UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K
 
 x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 
 For
the Fiscal Year Ended December 31, 2008
 OR
  ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 
 For the
transition period from N/A to N/A
 Commission
File Number:  000-53302
 
 SKINS,
Inc.
 (Name of
small business issuer as specified in its charter)
 
 Nevada
                
                20-3464383State
      of Incorporation
                
                IRS
      Employer Identification No.
 
 1 Newark
Street, Suite 25A  Hoboken, New
Jersey       07030
 (Address
of principal executive offices)
 
 (201) 377-5502
 (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, $0.001 par value per share
 (Title
of Class)
 
 Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
  ̈YesxNo
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
  ̈
Yes    x
No
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
 ̈
  
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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.  ̈
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
  Large accelerated filer   ̈
                Non-accelerated filer ̈
              
              Accelerated filer ̈
                Small Business Issuerx
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act. Yes  ̈ No
x
 
 The
aggregate market value of voting stock held by non-affiliates of the registrant
on December 31, 2008 was approximately $2,723,796. Solely for purposes of the foregoing
calculation, all of the registrant’s directors and officers as of December 31,
2008, are deemed to be affiliates.This
determination of affiliate status for this purpose does not reflect a
determination that any persons are affiliates for any other
purposes.
 
 State the number of shares
outstanding of each of the issuer’s classes of equity securities, as of the
latest practicable date: As of April 9 2009, there were71,634,408 shares of Common Stock, $0.001 par
value per share issued.
  Documents
Incorporated By Reference -None
  
  SKINS
INC.
 FORM 10-K
ANNUAL REPORT
 TABLE OF
CONTENTS
  PART
      IITEM 1.
                  DESCRIPTION
      OF BUSINESS
                  1ITEM
      1A.
                  RISK
      FACTORS
                  7ITEM
      1B.
                  UNRESOLVED
      STAFF COMMENTS
                  20ITEM 2.
                  DESCRIPTION
      OF PROPERTY
                  20ITEM 3.
                  LEGAL
      PROCEEDINGS
                  21ITEM 4.
                  SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  21PART IIITEM 5.
                  MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES
                  22ITEM 6.
                  SELECTED
      FINANCIAL DATA
                  24ITEM 7.
                  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                  24ITEM 7A.
                  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                  33ITEM 8.
                  FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                  33ITEM 9.
                  CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                  34ITEM 9A.
                  CONTROLS
      AND PROCEDURES
                  35ITEM 9B.
                  OTHER
      INFORMATION
                  37PART IIIITEM 10.
                  DIRECTORS,
      EXECUTIVE OFFICERS, KEY EMPLOYEES, AND CORPORATE
GOVERNANCE
                  37ITEM 11.
                  EXECUTIVE
      COMPENSATION
                  39ITEM
      12.
                  SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                  53ITEM
      13.
                  CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                  55ITEM
      14.
                  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
                  58PART
      IVITEM
      15.
                  EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES
                  59SIGNATURES
                  
                  60
 CERTIFICATION
PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002
  CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
 
 
  SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  In
addition to historical information, this report contains statements relating to
our future business and/or results, including, without limitation, the
statements under the captions “Risk Factors,” “Management's Discussion and
Analysis or Plan of Operation” and “Description of Business.” These statements
include certain projections and business trends that are “forward-looking.”
Forward-looking statements can include statements containing a projection of
revenues, income (including income loss) , earnings (including earnings loss)
per share, capital expenditures, dividends, capital structure, or other
financial items; a statement of the plans and objectives of management for
future operations, including plans or objectives relating to the products or
services of the issuer; a statement of future economic performance, including
any such statement contained in a discussion and analysis of financial condition
by the management or in the results of operations included pursuant to the rules
and regulations of the SEC; any report issued by an outside reviewer retained by
an issuer, to the extent that the report assesses a forward-looking statement
made by the issuer; or a statement containing a projection or estimate of such
other items as may be specified by rule or regulation of the SEC. You can
identify these statements by the use of words like “may,” “will,” “could,”
“should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,”
“forecast,” “potential,” “intend,” “continue” and variations of these words or
comparable words. Forward-looking statements do not guarantee future performance
and involve risks and uncertainties. Actual results will differ, and may differ
materially, from projected results as a result of certain risks and
uncertainties. These risks and uncertainties include, without limitation, those
described under “Risk Factors” and those detailed from time to time in our
filings with the SEC, and include, among others, the following:
 
 ·
                Our limited operating
      history;
 
 ·
              Our lack of profits from
      operations;
 
 ·
              Our recent restatement of our
      financial statements;
 
 ·
              Our ability to raise additional
      funds on acceptable terms or at
all;
 
 ·
              Our ability to successfully
      design, manufacture and commercialize our proposed
      product;
 
 ·
              Our reliance on one unproven and
      undeveloped product type;
 
 ·
              Rapidly changing consumer demands
      for footwear products;
 
 ·
              Our unestablished
      brand;
 
 ·
              The degree and nature of our
      competition;
 
 ·
              Our ability to employ and retain
      qualified employees;
 
 ·
              The limited trading market for
      our common stock;
 
 ·
              Current market conditions;
      and
 
 ·
              The other factors referenced in
      this report, including, without limitation, under the sections entitled
      “Risk Factors,” “Management's Discussion and Analysis or Plan of
      Operation,” and “Description of
  Business.”
  
  The
assumptions used for purposes of the forward-looking statements specified in the
following information represent estimates of future events and are subject to
uncertainty as to possible changes in economic, legislative, industry, and other
circumstances. As a result, the identification and interpretation of data and
other information and their use in developing and selecting assumptions from and
among reasonable alternatives require the exercise of judgment. To the extent
that the assumed events do not occur, the outcome may vary substantially from
anticipated or projected results, and, accordingly, no opinion is expressed on
the achievability of those forward-looking statements. We cannot guarantee that
any of the assumptions relating to the forward-looking statements specified in
the following information are accurate, and we assume no obligation to update
any such forward-looking statements.
  
  PART
I
 
 ITEM
1. DESCRIPTION OF BUSINESS
 
 Except
for historical information contained herein, the following discussion contains
forward-looking statements that involve risks and uncertainties.  Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company’s plans and expectations.  Actual
results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed elsewhere in this Form 10-K or incorporated herein by
reference, including those set forth in Management’s Discussion and Analysis
or Plan of Operation.
  As used
in this annual report, “we”, “us”, “our”, “Skins”, or “our company” refers to
Skins, Inc. andits wholly-owned
subsidiary, Skins Footwear Inc,
 
 Overview
 
 We are a
Nevada corporation with our corporate office located in New Jersey, have
designed and continue to develop a patented two-part, footwear structure
consisting of an outer collapsible “Skin” and an inner orthopedic support
section called the “Bone.” The design is intended to allow consumers to purchase
one inner section, the Bone, and numerous outer Skins, resulting in multiple
style variations from the same pair of shoes, with the same feel and fit despite
which Skin is being worn. We ha5 initially designed and manufactured men's and
women's footwear and distributed to a test market through a soft commercial
launches during   2007 and 2008.  We have made
technological advances  to the product, and we have updated the design
of the Bone.  The now updated design for the Spring/Summer 2009 season
was launched in  March 2009.  The Bone is designed such that
it can only be worn once it is inside the Skin and not on its own. The
improvements to the product, rendered inventory to be obsolete at December 31,
2008.
 
 Our
corporate offices are located at 1 Newark Street, Suite 25A, Hoboken,
NJ  07030.
 
 Development
Stage and Going Concern
  We are
still in the development stage. Since its formation the Company has not realized
any revenues from its planned operations. We intend to design, manufacture
and market high quality men's and women's footwear. Our primary activities since
incorporation have been conducting research and development, performing
business, strategic and financial planning, and raising capital.
  The
financial statements contained in this annual report have been prepared using
accounting principles generally accepted in the United States of America
applicable for a going concern which assumes that we will realize its assets and
discharge its liabilities in the ordinary course of business. As of December 31,
2008, we had no established  source of revenues and had accumulated
losses of $16,019,163 since our inception. Our ability to continue as a going
concern is dependent upon achieving production or sale of goods, our ability to
obtain the necessary financing to meet our obligations and pay our liabilities
arising from normal business operations when they come due and upon profitable
operations. The outcome of these matters cannot be predicted with any certainty
at this time and raise substantial doubt that we will be able to continue as a
going concern.
  1
  Beginning
in March 2009 the Company has  begun shipping  its newly
enhanced products embodied in the 2009 Spring/Summer Collection to selected
retail stores and chains throughout the United States, and internet retailers
with shipments beginning in March 2009.  We have a factoring and
letter of credit financing facility in place, as well as various financing
arrangements , however we will need to raise additional capital through private
equity placements and, or other financing means.
  The
Skins Product Concept
 
 We
believe that there are few, if any, methods for a consumer to change the look of
their shoe other than buying multiple pairs, in multiple colors, or multiple
styles. With the average price of high quality shoes ranging anywhere from $150
and up, the purchase of new shoes can be a costly proposition for
consumers.
 
 Other
markets have already launched products that exploit the concept of cost and
style in terms of interchangeability. Within the watch market, companies offer
cost effective, fashionable watches that have interchangeable straps and faces.
Within the sunglasses market, some companies have many fashion-focused models
with interchangeable lenses. Even in the cellular phone market, cellular phone
manufacturers offer interchangeable covers that are purely a fashion
statement.
 
 The
Bi-Sectional System
 
 We have
designed and continue to develop a line of footwear products based on our
patented modular shoe system built with two sections: the Bone and the Skin. The
Skins products are designed to be easy to use, comfortable, and employ quality
craftsmanship. The inner section - or the Bone - is made from a mold utilizing
advanced light-weight and resilient synthetic material. The Bone is designed to
be a consistent source of comfort and support, without regard to changing styles
and fashions. The outer section - or the Skin - is expected to represent our
core product. It is expected that Skins will be created with various
combinations of toe shapes, materials, fabrics, leather and outsole treads. We
expect to launch numerous styles per season for each targeted consumer
group.
 
 Design
and Development
 
 Our
principal goal in product design is to generate new and exciting interchangeable
footwear with classic contemporary and progressive styles. All of our footwear
is designed with an active lifestyle in mind. We design most of our styles to be
fashionable and marketable to the 18 to 35 year-old consumer, with most lines
appealing to the broad cross-section of the population. Any success of the Skins
product may be related to:
  ·
              The unique interchangeable Skin
      concept,
 
 ·
              A constant fit and feel of the
      bone,
 
 ·
              Collapsibility of the Skin,
      allowing ease of travel,
 
 ·
              Ease of purchase over the
      internet,
 
 ·
              Catalog and other non-traditional
      methods of distribution,
 
 ·
              Our ability to recognize trends
      in the footwear market,
and
  2
 
 ·
              A product design that anticipates
      and accommodates consumers' ever-evolving
    preferences.
 
 Our
technology is designed to allow consumers to continually change Skins to fit
their respective fashion and functional needs. We will attempt to identify,
interpret and translate current and emerging lifestyle trends in the design of
our footwear. We expect to obtain lifestyle trend information through various
methods intended to monitor changes in the culture and society,
including:
 
 ·
              Review and analysis of modern
      music, television, cinema, clothing and other trend-setting
      media,
 
 ·
              Travel to domestic and
      international fashion markets to identify and confirm current
      trends,
 
 ·
              Consultation with retail
      customers and end-consumers for information on current retail selling
      trends,
 
 ·
              Fit trials to ensure maximum
      comfort for consumers,
 
 ·
              Participation in major footwear
      tradeshows to stay abreast of popular brands, fashions and styles,
      and
 
 ·
              Subscription to various fashion
      and color information
services.
  We expect
that our footwear design process will typically begin approximately nine months
prior to the start of a season. Our products will be designed and developed by
our in-house staff and freelance design agencies. To promote innovation and
brand relevance, we expect to utilize dedicated design teams that focus on each
of the men's, women's, and children's categories and report to our chief design
executive, once we are able to locate and hire a person for this position. We
anticipate that the design process will be collaborative whereby design staff
will meet with retail and merchandising and sales and production personnel to
refine the design to our perceived demand of the markets. After the designers
arrive at a consensus regarding the fashion themes for the coming season, the
designers then translate these themes into products. These variations will
include variations in product color, material, structure and decoration, which
are arrived at after close consultation with those involved in design and
production.
 
 After a
design is complete, we will create prototype blueprints and specifications and
forward them to our third-party manufacturers, which will then forward the
design prototypes back to our design team. We plan to allow our major retail
customers, if any, to review upcoming design concepts prior to release. We
believe that input from these retailers could assist us in predicting consumer
reaction to our latest designs and afford us an opportunity to foster
collaborative relationships with our customers. Management believes that our
design teams will be able to modify and refine a design based on customer
input.
  Business
Strategy
 
 Footwear
manufacturers may expect a limited number of purchases from consumers since
footwear is commonly viewed by consumers as functional attire. The Skins product
concept is designed to change the consumer view of footwear from a functional
requirement to a fashionable accessory. The consequence is that we may be able
to market, sell and distribute in a similar manner as an apparel entity. In
essence, we expect that the non-traditional concept of our footwear will be
ground breaking and disruptive to lifestyle and the footwear and fashion
industry specifically.
  3
  We will
concentrate on our core design and development of the Skin and Bone product,
while outsourcing the production requirements to third parties. We plan an
initial strategy of developing our own brand. In the future, we intend to
license to existing brands to maximize our market exposure and product
distribution, in addition to working with the orthopedic market in supplying
Bones without foot-beds to orthopedic insole manufacturers to allow for
orthopedic fitted Bones for individuals with orthopedic needs. We expect to act
as a wholesaler, marketing our products to specialty, department and Internet
retail locations via marketing and branding efforts.
 
 We intend
to begin with both men and women's high-end footwear. We plan to introduce our
product in the high-end market to mavens, trendsetters and early adopters, in an
attempt to build brand equity and focus on exclusive specialty shops that sell
high-fashion quality apparel and footwear. We plan on conducting promotional
activities such as celebrity product placement and Skins sponsored events, in
addition to fashion and business press editorial coverage to increase the brand
visibility and credibility. We will be working with a fashion, footwear and
accessory specific public relations firm to assist and produce these events and
undertakings. After establishing our brand, we plan to broaden our distribution
with more mainstream middle-market retailers, and then begin to enter the
children's market and license our technology to other manufacturers.
  Marketing
Strategy
 
 We expect
that our marketing strategy will consist of the following elements:
 
 Product
Diversity
 
 We expect
that product diversity will be a key marketing strategy. Initially, we plan to
invest only the required time and money for the design and development of our
initial line of products. Following the initial stages of our market
penetration, if any, we plan to expand our product line and increase the number
of retail channels through which our products are sold. We believe that the
strategy of continuously diversifying our products will occur as we build and
develop our retail distribution channels.
 
 Branding
 
 We
believe that a well-recognized brand is an important element for success in the
footwear and apparel industry. We will attempt to position our footwear as a
lifestyle brand that encompasses innovation and design while maintaining quality
and a holistic fit. Our management will be directly involved in shaping our
image and the conception, development and implementation of its advertising and
marketing activities. We intend to aggressively promote our brand through a
comprehensive marketing campaign. We hope that this campaign, which will be
image-oriented and product specific, will eventually result in a high level of
recognition of the Skins brand across a variety of footwear and apparel
categories.
 
 Advertising
 
 We
anticipate that our advertisements will generally seek to build and increase
brand awareness by linking the Skins brand to contemporary lifestyles and
attitudes, rather than exclusively marketing a particular Skins footwear
product. We will market the Skins name to represent flexibility, managing the
brand and product design towards evolving footwear and apparel fashions and
consumer lifestyle preferences.
 
 We intend
to employ a multi-phased advertising strategy that we hope will expand with our
advertising requirements and investment capabilities. Initially, we plan to
utilize cost sensitive and effective means to reach our targeted customer base.
We expect to use this marketing phase within our first phase of growth and
expansion strategy, initially targeting the fashion centers within the US and
later within Europe, and Asia/Australia.
  Once, and
if, we reach certain predetermined levels of sales, we plan to invest monetary
and human capital to expand our advertising campaigns into a traditional
portfolio marketing campaign that is based on management of our marketing and
advertising portfolio.
  4
  Promotional
Activities
 
 We plan
on implementing product placement with well-known celebrities, hosting events to
help enhance the Skins image in the coming years, and to focus marketing efforts
for our products among specific consumer groups. We anticipate that high profile
and diverse appeal of celebrities may be able to assist the Skins brand to reach
new markets.
 
 Entertainment
Promotions: Our promotional strategies are expected to include retail
collaborations, in-store specials, product tie-ins and giveaways, and other
special events.
 
 Sourcing
and Production
 
 Outsourcing
 
 On
November 24, 2008, we entered into a Buying Agency Agreement with LJP
International, LLC (“LJP”).  Pursuant to the agreement, LJP will serve
as our non-exclusive buying and sourcing agent and will be responsible for
sourcing of raw materials, arranging manufacturing facilities, monitoring
manufacturer quality, finished product inspection, and coordinating freight
forwarders.  We will pay LJP an amount equal to 8% of the FOB country
of origin price for product ordered, shipped, and accept by
us.   Either party may terminate the agreement at any time upon
providing the other party with 90 days written notice.
 
 Production
 
 In 2008,
our company changed its production strategy, and with LJP’s assistance,
identified a shoe manufacturing facility in Brazil.  Management
believes that production in Brazil will enhance the quality of our product and
reduce costs over the long-term.  We had previously utilized
manufacturing facilities in China.
 
 Inventory
Risks
 
 Due to
the nature of our planned “high level” of style and fashion, inventory risks
will be higher, since fashions can change quickly and past styles can be rapidly
considered obsolete. We will attempt to reduce the risk of overstocking
by:
 
 ·
              Assessing demand for our products
      by soliciting input from our customers and monitoring retail sell-through
      processes,
 
 ·
              Analyzing historical and current
      sales and market data to develop internal product quantity
      forecasts,
 
 ·
              Seeking to share inventory risks
      with retail channels as much as possible,
  and
 
 ·
              Investing in core and basics
      inventory that can be held for more than one
  season.
  Growth
and Expansion Strategy
 
 We plan
to expand our operations in three primary segments:
  5
 
 Region
by Region
 
 We will
launch our operations in the United States  and attempt to maintain
those operations throughout the planned growth period. We expect sell direct to
the consumer in addition to expanding into developed countries in Western Europe
and throughout the world. This expansion process may be expedited via licensing
agreements with multinational apparel brands and distributors.
 
 Demographics
 
 We
believe that the Skins core product concept is suitable for all ages. We believe
that the key advantages of the product concept will initially attract the most
fashion-savvy age group - the 18 to 35 year olds. When and if the product
concept becomes more widely known, we plan to expand our demographic focus of
the product concept to the 5 to 55 year old market segments.
 
 Distribution
 
 Initially,
we will market our products to specialty high end retail stores and chains in
the U.S., and internet retailers.  Our sales strategy includes setting
sales meetings with the retail stores in which we hope to have our product
carried. We will exhibit and participate in international industry tradeshows
and events and establish close connections with the retailers we intend to do
business with, including them at times in pre-selection and viewing of upcoming
collections for the purpose of their review and comment. When and if our brand
becomes more widely known and the product concept is more widely accepted, we
will seek to establish licensing agreements with branded apparel companies. The
third phase of distribution may include self-managed Skins concept stores in the
heart of major metropolitan shopping areas acting primarily as a marketing tool
and serving as examples for future licensed retail.
 
 Pricing
Strategy
 
 Initially
we will target our Skins footwear products to the purchasers of higher end
lifestyle oriented and casual footwear and are aiming to the higher end of the
market.
 
 Competition
 
 We will
face intense direct and indirect competition.
 
 ·
              Direct Competition: We will
      primarily offer lifestyle, athletic and dress-casual shoes. Consequently,
      all footwear companies that can be defined within those categories will be
      our competition.
 
 ·
              Indirect Competition: In
      addition, due to, in managements opinion,  the unique Skins
      product concept that involves interchangeability, we should be able to
      utilize the distribution patterns of the apparel market, including
      Internet and catalog sales, and via specialty retail distribution without
      the requirement of a footwear department. This opportunity widens our
      competition to include apparel companies that do or potentially will offer
      footwear products with their respective brand. These companies are defined
      as indirect competition, since we will target these companies as potential
      retail distribution points and for possible licensing
      agreements.
 
