On July 2, 2009, the 2009 Plan was approved by
stockholders at the Company’s Annual Meeting of Stockholders. The following
types of awards, may be granted under the 2009 Plan: shares of restricted common
stock or restricted stock units; options to acquire shares of common stock
intended to qualify as incentive stock options, or ISOs, under Section 422(b) of
the Internal Revenue Code; non-qualified stock options to acquire shares of
common stock, or Non-ISOs; stock appreciation rights; performance-based awards;
and other stock-based awards approved by the committee. The 2009 Plan may be
administered by the Board of Directors or by a committee of the Board. Grants
under the 2009 Plan may be made to the Company’s employees, directors,
consultants and advisors. Each option shall expire within 10 years of the date
of grant. However, if ISOs are granted to persons owning more than 10% of the
outstanding voting stock, the exercise price may not be less than 110% of the
fair market value per share at the date of grant. The 2009 Plan also has
provisions that take effect if the Company experiences a change of control. The
2009 Plan provides that the exercise price for ISOs and Non-ISOs shall not be
less than the fair market value per share of the Company’s common stock at the
date of grant.




In July
2009, 2,600,000 options were granted to certain employees under the 2009 Plan,
including 2,000,000 options granted to our Chief Executive Officer. The
exercise price of such options is equal to the fair market value of the
Company’s Common stock on the date the options were granted.  The
stock based compensation related to these options is $83,159.
    Each
stock option award is estimated as of the date of grant using a Black-Scholes
option valuation model that uses the assumptions noted in the table
below.  Expected volatilities are based upon historical volatility of
the Company's stock and other factors for 2009.  The Company uses the
simplified method to estimate the expected term of the option
awards.  To address the lack of historical volatility data prior to
2009 for the Company, expected volatility is based on the volatilities of peer
companies for 2008 and 2007. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.  As of December 31, 2009, there were 10,150,000 issued and
8,237,500 outstanding under the 2009 plan and a total of 27,637,500 options
issued and outstanding under both of the Company’s plans.


2009
              
              
              2008
              
              
              2007Volatility
              
              159.99%
      to 160.76%
              
              
              142.20%
      to 148.64%
              
              
              
              144
              %Dividend
      Yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Expected
      term of options (in Years)
              
              
              3.5
              
              
              
              5
              
              
              
              4Risk-free
      interest rate
              
              2.43%
      to 2.51%
              
              
              1.50%
      to 3.03%
              
              
              
              4.78
              %




F-27






SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
17 - Stock Options (continued)





The
following table summarizes stock option activity:





Weighted-AverageShares
            
            
            Exercise
      PriceOutstanding
      at December 31, 2007
            
            
            12,325,000
            
            
            $
            0.14Granted
            
            
            7,275,000
            
            
            
            0.33ExercisedForfeited
      or expired
            
            
            (175,000
            )$Outstanding
      at December 31, 2008
            
            
            19,425,000
            
            
            $
            0.22Granted
            
            
            10,150,000
            
            
            
            0.10ExercisedForfeited
      or expired
            
            
            (1,937,500
            )
            
            
            0.10Outstanding
      at December 31, 2009
            
            
            27,637,500
            
            
            $
            0.19




A summary
of the non-vested stock option activity is as follows:





Weighted-AverageGrant
      DateNon-vested
      shares
            
            Shares
            
            
            Fair
      ValueNon-vested
      at December 31, 2007
            
            
            8,367,000
            
            
            
            0.13Granted
            
            
            7,275,000
            
            
            
            0.33Vested
            
            
            (3,572,000
            )
            
            
            0.33Forfeited
            
            
            (175,000
            )
            
            
            0.33Non-vested
      at December 31, 2008
            
            
            11,895,000
            
            
            
            0.19Granted
            
            
            10,150,000
            
            
            
            0.08Vested
            
            
            (6,970,000
            )
            
            
            0.15Forfeited
            
            
            (1,925,000
            )
            
            
            0.08Non-vested
      at December  31, 2009
            
            
            13,150,000
            
            
            
            0.16





The
fair value of restricted stock awards is based on the market price of the stock
at the grant date and compensation
cost is amortized to expense on a straight-line basis over the requisite service
period as stated above.




As
of December 31, 2009, 2008, and 2007, there was approximately $1,569,567,
$2,566,818 and $898,350 respectively of unrecognized compensation cost related
to non-vested stock awards.




Note
18 - Stock Purchase Warrants





In
February 2007, the Company granted 1,800,000 warrants to Geltech Sales LLC with
an exercisable period of seven years with an exercise price of
$.24.  On October 16, 2007, we notified Geltech that we elected to
terminate this agreement with Geltech based on performance obligations;
resulting in a cancellation of 1,075,000 warrants.





During
the 2007 calendar year, 2,959,390 warrants were issued to "Selling Agents" for
private placement of common shares.  These warrants have an
exercisable period of five years with an exercise price ranging from $.06 to
$.11 per share.  During the third and fourth quarter of 2007, the
Company granted 690,000 warrants to investors who purchased convertible debt
which was then converted into common shares.  These warrants have a
three year period with an exercise price of $.50.