 The
apparel and footwear industries are extremely competitive and highly fragmented.
This is most likely due to low barriers to entry. All that is required to enter
the industries are clothing designs that appeal to department store and/or
specialty store buyers. If a designer receives orders, he or she can contract
the production of the item to a low-cost, independent manufacturer, usually
outside the United States. In many areas, the barriers to entry are
insignificant. These industries are characterized by simple technologies, low
fixed assets per employee and ease of expansion through the use of
contractors.
  6
 
 Although
entering into the apparel and footwear industry may be relatively simple, being
successful in the industry is much more difficult. The strength of large
retailers is a major challenge to many designers, including us. As retailers
shrink their inventories and place orders closer to the time that merchandise
will be needed, designers and manufacturers are forced to assume more inventory
risk.
 
 Employees
 
 As a
development stage company, and even as we begin selling our product, we plan to
rely on outside consultants and resources in an attempt to control our costs and
expenses. Accordingly, as of December 31, 2008, we employed five full-time
employees. None of our employees are covered by a collective bargaining
agreement.
 
 Patent
and Patent Applications
 
 We own
one issued United States patent claiming the modular shoe system; this patent
issued February 6, 2007 as U.S. patent number 7,171,768 (the ‘768 patent). 
Additionally we have two pending U.S. patent applications also claiming certain
aspects of the modular shoe system: U.S. patent application serial number
(USPASN) 11/638,166 filed December 13, 2006, which is a continuation of the
‘768 patent, and USPASN 11/578,741 which is a national phase application of
Patent Cooperation Treaty (PCT) international application serial number
PCT/US04/033446 (the '446 application).  The '446 application has also been
nationalized in Australia, Canada, China (PRC), Europe, Hong Kong, Israel,
Japan, Korea, New Zealand and the Russian Federation.
 
 WHERE YOU CAN FIND MORE
INFORMATION
 
 You are
advised to read this Form 10-K in conjunction with other reports and documents
that we file from time to time with the SEC. In particular, please read our
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from
time to time. You may obtain copies of these reports directly from us or from
the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E. Washington,
D.C. 20549, and you may obtain information about obtaining access to the
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains information for electronic filers at its website
http://www.sec.gov.
 
 ITEM
1A.  RISK FACTORS
  Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. Our business, financial condition or results of operations could be
materially adversely affected by these risks if any of them actually occur. Skins Inc. is the 100% parent of Skins Footwear Inc. and Skins
Inc.'s sole business operation consists of the operations of Skins Footwear Inc.
The discussion below refers to the registrant, Skins Inc., and its wholly-owned
subsidiary, Skins Footwear Inc, which are referred to in the discussion below as
“Skins,” the “Company,” “we,” “us,” and “our.” The trading price of our common
stock could decline due to any of these risks, and an investor may lose all or
part of his or her investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting us.
This  report also contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by our company described below and elsewhere in this
report.
  7
  RISKS
RELATED TO OUR BUSINESS
  If
we are unable to obtain additional financing, enter into a merger or
acquisition, or generate revenue we may not have sufficient cash to continue
operations.
 
 In May
2007 the Company sold a total of 4,000,000 units in a private offering for
aggregate proceeds of $3,000,000, and in April 2008, the Company conducted
another private placement that raised approximately $2,680,645 in gross
proceeds. The Company has also raised approximately $705,000 by issuing secured
promissory notes entered into from December 2007 through March 2008, all of
which were invested in the April 2008 private placement in lieu of
repayment.  In September 2008 and November 2008 the Company sold a
total of 9,700,000 units in a private offering for aggregate proceeds of
$485,000.  In January 2009 the Company sold 1,557,500 units in a
private placement for aggregate proceeds of $77,875 of which 757,500 units were
purchased by Michael Rosenthal, Company chairman, for $37,875.
 
 In
November 2008 the Company closed on a one-year Revolving Loan and Security
Agreement which provides for a $3 million letter of credit and accounts
receivable factoring facility.  Any financings under this facility are
guaranteed by Mark Klein, the Company’s Chief Executive.
 
 In March
2009 the Company entered into two separate transactions for additional
funding.  In the first transaction, pursuant to a Securities Purchase
Agreement, an investor will purchase up to $2 million of Common Stock from the
Company over an 18 month period in addition to purchasing from the Company a
one-year 7% convertible debenture for $85,000.  In the second
transaction the Company sold two two-year 8% convertible debentures for $185,000
each.
 
 On March
23, 2009 the Company entered into a certain Securities Purchase Agreement
("SPA") with Tangiers Investors, LP (“Tangiers”) where
the  Company  may,  at  its
discretion,  periodically  sell  to  Tangiers  shares  of  the
Company's common stock for a total purchase price of up to Two Million Dollars
($2,000,000) in which Tangiers will pay the Company 90% of the lowest volume
weighted average price of the Company's common stock as quoted by
Bloomberg,  LP on the Over-the-Counter Bulletin Board or other
principal market on which the Company's common stock is traded for the five days
immediately following the notice date. The SPA has contains other rights and
responsibilities, including the requirement to file a registration statement. In
relation with the SPA, in the amount of Eighty-Five Thousand Dollars
($85,000).  This transaction closed on April 1, 2009.
 
 We
anticipate raising additional funds through public or private financing,
strategic relationships or other arrangements in the near future to support our
business operations; however we currently do not have commitments from third
parties for additional capital. We cannot be certain that any such financing
will be available on acceptable terms, or at all, and our failure to raise
capital when needed could limit our ability to continue our
operations.  Failure to secure additional financing in a timely manner
and on favorable terms would have a material adverse effect on our financial
performance, results of operations and stock price and require us to curtail or
cease operations, sell off our assets, seek protection from our creditors
through bankruptcy proceedings, or otherwise. Furthermore, additional equity
financing may be dilutive to the holders of our common stock, and debt
financing, if available, may involve restrictive covenants, and strategic
relationships, if necessary to raise additional funds, may require that we
relinquish valuable rights.
  Our
independent registered public accountants indicate that they have substantial
doubts that we can continue as a going concern, which may negatively affect our
ability to raise additional funds and otherwise operate our business. If we fail
to raise sufficient capital, we will not be able to implement our business plan,
we may have to liquidate our business, and you may lose your
investment.
  MHM
Mahoney Cohen CPAs (The New York Practice of Mayer Hoffman McCann P.C.), our
independent registered public accountants, has added an explanatory paragraph to
their audit opinion issued in connection with the financial statements for the
year ended December 31, 2008 indicating that it has substantial doubt about our
ability to continue as a going concern given our recurring losses from
operations and deficiencies in working capital. This opinion could materially
limit our ability to raise additional funds by issuing new debt or equity
securities or otherwise. If we fail to raise sufficient capital, we will not be
able to implement our business plan, we may have to liquidate our business and
you may lose your investment. You should consider our independent registered
public accountants' comments when determining if an investment in us is
suitable.
  8
 
 We
are a development stage company with a limited operating history on which to
evaluate our business.
  Our
business prospects are difficult to predict because of our limited operating
history, early stage of development, unproven business strategy and unproven
product. We are a development stage company that has yet to generate any revenue
since our inception. Since our inception in May 2004, it has been our business
plan to design, develop, manufacture and distribute our sole product
type--footwear with an interchangeable outer skin. Our Skins shoe product has
only been introduced to selected test markets and there is no guarantee that our
product will be able to generate any significant revenues. To the extent that we
are able to implement our business plan, our business will be subject to all of
the problems that typically affect a business with a limited operating history,
such as unanticipated expenses, capital shortfalls, delays in design and
manufacturing and possible cost overruns.
 
 We
have a history of losses and we anticipate that our expenses will dramatically
increase as we execute our business plan. Thus, we will likely experience
continued losses in the near future and may not ever achieve or maintain
profitability.
 
 We have
yet to initiate sales or demonstrate that we can generate sufficient sales to
become profitable. We incurred significant net losses since our inception from
May 2004 through December 31, 2008 of  $16,019,163 including losses of
$4,621,672 and $6,612,193 for the years ended December 31, 2008 and 2007,
respectively. As of December 31, 2008, we had an accumulated deficit
of  $15,643,305. We expect to continue to incur operating losses in
the future. Further, we expect operating expenses to increase as we seek to
finalize our designs, build relationships with manufacturers and a distribution
channel for product introductions, continue design and development projects, and
increase administrative activities to support our planned growth. The extent of
our future operating losses and the timing of our profitability are highly
uncertain, and we may never generate sufficient revenues to achieve or sustain
profitability.
  We
face risks related to our accounting restatements.
 
 In August
and September 2006, we determined that we had accounting inaccuracies in
previously reported financial statements and decided to restate our financial
statements for the year ended December 31, 2005 and the three months and six
months ended March 31, 2006 and June 30, 2006, respectively. The restatements
related to our determination that we misapplied accounting principles generally
accepted in the United States of America in relation to (i) options granted on
October 24, 2005 that were cancelled and replaced on March 16, 2006, (ii)
derivative instruments that existed at December 31, 2005, March 31, 2006 and
June 30, 2006, and (iii) 122,000 fully vested common stock shares granted to two
of the Company's shareholders on April 3, 2006 for consulting services to be
provided over a two year term. Such restatement of our financial statements
could lead to litigation claims and/or regulatory proceedings against us. The
defense of any such claims or proceedings may cause the diversion of
management's attention and resources, and we may be required to pay damages if
any such claims or proceedings are not resolved in our favor. Any litigation or
regulatory proceeding, even if resolved in our favor, could cause us to incur
significant legal and other expenses. We also may have difficulty raising equity
capital or obtaining other financing, such as lines of credit or otherwise. We
may not be able to effectuate our current operating strategy, including our
ability effect the initial launch of our product and obtain additional financing
in the future. The occurrence of any of the foregoing could harm our business
and reputation and cause the price of our securities to
decline.
  9
 
 Our
business is based on a single unproven and undeveloped product, and we may not
be able to generate significant revenue if our product fails.
 
 We are a
development stage company.  Our business and ability to generate
revenue will depend on our ability to successfully develop and commercialize our
only product type-the Skins and Bone shoe-which is currently in development and
testing stages. We have conducted various wear, fit and abrasion testing on our
product, but there is no guarantee that the product will ever be fully and
successfully developed. We may experience unforeseen difficulties during our
testing and development of our product, which may require us to expend a
significant amount of resources in an attempt to address any faults that are
discovered. Such faults may be related to comfort, durability, appearance and
any other characteristics that would affect the commercial viability of the
product.
 
 Further,
even if we are able to develop and release our product, there can be no
assurance that it will be well-received by the market or that it will generate
any substantial revenue. Accordingly, our failure to generate revenue from our
sole product type will have a significant negative impact on our business and
results of operation, and shareholders in our company may lose all or part of
their investment.
  Our
management has a limited amount of senior management experience in manufacturing
footwear and apparel industry and limited design experience in the
industry.
 
 Our
company is new to the footwear industry and our management has limited
experience conducting business with overseas manufactures. The lack of
experience in footwear management and the non-traditional design of our footwear
may make it difficult to compete against companies that have more senior
management and are manufacturing conventional footwear designs. We expect to add
additional key personnel in the near future. Our failure to attract and fully
integrate our new employees into our operations or successfully manage such
employees could have a material adverse effect on our business, financial
condition and results of operations.
 
 Our
future success depends on our ability to respond to changing consumer demands,
to identify and to interpret fashion trends and successfully to market new
products.
 
 The
footwear industry is subject to rapidly changing consumer demands and fashion
trends, particularly in the “high fashion” market that we intend to market our
product. Accordingly, we must identify and interpret fashion trends and respond
in a timely manner. Demand for and market acceptance of new products are
uncertain and achieving market acceptance for new products generally requires
substantial product development and marketing efforts and expenditures. If we do
not meet changing consumer demands or are unable to continually develop styles
that appeal to current consumer demands, our results of operations will be
negatively impacted. In addition, we will have to make decisions about product
designs and marketing expenditures several months in advance of the time when
consumer acceptance can be determined, which makes it more difficult to appeal
to current demands. If we fail to anticipate, identify or react appropriately to
changes in styles and trends or are not successful in marketing our products, we
could experience excess inventories, higher than normal markdowns or an
inability to sell our products once and if the products are
available.
 
 Our
business and the success of our products could be harmed if we are unable to
establish and maintain a brand image.
 
 We
believe that establishing the Skins brand is critical to achieving acceptance of
our footwear products and to establishing key strategic relationships. As a new
company with a new brand, we believe that we have little to no brand recognition
with the public. We may experience difficulty in establishing a brand name that
is well-known and regarded, and any brand image that we may be able to create
may be quickly impaired. The importance of brand recognition will increase when
and if our competitors create products that are similar to our products. Even if
we are able to establish a brand image and react appropriately to changes in
consumer preferences, consumers may consider our brand image to be outdated or
associate our brand with styles of footwear that are no longer popular. In the
past, footwear companies have experienced fluctuations in revenues and sales
due, at least in part, to changes in the companies' brand image. Our results of
operations may be similarly affected in the future should our products even be
successfully launched.
  10
 
 We
may fail in introducing and promoting our new products to the footwear market,
which will have an adverse effect on our ability to generate
revenues.
  Demand
for and market acceptance of new products such as the Skin and Bones product
type is inherently uncertain. We expect that our revenue, if and when generated,
will come from the sale of our products, and our ability to sell our products
will depend on various factors, including the eventual strength, if any, of our
brand name, competitive conditions and our access to necessary capital. If we
fail to introduce and promote our products, we may not be able to generate any
significant revenues. In addition, as part of our growth strategy, we intend to
expand our product offerings to introduce products in multiple categories. This
strategy may however prove unsuccessful and our association with failed products
could impair our brand image. Introducing and achieving market acceptance for
these products will require, among other things:
 
 ·
              the establishment of our
      brand;
  ·
              the development and application
      of advanced performance technologies to our planned product
      introductions;
  ·
              the establishment of key
      relationships with designers of and customers for our apparel products;
      and
  ·
              substantial marketing and product
      development efforts and expenditures to create and sustain consumer
      demand.
  When
and if our products are introduced and commercially available, we expect to rely
on licensees for sales outside the U.S., and our dependence on licensees may
adversely impact our business and results of operations.
 
 We expect
that our sales outside the U.S., if any, will be conducted through licensees.
Any dependence on licensees will subject us to a number of risks,
including:
 
 ·
              Our brand image will be
      dependent, in part, on the marketing efforts of our licensees and on the
      quality of the products that licensees distribute. If licensees or their
      sponsors or endorsers do not maintain our brand image or our licensees
      fail to adhere to our quality control standards, our brand image could
      suffer.
  ·
              We expect that our licensees will
      likely have the exclusive right to distribute products in a particular
      country or region. Licensees may engage in the trans-shipment, or gray
      marketing, of goods to countries where they are not licensed to sell
      products.
  ·
              Licensees may use manufacturers
      who fail to meet our human rights or product quality standards, which
      could harm our brand image and
  reputation.
  ·
              Licensees may fail to timely and
      accurately report sales and licensing income to
  us.
  ·
              Our reserve for unpaid licensee
      revenue may be
insufficient.
  11
  Revenue
we may receive from international licensees will subject us to the risks of
doing business abroad, including, political risks, foreign currency risks, funds
transfer restrictions and exposure to different legal standards, particularly
with respect to intellectual property.
  Our
business could be harmed if we fail to maintain proper inventory levels once
product is available.
 
 We may
have difficulty in determining and maintaining the proper inventory levels for
our Skins shoe product and styles, and if our inventory levels are too high or
low, our results of operations will suffer. We plan to market our Skins shoe
product as a “high level” style and fashion product, and, as a result, we will
be subject to a higher risk of having an overstocked inventory because such
styles and fashions change quickly and past styles can be rapidly considered
obsolete. We expect to place orders with manufacturers for most of our products
prior to the time we receive customer orders. Our inventory levels that are in
excess of any customer demand, if any, that may develop for our products, once
available, may result in an inventory of unfashionable product styles, inventory
write-downs, and the sale of excess inventory at discounted prices could
significantly impair our brand image as it is built and have a material adverse
effect on our operating results and financial condition. Conversely, if we
underestimate any consumer demand for our products that may develop or if our
manufacturers, which are located in Brazil, fail to supply the quality products
that we require at the time we need them, we may experience inventory shortages.
Inventory shortages might delay shipments to customers, negatively impact
retailer and distributor relationships, and diminish any brand loyalty that we
may be able to foster.
 
 We
expect to rely on independent contract manufacturers and, as a result, will be
exposed to potential disruptions in product supply.
 
 Our
footwear products will likely be manufactured by independent contract
manufacturers. We will not have long-term contracts with manufacturers and will
compete with other footwear companies for production facilities. We could
experience difficulties with these manufacturers, including reductions in the
availability of production capacity, failure to meet our quality control
standards, failure to meet production deadlines or increased manufacturing
costs. This could result in future customers, if any, canceling orders, refusing
to accept deliveries or demanding reductions in purchase prices, any of which
could have a negative impact on our cash flow and harm our
business.
  We
are likely to depend upon a relatively small group of customers for a large
portion of our sales.
 
 Our
customers are not likely to have a contractual obligation to purchase our
products once they are available and we cannot be certain that we will be able
to retain major customers. We are likely to rely at all stages of our business
on certain significant customers, as they may develop. Furthermore, the retail
industry regularly experiences consolidation, contractions and closings. If
there are further consolidations, contractions or closings in the future, we may
lose future customers or be unable to collect accounts receivable of major
customers in excess of amounts that we may insure. If we lose a major customer
in the future, experience a significant decrease in sales to a major customer or
are unable to collect the accounts receivable of a major customer in excess of
amounts insured, our business could be harmed.
 
 Any
international sales and manufacturing operations we are able to develop will be
subject to the risks of doing business abroad, which could affect our ability to
sell or manufacture our products in international markets, obtain products from
foreign suppliers or control the costs of our products.
 
 Substantially
all of any net sales we may be able to develop are likely to be derived from
sales of footwear manufactured in foreign countries, which is currently Brazil.
We also expect to sell our footwear products in foreign countries and plan to
establish international sales efforts over time as part of our growth strategy.
Foreign manufacturing and sales will be subject to a number of risks,
including:
 
 ·
              work
      stoppages;
  12
  ·
              natural disasters and outbreaks
      pandemic diseases (such as the Avian
  Flu);
  ·
              changing domestic and foreign
      economic conditions;
  ·
              currency exchange rate
      fluctuations;
  ·
              electrical
      shortages;
  ·
              transportation delays or damage
      to products in transit;
  ·
              the imposition of tariffs and
      trade duties both international and
  domestically;
  ·
              import and export controls and
      other non-tariff barriers;
  ·
              exposure to different legal
      standards (particularly with respect to intellectual
      property);
  ·
              compliance with foreign laws;
      and
  ·
              changes in domestic and foreign
      governmental policies.
  The effects of these factors could restrict our ability to
manufacture or sell our shoe products in a particular country and have a
negative impact on our operating results.
 
 Our
business could be harmed if our future contract manufacturers, suppliers or
licensees violate labor or other laws.
 
 Once we
are able to retain them, our independent contract manufacturers, suppliers and
licensees may not operate in compliance with applicable United States and
foreign laws and regulations, including labor practices. If one of any of our
possible future independent contract manufacturers, suppliers or licensees
violates labor or other laws or diverges from those labor practices generally
accepted as ethical in the United States, we could result in adverse publicity
for us, damage our reputation in the United States or render our conduct of
business in a particular foreign country undesirable or impractical, any of
which could harm our business.
 
 We
expect that once our products are introduced and when, and if, we are able to
generate revenue on our products, our quarterly revenues and operating results
will fluctuate as a result of a variety of factors, including seasonal
fluctuations in demand for footwear, delivery date delays and potential
fluctuations in our annualized tax rate, which may result in volatility of our
stock price.
 
 Once and
if established, our quarterly revenues and operating results can be expected to
fluctuate due to a number of factors, many of which are beyond our control. For
example, sales of footwear products have historically been seasonal in nature
with the strongest sales generally occurring in the second and third quarters.
Delays in scheduling or pickup of purchased products by domestic customers could
negatively impact our net sales and results of operations for any given quarter.
In addition, a number of companies in the footwear industry specifically, and
others in the fashion and apparel industry in general, have experienced periods
of growth in revenues and earnings and thereafter periods of declining sales and
losses, based on the market reception of their collection of products for a
particular season. Also, our annualized tax rate will be based on projections of
our domestic and international operating results for the year, which we will
review and revise as necessary at the end of each quarter, and we will be highly
sensitive to fluctuations in projected international earnings. Any quarterly
fluctuations in our annualized tax rate that may occur could have a material
impact on our quarterly operating results. As a result of these specific and
other general factors, our operating results will likely vary from quarter to
quarter and the results for any particular quarter may not be necessarily
indicative of results for the full year.
  13
  We
will face intense competition, including competition from companies with
significantly greater resources than ours, and if we are unable to compete
effectively with these companies, our business could be harmed.
 
 We will
face intense competition in the footwear industry from other established
companies. We have no product sales, introductions, manufacturing or brand
equity. All of our competitors have significantly greater financial,
technological, engineering, manufacturing, marketing and distribution resources
than we do. Their greater capabilities in these areas will enable them to better
withstand periodic downturns in the footwear industry, compete more effectively
on the basis of price and production and more quickly develop new products. In
addition, new companies may enter the markets in which we expect to compete,
further increasing competition in the footwear industry.
 
 We
believe that our ability to compete successfully will depend on a number of
factors, including the style and quality of our products once marketed and the
strength of our brand, once established, as well as many factors beyond our
control. We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, loss of
market share and an inability to generate cash flows that are sufficient to
maintain or expand our development and marketing of new products.
 
 We
depend on key personnel to manage our business effectively in a rapidly changing
market, and if we are unable to retain existing personnel, our business could be
harmed.
 
 Our
future success depends upon the continued services of Mark Klein, President and
Chief Executive Officer. The loss of the services of Mr. Klein or any other key
employee could harm us. Our future success also depends on our ability to
identify, attract and retain additional qualified personnel. Competition for
employees in our industry is intense and we may not be successful in attracting
and retaining such personnel.
 
 The
disruption, expense and potential liability associated with unanticipated future
litigation against us could have a material adverse effect on our business,
results of operations and financial condition.
 
 We expect
to be subject to various legal proceedings and threatened legal proceedings from
time to time as part of our ordinary business. We are not currently a party to
any legal proceedings. However, any unanticipated litigation in the future,
regardless of merits, could significantly divert management's attention
from our operations and result in substantial legal fees to it. Further, there
can be no assurance that any actions that have been or will be brought against
us will be resolved in our favor or, if significant monetary judgments are
rendered against us, that we will have the ability to pay such judgments. Such
disruptions, legal fees and any losses resulting from these claims could have a
material adverse effect on our business, results of operations and financial
condition.
  Our
ability to compete will be jeopardized if we are unable to protect our
intellectual property rights or if we are sued for intellectual property
infringement.
 
 We hope
to use trademarks on most or all of our products and believe that having
distinctive marks that are readily identifiable will be an important factor in
creating a market for our goods, in identifying our and in distinguishing our
products from the products of others.
  14
 
 We own
one issued United States patent claiming the modular shoe system; this patent
issued February 6, 2007 as U.S. patent number 7,171,768 (the ‘768 patent). 
Additionally we have two pending U.S. patent applications also claiming certain
aspects of the modular shoe system: U.S. patent application serial number
(USPASN) 11/638,166 filed December 13, 2006, which is a continuation
of ‘768 patent, and  USPASN 11/578,741 which is a national phase
application of Patent Cooperation Treaty (PCT) international application serial
number PCT/US04/033446 (the '446 application).  The '446 application has
also been nationalized in Australia, Canada, China (PRC), Europe, Hong Kong,
Israel, Japan, Korea, New Zealand and the Russian Federation.
 
 We
believe that our ability to achieve success will depend primarily upon our
ability to be effective in design, research and development, production and
marketing rather than upon our patent position, however, we expect to establish
a policy of filing applications for United States and foreign patents on designs
and technologies that we deem valuable. If we fail to protect or maintain our
trademarks, we may lose or damage our intellectual property rights and impair
our ability to generate revenue in the future.
 
 We
may incur significant litigation expenses protecting our intellectual property
or defending our use of intellectual property, which may have a material adverse
effect on our cash flow and results of operations.
 
 If our
efforts to protect our intellectual property rights are inadequate to prevent
imitation of our products by others or to prevent others from seeking to block
sales of our products as a violation of the intellectual property rights of
others, we could incur substantial significant legal expenses in resolving such
disputes.
 
 Our
competitors may develop similar, non-infringing products that adversely affect
our ability to generate revenues.
 
 Our
competitors may be able to produce a footwear product that is similar to our
product without infringing on our intellectual property rights. Since we have
yet to establish any significant brand recognition for our product, we could
lose a substantial amount of business due to competitors developing products
similar to our Skin and Bones footwear product. As a result, our future growth
and ability to generate revenues from the sale of our product could suffer a
material adverse effect.
 
 Our
business may be negatively impacted as a result of changes in the economy and
consumer spending.
 
 Our
business will depend on the general economic environment and levels of consumer
spending that affect not only the ultimate consumer, but also retailers, our
likely primary direct customers. Purchases of footwear tend to decline in
periods of recession or uncertainty regarding future economic prospects, when
consumer spending, particularly on discretionary items, declines. During periods
of recession or economic uncertainty, we may not be able to maintain or increase
our sales to customers, maintain sales levels, establish international
operations on a profitable basis or create earnings from operations as a
percentage of net sales. As a result, our operating results may be adversely and
materially affected by downward trends in the economy or the occurrence of
events that adversely affect the economy in general. Our operating results and
margins will be adversely impacted if we do not grow as
anticipated.
 
 We
may be unable to scale our operations successfully.
  Our plan
is to grow our business rapidly. Our growth, if it occurs as planned, will place
significant demands on our management, as well as our financial, administrative
and other resources. Our success will be heavily dependent on our ability to
integrate additional qualified employees that provide expertise in order to help
grow the business. There is no guarantee that we will be able to locate and
retain qualified personnel for such positions, which would likely hinder our
ability to manage operations. Furthermore, we cannot guarantee that any of the
systems, procedures and controls we put in place will be adequate to support the
commercialization of our products or other operations. Our operating results
will depend substantially on the ability of our officers and key employees to
manage changing business conditions and to implement and improve our financial,
administrative and other resources. If we are unable to respond to and manage
changing business conditions, or the scale of our products, services and
operations, then the quality of our services, our ability to retain key
personnel and our business could be harmed.
  15
  RISKS
RELATED TO OUR CAPITAL STRUCTURE
  There
is no assurance of an established public trading market, which would adversely
affect the ability of our investors to sell their securities in the public
market.
  Although
our common stock is listed on the OTC Bulletin Board, a regular trading market
for the securities does not yet exist and may not exist or be sustained in the
future. The NASD has enacted changes that limit quotations on the OTC Bulletin
Board to securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTC Bulletin Board of
these rule changes and other proposed changes cannot be determined at this time.
The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides
significantly less liquidity than the NASD's automated quotation system, or the
NASDAQ Stock Market. Quotes for stocks included on the OTC Bulletin Board are
not listed in the financial sections of newspapers as are those for the NASDAQ
Stock Market. Therefore, prices for securities traded solely on the OTC Bulletin
Board may be difficult to obtain and holders of common stock may be unable to
resell their securities at or near their original offering price or at any
price. Market prices for our common stock will be influenced by a number of
factors, including:
 
 ·
              the issuance of new equity
      securities pursuant to the share exchange transaction, or a future
      offering;
  ·
              changes in interest
      rates;
  ·
              competitive developments,
      including announcements by competitors of new products or services or
      significant contracts, acquisitions, strategic partnerships, joint
      ventures or capital
commitments;
  ·
              variations in quarterly operating
      results;
  ·
              change in financial estimates by
      securities analysts;
  ·
              the depth and liquidity of the
      market for our common stock;
  ·
              investor perceptions of our
      company and the footwear industry generally;
  and
  ·
              general economic and other
      national conditions.
  Our
principal stockholders have significant influence over our company.
  Mark
Klein, Michael J. Rosenthal, Geoffrey Dubey and Joshua Hermelin, each of whom
were principal stockholders of Skins Footwear prior to the Share Exchange
Transactions, beneficially own, in the aggregate, a majority of our outstanding
voting stock following the Share Exchange Transaction. Mr. Klein became our
President and Chief Executive Officer and Mr. Rosenthal became director of our
company upon the closing of the Share Exchange Transaction. These stockholders
possess significant influence over our company, giving them the ability, among
other things, to elect a majority of the Board of Directors and to approve
significant corporate transactions. Such stock ownership and control may also
have the effect of delaying or preventing a future change in control, impeding a
merger, consolidation, takeover or other business combination or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of our company.
  16
  We
may not be able to achieve the benefits we expect to result from the Share
Exchange Transaction.
  On March
20, 2006, the Share Exchange Transaction closed, Skins Footwear Inc. became our
wholly-owned subsidiary and our sole business operations became that of Skins
Footwear Inc. Also, the management and directors of Skins Footwear Inc. became
the management and directors of our company.
  The Share
Exchange Transaction was conducted for various reasons, but there is no
guarantee that we will ever obtain the anticipated benefits, as
follows:
 
 ·
              the increased market liquidity
      expected to result from exchanging stock in a private company for publicly
      traded securities;
  ·
              the ability to use registered
      securities to make acquisition of assets or
    businesses;
  ·
              increased visibility in the
      financial community;
  ·
              enhanced access to the capital
      markets;
  ·
              improved transparency of
      operations; and
  ·
              perceived credibility and
      enhanced corporate image of being a publicly traded
      company.
 
 There can
be no assurance that any of the anticipated benefits of the Share Exchange
Transaction will be realized in respect to our new business operations. In
addition, the attention and effort devoted to achieving the benefits of the
Share Exchange Transaction and attending to the obligations of being a public
company, such as reporting requirements and securities regulations, could
significantly divert our management's attention from other important issues,
which could materially and adversely affect our operating results or stock price
in the future.
  Failure
To Achieve And Maintain Effective Internal Controls In Accordance
With Section 404 Of The Sarbanes-Oxley Act Could Have A Material
Adverse Effect On Our Business And Operating Results.
 
 Our
internal control over financial reporting or disclosure controls and procedures
may have weaknesses and conditions that need to be addressed, the disclosure of
which may have an adverse impact on the price of our common stock. We are
required to establish and maintain appropriate internal controls over financial
reporting and disclosure controls and procedures. Failure to establish those
controls, or any failure of those controls once established, could adversely
impact our public disclosures regarding our business, financial condition or
results of operations. In addition, management’s assessment of internal controls
over financial reporting or disclosure controls and procedures may identify
weaknesses and conditions that need to be addressed in our internal controls
over financial reporting, disclosure controls and procedures or other matters
that may raise concerns for investors. Any actual or perceived weaknesses and
conditions that need to be addressed in our internal control over financial
reporting or disclosure controls and procedures may have an adverse impact on
the price of our common stock.
 
 As of
December 31, 2008, our management, including our Chief Executive Officer, or
“CEO,” who is the Principal Executive Officer, and our Chief Financial Officer,
or “CFO,” who is our Principal Financial and Accounting Officer, performed an
evaluation of the effectiveness and the operation of our disclosure controls and
procedures and internal controls over financial reporting as defined in Rules
13a-15(e) or 15d-15(e) and Rules 13(a) -15(f) and 15d- 15(f), respectively under
the Securities Exchange Act of 1934, as amended, or the “Exchange
Act.
  17
  In
addition, in connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public
Company Accounting Oversight Board, or the PCAOB. A material weakness is a
significant deficiency, or combination of significant 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. The PCAOB
defines “significant deficiency” as a deficiency that results in more
than a remote likelihood that a misstatement of the financial statements
that is more than inconsequential will not be prevented or
detected.
  In the
event that a material weakness is identified, we will employ qualified personnel
and adopt and implement policies and procedures to address any material
weaknesses that we identify. However, the process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future.
 Any
failure to complete our assessment of our internal control over financial
reporting, to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial
statements. Any such failure could also adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls
could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an assessment of the effectiveness of our internal control over
financial reporting based on criteria established in “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), as of December 31,
2008.
  In
connection with the assessment described above, management identified the
following control deficiencies that represent material weaknesses at December
31, 2008:
  ·
              Due to the limited number of
      Company personnel, a lack of segregation of duties
      exists.   An essential part of internal control is for
      certain procedures to be properly segregated and the results of their
      performance be adequately reviewed.  This is normally
      accomplished by assigning duties so that no one person handles a
      transaction from beginning to end and incompatible duties between
      functions are not handled by the same
  person.
  As a
result of the material weaknesses described above, management has concluded
that, as of December 31, 2008, our internal control over financial reporting was
not effective based on the criteria in “Internal Control-Integrated Framework”
issued by COSO.   We intend to initiate measures to remediate and
refine our internal controls to address this identified material weakness as the
Company grows and when we obtain a stronger cash position that would justify
additional expenditures.
  18
  Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
  Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
  Our
common stock is considered a “penny stock,” and is subject to additional sale
and trading regulations that may make it more difficult to sell.
  Our
common stock is considered to be a “penny stock” since it does not qualify for
one of the exemptions from the definition of “penny stock” under Section 3a51-1
of the Securities Exchange Act for 1934, as amended, or the Exchange Act. Our
common stock is a “penny stock” because it meets one or more of the following
conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is
NOT traded on a “recognized” national exchange; (iii) it is NOT quoted on the
Nasdaq Stock Market, or even if so, has a price less than $5.00 per share; or
(iv) is issued by a company that has been in business less than three years with
net tangible assets less than $5 million.
  The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor's account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
  19
  Operating
History And Lack Of Profits Which Could Lead To Wide Fluctuations In Our Share
Price. The Price At Which You Purchase Our Common Shares May Not Be Indicative
Of The Price That Will Prevail In The Trading Market. You May Be Unable To Sell
Your Common Shares At Or Above Your Purchase Price, Which May Result In
Substantial Losses To You. The Market Price For Our Common Shares Is
Particularly Volatile Given Our Status As A Relatively Unknown Company With A
Small And Thinly Traded Public Float.
  The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or “risky” investment due to our
limited operating history and lack of profits to date, and uncertainty of future
market acceptance for our potential products. As a consequence of this enhanced
risk, more risk-adverse investors may, under the fear of losing all or most of
their investment in the event of negative news or lack of progress, be more
inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the stock of a seasoned issuer. Many of
these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common shares will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price.
  Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask
differential and markups by selling broker-dealers; and (5) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have
been manipulated to a desired level, along with the resulting inevitable
collapse of those prices and with consequent investor losses. Our management is
aware of the abuses that have occurred historically in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, management will
strive within the confines of practical limitations to prevent the described
patterns from being established with respect to our securities. The occurrence
of these patterns or practices could increase the volatility of our share
price.
  We
do not foresee paying cash dividends in the foreseeable future.
  To date,
we have not declared or paid any cash dividends on our shares of common stock
and currently intend to retain any future earnings for funding growth. We do not
anticipate paying any dividends in the foreseeable future. As a result, you
should not rely on an investment in our securities if you require dividend
income. Capital appreciation, if any, of our shares may be your sole source of
gain for the foreseeable future. Moreover, you may not be able to resell your
shares in our company at or above the price you paid for them.
 
 ITEM
1B. UNRESOLVED STAFF COMMENTS
  Not
applicable to small business filers.
 
 ITEM
2. DESCRIPTION OF PROPERTY.
 
 We do not
own any real property.
 
 On
September 26, 2008 the Company entered into a one year lease, beginning October
1, 2008, for new office space in Hoboken, New Jersey. The minimum monthly rental
under the lease is $2,200 per month. The Company also paid a one-month security
deposit. The lease is renewable for one year at a minimum rental rate of $2,200
per month.
  20
 
 ITEM
3. LEGAL PROCEEDINGS.
  We are
currently not involved in any litigation that we believe could have a materially
adverse effect on our financial condition or results of operations. There is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the executive officers of our company or any of our
subsidiaries, threatened against or affecting our company, our common stock, any
of our subsidiaries or of our company’s or our company’s subsidiaries’ officers
or directors in their capacities as such, in which an adverse decision could
have a material adverse effect.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
 The
Company submitted no matters to a vote of its security holders during the fiscal
year ended December 31, 2008.
  21
  PART
II
 
 ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  Our
common stock is listed on the Over-the-Counter Bulleting Board under the trading
symbol “SKNN.” Prior to April 18, 2006, our shares were listed under the symbol
“LGIM.” No trading market for our common stock developed until March 20, 2006,
the closing of the Share Exchange Transaction. The following table sets forth
the high and low bid prices for our common stock for the periods noted, as
reported by the National Daily Quotation Service and the Over-The-Counter
Bulletin Board. Quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
 
 2008High
                      
                      
                      LowFourth
      Quarter
                      
                      $
                      0.10
                      
                      
                      $
                      0.04Third
      Quarter
                      
                      $
                      0.22
                      
                      
                      $
                      0.04Second Quarter
                      
                      $
                      0.69
                      
                      
                      $
                      0.17First
      Quarter
                      
                      $
                      0.38
                      
                      
                      $
                      0.16
 
 2007High
                      
                      
                      LowFourth
      Quarter
                      
                      $
                      1.40
                      
                      
                      $
                      0.23Third
      Quarter
                      
                      $
                      2.29
                      
                      
                      $
                      1.20Second
      Quarter
                      
                      $
                      1.84
                      
                      
                      $
                      0.75First
      Quarter
                      
                      $
                      2.79
                      
                      
                      $
                      1.53
 
 As
of December 31, 2008, we had approximately 38 registered shareholders. The
closing sales price of our common stock on December 31, 2008 was $0.05, as
reported on the Over-the-Counter Bulletin Board.
 
 The price
of our common stock will likely fluctuate in the future. The stock market in
general has experienced extreme stock price fluctuations in the past few years.
In some cases, these fluctuations have been unrelated to the operating
performance of the affected companies. Many companies have experienced dramatic
volatility in the market prices of their common stock. We believe that a number
of factors, both within and outside our control, could cause the price of our
common stock to fluctuate, perhaps substantially. Factors such as the following
could have a significant adverse impact on the market price of our common
stock:
  ·
              Our limited operating
      history;
 
 ·
              Our lack of profits from
      operations;
  22
  ·
              Our restatement of our financial
      statements;
 
 ·
              Our ability to raise additional
      funds on acceptable terms or at
all;
 
 ·
              Our ability to successfully
      design, manufacture and commercialize our proposed
      product;
 
 ·
              Our reliance on one unproven and
      undeveloped product type;
 
 ·
              Rapidly changing consumer demands
      for footwear products;
 
 ·
              Our unestablished
      brand;
 
 ·
              The degree and nature of our
      competition;
 
 ·
              Our ability to employ and retain
      qualified employees;
 
 ·
              The limited trading market for
      our common stock; and
 
 ·
              Current market
      conditions
 
 Securities
Authorized for Issuance Under Equity Compensation Plans
  The table
below provides information regarding our securities that have been authorized
for issuance under equity compensation plans as of December 31,
2008:
  # of securities to be
                                issued upon exercise of
                                outstanding options,
                                warrants and rights
                                (a)
                              
                              
                              Weighted-
                                average exercise
                                price of outstanding
                                options, warrants and rights
                                (b)
                              
                              
                              # of
                                Common
                                Shares
                              
                              
                              # of securities
                                remaining available
                                for future issuance
                                under equity
                                compensation plans
                                (excluding securities
                                reflected in column
                                (a)Equity
                                compensation
                                plans
      approved
                                by
      security
                                holders
                              
                              
                              3,549,092
                              (1)
                              
                              $
                              $0.39
                              
                              
                              
                              
                              
                              
                              1,450,908
                              (2)Equity
                                compensation
                                plans
      not
                                approved
                                by
      securities
                                holders
                              
                              
                              150,000
                              (3)
                              
                              
                              1.38
                              
                              
                              
                              1,900,000
                              (3)
                              
                              
                              5,950,000,
                              (2)Total
                              
                              
                              3,699,092
                              1
                              
                              $
                              1.02
                              
                              
                              
                              1,900,000
                              
                              
                              
                              7,400,908
  (1)
                  Represents stock options
      outstanding under our Amended and Restated 2005 Incentive Plan (the “2005
      Incentive Plan”), under which a total of 5,000,000 shares are authorized
      to be issued.  On October 29, 2008 and February 5, 2009 the
      Company Board of Directors approved an increase to 13,000,000 and
      30,000,000 shares, respectively, authorized under the 2005 Incentive
      Plan
 
  23
  (2)
                    Represents shares available for
      future issuance under our 2005 Incentive
  Plan.
 (3)
                  Represents warrants that were
      issued to third parties for
services.
 