In
November 2007, the Company issued 100,000 warrants to sale representative for
services rendered.  These warrants are exercisable for a period of
seven years with an exercise price of $.08 per share.





In
December 2007, the Company issued 75,000 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$.05 per share.




F-28





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
18 - Stock Purchase Warrants (continued)





In
December 2007, the Company issued 255,000 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$.20 per share.  The stock based compensation
expense related to these warrants is $12,350.





In
January 2008, the Company issued 112,500 warrants to investors holding
convertible debentures which were converted to common stock.  These
warrants are exercisable for a period of three years with an exercise price of
$.05 cents per share. The stock based compensation expense related to these
warrants is $4,000.





In March
2008, the Company issued 112,500 warrants to investors holding convertible
debentures which were converted to common stock.  These warrants are
exercisable for a period of three years with an exercise price of $.05 cents per
share. The stock based compensation expense related to these warrants is
$7,000.





In March
2008 the company granted 7,000,000 warrants to consultants and advisory board
members in a private transaction. These warrants are exercisable for a period of
five years with an exercise price of $.05 cents. The stock based compensation
expense related to these warrants is $1,091,00.





In April
2008 the company granted 1,000,000 warrants to a consultant in a private
transaction. These warrants are exercisable for a period of five years with an
exercise price of $0.05. The stock based compensation expense related to these
warrants is $122,000.





In
September 2008 the company granted 1,362,500 warrants for services
rendered.  These warrants are exercisable for a period of five years
with an exercise price of $0.05. The stock based compensation expense related to
these warrants is $233,000.





In 2009,
the Company granted 3,000,000 warrants to two consultants, which warrants are
exercisable at $0.08 per share for a period of five years. The stock based
compensation expense related to these warrants is $323,000.





In May
2009, the Company entered into an agreement with Mr. Pasqual W. Croce, Jr. and
Liquid Mojo, LLC (together, “Croce”), pursuant to which the parties agreed,
subject to the conditions of this new agreement, to cancel the ongoing royalty
obligation payable to Croce by the Company under the agreement entered into
between the Company and Croce in February 2008. In consideration of the
agreement by Croce to waive future royalties, the Company agreed to issue to
Croce warrants to purchase an aggregate of 2,500,000 shares of Common Stock,
exercisable for a period of five years at a price of $0.05 per share. The stock
based compensation expense related to these warrants is $288,000.





Effective
as of June 1, 2009, pursuant to the Consulting Agreement entered into between
the Company and Mr. John David Alden, the principal of Peace Mountain, the
Company issued to Mr. Alden warrants to purchase an aggregate of 3,000,000
shares of Common Stock, exercisable for a period of five years at a price of
$0.05 per share. The stock based compensation expense related to these warrants
is $404,000.





In August
2009, the Company granted 2,000,000 warrants to an advisory board member in a
private transaction in connection of services rendered. These warrants are
exercisable for a period of five years with an exercise price of $.06 cents. The
stock based compensation expense related to these warrants is
$180,000.




In
December 2008 and January 2009, the Company granted 272,275 and 77,042, issued
in connection with and equity raise, warrants to "Selling Agents" for private
placement of common shares.  These warrants have an exercisable period
of five years with an exercisable price of $.07.  The stock based
compensation expense related to these warrants is $17,000 .




The
following table summarizes stock warrant activity:





Shares
                  
                  
                  Weighted-Average
                    Exercise
      PriceOutstanding
      at December 31, 2007
                  
                  
                  9,814,890
                  
                  
                  
                  0.36Granted
                  
                  
                  11,185,833
                  
                  
                  
                  0.06ExercisedForfeited
                  
                  
                  (3,923,000
                  )Outstanding
      at December 31, 2008
                  
                  
                  17,077,723
                  
                  
                  
                  0.16Granted
                  
                  
                  10,577,042
                  
                  
                  
                  0.06Exercised
                  
                  
                  (2,862,500
                  )
                  
                  
                  0.05Forfeited
                  
                  
                  (640,000
                  )
                  
                  
                  0.75Outstanding
      at December 31, 2009
                  
                  
                  24,152,765
                  
                  
                  
                  0.11





F-29





SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
19 - Loss Per Share





Loss
      per share is based on the weighted average number of common
      shares.  Dilutive loss per share was not presented, as the
      Company as of December 31, 2009, has outstanding 27,637,500 options and
      24,152,765 warrants which would have an antidilutive effect on
      earnings.