 Dividends
 
 We may never pay any dividends to our
shareholders. We did not declare any dividends for the year ended
December 31, 2008. Our Board of Directors does not intend to distribute
dividends in the near future. The declaration, payment and amount of any future
dividends will be made at the discretion of the Board of Directors, and will
depend upon, among other things, the results of our operations, cash flows and
financial condition, operating and capital requirements, and other factors as
the Board of Directors considers relevant. There is no assurance that future
dividends will be paid, and if dividends are paid, there is no assurance with
respect to the amount of any such dividend.
  Transfer
Agent
 
 Our
Transfer Agent and Registrar for the common stock isNevada Agency &
Trust Company, 50 West Liberty Street, Suite 880, Reno, NV 89501
  ITEM
6.  SELECTED FINANCIAL DATA
 
 Not
required under Regulation S-K for “smaller reporting companies”.
 
 ITEM
7.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND
 RESULTS
OF OPERATIONS
 
 FORWARD-LOOKING
STATEMENTS
 
 The following discussion includes
forward looking statements and uncertainties, including plans, objectives,
goals, strategies, financial projections as well as known and unknown
uncertainties. The actual results of our future performance may differ
materially from the results anticipated in these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievement. Forward-looking statements speak
only as of the date the statement was made. We do not undertake and specifically
decline any obligation to update any forward-looking
statements.
  24





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-K.





OVERVIEW





Our
Company





We are a
development stage company. We have not yet realized any revenues from our
planned operations.





We have
designed and continue to develop an innovative footwear product - a two-part
footwear structure consisting of an outer collapsible “Skin” and an inner
orthopedic support section called the “Bone.” This structure enables consumers
to purchase one inner section and multiple outer skins - resulting in multiple
style variations from the same pair of inner section, with the same feel and fit
despite the type of Skin being worn. Our primary activities have been conducting
research and development, performing business, strategic and financial planning,
and raising capital.





We have
initially designed and manufactured men's and women's footwear and distributed
to a test market through  soft commercial launches in  2007
and 2008. Due to technological advances in the product, we updated the
design of the Bone to be launched for the Spring/Summer 2009 season. The Bone is
designed such that it can only be worn once it is inside the Skin and not on its
own. As a result of the product enhancements and advanced technologies all
inventory was rendered obsolete at December 31, 2008.





We
anticipate marketing our products via traditional footwear channels,
non-traditional apparel channels, the Internet and other retail locations that
traditionally do not have a footwear department. Due to the interchangeability
of a Skin and a Bone, a consumer will know how the product will fit and feel
once they own a Bone, allowing the customer to purchase a Skin from various
venues without having to try on the product.





Our
objective is to create a new attire concept that allows and encourages consumers
to more frequently change their footwear - positioning the Skins concept between
footwear and apparel. Our footwear will initially be designed with an active,
youthful lifestyle in mind. We will initially design most of our styles to be
fashionable and marketable to the 18- to 35-year old consumer, with
consideration in the future to lines that will appeal to the broad cross-section
of the population.





PLANNED
OPERATIONS





Product
Development





We have
designed, outsourced manufactured and are marketing a patented quality men’s and
women’s footwear.  We completed a test and soft launch to limited
number of select retailers during the third quarter of 2007 and the second
quarter of 2008. The focus is on creating a high-end line of Skins priced at a
manufacturer's suggested average retail price of $110 to $130 for women and $140
to $160 for men. Based upon  test launches in 2007 and 2008, further
market research conducted with our retail partners, design consultants, and
practical feedback, the Bone now has no toe-box in an attempt to increase
comfort and provide a better fit to a wider audience of consumers. The Bone and
Skins technology, as it stands today, has now been field tested with different
retailers, different consumers and is scalable and transferable. Our Skins are
being designed by our in-house designer and other outsourced design firms. They
collaboratively put together the collection for men's and women's Skins, the
packaging and retail displays, and help in refining the creative identity of the
brand.


25


We
continue to seek ways to lower costs, and explore other materials with various
characteristic benefits and will always look to improve upon our
product.  As a result we made the decision to use a manufacturer
located in Brazil and use a sourcing agent with local Brazilian shoe
manufacturing expertise.  We believe that the change in manufacturer
will both reduce our production costs while raising the quality of our
product.   The Brazilian made  Spring/Summer 2009
Collection (“SS 2009”) was delivered in March 2009 and shipped to retailers
through April 2009.   We are currently taking orders on the
Brazilian made Fall/Winter 2009 Collection (“F/W 2009”).





Sourcing





On
November 24, 2008 the Company entered into a Buying Agency Agreement with LJP
International, LLC.  Pursuant to the agreement, LJP will serve as the
Company’s non-exclusive buying and sourcing agent and will be responsible for
sourcing of raw materials, arranging manufacturing facilities, monitoring
manufacturer quality, finished product inspection, and coordinating freight
forwarders.  The Company will pay LJP an amount equal to 8% of the FOB
country of origin price for product ordered, shipped, and accept by the
Company.   Either party may terminate the agreement at any time
upon providing the other party with 90 days written notice.





Planned
Distribution





We plan
to act as a wholesaler and market our products to specialty, department, and
Internet retail locations via our marketing and branding efforts in addition to
international distributors.





Our
management will consider the children's market and more mainstream middle-market
retailers once our brand is more established. Our management is also considering
licensing our technology in the future.





We have
designed, outsourced manufactured, and are now marketing quality men’s and
women’s footwear with distribution to select retailers that began in March 2009.
Our management is currently writing orders for the Fall/Winter 2009 retail
season. The planned distribution will encompass independent specialty retailers,
national retailers and department stores, E-tailers, and some International
distribution.





Results
of Operations and Financial Condition





Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007





There
were no earned revenues during the years ended December 31, 2008 and
2007.





Design
and development expenses were $858,261 and $1,859,238 for the years ended
December 31, 2008 and 2007, respectively.  The decrease of $1,000,977
was primarily attributable to a decrease in the amount of design and development
costs from the prior year needed to further develop the product and bring it to
market due to the lack of resources.





Selling,
general and administrative expenses (SG&A) for the years ended December 31,
2008 and 2007 were $3,651,975 and $4,780,436, respectively.


26


The
decrease in SG&A expenses of $1,128,461 are primarily attributable to
increases in employee compensation and benefits of approximately $80,000 to
staff the business in anticipation of bringing the product to market, increased
warehouse and operating expenses of $5,000, increases in non-cash and other
charges such as additional non cash fees paid to promissory note holders
totaling approximately $187,000, and an increase in depreciation of
approximately $190,000, which were offset by reductions in travel of
approximately $274,000, marketing and advertising expenses of approximately
$459,000, professional and other expenses of approximately $326,000, share-based
compensation of approximately $333,000, termination expenses for a previous
employee of $170,000, and non recurring income of $28,000.





Our net
loss for the year ended December 31, 2008 was $4,621,672 or $0.09 per share as
compared to a net loss of  $6,612,193 or $0.18 per share for the year
ended December 31, 2007.





Liquidity
and Capital Resources





As
of  December 31, 2008, we had no established source of revenues and
had accumulated losses of $16,019,163 since inception. Our ability to continue
as a going concern is dependent upon achieving production, sales, profitability
and our ability to obtain the necessary financing to meet our obligations and
pay our liabilities arising from normal business operations when they come due.
The outcome of these matters cannot be predicted with any certainty at this time
and raise substantial doubt that we will be able to continue as a going concern.
The financial statements contained in this Form 10-K do not include any
adjustments to the amounts and classification of assets and liabilities that may
be necessary should we be unable to continue as a going concern. We anticipate
that additional funding may be generated from the sale of common shares and/or
debt with an equity feature and from asset based financing or
factoring.





At
December 31, 2008, we had $88 in cash . We earned no revenues since our
inception in May 2004.





Generally,
we have primarily financed operations to date through the proceeds of the
private placement of equity securities, the proceeds of warrants exercised, and
the issuance of promissory notes.





We
received net proceeds of $2,261,462 from the private placements that were
conducted in connection with the share exchange transaction during the fiscal
quarter ended March 31, 2006. During the fourth quarter of fiscal 2006 and the
first quarter of fiscal 2007 we received cash proceeds from warrant exercises
totaling $1,680,763 and $609,462, respectively.





On May
21, 2007, we closed a financing transaction pursuant to which we sold a total of
4,000,000 units to seven investors and raised an aggregate of $3,000,000. Each
unit consists of one share of our common stock and one share purchase warrant
that is exercisable at an exercise price of $1.00 per share at any time upon
election of the holder during the 30 months after the offering. Net proceeds
from the private offering were $2,962,013 (net of issuance costs of
$37,987).





From
December 2007 through March 2008, we issued secured promissory notes in a total
amount of $705,000 to various lenders. The notes bore interest at the rate of 5%
per annum compounded annually and were secured by the grant of a security
interest by us to the lenders in all of our intellectual property rights,
patents, copyrights, trademarks which we now have or acquire and all proceeds
and products thereof. We agreed to repay the Loan upon our completion of a
financing, and in no event later than six months from each of the notes’ date of
issuance. Pursuant to the notes, and in consideration of entering into the
notes, the lenders received a total of 1,285,976 shares of our common stock. In
addition, the lenders received piggy-back registration rights with respect to
the shares. In April 2008, we conducted a private placement and the lenders
invested the principal amounts due under the notes into the placement and waived
interest due under the notes. As part of the consideration, we issued an
additional 316,298 shares of common stock to the lenders as part of the
transaction.





On April
9, 2008, we sold a total of 13,403,225 units to 27 investors and raised
aggregate gross proceeds of approximately $2,680,645 in a private offering.
Of the gross proceeds of $2,680,645 raised in the offering,


27





(i)
            $1,935,000
      represents cash received by the Company from
      investors,




(ii)
            $705,000
      represents an amount due under six secured promissory notes previously
      issued by the Company that was invested by five holders into this
      offering, and




(iii)
            $40,645
      represents amounts owed by the Company to three non-employee board members
      and two advisory board members in lieu of payment for fees due to
      them.





In
addition, the Company issued 100,000 units to a financial consultant that
provided services in connection with the offering in lieu of $20,000 payment in
cash for such services.





Each unit
was sold for $0.20 and consists of one share of common stock of the Company and
one share purchase warrant, exercisable at an exercise price of $0.40 per share
at any time upon election of the holder during the 24 month period following the
offering.





Pursuant
to a private placement offering the Company sold 4,900,000 private placement
units for $245,000 in September 2008. Each Unit was sold for $0.05 and consists
of one share of the Company Common stock and one purchase Warrant representing
one and one-half shares of Company Common Stock, exercisable at an exercise
price of $0.05 per Warrant. The Warrants expire 30 months from the date of
issuance.





On
November 7, 2008 and November 19, 2008 the Company sold 3,000,000 and
1,800,000 private placement units for $150,000 and $90,000, respectively,
pursuant to a private placement offering. Each unit was sold for $0.05 and
consisted of one share of Company Common stock and one purchase Warrant
representing one and one-half shares of Company Common Stock, exercisable at an
exercise price of $0.05 per share. The Warrants expire 30 months from the date
of issuance.





On
November 11, 2008 the Company closed on a Revolving Loan and Security Agreement
(the “Loan Agreement) which included a September 12, 2008 Facility Letter signed
with Ashford Finance, LLC (“Ashford”), their terms of which provide for a $3
million Letter of Credit and Accounts Receivable financing facility. The Loan
Agreement terminates on November 30, 2009. All financings by Ashford are subject
to Ashford’s sole discretion. All Letters of Credit funded for inventory
production will be based upon purchase orders from customers acceptable to
Ashford. In addition Ashford will finance up to 75% of eligible accounts
receivable, as defined. This agreement is collateralized by a first priority
security interest in all Company assets, as defined. In addition all borrowings
under the terms of the Facility are personally guaranteed by Mark Klein, the
Company’s Chief Executive Officer. To date the Company has not made any
borrowings under the Loan Agreement.





Net cash
used in operating activities for the year ended December 31, 2008 was $2,385,647
as compared to net cash used of $5,324,722 in the same period in 2007. The
decrease in net cash used was primarily attributable to a decrease in net loss
from operations during the year ended December 30, 2008 as compared to the same
period in 2007, which was primarily attributable to a decrease in operating
expenditures compared to the year ended December 31, 2007. Operating
expenditures consisted principally of design and development, advertising and
promotion, legal and accounting fees and salaries and costs to bring the product
to market.





Cash used
in investing activities for the year ended December 31, 2008 was $528,904, as
compared to $260,023 during the same period in 2007. The increase in net cash
used was primarily attributable to an increase in our purchase of molds, store
displays and property and equipment.


28


Net cash
provided by financing activities for the year ended December 31, 2008 was
$2,908,453, as compared to $3,836,005 for the same period in 2007. The decrease
was primarily attributable to the Company receiving $555,000 from the issuance
of secured promissory notes to various lenders, the raising of $1,868,453 (net
of direct costs of $66,547) from the April 9, 2008 private placement, and
raising $485,000 from the September 2008 and November 2008 private placement
offerings while the Company raised a net $2,962,013 in the May 21, 2007
financing transaction.





At
December 31, 2008, we had 3,459,092 stock options and 27,767,592 common stock
purchase warrants outstanding. The outstanding stock options have a weighted
average exercise price of $0.39 per share as adjusted for the April 2, 2008
option repricing. The outstanding warrants have a weighted average exercise
price of $0.36 per share. Accordingly, at December 31, 2008, the outstanding
options and warrants represented a total of 36,283,867 shares issuable for a
maximum of $11,478,038 if these options and warrants were exercised in full. The
exercise of these options and warrants is completely at the discretion of the
holders. There is no assurance that any of these options or any additional
warrants will be exercised.





On June
16, 2008 the Company appointed Michael Solomon as its new Chief Financial
Officer and executed an employment letter on July 9, 2008. Mr. Solomon will be
paid $175,000 base salary per year which will be increased to $200,000 per year
after the Company completes a financing transaction or series of financing
transactions cumulatively totaling in excess of $1 million. Mr. Solomon also was
granted 150,000 shares of the Company’s common stock to be issued upon his
appointment and  received an additional 250,000 shares of common stock
three months from the commencement of his employment. On July 30, 2008, the
Company and Mr. Solomon, entered into an amendment (the “Amendment”) to the
employment letter agreement dated July 9, 2008. Pursuant to the terms of the
Amendment, the 150,000 restricted shares of the Company’s Common Stock granted
to Mr. Solomon and the 250,000 restricted shares to be to Mr. Solomon under his
agreement are subject to certain additional restrictions and subject to
forfeiture, as set forth in the Amendment.  On October 30, 2008 the
Company issued 400,000 shares of common stock to Mr. Solomon.  As a
result the Company recorded $92,000 of share-based compensation from this
issuance.





If we are
unable to obtain additional financing, enter into a merger or acquisition, or
generate revenue we may not have sufficient cash to continue operations for
beyond December 31, 2009. We anticipate raising additional funds through public
or private financing, strategic relationships or other arrangements in the near
future to support our business operations; however we currently may not have
commitments from third parties for sufficient additional capital. We cannot be
certain that any such financing will be available on acceptable terms, or at
all, and our failure to raise capital when needed could limit our ability to
continue our operations. Our ability to obtain additional funding prior to
December 31, 2009, and thereafter, will determine our ability to continue as a
going concern. Failure to secure additional financing in a timely manner and on
favorable terms would have a material adverse effect on our financial
performance, results of operations and stock price and require us to curtail or
cease operations, sell off our assets, seek protection from our creditors
through bankruptcy proceedings, or otherwise. Furthermore, additional equity
financing may be dilutive to the holders of our common stock, and debt
financing, if available, may involve restrictive covenants, and strategic
relationships, if necessary to raise additional funds, may require that we
relinquish valuable rights.





RECENT
EVENTS





Stock
Option Issuances





On
February 5, 2009 the Company Board of Directors approved the issuance of
13,418,182 stock options to Board
members, Company officers, employees, and
consultants.    All stock options were issued at an exercise
price of $0.055, fair market value on the date of grant, expire 24 months from
that date, and were fully vested upon grant except for 1 million of the options
which were issued to certain consultants.   Of the total granted
7,168,182 stock options represented payment in lieu of $197,125 of accrued
salary, board member fees, and certain consulting fees.


29


January
2009 Private Placement





On
January 16, 2009 and January 20, 2009 the Company sold 600,000 and 200,000
private placement units, respectively, for $40,000.   During
January 2009 the Company sold 757,500 private placement units to Michael J.
Rosenthal, the Company Chairman, for $37,875. Each unit was sold for $0.05 and
consisted of one share of Company Common stock and one purchase Warrant
representing one and one-half shares of Company Common Stock, exercisable at an
exercise price of $0.05 per share. The Warrants expire 30 months from the date
of issuance.





March
2009 Financing Agreements





a.
Tangiers Investors, LP Securities Purchase Agreement and Convertible
Debenture





On March
23, 2009 the Company signed with Tangiers Investors, LP, a limited partnership
(“Tangiers”) a Securities Purchase Agreement (“SPA”) and a Registration Rights
Agreement. (“Registration Rights Agreement”).   In addition, the
Company sold a one-year 7% Convertible Debenture to Tangiers for
$85,000.





Under
terms of the SPA Tangiers will purchase from the Company up to $2
million  of Common Stock during an 18 month commitment period
(“Commitment Period”) commencing with a registration statement, filed by the
Company being declared effective by the Securities and Exchange Commission.
Under the Registration Rights Agreement the registration statement must remain
effective during the Commitment Period, and must include all shares anticipated
being sold to Tangiers.  Any sales of Common Stock to Tangiers will be
made at the Company’s sole discretion. Any funding under the SPA will be used
for general corporate purposes.





The
Company may sell to Tangiers shares of Common Stock every 10 Trading Days
(“Trading Days”),as defined. The purchase price of the Common Stock shall be 90%
of the Market Price which is defined as the lowest daily volume weighted average
price of the Common Stock during the five consecutive Trading Days after the
Company gives Notice (“Notice”) to Tangiers of its intent to sell Common Shares
under the SPA.  The maximum total dollar amount sold to Tangiers
will  be equal to the average daily trading volume in dollar amount
during the ten Trading Days preceding the notice of sale by the Company to
Tangiers but in no case shall be more than $250,000.  In addition the
total number of shares of Common Stock purchased by Tangiers during the
Commitment Period shall not exceed 9.9% of the then outstanding Common Stock of
the Company.  For at least ten days after any Notice is given to
Tangiers the Company may not sell or issue Common Stock, Preferred Stock,
purchase warrants, or stock options except on terms or
exceptions  described in the SPA.  Further, the Company will
not, without prior written consent of Tangiers and which shall not be
unreasonably withheld, enter into any other equity line of credit financing
agreement.





Upon
execution of the SPA the Company will pay a $100,000 Commitment Fee (“Commitment
Fee”) to Tangiers payable in shares of Common Stock which shall be determined by
dividing the Commitment Fee by the lowest volume weighted average price of the
Company’s Common Stock during the ten business days immediately following the
execution of the SPA (March 23, 2009).  The shares to be issued as
payment of the Commitment Fee have no registration rights.


30


In
addition, Tangiers purchased from the Company a 7% Convertible Debenture
(“Tangiers Debenture”) for $85,000 cash.  The Tangiers Debenture
matures on March 23, 2010 (“Maturity Date”) and accrues interest, which is
payable on the Maturity date in cash or with shares of Common Stock, at the
Company’s sole discretion.  The Tangiers Debenture may not be prepaid
without the written consent of Tangiers.   The Tangiers Debenture
may be converted, in whole or in part, at any time at the sole discretion of
Tangiers, at the Conversion Price (“Conversion Price”), which shall be equal to
75% of the average of the three lowest volume weighted average trading prices of
the Company’s Common Stock during the five Trading Days prior to
conversion.  However, if the average of the three lowest volume
weighted average trading prices is below $0.01 the Company can elect to prepay
at a premium of 125% the portion of the Tangier Debenture which was subject to
the conversion election.  The Conversion Price shall be subject to
adjustment as defined in the SPA and the conversion privileges shall not be
effective if a conversion shall cause Tangiers to own more than 9.9% of the then
outstanding Common Stock of the Company.





In the
case of an Event of Default, as defined, or a Fundamental Corporate Change, as
defined, the Maturity Date shall be accelerated and the principal amount due
shall be increased by 150%.  In the event of late payment of principal
or interest the Conversion Price shall be subject to adjustment, as
defined.





The
Tangiers transactions closed on April 1, 2009.





b.  JED
Management Corp. Convertible Debentures





On March
19, 2009 and March 25, 2009 the Company sold two 8% Convertible Debentures (“the
Debentures”) to JED Management Corp. (“JED”) for $185,000 each.





Principal
and accrued interest on the Debentures matures on as follows: $76,000 on March
19, 2011, $109,000 on March 25, 2011 for the first of the Debentures, and
$185,000 on March 25, 2011on the second of the Debentures.  The
Company may prepay, at its sole discretion, any portion of the principal for
125% of the amount being prepaid plus any portion of the accrued
interest.   JED, at its sole discretion, may convert the
principal plus accrued interest into shares of Common Stock at a price of (60%)
of the lowest closing bid price, determined on the then current trading market
for the Company’s Common Stock, for 10 trading days prior to
conversion.  In addition, one of the Debenture’s, in lieu of
conversion may be exchanged, including all principal and interest, for non-trade
debt of $275,000.





For
a period of six months from March 19, 2009 and March 25, 2009, respectively, JED
shall be entitled to “piggyback” registration rights on registration statements
being filed by the Company except if the registration statements are being filed
for the purposes of Private Investment in Public Equity
(“Pipe”)transactions.





In the
case of an Event of Default, as defined, the payment of principal and accrued
interest shall be immediately due and payable if JED so elects.





On March
27, 2009 JED exchanged the second of the debentures for $275,000
of payables of the Company pursuant to Assignment and Assumption Agreements
(“A-A Agreements”) between JED and two of the Company’s
vendors.  Pursuant to the A-A Agreements JED purchased from the
vendors, at a discount, payables owed to the vendors provided that the Company
agrees to convert to common stock the payables, now owned by JED, at 60% of the
lowest closing bid price for 10 days prior to the conversion
date.  All conversions of the payables into common stock are
made at the sole discretion of JED.  From March 27, 2009-April 9, 2009
JED converted $30,000 of payables into 559,211 shares of common
stock.


31


April
2008 Option Repricing





On April
2, 2008, we repriced a total of 2,794,625 options that we had previously granted
to certain of our employees, directors and consultants. The options, all of
which had been previously issued pursuant to our Amended And Restated 2005
Incentive Plan (the “Plan”), were repriced to be $0.40 per share, which is
greater than the $0.33 closing trading price of our common stock on the date the
Board of Directors approved the transaction. The Board of Directors resolved
that an exercise of $0.40 per share would provide an incentive to the recipients
of the repriced options to continue to work in the best interests of our
company. The other terms of the options, including the vesting schedules,
remained unchanged as a result of the repricing. Total additional compensation
expense on non vested options relating to the April 2, 2008 repricing is
approximately $26,000 which will be expensed ratably over the 7 to 29 months
service period that remain. Additional compensation expense on vested and
unvested options relating to the April 2, 2008 repricing is $73,422 and $6,458,
respectively, is included in selling, general and administrative expenses for
the year ended December 31, 2008. The repriced options had originally been
issued with $0.80 to $1.37 per share option exercise prices, which prices
reflected the then current market prices of our stock on the dates of original
grant. As a result of the sharp reduction in the Company’s stock price, the
Board of Directors believed that such options no longer would properly
incentivize the Company’s employees, officers and consultants who held such
options to work in the best interests of the Company and its stockholders.
Moreover, the Board of Directors believed that if these options were repriced,
that such options would provide better incentives to such employees, officers
and directors.





Critical
Accounting Policies





Our
financial statements reflect the selection and application of accounting
policies, which require management to make significant estimates and
assumptions. The Company believes that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.





Inventory
and Inventory Reserves





Inventory
is stated at the lower of cost or market, under the first-in, first-out method
of inventory valuation. The Company will evaluate its inventory on a quarterly
basis to identify excess, slow-moving and obsolete inventory and assesses
reserve adequacy. When this evaluation indicates such inventory exists, the
reserve is increased by a charge to operations or such inventories are written
off.





Share-Based
Compensation





The
Company uses the fair value recognition provisions of Financial Accounting
Standards No. 123R, "Share Based Payment", which requires the Company to expense
the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of such instruments. The Company
uses the Black-Sholes model to calculate the fair value of the equity instrument
on the grant date.





The
Company uses the provisions of FAS 123(R) and EITF 96-18,Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services to account for the compensation expense
associated with grants to non-employees. The Company measures the compensation
associated with these grants based on the fair value of the equity instruments
issued using the Black-Scholes Model. In all option grants of this kind there is
no measurement date to calculate the fair value of the options at the date of
grant because the performance commitment had not yet occurred (there are no
sufficiently large disincentives for non-performance) and the performance by the
non-employees was not complete. The Company calculates the expense at each
reporting period based upon fair value of the options that vested during the
reporting period using the fair value on the reporting date.





Deferred
Tax Assets





In
assessing the realization of deferred tax assets, the Company considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As a result of uncertainty of achieving sufficient taxable
income in the future a full valuation allowance against its deferred tax asset
has been recorded. If these estimates and assumptions change in the future, the
Company may be required to reverse the valuation allowance against deferred tax
assets, which could result in additional income tax income.


32


Impairment
of Long Lived Assets





The
Company assesses the valuation of components of its property and equipment and
other long-lived assets whenever events or circumstances dictate that the
carrying value might not be recoverable. The Company bases its evaluation on
indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external
market conditions or factors that may be present. If such factors indicate that
the carrying amount of an asset group may not be recoverable, the Company
determines whether an impairment has occurred by analyzing an estimate of
undiscounted future cash flows at the lowest level for which identifiable cash
flows exist. If the estimate of the undiscounted cash flows during the estimated
useful like of the asset if less than the carrying value of the asset the
Company recognizes a loss for the difference between the carrying value of the
asset and its estimated fair value, generally measured by the present value of
the estimated cash flows.





Off
Balance Sheet Arrangements





We do not
have any off-balance sheet arrangements.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable to smaller reporting companies.




PART
III
  ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The
information required by this Item 8 is incorporated by reference to the Index to
Consolidated Financial Statements beginning at page F-1 of at the end of this
Form 10-K.


33


SKINS
INC. AND SUBSIDIARY


A
DEVELOPMENT STAGE COMPANY)





PageReportof Independent
      Registered Public Accounting Firm – MHM Mahoney Cohen CPAs
                  
                  
                  F-1Reportof Independent
      Registered Public Accounting Firm – Mahoney Cohen & Company, CPA,
      P.C.
                  
                  
                  F-2Financial
      Statements:Consolidated
      Balance Sheets
                  
                  
                  F-3Consolidated
      Statements of Operations
                  
                  
                  F-4Consolidated
      Statements of Stockholders’ Equity (Deficiency)
                  
                  
                  F-5Consolidated
      Statements of Cash Flows
                  
                  
                  F-6Notes
      to Consolidated Financial Statements
                  
                  
                  F-7





Report
of Independent Registered Public Accounting Firm





Board of
Directors and Stockholders


Skins
Inc. and Subsidiary





We have
audited the accompanying consolidated balance sheet of Skins Inc. and Subsidiary
(a development stage company) as of December 31, 2008, and the related
consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended and for the period from May 18, 2004,
date of inception, to December 31, 2008. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.





We
conducted our audit 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
consolidated 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 consolidated 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
audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Skins Inc. and Subsidiary at
December 31, 2008, and the results of their operations and their cash flows for
the year ended December 31, 2008, and for the period from May 18, 2004, date of
inception, to December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
Skins, Inc. and Subsidiary will continue as a going concern. As more fully
described in Note 1, at December 31, 2008, the Company has no established source
of revenues, a working capital deficit of $1,462,979, and has accumulated losses
of $16,019,163 since inception. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.





/s/ MHM
Mahoney Cohen  CPAs


(The New
York Practice of Mayer Hoffman McCann P.C.)





New York,
New York


F-1


Report
of Independent Registered Public Accounting Firm





Board of
Directors and Stockholders


Skins
Inc. and Subsidiary





We have
audited the accompanying consolidated balance sheet of Skins Inc. and Subsidiary
(a development stage company) as of December 31, 2007, and the related
consolidated statements of operations, stockholders' equity (deficiency)
and cash flows for the year then ended and for the period from May 18, 2004,
date of inception, to December 31, 2007. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.





We
conducted our audit 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
consolidated 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 consolidated 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
audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Skins Inc. and Subsidiary at
December 31, 2007, and the results of their operations and their cash flows for
the year ended December 31, 2007, and for the period from May 18, 2004, date of
inception, to December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
Skins, Inc. and Subsidiary will continue as a going concern. As more fully
described in Note 1, at December 31, 2007, the Company has no established source
of revenues and has accumulated losses of $11,397,491 since inception. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.





/s/
Mahoney Cohen & Company, CPA, P.C.





New York,
New York


April 12,
2008


F-2


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)





CONSOLIDATED
BALANCE SHEETS





As of December 31,2008
                                                                              
                                                                              
                                                                              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                                                              
                                                                              $
                                                                              88
                                                                              
                                                                              
                                                                              $
                                                                              6,186Prepaid
      expenses
                                                                              
                                                                              
                                                                              56,355
                                                                              
                                                                              
                                                                              
                                                                              251,034Total
      current assets
                                                                              
                                                                              
                                                                              56,443
                                                                              
                                                                              
                                                                              
                                                                              257,220Property
      and equipment, net (Note 3)
                                                                              
                                                                              
                                                                              173,071
                                                                              
                                                                              
                                                                              
                                                                              13,209Software
      costs, net (Note 4)
                                                                              
                                                                              
                                                                              434
                                                                              
                                                                              
                                                                              
                                                                              16,634Capitalized
      production molds (Note 5)
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              10,660Patent
      costs, net (Note 6)
                                                                              
                                                                              
                                                                              195,357
                                                                              
                                                                              
                                                                              
                                                                              159,400Other
      intangibles, net (Note 7)
                                                                              
                                                                              
                                                                              4,198
                                                                              
                                                                              
                                                                              
                                                                              1,378Total
      Assets
                                                                              
                                                                              $
                                                                              429,503
                                                                              
                                                                              
                                                                              $
                                                                              458,501LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued liabilities (Note 8)
                                                                              
                                                                              $
                                                                              1,497,434
                                                                              
                                                                              
                                                                              $
                                                                              750,425Liquidated
      damages
                                                                              
                                                                              
                                                                              21,988
                                                                              
                                                                              
                                                                              
                                                                              21,988Notes
      Payable, net of discounts (Note 9)
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              95,777Total
      current liabilities
                                                                              
                                                                              
                                                                              1,519,422
                                                                              
                                                                              
                                                                              
                                                                              868,190Commitments and
      contingencies (Note
10)Stockholders'
      Deficiency (Notes 1 and 12)Common  Stock,
      $.001 par value; 436,363,650 shares authorized; 68,608,471 and 40,961,294
      shares issued and outstanding at December 31, 2008 and  2007,
      respectively
                                                                              
                                                                              
                                                                              68,608
                                                                              
                                                                              
                                                                              
                                                                              40,961Additional
      paid in capital
                                                                              
                                                                              
                                                                              14,484,778
                                                                              
                                                                              
                                                                              
                                                                              10,570,983Deficit
      accumulated in the development stage
                                                                              
                                                                              
                                                                              (15,643,305
                                                                              )
                                                                              
                                                                              
                                                                              (11,021,633
                                                                              )Total
      stockholders' deficiency
                                                                              
                                                                              
                                                                              (1,089,919
                                                                              )
                                                                              
                                                                              
                                                                              (409,689
                                                                              )Total
      Liabilities and Stockholders' Deficiency
                                                                              
                                                                              $
                                                                              429,503
                                                                              
                                                                              
                                                                              $
                                                                              458,501





The
accompanying notes are an integral part of the consolidated financial
statements.


F-3


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)





CONSOLIDATED
STATEMENTS OF OPERATIONS




Year Ended December 31,
                                  
                                  
                                  Period from
                                    Inception (May
                                    18, 2004) to
                                    December 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008Operating
      expenses:Design
      and development
                                  
                                  $
                                  858,261
                                  
                                  
                                  $
                                  1,859,238
                                  
                                  
                                  $
                                  3,193,105Selling,
      general and administrative
                                  
                                  
                                  3,651,975
                                  
                                  
                                  
                                  4,780,436
                                  
                                  
                                  
                                  11,430,675Total
      operating expenses
                                  
                                  
                                  4,510,236
                                  
                                  
                                  
                                  6,639,674
                                  
                                  
                                  
                                  14,623,780Operating
      loss
                                  
                                  
                                  (4,510,236
                                  )
                                  
                                  
                                  (6,639.674
                                  )
      )
                                  
                                  
                                  (14,616,114
                                  )Unrealized
      (loss) on derivative instruments
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,306,754
                                  )Liquidated
      damages
                                  
                                  
                                  -
                                  
                                  
                                  
                                  5,290
                                  
                                  
                                  
                                  (21,988
                                  )Interest
      income
                                  
                                  
                                  2,235
                                  
                                  
                                  
                                  47,705
                                  
                                  
                                  
                                  77,810Loss
      on disposal of property and equipment
                                  
                                  
                                  (1,993
                                  )
                                  
                                  
                                  (22,179
                                  )
                                  
                                  
                                  (24,172
                                  )Amortization
      of discount on notes payable
                                  
                                  
                                  (100,873
                                  )
                                  
                                  
                                  (3,130
                                  )
                                  
                                  
                                  (104,003
                                  )Interest
      expense
                                  
                                  
                                  (10,805
                                  )
                                  
                                  
                                  (205
                                  )
                                  
                                  
                                  (16,276
                                  )Net
      loss
                                  
                                  $
                                  (4,621,672
                                  )
                                  
                                  $
                                  (6,612,193
                                  )
                                  
                                  $
                                  (16,019,
      163
                                  )Basic
      and diluted loss per share
                                  
                                  $
                                  (0.09
                                  )
                                  
                                  $
                                  (0.18
                                  )Weighted
      average number of common shares outstanding, basic and
    diluted
                                  
                                  
                                  53,694,274
                                  
                                  
                                  
                                  37,888,638





The
accompanying notes are an integral part of the consolidated financial
statements.


F-4


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)





CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)




DeficitAdditional
                        
                        
                        Accumulated
                        
                        
                        TotalPaid-in
                        
                        
                        In The
                        
                        
                        Stockholders'Common Stock
                        
                        
                        (deficit in)
                        
                        
                        Development
                        
                        
                        Equity/Shares
                        
                        
                        Amounts
                        
                        
                        Capital
                        
                        
                        Stage
                        
                        
                        (Deficiency)Transfer
      of net liabilities from a predecessor entity - May 18,
2004
                        
                        
                        
                        
                        $
                        -
                        
                        
                        $
                        (32,312
                        )
                        
                        $
                        -
                        
                        
                        $
                        (32,312
                        )Shares
      issued on June 1, 2004
                        
                        
                        954,513
                        
                        
                        
                        955
                        
                        
                        
                        9,045
                        
                        
                        
                        
                        
                        
                        
                        10,000Shares
      issued on July 2, 2004
                        
                        
                        954,513
                        
                        
                        
                        955
                        
                        
                        
                        9,045
                        
                        
                        
                        
                        
                        
                        
                        10,000Shares
      issued on August 4, 2004
                        
                        
                        1,909,026
                        
                        
                        
                        1,909
                        
                        
                        
                        18,091
                        
                        
                        
                        
                        
                        
                        
                        20,000Shares
      issued on August 10, 2004
                        
                        
                        1,909,026
                        
                        
                        
                        1,909
                        
                        
                        
                        18,091
                        
                        
                        
                        
                        
                        
                        
                        20,000Shares
      issued on December 1, 2004
                        
                        
                        8,338,484
                        
                        
                        
                        8,338
                        
                        
                        
                        79,162
                        
                        
                        
                        
                        
                        
                        
                        87,500Shares
      issued on December 30, 2004
                        
                        
                        144,077
                        
                        
                        
                        144
                        
                        
                        
                        1,356
                        
                        
                        
                        
                        
                        
                        
                        1,500Shares
      issued on December 31, 2004
                        
                        
                        3,818,053
                        
                        
                        
                        3,818
                        
                        
                        
                        36,182
                        
                        
                        
                        
                        
                        
                        
                        40,000Net
      Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (152,706
                        )
                        
                        
                        (152,706
                        )Balances
      at December 31, 2004
                        
                        
                        18,027,692
                        
                        
                        
                        18,028
                        
                        
                        
                        138,660
                        
                        
                        
                        (152,706
                        )
                        
                        
                        3,982Shares
      issued for services on October 20, 2005
                        
                        
                        1,376,308
                        
                        
                        
                        1,376
                        
                        
                        
                        (1,370
                        )
                        
                        
                        -
                        
                        
                        
                        6Net
      Loss January 1, 2005 to October 20, 2005
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (223,152
                        )
                        
                        
                        (223,152
                        )Recapitalization
      of deficit upon merger of Skins Shoes, LLC into Skin Shoes, Inc. on
      October 20, 2005 (Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (375,858
                        )
                        
                        
                        375,858
                        
                        
                        
                        -Net
      Loss Oct 21, 2005 to Dec 31, 2005
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (309,162
                        )
                        
                        
                        (309,162
                        )Balances
      at December 31, 2005
                        
                        
                        19,404,000
                        
                        
                        
                        19,404
                        
                        
                        
                        (238,568
                        )
                        
                        
                        (309,162
                        )
                        
                        
                        (528,326
                        )Reclassification
      of Share based liability Awards to equity Awards upon the re-Adoption of
      the 2005 Incentive Stock Plan on March 16, 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        241,157
                        
                        
                        
                        -
                        
                        
                        
                        241,157Skins
      Inc. net assets assumed - March 20, 2006
                        
                        
                        14,821,434
                        
                        
                        
                        14,821
                        
                        
                        
                        1,693,886
                        
                        
                        
                        
                        
                        
                        
                        1,708,707Conversion
      of convertible debenture - Common Stock - March 20, 2006
                        
                        
                        178,572
                        
                        
                        
                        179
                        
                        
                        
                        119,821
                        
                        
                        
                        
                        
                        
                        
                        120,000Shares
      issued for consulting services on April 3, 2006
                        
                        
                        122,000
                        
                        
                        
                        122
                        
                        
                        
                        145,058
                        
                        
                        
                        
                        
                        
                        
                        145,180Share
      based Compensation, June 30, 2006
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        86,156
                        
                        
                        
                        
                        
                        
                        
                        86,156Share
      based Compensation, September 30, 2006
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        130,218
                        
                        
                        
                        
                        
                        
                        
                        130,218Reclassification
      of Derivative Liability as Form SB-2 became effective on October 10,
      2006
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,890,600
                        
                        
                        
                        
                        
                        
                        
                        1,890,600Warrants
      Exercised December 5, 2006
                        
                        
                        30,000
                        
                        
                        
                        30
                        
                        
                        
                        29,970
                        
                        
                        
                        
                        
                        
                        
                        30,000Warrants
      Exercised December 8, 2006
                        
                        
                        120,000
                        
                        
                        
                        120
                        
                        
                        
                        119,880
                        
                        
                        
                        
                        
                        
                        
                        120,000Warrants
      Exercised December 11, 2006
                        
                        
                        320,000
                        
                        
                        
                        320
                        
                        
                        
                        319,680
                        
                        
                        
                        
                        
                        
                        
                        320,000Warrants
      Exercised December 12, 2006
                        
                        
                        115,715
                        
                        
                        
                        116
                        
                        
                        
                        115,599
                        
                        
                        
                        
                        
                        
                        
                        115,715Warrants
      Exercised December 14, 2006
                        
                        
                        119,000
                        
                        
                        
                        119
                        
                        
                        
                        118,881
                        
                        
                        
                        
                        
                        
                        
                        119,000Warrants
      Exercised December 15, 2006
                        
                        
                        274,000
                        
                        
                        
                        274
                        
                        
                        
                        273,726
                        
                        
                        
                        
                        
                        
                        
                        274,000Warrants
      Exercised December 19, 2006
                        
                        
                        363,476
                        
                        
                        
                        363
                        
                        
                        