December
      31,
            
            
            December
      31,2009
            
            
            2008Net
      Loss
            
            $
            (7,305,831
            )
            
            $
            (6,232,123)Weighted
      average of common shares outstanding used in earnings per share during the
      period
            
            
            206,192,127
            
            
            
            135,773,615Loss
      per common shares
            
            $
            (
       03
            )
            
            $
            (
       .05
            )





Note
20 - Commitments





On
January 9, 2009, the Company entered into an agreement with Hallinan Capital
Corp to sublease approximately 1,978 square feet of office space located at
Three Bala Plaza East, Suite 101, Bala Cynwyd, PA 19004.  The premises
will serve as the Company’s new corporate headquarters.  The sublease
expires two years following the commencement date and will terminate on such
expiration date provided that either party gives six months notice of its
intention to terminate the lease to the other party.  In the event
that neither party provides such notice, the sublease will continue on a month
to month basis, with either party having the right to terminate at any time upon
the provision of six months written notice.  The sublease will
however, terminate without regard to such notice provisions upon the expiration
or termination of the lease under which premises have been sublet to the
Company.





The
Company also has various equipment leases which are classified as operating
leases.





Total
rent expense for all operating leases for the years ended December 31, 2009,
2008 and 2007, was approximately $155,000 and $16,000 and $0
respectively.





Approximate
future minimum lease payments under the noncancellable operating leases with
initial or remaining terms of one year or more is as follows:




2010
              
              $
              116,0002011
              
              
              103,0002012
              
              
              81,000Total
              
              $
              300,000




December
1, 2008, we entered into an employment relationship with Mr. Ronald D. Wilson,
who will serve as the President and Chief Executive Officer of the Company
effective immediately. Pursuant to an offer letter Mr. Wilson entered into with
the Company, the Company will pay and provide the following compensation to Mr.
Wilson: (a) base salary of $150,000 per annum; (b) grant of 2,000,000 shares of
restricted common stock; (c) grant of warrants to purchase 2,000,000 shares of
common stock which shall be immediately exercisable on the date of grant for a
period of five years at an exercise price equal to the closing price of the
Company’s common stock on the date of grant; (d) subject to the approval of the
Company’s stockholders of a new equity compensation plan, options to purchase
2,000,000 shares of common stock, exercisable for a period of five years and
which options will vest in full on the first anniversary of the grant date and
have an exercise price equal to the fair market value of the Company’s common
stock, as determined in accordance with the new equity compensation plan, on the
date that such plan is approved by the Company’s stockholders; (e) a car
allowance of $700 per month; (f) reimbursement of health benefits or cash
equivalent in an amount not to exceed $1,000 per month; and (g) $2,000 per month
for a rental lease for housing for 1 year period.




Note
21 - contingencies




Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and its
legal counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought
therein.
  If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.




On
February 24, 2010, the Company filed a lawsuit with the Court of Common Pleas of
Montgomery County (the “Court”) against Beverage Incubators, Inc. and Victory
Beverage Company, Inc. (collectively, “Bev Inc.”), alleging breach of contract
and unjust enrichment claims concerning Bev Inc.’s failure to pay certain
invoices from the Company for product received from the Company.  The
amount in controversy is $115,900.30.  The Company is currently
awaiting Bev Inc.’s answer to the Company’s filed complaint.





We are
aware that a third party based in the United Kingdom  has made
allegations concerning our trademark rights in the European Union. During the
fourth quarter of the 2009 fiscal year, the company vigorously refuted these
allegations through correspondence with this third party. Although the Company
does not make any assertions that this matter is resolved, as of the date of
this report, the Company has not received a response to its correspondence. The
Company intends to continue to vigorously contest any claims which this third
party may raise concerning the validity of its trademarks and management does
not believe that this matter will have a material adverse effect on the
Company’s business, results of operations or financial condition.





In
      addition, the Company may be subject to other claims and litigation
      arising in the ordinary course of business.  The Company’s
      management considers that any liability from any reasonably foreseeable
      disposition of such other claims and litigation, individually or in the
      aggregate, would not have a material adverse effect on its consolidated
      financial position, results of operations or cash flows.




F-30




SKINNY
NUTRITIONAL CORP.





NOTES
TO FINANCIAL STATEMENTS





Note
22 - Subsequent Events





The
Company adopted FASB ASC Topic 855, “Subsequent Events”. ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. Specifically, it sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The adoption
of ASC 855 had no impact on the Company’s financial statements.








In
accordance with ASC 855, the Company evaluated subsequent events through March
31, 2009, the date these financial statements were issued. Other than those
previously disclosed there were no additional material subsequent events
that required recognition or additional disclosure in these financial
statements.





F-31


SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, Skinny Nutritional
Corp., Inc. has caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.




Date: April
      1, 2010
            
            SKINNY
      NUTRITIONAL CORP.By:
            /s/
      Ronald WilsonRonald
      Wilson
              President
      and Chief Executive Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
datesindicated.





Name
            
            Title
            
            Date/s/
      Ronald Wilson
            
            Chief
      Executive Officer, President and Director
            
            April 1,
      2010Ronald
      Wilson/s/
      Donald J. McDonald
            
            Chief
      Financial Officer and Director
            
            April 1,
      2010Donald
      J. McDonald/s/
      Michael Salaman
            
            Chairman
      of the Board of Directors
            
            April 1,
      2010Michael
      Salaman/s/
      William R. Sasso
            
            Director
            
            April 1,
      2010William
      R. Sasso


66