                        363,113
                        
                        
                        
                        
                        
                        
                        
                        363,476Warrants
      Exercised December 21, 2006
                        
                        
                        238,572
                        
                        
                        
                        238
                        
                        
                        
                        238,334
                        
                        
                        
                        
                        
                        
                        
                        238,572Warrants
      Exercised December 22, 2006
                        
                        
                        100,000
                        
                        
                        
                        100
                        
                        
                        
                        99,900
                        
                        
                        
                        
                        
                        
                        
                        100,000Share
      based Compensation, December 31, 2006
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        356,240
                        
                        
                        
                        
                        
                        
                        
                        356,240Net
      Loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (4,100,278
                        )
                        
                        
                        (4,100,278
                        )Balances
      at December 31, 2006
                        
                        
                        36,206,769
                        
                        
                        
                        36,206
                        
                        
                        
                        6,103,651
                        
                        
                        
                        (4,409,440
                        )
                        
                        
                        1,730,417Warrants
      Exercised January 5, 2007
                        
                        
                        100,000
                        
                        
                        
                        100
                        
                        
                        
                        99,900
                        
                        
                        
                        
                        
                        
                        
                        100,000Warrants
      Exercised January 6, 2007
                        
                        
                        11,904
                        
                        
                        
                        12
                        
                        
                        
                        11,882
                        
                        
                        
                        
                        
                        
                        
                        11,894Warrants
      Exercised January 10, 2007
                        
                        
                        100,000
                        
                        
                        
                        100
                        
                        
                        
                        99,900
                        
                        
                        
                        
                        
                        
                        
                        100,000Warrants
      Exercised January 25, 2007
                        
                        
                        200,000
                        
                        
                        
                        200
                        
                        
                        
                        199,800
                        
                        
                        
                        
                        
                        
                        
                        200,000Warrants
      Exercised February 7, 2007
                        
                        
                        59,524
                        
                        
                        
                        60
                        
                        
                        
                        59,464
                        
                        
                        
                        
                        
                        
                        
                        59,524Warrants
      Exercised February 26, 2007
                        
                        
                        138,070
                        
                        
                        
                        138
                        
                        
                        
                        137,906
                        
                        
                        
                        -
                        
                        
                        
                        138,044Repurchase
      of options
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (30,445
                        )
                        
                        
                        -
                        
                        
                        
                        (30,445
                        )Share
      based Compensation, March 31, 2007
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        195,381
                        
                        
                        
                        
                        
                        
                        
                        195,381Shares
      issued on May 21, 2007 (net of issuance costs of $37,987)
                        
                        
                        4,000,000
                        
                        
                        
                        4,000
                        
                        
                        
                        2,958,013
                        
                        
                        
                        
                        
                        
                        
                        2,962,013Share
      based Compensation, June 30, 2007
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        156,138
                        
                        
                        
                        
                        
                        
                        
                        156,138Warrants
      exercised July 24, 2007
                        
                        
                        60,000
                        
                        
                        
                        60
                        
                        
                        
                        59,865
                        
                        
                        
                        
                        
                        
                        
                        59,925Warrants
      exercised August 7, 2007
                        
                        
                        10,000
                        
                        
                        
                        10
                        
                        
                        
                        9,965
                        
                        
                        
                        
                        
                        
                        
                        9,975Warrants
      exercised August 14 2007
                        
                        
                        75,000
                        
                        
                        
                        75
                        
                        
                        
                        75,000
                        
                        
                        
                        
                        
                        
                        
                        75,075Share
      based compensation, September 30, 2007
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        213,453
                        
                        
                        
                        
                        
                        
                        
                        213,453Shares
      issued on October 31, 2007 to correct prior balances
                        
                        
                        2Discount
      on note payable for common stock to be issued - December 21, 2007 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        57,353
                        
                        
                        
                        
                        
                        
                        
                        57,353Share
      based compensation for the three months ended December 31,
      2007
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        163,757
                        
                        
                        
                        
                        
                        
                        
                        163,757Net
      Loss
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (6,612,193
                        )
                        
                        
                        (6,612,193
                        )Balances
      at December 31, 2007
                        
                        
                        40,961,294
                        
                        
                        
                        40,961
                        
                        
                        
                        10,570,983
                        
                        
                        
                        (11,021,633
                        )
                        
                        
                        (409,689
                        )Discount
      on notes payable for common stock to be issued - January 7, 2008 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        68,382
                        
                        
                        
                        
                        
                        
                        
                        68,382Discount
      on note payable for common stock to be issued- February 11, 2008 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        15,294
                        
                        
                        
                        
                        
                        
                        
                        15,294Discount
      on note payable for common stock to be issued- February 14, 2008 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        50,000
                        
                        
                        
                        
                        
                        
                        
                        50,000Discount
      on note payable for common stock to be issued- February 28, 2008 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        8,478
                        
                        
                        
                        
                        
                        
                        
                        8,478Shares
      issued on March 14, 2008 for the common stock to be issued on the December
      21, 2007 note discount (Note 9)
                        
                        
                        220,588
                        
                        
                        
                        221
                        
                        
                        
                        (221
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on March 14, 2008 for the common stock to be issued on the January
      7, 2008 note (Note 9)
                        
                        
                        220,588
                        
                        
                        
                        221
                        
                        
                        
                        (221
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      11, 2008 note (Note 9)
                        
                        
                        58,824
                        
                        
                        
                        59
                        
                        
                        
                        (59
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      14, 2008 note (Note 9)
                        
                        
                        185,185
                        
                        
                        
                        185
                        
                        
                        
                        (185
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      28, 2008 note (Note 9)
                        
                        
                        32,609
                        
                        
                        
                        32
                        
                        
                        
                        (32
                        )
                        
                        
                        
                        
                        
                        
                        -Discount
      on note payable for common stock to be issued- March 17, 2008 (Note
      9)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        90,909
                        
                        
                        
                        
                        
                        
                        
                        90,909Share
      based compensation for the three months ended March 31,
    2008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        74,454
                        
                        
                        
                        
                        
                        
                        
                        74,454Proceeds
      received on March 27, 2008 for issuance of common stock in relation to the
      April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        150,000
                        
                        
                        
                        
                        
                        
                        
                        150,000Proceeds
      received on March 28, 2008 for issuance of common stock in relation to the
      April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        160,000
                        
                        
                        
                        
                        
                        
                        
                        160,000Proceeds
      received on April 1, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        100,000
                        
                        
                        
                        
                        
                        
                        
                        100,000Compensation
      expense on repriced stock options April 2, 2008 (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        76,338
                        
                        
                        
                        
                        
                        
                        
                        76,338Proceeds
      received on April 2, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        150,000
                        
                        
                        
                        
                        
                        
                        
                        150,000Proceeds
      received on April 3, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        45,000
                        
                        
                        
                        
                        
                        
                        
                        45,000Proceeds
      received on April 4, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        215,000
                        
                        
                        
                        
                        
                        
                        
                        215,000Proceeds
      received on April 7, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        65,000
                        
                        
                        
                        
                        
                        
                        
                        65,000Proceeds
      received on April 9, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        200,000
                        
                        
                        
                        
                        
                        
                        
                        200,000Exchange
      of $705,000 of secured promissory notes, net of unamortized discount of
      $186,413 and accrued interest of $6,114 for private placement units on
      April 9, 2008 (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        524,701
                        
                        
                        
                        
                        
                        
                        
                        524,701Fee
      expense on additional shares to be issued to secured promissory note
      holders in lieu of principal and interest payment as of April 9, 2008
      (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        186,413
                        
                        
                        
                        
                        
                        
                        
                        186,413Private
      placement units from April 9, 2008 offering to be issued to non-employee
      and advisory board members in lieu of payment of fees owed (Note
      12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        40,645
                        
                        
                        
                        
                        
                        
                        
                        40,645Proceeds
      received on April 11, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        600,000
                        
                        
                        
                        
                        
                        
                        
                        600,000Proceeds
      received on April 12, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        220,000
                        
                        
                        
                        
                        
                        
                        
                        220,000Proceeds
      received on April 15, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        20,000
                        
                        
                        
                        
                        
                        
                        
                        20,000Proceeds
      received on April 16, 2008 for the issuance of common stock in relation to
      the April 9, 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        10,000
                        
                        
                        
                        
                        
                        
                        
                        10,000Issuance
      of shares on April 18, 2008 in relation to March 17, 2008 promissory note
      (Note 12)
                        
                        
                        568,182
                        
                        
                        
                        569
                        
                        
                        
                        (569
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on May 28, 2008 related to private placement cash proceeds received
      in March and April 2008, less direct costs of $66,547 (Note
      12)
                        
                        
                        9,675,000
                        
                        
                        
                        9,675
                        
                        
                        
                        (76,222
                        )
                        
                        
                        
                        
                        
                        
                        (66,547
                        )Shares
      issued on May 28, 2008 related to exchange of promissory notes in April 9,
      2008 private placement (Note 12)
                        
                        
                        3,525,000
                        
                        
                        
                        3,525
                        
                        
                        
                        (3,525
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on May 28, 2008 for Fee Expense in relation to additional shares on
      exchange of promissory notes (Note 12)
                        
                        
                        316,298
                        
                        
                        
                        316
                        
                        
                        
                        (316
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on May 28, 2008 in relation to April 9, 2008 private placement for
      payment of fees due to non-employee board and advisory board members (Note
      12)
                        
                        
                        203,225
                        
                        
                        
                        203
                        
                        
                        
                        (203
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on May 28, 2008 to consultant in relation to the April 9, 2008
      private placement (Note 12)
                        
                        
                        100,000
                        
                        
                        
                        100
                        
                        
                        
                        (100
                        )
                        
                        
                        
                        
                        
                        
                        -Share-based
      compensation for the three months ended June 30, 2008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        76,102
                        
                        
                        
                        
                        
                        
                        
                        76,102Proceeds
      received on September 4, 2008 for the issuance of common stock in relation
      to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        125,000
                        
                        
                        
                        
                        
                        
                        
                        125,000Proceeds
      received on September 5, 2008 for the issuance of common stock in relation
      to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        50,000
                        
                        
                        
                        
                        
                        
                        
                        50,000Proceeds
      received on September 10, 2008 for the issuance of common stock in
      relation to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        20,000
                        
                        
                        
                        
                        
                        
                        
                        20,000Proceeds
      received on September 18, 2008 for the issuance of common stock in
      relation to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        50,000
                        
                        
                        
                        
                        
                        
                        
                        50,000Share-based
      compensation for the three months ended September 30, 2008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        114,418
                        
                        
                        
                        
                        
                        
                        
                        114,418Escrow
      Shares returned and canceled on September 20, 2008 pursuant to terms of
      March 20, 2006 Exchange Transaction (Note 2)
                        
                        
                        (72,689
                        )
                        
                        
                        (73
                        )
                        
                        
                        73
                        
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on October 30, 2008 to the Company’s Chief Financial Officer
      pursuant to employment letter (Note 12)
                        
                        
                        400,000
                        
                        
                        
                        400
                        
                        
                        
                        91,600
                        
                        
                        
                        
                        
                        
                        
                        92,000Shares
      issued on October 30, 2008 to the Consultant pursuant to July 30, 2008
      letter agreement (Note 12
                        
                        
                        200,000
                        
                        
                        
                        200
                        
                        
                        
                        9,800
                        
                        
                        
                        
                        
                        
                        
                        10,000Proceeds
      received on November 7, 2008 for the issuance of common stock in relation
      to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        150,000
                        
                        
                        
                        
                        
                        
                        
                        150,000Shares
      issued on November 18, 2008 to consultants in lieu of payment for services
      (Note 12)
                        
                        
                        1,900,000
                        
                        
                        
                        1,900
                        
                        
                        
                        121,100
                        
                        
                        
                        
                        
                        
                        
                        123,000Proceeds
      received on November 19, 2008 for the issuance of common stock in relation
      to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        80,000
                        
                        
                        
                        
                        
                        
                        
                        80,000Proceeds
      received on November 26, 2008 for the issuance of common stock in relation
      to the September 2008 private placement (Note 12)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        10,000
                        
                        
                        
                        
                        
                        
                        
                        10,000Shares
      issued on December 19, 2008 related to private placement cash proceeds
      received in September and November 2008 (Note 12)
                        
                        
                        9,700,000
                        
                        
                        
                        9,700
                        
                        
                        
                        (9,700
                        )
                        
                        
                        
                        
                        
                        
                        -Shares
      issued on December 19, 2008 related to units from September 2008 offering
      issued to a former non-employee Board member and two former Advisory board
      members in lieu of payment of fees owed (Note 12)
                        
                        
                        414,367
                        
                        
                        
                        414
                        
                        
                        
                        20,304
                        
                        
                        
                        
                        
                        
                        
                        20,718Share-based
      compensation for the three months ended December 31, 2008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        16,137
                        
                        
                        
                        
                        
                        
                        
                        16,137Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (4,621,672
                        )
                        
                        
                        (4,621,672
                        )Balances
      at December 31, 2008
                        
                        
                        68,608,471
                        
                        
                        $
                        68,608
                        
                        
                        $
                        14,484,778
                        
                        
                        $
                        (15,643,305
                        )
                        
                        $
                        (1,089,919
                        )





The
accompanying notes are an integral part of the consolidated financial
statements.


F-5


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Year Ended
                                                                          December
      31,
                                                                        
                                                                        
                                                                        Period from
                                                                          Inception
                                                                          (May 18, 2004) to
                                                                          December
      31,2008
                                                                        
                                                                        
                                                                        2007
                                                                        
                                                                        
                                                                        2008Cash
      flows used in operating activities:Net
      loss
                                                                        
                                                                        $
                                                                        (4,621,672
                                                                        )
                                                                        
                                                                        $
                                                                        (6,612,193
                                                                        )
                                                                        
                                                                        $
                                                                        (16,019,163
                                                                        )A
      Adjustments to reconcile net loss from operations to net cash used in
      operating activities:Depreciation
                                                                        
                                                                        
                                                                        200,022
                                                                        
                                                                        
                                                                        
                                                                        15,623
                                                                        
                                                                        
                                                                        
                                                                        219,991Amortization
                                                                        
                                                                        
                                                                        26,330
                                                                        
                                                                        
                                                                        
                                                                        21,670
                                                                        
                                                                        
                                                                        
                                                                        55,663Issuance
      of common stock for services
                                                                        
                                                                        
                                                                        397,273
                                                                        
                                                                        
                                                                        
                                                                        72,590
                                                                        
                                                                        
                                                                        
                                                                        499,402Share
      based compensation expense
                                                                        
                                                                        
                                                                        357,449
                                                                        
                                                                        
                                                                        
                                                                        728,729
                                                                        
                                                                        
                                                                        
                                                                        1,924,866Loss
      on write down of molds
                                                                        
                                                                        
                                                                        128,780
                                                                        
                                                                        
                                                                        
                                                                        114,376
                                                                        
                                                                        
                                                                        
                                                                        243,156Loss
      on disposal of property and equipment
                                                                        
                                                                        
                                                                        1,993
                                                                        
                                                                        
                                                                        
                                                                        22,179
                                                                        
                                                                        
                                                                        
                                                                        24,172Amortization
      on discount of note payable
                                                                        
                                                                        
                                                                        100,873
                                                                        
                                                                        
                                                                        
                                                                        3,130
                                                                        
                                                                        
                                                                        
                                                                        104,003Unrealized
      loss on derivative instruments
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,306,754Changes
      in operating assets and liabilities:Prepaid
      expenses
                                                                        
                                                                        
                                                                        198,819
                                                                        
                                                                        
                                                                        
                                                                        (158,366
                                                                        )
                                                                        
                                                                        
                                                                        (32,984
                                                                        )Accounts
      payable and accrued liabilities
                                                                        
                                                                        
                                                                        824,486
                                                                        
                                                                        
                                                                        
                                                                        472,830
                                                                        
                                                                        
                                                                        
                                                                        1,559,094Liquidated
      Damages
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        5,290
                                                                        
                                                                        
                                                                        
                                                                        21,988Net
      cash used in operating activities
                                                                        
                                                                        
                                                                        (2,385,647
                                                                        )
                                                                        
                                                                        
                                                                        (5,324,722
                                                                        )
                                                                        
                                                                        
                                                                        (10,093,058
                                                                        )Cash
      flows used in investing activities:Purchases
      of molds
                                                                        
                                                                        
                                                                        (118,120
                                                                        )
                                                                        
                                                                        
                                                                        (125,036
                                                                        )
                                                                        
                                                                        
                                                                        (243,156
                                                                        )Software
      costs
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (31,551
                                                                        )
                                                                        
                                                                        
                                                                        (31,551
                                                                        )Purchase
      of property and equipment
                                                                        
                                                                        
                                                                        (361,877
                                                                        )
                                                                        
                                                                        
                                                                        (44,756
                                                                        )
                                                                        
                                                                        
                                                                        (415,256
                                                                        )Patent
      Costs
                                                                        
                                                                        
                                                                        (45,708
                                                                        )
                                                                        
                                                                        
                                                                        (57,290
                                                                        )
                                                                        
                                                                        
                                                                        (211,061
                                                                        )Other
      intangibles
                                                                        
                                                                        
                                                                        (3,199
                                                                        )
                                                                        
                                                                        
                                                                        (1,390
                                                                        )
                                                                        
                                                                        
                                                                        (4,589
                                                                        )Cash
      used in investing activities
                                                                        
                                                                        
                                                                        (528,904
                                                                        )
                                                                        
                                                                        
                                                                        (260,023
                                                                        )
                                                                        
                                                                        
                                                                        (905,613
                                                                        )Cash
      flows provided by financing activities:Cash
      assumed in connection with Recapitalization
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        2,261,462Related-party
      payments
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (26,924
                                                                        )Proceeds
      from issuance of Common Stock (net of issuance costs)
                                                                        
                                                                        
                                                                        2,353,453
                                                                        
                                                                        
                                                                        
                                                                        3,716,450
                                                                        
                                                                        
                                                                        
                                                                        7,939,666Proceeds
      from notes payable
                                                                        
                                                                        
                                                                        555,000
                                                                        
                                                                        
                                                                        
                                                                        150,000
                                                                        
                                                                        
                                                                        
                                                                        855,000Repurchase
      of options (Note 11)
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        (30,445
                                                                        )
                                                                        
                                                                        
                                                                        (30,445
                                                                        )Net
      cash provided by financing activities
                                                                        
                                                                        
                                                                        2,908,453
                                                                        
                                                                        
                                                                        
                                                                        3,836,005
                                                                        
                                                                        
                                                                        
                                                                        10,998,759Net
      increase (decrease) in cash and cash equivalents
                                                                        
                                                                        
                                                                        (6,098
                                                                        )
                                                                        
                                                                        
                                                                        (1,748,740
                                                                        )
                                                                        
                                                                        
                                                                        88Cash
      and cash equivalents at beginning of year
                                                                        
                                                                        
                                                                        6,186
                                                                        
                                                                        
                                                                        
                                                                        1,754,926
                                                                        
                                                                        
                                                                        
                                                                        -Cash
      and cash equivalents at end of year
                                                                        
                                                                        $
                                                                        88
                                                                        
                                                                        
                                                                        $
                                                                        6,186
                                                                        
                                                                        
                                                                        $
                                                                        88Supplemental
      Disclosure of Cash Flow InformationCash
      paid during this year for:Interest
                                                                        
                                                                        $
                                                                        4,896
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        10,162Supplemental
      Schedule of Non-Cash Investing and Financing Activities:On
      May 18, 2004 the Company received Net Liabilities from a predecessor
      entity totaling
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        32,312Net
      liabilities assumed from reverse acquisition on March 20, 2006, net of
      cash of $2,261,462
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        552,755Conversion
      of convertible debenture, assumed from reverse acquisition, to common
      stock
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        120,000Conversion
      of convertible debenture, assumed from reverse acquisition, to warrant
      liability
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        30,000Transfer
      of deficit due to merger of Skin Shoes, LLC into Skin Shoes, Inc. on
      October 20, 2005
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        375,568Issuance
      of Common Stock to consultants on April 3, 2006 for services to be
      provided for a two year term
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        145,180Reclassification
      of share based liability awards to equity awards upon the re-adoption of
      the 2005 Incentive Stock Plan on March 16, 2006
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        241,157Reclassification
      of derivative liability to equity upon the declaration of the SB-2
      registration statement as effective.
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        1,890,600Exchange
      of $705,000 of secured promissory notes, net of unamortized discount of
      $186,413 and accrued interest of $6,114, for private placement units on
      April 9, 2008
                                                                        
                                                                        
                                                                        524,701
                                                                        
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        
                                                                        524,701Discounts
      on notes payable for common stock to be issued December 31, 2007, January
      7, February 11, February 24, February 28, March 17, 2008 (Note
      9)
                                                                        
                                                                        
                                                                        233,063
                                                                        
                                                                        
                                                                        
                                                                        57,353
                                                                        
                                                                        
                                                                        
                                                                        290,416617,592
      shares of common stock issued to non-employee and Advisory Board members
      for payment of fees due
                                                                        
                                                                        $
                                                                        61,363
                                                                        
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        61,363Issuance
      of Common Stock to a consultant on November 18, 2008 for services to be
      provided over a three month term
                                                                        
                                                                        $
                                                                        60,000
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        60,000Issuance
      of Common Stock on October 30, 2008for
      a payable to a  consultant
                                                                        
                                                                        $
                                                                        10,000
                                                                        
                                                                        
                                                                        –
                                                                        
                                                                        
                                                                        $
                                                                        10,000Issuance
      of Common Stock to Consultants onMarch
      3, 2006 for services to be provided fora
      two year term
                                                                        
                                                                        $
                                                                        -
                                                                        
                                                                        
                                                                        -
                                                                        
                                                                        
                                                                        $
                                                                        127,030





The
accompanying notes are an integral part of the consolidated  financial
statements.


F-6


Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
1: DESCRIPTION OF BUSINESS





Overview





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





Basis
of presentation, organization and other matters





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





Logicom
was incorporated in the State of Nevada on January 23, 2004. Logicom was in the
development stage since its formation and it had not realized any revenues from
its planned operations. Logicom entered into a share exchange agreement with all
of the shareholders of Skins Footwear, a privately held development stage
footwear company, on November 2, 2005.





Skins
Footwear was originally organized on May 18, 2004 as a New Jersey limited
liability company under the name Skin Shoes, LLC. On October 11, 2005, Skins
Shoes, LLC created a Delaware corporation under the name Skin Shoes, Inc. as a
wholly owned subsidiary and merged with and into Skin Shoes, Inc. on October 20,
2005, resulting in Skins Shoes, Inc. becoming the surviving Delaware corporation
and the limited liability company ceasing to exist. The merger on October 20,
2005 was a conversion of a non-taxable entity to a taxable corporation. The
deficit accumulated in the development stage on October 20, 2005 was treated as
a return of capital to the members of Skin Shoes, LLC, which was then
contributed to Skin Shoes, Inc., and as a result the accumulated deficit was
reclassified to additional paid in capital at October 20, 2005 in the
consolidated statements of stockholders' equity.





On April
10, 2006, Logicom changed its corporate name to Skins Inc. and Skins Shoes, Inc.
changed its corporate name to Skins Footwear Inc.





The
acquisition of Skins Footwear by the Company on March 20, 2006 was accounted for
as a recapitalization by the Company. The recapitalization was the merger of a
private operating company (Skins Footwear) into a non-operating public shell
corporation (the Company) with nominal net assets and as such is treated as a
capital transaction, rather than a business combination. As a result no Goodwill
is recorded. The transaction is the equivalent to the issuance of stock by the
private company for the net monetary assets of the shell corporation. The pre
acquisition financial statements of Skins Footwear are treated as the historical
financial statements of the consolidated companies. The financial statements
presented reflect the change in capitalization for all periods presented,
therefore the capital structure of the consolidated enterprise, being the
capital structure of the legal parent, is different from that appearing in the
financial statements of Skins Shoes, LLC and Skins Shoes, Inc. in earlier
periods due to the recapitalization.


F-7


Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
1: DESCRIPTION OF BUSINESS  (continued)





Development
Stage





The
Company is in the development stage. Since its formation the Company has not
realized any revenues from its planned operations. The Company intends to
design, manufacture and market high quality men's and women's footwear. The
Company's primary activities since incorporation have been conducting research
and development, performing business, strategic and financial planning, and
raising capital. The deficit accumulated in the development stage presented on
the consolidated balance sheet on December 31, 2008 will not agree with the
total loss from May 18, 2004 (inception date) to December 31, 2008 due to the
treatment of the merger of the non-taxable entity to a taxable corporation on
October 20, 2005 described in paragraph three of Note 1, basis of presentation,
organization and other matters.





Going
Concern





The
financial statements have been prepared using accounting principles generally
accepted in the United States of America applicable for a going concern which
assumes that the Company will realize its assets and discharge its liabilities
in the ordinary course of business. As of December 31, 2008, the Company has no
established source of revenues, a working capital deficit of approximately
$1,500,000, and has accumulated losses of $16,019,163 since its
inception.  Its ability to continue as a going concern is dependent
upon achieving production  and sale of goods, the ability of the
Company to obtain the necessary financing to meet its obligations and pay its
liabilities arising from normal business operations when they come due and upon
profitable operations. The outcome of these matters cannot be predicted with any
certainty at this time and raises substantial doubt that the Company will be
able to continue as a going concern. These consolidated financial statements do
not include any adjustments to the amounts and classification of assets and
liabilities that may be necessary should the Company be unable to continue as a
going concern.





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


F-8


Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Skins Footwear. All significant inter-company
transactions and balances have been eliminated in consolidation.





Concentration of Credit
Risk





The
Company maintains cash balances at one financial institution. At various times
throughout the years, the Company's cash balances exceeded FDIC insurance
limits.





Cash
Equivalents





The
Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash
equivalents.





Property and
Equipment





Equipment is stated at cost, less accumulated depreciation, which is calculated
using the straight-line method over the estimated useful lives of the respective
assets, ranging between one and five years.


F-9


Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Software
Costs





In
accordance with Statement of Position 98-1 “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use”, the Company capitalized
software costs related to the design up to the point when the software was
operating. Software costs are being amortized by the straight-line method over
estimated useful life of 18 months. Subsequent maintenance and modification
costs are charged to operations as incurred.





Impairment of Long Lived
Assets





The
Company assesses the valuation of components of its property and equipment and
other long-lived assets whenever events or circumstance dictate that the
carrying value might not be recoverable. The Company bases its evaluation on
indicators such as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements and other external
market conditions or factors that may be present. If such factors indicate that
the carrying amount of an asset group may not be recoverable, the Company
determines whether an impairment has occurred by analyzing an estimate of
undiscounted future cash flows at the lowest level for which identifiable cash
flows exist. If the estimate of the undiscounted cash flows during the estimated
useful like of the asset if less than the carrying value of the asset the
Company recognizes a loss for the difference between the carrying value of the
asset and its estimated fair value, generally measured by the present value of
the estimated cash flows.





Production
Molds





Production
molds to be used in production of inventory are stated at cost.





Patent
Costs





Costs
associated with the development and filing of patent applications are
capitalized and amortized over the useful life of 20 years, using the
straight-line method.





Design and
Development





Costs to develop the Company's products are expensed as incurred in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 2, “Accounting for Research and
Development Costs.” These costs include research, related overhead
expenses, including salaries and other personnel related expenses, travel costs,
supplies and depreciation of equipment.





Use of
Estimates





The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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.


F-10


Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Estimated Fair Value of
Financial Instruments





The Company's financial instruments include cash, accounts payable and
liquidated damages payable. Management believes the estimated fair value of
cash, accounts payable and liquidated damages payable at December 31, 2008
approximate their carrying value as reflected in the balance sheets due to the
short-term nature of these instruments





Income
Taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. At
December 31, 2008 and 2007, the Company had a full valuation allowance against
its deferred tax assets.





The
Company files an income tax return in the U.S. federal
jurisdiction,  New York, and New Jersey. Tax returns for the years
2005 through 2007 remain open for examination in various tax jurisdictions in
which it operates. The Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109, Accounting for Income Taxes” (“FIN 48”), on January
1, 2007. As a result of the implementation of FIN 48, the Company recognized no
material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, and at December 31, 2008 and 2007, there
were no unrecognized tax benefits. Interest and penalties related to uncertain
tax positions will be recognized in income tax expense. As of December 31, 2008
and 2007, no interest and penalties related to uncertain tax positions had been
accrued.





Stock
Options





The
Company has elected to adopt the intrinsic-value method of accounting for
liability awards and the fair value (calculated) method for equity awards issued
to employees under SFAS No. 123 (R), “Share Based Payment” (SFAS No. 123(R)”)
that were granted prior to the Company becoming a public company. The Company
uses the fair value method for all liability and equity awards after it became a
public company.





The
Company accounts for its stock-based employee compensation arrangements under
SFAS No. 123R, which requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, based on the
grant date fair value of those awards, in the financial
statements.


F-11


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Derivative
Instruments





In
accordance with the Emerging Issues Task Force (EITF) 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock, the Company records a liability for the derivative
instrument that results due to the number of potential common stock shares plus
outstanding shares that exceed the number of authorized common stock shares. At
each balance sheet date, the liability for these potential excess shares is
adjusted to fair value with the change being recorded as a gain or loss on the
statement of operations. At December 31, 2005, the Company had 1,000 common
authorized shares and had 515,725 of outstanding shares plus potential shares
from the exercise of options that had vested. The 514,725 excess potential
shares were attributed to the option grants that had vested. The Company
calculated the fair value of these potential shares using the Black-Scholes
model and recorded a derivative liability of $22,191 at December 31, 2005. The
liability booked was net of the derivative recorded for the options granted to
non-employees where services were provided (Note 2) because the options used in
that calculation are also part of the derivative calculation for the shares and
potential shares over the authorized share amount. On March 16, 2006 the
Company increased its authorization of common stock and cured this liability. At
March 16, 2006, the Company reversed out the liability through a charge to
unrealized gains on derivative instruments.





In
accordance with EITF 00-19, the Company recorded a liability for the derivative
instruments that result from the liquidated damages provision it had with
stockholders who also held warrants to purchase common stock in accordance with
the Share Exchange Agreement. At each balance sheet date after the
March 20, 2006 Share Exchange Close, a liability was calculated for
3,000,000 warrants subject to the liquidated damages provision. On March 20,
2006, 2,821,428 of the 3,000,000 warrants were granted upon the close of the
private placement which occurred immediately prior to the close of the share
exchange transaction (Note 12). The Company assumed a derivative liability of
$553,846 which was reflected in the net assets assumed on the Company's
Statement of Shareholder Equity (Deficit). The change in the value of the
derivative liability from March 20, 2006 to October 10, 2006 was recorded in the
Statement of Operations. The remaining 178,572 warrants were granted in
conjunction with the conversion of the convertible debenture. The Company
calculated a fair value of $30,000 for the 178,572 warrants issued upon
conversion of the convertible debenture in accordance with EITF 00-27 and
treated these warrants as a liability in accordance with EITF 00-19. The change
in fair value of the derivative liability from the conversion date, March 20,
2006, to October 10, 2006 was recorded in the Statement of Operations. The
provision required the Company to have its Registration Statement declared
effective (to register the common stock and common stock equivalents issued in
relation to the Share Exchange Agreement (Note 12) by the middle of August 2006.
If the Registration Statement was not declared effective before the
effectiveness date, the Company was required to pay liquidated damages to each
Share Exchange Common Stock holder equal to 0.025% for each day after the
effectiveness date until the Registration Statement is declared effective by the
United States Securities and Exchange Commission. At December 31, 2006 The
Company accrued approximately $27,000 for the potential liquidated damages
payable. During the year ended December 31, 2007, waivers and releases were
obtained from shareholders of approximately $5,000.





On
October 10, 2006 the registration statement was declared effective by the United
States Securities and Exchange Commission. As a result the Company reclassified
its derivative liability at October 10, 2006 to additional paid in capital in
accordance with paragraph 10 of EITF 00-19.


F-12


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Net Loss per Common
Share





Basic net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during the period  For the years ended
December 31, 2008 and 2007 the Company had 1,404,000 common shares held in
escrow through September 20, 2008 and zero held in escrow
thereafter.  . The shares held in escrow were excluded from the
weighted average common share calculation at each date because all the necessary
conditions for the release of the escrow shares had not been satisfied at that
time.





Diluted
net loss per share is computed by dividing the net loss by the weighted average
number of common and common equivalent shares outstanding during the period.
Basic and diluted net loss per share are the same.





Years ended
                              December 31,2008
                            
                            
                            2007Numerator:Net
      loss - basic and diluted
                            
                            $
                            (4,621,672
                            )
                            
                            $
                            (6,612,193
                            )Denominator:Weighted
      average shares – basic
                            
                            
                            53,694,274
                            
                            
                            
                            37,888,638Effect
      of dilutive stock options and warrants
                            
                            
                            -
                            
                            
                            
                            -Denominator
      for diluted earnings per share
                            
                            
                            53,694,274
                            
                            
                            
                            37,888,638Loss
      per shareBasic
                            
                            $
                            (0.09
                            )
                            
                            $
                            (0.18
                            )Diluted
                            
                            $
                            (0.09
                            )
                            
                            $
                            (0.18
                            )





At
December 31, 2008 and 2007 the Company stock options outstanding totaled
3,459,092 and 3,336,500, respectively. In addition, at December 31, 2008 and
2007, the Company’s warrants outstanding represented 32,824,775 and 4,714,714
common shares, respectively. Inclusion of the Company’s options and warrants in
diluted loss per share for the years ended December 31, 2008 and 2007 have an
anti-dilutive effect because the Company incurred a loss
from operations.


F-13


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Recently Adopted and Issued
Accounting Pronouncements





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





In
October 2008 the FASB issued FSP FAS No. 157-3 (“FSP FAS 157-3”), “Determining
Fair Value of a Financial Asset When the Market for That Asset is Not Active.”
FSP FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not
active and provides an example to illustrate key considerations in determining
the fair value of a financial asset when the market for that financial asset is
not active. FSP FAS 157-3 is effective upon issuance, including prior periods
for which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as
a change in accounting estimate following the guidance in FASB Statement No.
154, “Accounting Changes and Error Corrections.” FSP 157-3 is effective for the
financial statements included in the Company’s annual report for the year ended
December 31, 2008 and application of FSP FAS 157-3 had no impact on the
Company’s consolidated financial statements.





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





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


F-14





SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





SFAS No.
161, Disclosures about Derivative Instruments and Hedging Activities - An
Amendment of FASB Statement No. 133 (Summary - On March 19, 2008, the FASB
issued FASB Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities - an Amendment of FASB Statement 133. Statement 161 enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: (a) an entity uses derivative instruments;
(b) derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
and (c) derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. Specifically,
Statement 161 requires:





·
            Disclosure of the objectives for
      using derivative instruments be disclosed in terms of underlying risk and
      accounting designation;




·
            Disclosure of the fair values of
      derivative instruments and their gains and losses in a tabular
      format;




·
            Disclosure of information about
      credit-risk-related contingent features;
  and




·
            Cross-reference from the
      derivative footnote to other footnotes in which derivative-related
      information is disclosed.




Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged. The Company is currently evaluating
the impact that adoption of SFAS 161 may have on the financial
statements.





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





SFAS 162
is effective November 15, 2008 and is only effective for nongovernmental
entities; therefore, the GAAP hierarchy will remain in SAS 69 for state and
local governmental entities and federal governmental
entities.  Adoption of  SFAS 162 did not have a material
impact on the Company’s  consolidated financial
statements.




In May
2008, the financial
accounting standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1
clarifies that convertible debt instruments may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants.” Management is currently
evaluating the impact the adoption FSP APB-14-1 may have on the consolidated
financial statements.




F-15




SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




In June
2008 the FAB issued FSP Emerging Task Force (“EITF”) 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” FSP EITF 03-6-1 provides that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF-03-6-1 is effective for fiscal years beginning after December
15, 2008, and interim periods within those years. Upon adoption, a company is
required to retrospectively adjust its earnings per share data (including any
amounts related to interim periods, summaries of earnings and selected financial
data) to conform to the provisions of FSP EITF 03-6-1. Management is currently
evaluating the requirements of FSP EITF 03-6-1 and has not yet determined the
impact on the Company’s consolidated financial statements.




NOTE 3: PROPERTY
AND EQUIPMENT





Property
and equipment consist of the following:




December 31,
                          2008
                        
                        
                        December 31,
                          2007Sewing
      equipment
                        
                        $
                        1,882
                        
                        
                        $
                        1,882Computer
      equipment
                        
                        
                        18,623
                        
                        
                        
                        19,652Store
      displays
                        
                        
                        360,343
                        
                        
                        
                        -380,848
                        
                        
                        
                        21,534Less
      accumulated depreciation
                        
                        
                        207,777
                        
                        
                        
                        8,325$
                        173,071
                        
                        
                        $
                        13,209





The
Company determined that $419 of office equipment and $21,760 of displays to be
obsolete for the year ended December 31, 2007.





Depreciation
expense related to property and equipment was $200,022 and $15,623 for the years
ended December 31, 2008 and 2007, respectively.




F-16




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
4: SOFTWARE COSTS





Software
costs, net consist of the following:




December 31,
                        2008
                      
                      
                      December 31,
                        2007Website
      design costs
                      
                      $
                      31,551
                      
                      
                      $
                      31,551Less
      accumulated amortization
                      
                      
                      31,117
                      
                      
                      
                      14,917$
                      434
                      
                      
                      $
                      16,634





Amortization
expense related to software costs was $16,200 and $14,917 for the years ended
December 31, 2008 and 2007, respectively.




NOTE 5: CAPITALIZED
PRODUCTION MOLDS





During
the year ended December 31, 2008, and  2007, respectively, the Company
purchased $118,120 and $125,036, respectively of production molds. The Company
periodically evaluates the value of its assets and will write off the
unamortized value if it is determined that the asset will not be recovered in
the ordinary course of business. During the years ended December 31, 2008, and
2007 the Company determined that capitalized molds of $128,780 and $114,376,
respectively, to be obsolete. The Company’s capitalized production molds are $0
and $10,660 at December 31, 2008 and 2007, respectively.





No
amortization of production molds is included in the December 31, 2008 and 2007
consolidated statement of operations as they were not placed in
service.




NOTE
6: PATENT COSTS




The
Company periodically evaluates the recoverability of unamortized patents and
will write off the unamortized value if it is determined they no longer have
value. Patent costs consists of:





December 31,
                        2008
                      
                      
                      December 31,
                        2007Patent
      costs
                      
                      $
                      219,512
                      
                      
                      $
                      173,804Less
      accumulated amortization
                      
                      
                      24,155
                      
                      
                      
                      14,404$
                      195,357
                      
                      
                      $
                      159,400




Amortization
expense related to patents was $9,751 and $6,741 for the years ended December
31, 2008 and 2007, respectively.  The estimated aggregate amortization
expense for the next five years is estimated to be approximately $10,900 for
each year.




F-17




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
7: OTHER INTANGIBLES





The
Company’s capitalized internet brand name was $4,589 and $1,390 at December 31,
2008 and 2007, respectively, and is being amortized using the straight line
method over an estimated useful life of 10 years. Accumulated amortization at
December 31, 2008 and  2007 is $391 and $12, respectively.
Amortization expense related to other intangibles was $379 and $12 for the years
ended December 31, 2008 and 2007, respectively.




NOTE
8: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




Accounts payable and accrued liabilities consist of the
following:





December 31,
                        2008
                      
                      
                      December 31,
                        2007Trade
      payables
                      
                      $
                      828,078
                      
                      
                      $
                      590,556Professional
      fees
                      
                      
                      320,084
                      
                      
                      
                      87,943Commissions
      payable
                      
                      
                      30,000
                      
                      
                      
                      28,000Board
      Fees and Director Fees
                      
                      
                      92,500
                      
                      
                      
                      18,750Payroll
      and payroll taxes payable
                      
                      
                      212,965
                      
                      
                      
                      -Other
      accrued liabilities
                      
                      
                      13,807
                      
                      
                      
                      25,176$
                      1,497,434
                      
                      
                      $
                      750,425




NOTE
9: NOTES PAYABLE





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





A
total discount of $290,416 was taken on the Notes for the fair value
of the shares of common stock issuable upon each note's issuance date. At
December 31, 2007  Notes Payable was $150,000, net of $54,223
unamortized discount . The Company amortized the discount using the effective
interest rate method over the term of the Notes.




The
Company issued 717,794 and 568,182 common shares on March 14 and April 18, 2008,
respectively, related to the issuance of the notes.




F-18




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
9: NOTES PAYABLE (continued)





Amortization
of discounts was $100,873 and $3,130 for the years ended December 31, 2008 and
2007, respectively.





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




NOTE
10: COMMITMENTS AND CONTINGENCIES





On
September 28, 2007, the Company and Mark Klein executed an Amended and Restated
Employment Agreement (the “Agreement”) in connection with the continued
employment of Mr. Klein as the Company's Chief Executive Officer and President.
The Agreement supersedes, amends and restates the prior employment agreement
entered into by Mr. Klein and the Company when Mr. Klein was initially appointed
Chief Executive Officer and President on March 20, 2006. Pursuant to the terms
of the Agreement, the Company will continue to employ Mr. Klein for a period of
three years with successive one-year automatic renewals unless either party
provides 180-days advance notice of intent not to renew the Company will pay Mr.
Klein an annual base salary of $250,000 with a bonus of up to 50% of the base
salary at the discretion of the Board of Directors. Mr. Klein is also eligible
to receive paid vacation and other benefits made available by the Company to its
executives, including a Company-owned or leased automobile. If Mr. Klein's
employment is terminated with cause, as defined in the Agreement, Mr. Klein
will receive that portion of any unpaid base salary that has been earned through
the termination date and any accrued but unpaid vacation pay as well as any
expense reimbursements due and owing to him. If Mr. Klein is terminated
without cause, resigns with good reason or is terminated upon a change of
control, he will receive, in addition to his accrued base salary, bonus
compensation, vested deferred compensation, any benefits under any plans of the
Company in which he is a participant to the full extent of his rights under such
plan, and accrued vacation benefits prorated through the termination date, 12
months of his base salary along with health benefits, to be paid out
proportionally, on the Company's usual paydays, over a 12 month period. 
Mr. Klein has agreed not to compete with the Company during his employment or in
the 12 months that severance payments are made.





On
November 7, 2006 the Company entered into a factoring agreement with FCC, LLC
(“First Capital”) through October 31, 2008. The agreement provided for the
Company to sell its credit-approved accounts receivable to First Capital without
recourse as to bad debts but with recourse as to all future customer claims.
First Capital  was to provide cash advances to the Company in an
amount equal to 85% of the value of the assigned accounts receivable, as
defined. In addition the First Capital will make cash advances to the Company
against the value of the Company’s future finished goods inventory, up to a
maximum of $500,000.  Unpaid advances  were to bear interest
at the greater of 6% or 1% above the prime rate. Upon commencement of factoring,
the Company’s obligation to First Capital will be secured by all of its tangible
and intangible assets. This agreement expired on October 31,
2008.   The Company settled the minimum fees due under the First
Capital agreement for $35,000 of which $30,000 remains outstanding as of
December 31, 2008.




F-19


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 NOTE
10: COMMITMENTS AND CONTINGENCIES (continued)


On June
16, 2008 the Company appointed Michael Solomon as its new Chief Financial
Officer and executed an employment letter on July 9, 2008. Pursuant to the terms
of the employment letter Mr. Solomon will be paid $175,000 base salary per year
which will be increased to $200,000 per year after the Company completes a
financing transaction or series of financing transactions cumulatively totaling
in excess of $1 million.





On
November 11, 2008 the Company closed on a Revolving Loan and Security Agreement
(the “Loan Agreement) which included a September 12, 2008 Facility Letter signed
with Ashford Finance, LLC (“Ashford”), the terms of which provide for a $3
million Letter of Credit and Accounts Receivable financing facility. The Loan
Agreement terminates on November 30, 2009. All financings by Ashford are subject
to Ashford’s sole discretion. All Letters of Credit funded for inventory
production will be based upon purchase orders from customers acceptable to
Ashford. In addition Ashford will finance up to 75% of eligible accounts
receivable, as defined. This agreement is collateralized by a first priority
security interest in all Company assets, as defined. In addition all borrowings
under the terms of the Facility are personally guaranteed by Mark Klein, the
Company’s Chief Executive Officer. As of December 31, 2008 the Company has not
made any borrowings under the Loan Agreement.





Further,
Ashford will only finance Letters of Credit or accounts receivable for
transactions involving customers for whom the Company has obtained credit
insurance. Accordingly, on September 15, 2008 the Company obtained a one-year
$500,000 credit insurance policy on certain customers for a total cost of
$13,080 which represents the annual insurance premium plus expenses which is
being amortized on a straight-line basis over the policy term. For the year
ended December 31, 2008 the Company recorded insurance expense of $3,834 which
is included in selling, general and administrative expenses.





All
financings by Ashford will be charged interest at a rate of Prime plus 3%, as
defined. Ashford will also charge an account management fee between 2.25% and 3%
per month on the face value of each Letter of Credit issued, the fee depending
upon total volume of Letters of Credit issued. Accounts receivable financing
will be charged an account management fee ranging from 1.75%-2.5% per month
depending on the total volume of accounts receivable financed. On any default,
as defined, both the interest rate and the account management fees will be
increased by an additional 4% per annum.





On
November 24, 2008 the Company entered into a Buying Agency Agreement with LJP
International, LLC (“LJP”).  Pursuant to the agreement, LJP will serve
as the Company’s non-exclusive buying and sourcing agent and will be responsible
for sourcing of raw materials, arranging manufacturing facilities, monitoring
manufacturer quality, finished product inspection, and coordinating freight
forwarders.  The Company will pay LJP an amount equal to 8% of the FOB
country of origin price for product ordered, shipped, and accepted by the
Company.   Either party may terminate the agreement at any time
upon providing the other party with 90 days written notice.  There
were no amounts due under this agreement for the year ended December 31,
2008.





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





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




F-20




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
10: COMMITMENTS AND CONTINGENCIES (continued)





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





On May
27, 2008, the Company amended its agreement with TLD Asian Pacific Ltd (“TLD”)
with an effective date of August 10, 2007 for a period of twelve months from the
effective date. According to the amended agreement the Company agreed to pay TLD
$9,000 monthly totaling $108,000 over the twelve month period pursuant to which
TLD will continue to be responsible for conceptualization, development,
commercialization, product and consulting on the engineering and further
development of Skins and Bones on a non-exclusive basis. Prior to the signing of
the agreement the Company was paying TLD $9,600 monthly. TLD agreed to payback
retroactively to August 10, 2007, $6,000 of previously paid fees.  The
contracted expired on August 10, 2008.





On July
31, 2008 the Company signed a one year agreement with a
Consultant  for, among other things, introductions to institutional
financing sources. For any non-equity financing received from funding sources
introduced by the Consultant the Consultant shall be paid a cash fee of 2% of
the gross proceeds of the funding and an equal amount in Warrants to purchase
Company stock. For any equity financing received from sources introduced by the
Consultant the Consultant shall be paid a finders fee of 2% in cash and 3% in
Warrants to purchase Company stock. The Warrants will be issued at the closing
bid price on the day the financing is procured, receive Piggy Back Registration
Rights, and shall expire one year from the date of
issuance.   There was no amounts due under this agreement for the
year ended December 31, 2008.





On
September 26, 2008 the Company entered into a one year lease, beginning October
1, 2008, for new office space in Hoboken, New Jersey. The minimum monthly rental
under the lease is $2,200 per month. The Company also paid a one-month security
deposit. The lease is renewable for one year at a minimum rental rate of $2,200
per month.




F-21


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


NOTE
11: STOCK OPTIONS




In
October 2005, Skins Footwear's Board of Directors approved the 2005 Incentive
Plan (the “2005 Plan”). The 2005 Plan provides that the following types of
awards may be granted under the 2005 Plan: stock appreciation rights (“SARs”);
incentive stock options (“ISOs”); non-qualified stock options (“NQSOs”);
restricted stock awards; unrestricted stock awards; and performance share awards
which entitle recipients to acquire shares upon the attainment of specified
performance goals, stock units and other stock-based awards, short-term cash
incentive awards or any other award. Under the 2005 Plan, awards may be granted
with respect to a maximum of 3,375,000 shares of Skins Footwear's common
stock, subject to adjustment in connection with certain events such as a stock
split, merger or other recapitalization of the Company. On September 28, 2007,
the Company held its annual meeting of stockholders at which an amendment of our 2005
Incentive Plan was approved to increase the authorized number of shares that are
available for issuance under the 2005 Incentive Plan by 1,625,000 shares, to a
total of 5,000,000 shares.




On
October 29, 2008 the Company’s Board of Directors approved an increase in the
number of shares authorized to be issued under the Company’s 2005 Incentive Plan
from 5,000,000 to 13,000,000. The Directors also approved the registering of the
shares authorized under the plan on Form S-8 with the Securities and Exchange
Commission, which the Company filed on November 12, 2008.


On
February 5, 2009 the Company Board of Directors approved an increase in the
number of shares authorized to be issued under the Company’s 2005 Incentive Plan
from 13,000,000 to 30,000,000.





On
October 24, 2005 Skins Footwear granted the following individuals options under
the 2005 Plan:





·
            Two board members were granted
      421,875 options each at an exercise price of $0.80 that vest ratably over
      a 36-month period.




·
            Two consultants were granted
      421,875 options each at an exercise price of $0.80 a share that vests
      ratably over a 36-month
period.




·
            One consultant was granted
      421,875 options at an exercise price of $0.80 that vested immediately for
      finder fee services.





As part
of the Share Exchange Agreement dated November 2, 2005, the Company assumed
Skins Footwear’s 2005 Incentive Plan.




The
awards granted to the two board members were treated as liability awards upon
the grant on October 24, 2005. The treatment of the awards as liability was due
to an insufficient number of authorized shares at the time of issuance. The
Company used the intrinsic value method to determine compensation on these
liability awards.





March 16, 2006
Replacement Option Grants




On March
16, 2006 as a result of the granting of options in excess of the authorized
shares allowed, Skins Footwear canceled and re-adopted its 2005 Incentive Stock
Plan. In connection thereof, Skins Footwear increased its authorized shares to
4,000,000. Additionally, all options granted under the original plan were
canceled and re-granted in accordance with the terms of the re-adopted 2005
Incentive Stock Option Plan.




F-22


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 NOTE
11: STOCK OPTIONS (continued)




The
replacement options to the two board members were treated as replacement equity
awards. On the date of replacement the Company calculated the fair value
(calculated method) of the replacement options using a Black-Scholes option
valuation model that uses the assumptions noted in the following table. At the
time of the replacement of the options the Company was non-public and calculated
its expected volatility based on the calculated method using the Dow Jones US
Footwear Index. The Company elected to use the calculated method because it did
not have a trading history for its stock and it was a development stage company.
The Company chose the Dow Jones US Footwear Index because it represents an
industry index closest to which the Company operates. The Company estimates
option exercise and employee termination within the valuation model; separate
groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected term of options
granted is derived from the output of the option valuation model and represents
the period of time that options granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant.




Expected
      volatility
                
                
                17.30
                %Expected
      dividends
                
                
                0Expected
      Term (Years)
                
                
                3Risk
      free interest rate
                
                
                4.70
                %




The total
incremental compensation expense from the cancellation and replacement of the
awards was $196,763, which is expected to be recognized over a period of 32
months from March 16, 2006. For the years ended December 31, 2008 and 2007, the
Company recorded compensation expense of $21,977 and $66,102, respectively
related to the replacement option grants to the board members.  On October
19, 2007, one of the board members that was granted 421,875 replacement options
resigned. Any non vested portion of the option expired immediately and the
vested portion of the option was exercisable for a period of 90 days following
optionee’s termination. As of January 19, 2008, the former board member did not
exercise any of the vested options; subsequently all options have been
forfeited.





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





·
            The 421,875 options granted to
      two-consultants that vest over a 36-month period were granted for services
      not yet rendered. The Company used the provisions of FAS 123(R) and EITF
      96-18,Accounting
      for Equity Instruments That Are Issued to Other Than Employees for
      Acquiring, or in Conjunction with Selling, Goods or Servicesto account for the compensation
      expense associated with these grants. The Company measured the
      compensation associated with these grants based on the fair value of the
      equity instruments issued. There is no measurement date to calculate the
      fair value of the options at the date of grant because the performance
      commitment had not yet occurred (there are no sufficiently large
      disincentives for non-performance) and the performance by the two
      consultants was not complete. The Company calculated the expense at each
      reporting period based upon fair value of the options that vested during
      the reporting period using the fair value on the reporting date. Fair
      value was calculated using the Black-Scholes model. The options were
      treated as liability awards upon the original grant because the Company
      did not have a sufficient number of authorized shares. The options became
      equity awards on the date they were cancelled and re-granted. For the
      years ended December 31, 2008 and 2007, the Company recorded compensation
      expense of $21,655 and $256,059,
  respectively.




F-23


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 NOTE
11: STOCK OPTIONS (continued)


·
            The
      remaining 421,875 options were granted to a non-employee for services that
      had already been provided. The Company used the provisions of EITF-00-19
      to account for these options. At the grant date and at December 31,
      2005, the Company treated the option grant as a liability award because it
      did not have enough authorized shares to settle the contract in equity.
      Therefore, these options were recorded at fair value as a liability at
      December 31, 2005. The fair value of the options was calculated using the
      Black-Scholes model at December 31, 2005. On March 16, 2006 the Company
      increased its authorization of Common Stock therefore alleviating the
      potential liability. The Company recorded the fair value of the options
      using a Black-Scholes model as of March 16, 2006 and reclassified the
      total remaining liability from these awards to additional paid in
      capital.





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





March 16,
                            2006
                          
                          
                          December
      31,
                            2008
                          
                          
                          December
31,
                            2007Expected
      volatility
                          
                          
                          17.30
                          %
                          
                          
                          159.89
                          %
                          
                          
                          111.71
                          %Expected
      dividends
                          
                          None
                          
                          
                          None
                          
                          
                          NoneExpected
      term (in years)
                          
                          
                          4.6
                          
                          
                          
                          2
                          
                          
                          
                          2.82Risk-free
      interest rate
                          
                          
                          4.7
                          %
                          
                          
                          1.57
                          %
                          
                          
                          3.25
                          %





2006 Option
Grants




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





On June
19, 2006 the Company granted 150,000 options to the Vice President of Finance
and Operations. The options vest quarterly beginning three months after the
grant date at 12,500 per quarter and have an exercise price of $1.19. In March
2007 the Company cancelled all of these options in exchange for a cash payment
to this Vice President of $88,500.




For the
year ended December 31, 2007, the Company recorded a total compensation expense
of $67,190 related to the Former Vice President's June 19, 2006 option grant.
Total compensation was made up of the $9,135 service period expense and $58,055
from the unrecognized compensation that effectively vests upon repurchase of the
options. The $30,445 cost in excess of the repurchase amount is the difference
between the $88,500 and the cash paid less the unrecognized cost of $58,055 and
is recognized as a charge to additional paid in capital.





The total
compensation expense related to the non-vested options on 2006 awards at
December 31, 2008 is $11,433. For the years ended December 31, 2008 and 2007 the
Company recorded compensation expense of $30,456 and $39,434, respectively
related to the two grants above.




F-24




Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)


On May 9,
2006 the Company granted 300,000 options to a consultant at a per share exercise
price of $1.06. The options vest quarterly beginning three months from the date
of the agreement and expire 30 days after the related investor relations
agreement is terminated. The Company used the provisions of FAS 123(R) and EITF
96-18 to account for the compensation expense associated with this grant. The
Company measured the compensation associated with this grant based on the fair
value of the equity instrument. There is no measurement date to calculate the
fair value of this grant at the date of grant because the performance commitment
had not yet occurred and the performance by the consultant was not complete. The
Company calculated the expense at each reporting period based on the fair value
of the options that vested during the reporting period. For the years ended
December 31, 2008 and 2007, the Company recorded compensation expense of $35 and
$153,441, respectively.





On
October 12, 2006 the Company granted 375,000 options to a consultant. 175,000
options vest immediately with the remaining 175,000 vesting annually over a
three-year period with the first vesting occurring one year after the year of
grant. In addition, the Company granted three other consultants a total of
80,000 options that vest annually over a three-year period with the first
vesting occurring one year after the year of grant. The 455,000 options were
granted for services not yet occurred. The Company used the provisions of FAS
123(R) and EITF 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services to account
for the compensation expense associated with these grants. The Company measured
the compensation associated with these grants based on the fair value of the
equity instruments issued. There is no measurement date to calculate the fair
value of the options at the date of grant because the performance commitment had
not yet occurred (there are no sufficiently large disincentives for
non-performance) and the performance by the consultants were not complete. The
Company will calculate the expense at each reporting period based upon fair
value of the options that vested during the reporting period using the fair
value on the reporting date.  Fair value was calculated using the
Black-Scholes model.  For the years ended December 31, 2008 and 2007,
the Company recorded compensation expense of $3,485, and $62,748, respectively
for these options.





The fair
value of the options granted to a consultants on May 9, 2006 and October 12,
2006 was calculated using the Black-Scholes option valuation model with the
following assumptions:





October, 12, 2006
                          
                          May 9, 2006Grant
                          
                          Consultant Grant(Vest 2008)
                          
                          (Vest 2008)Expected
      Volatility
                          
                          
                          156.13
                          %
                          
                          
                          114.58
                          %Expected
      dividends
                          
                          None
                          
                          
                          NoneExpected
      Term (Years)
                          
                          
                          3
                          
                          
                          
                          .25Risk
      Free Interest Rate
                          
                          
                          2.06
                          %
                          
                          
                          2.31
                          %




2007 Option
Grants





On March
14, 2007 the Company granted 20,000 options to an employee of the Company. The
options vest on an annual basis over three years, with the first one-third
vesting on the one year anniversary of the grant date and have a per share
exercise price of $1.63. The options expire on March 14, 2011. On November 8,
2007, the employee resigned and the options were forfeited.




F-25


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)




On April
13, 2007 the Company granted 500,000 options to its Chief Operating Officer. The
options vest in six semi-annual installments from the date of grant over three
years, and have a per share exercise price of $1.25. The options expire on April
13, 2012.





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





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





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





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





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




F-26


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)




On
September 28, 2007, the Company granted warrants to a consultant to purchase up
to 150,000 shares of common stock from the Company at an exercise price of $1.38
per share. The warrants were granted to the consultant in accordance with an
Investor Relations Agreement dated May 9, 2006, as amended by the First Addendum
dated September 19, 2007, entered into by the Company and the consultant. The
vesting schedule of the consultant warrants are contingent upon the number of
shares issued upon the exercise of investor warrants sold by the Company in a
private placement in May 2007. A total of 4,000,000 warrants were
issued in that private placement. The warrants become exercisable, subject to
terms and conditions of the investor relations agreement, as follows: the first
one-third of the consultant’s warrants vest upon the exercise of 1,217,200
investor warrants, the second one-third of the consultant’s warrants vest upon
the exercise of 2,434,400 investor warrants, and the final one-third of the
consultant’s warrants vest upon the exercise of 3,651,600 investor warrants. The
Company used the provisions of FAS 123(R) and EITF 96-18 to account for the
compensation expense associated with this warrant issuance. The Company measures
the compensation associated with this issuance based on the fair value of the
equity instrument. There was no measurement date to calculate the fair value of
this issuance at the date of grant because the performance commitment had not
yet occurred and the performance by the consultant was not complete. The Company
calculates the expense at each reporting period based on the fair value of the
warrants that will vest during the reporting period.  At December 31,
2008 no warrants under this issuance had vested, therefore no expense had been
incurred.




On
November 12, 2007, the Company granted 24,000 options to a consultant. The first
one-third of the options vest on December 1, 2007, and the second and final
one-third of the options vest on December 1, 2008 and 2009, respectively. The
grant has an exercise price of $0.78 per share. The options expire on April 7,
2012. The Company will use the provisions of FAS 123(R) and EITF 96-18,Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services to account for the compensation expense
associated with this grant. The Company will measure the compensation associated
with these grants based on the fair value of the equity instruments. For the
years ended December 31, 2008 and 2007 the Company recorded compensation expense
of $346 and $1,193, respectively.





The total
compensation expense related to the non-vested options on 2007 awards to
employees at December 31, 2008 is $92,999. For the years ended December 31, 2008
and 2007 the Company recorded compensation expense of $125,409 and $149,752,
respectively.





The fair
value of the options granted to consultants on November 12, 2007 were calculated
using the Black-Scholes option valuation model with the following
assumptions:




F-27


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)




November12,
                              2007OptionGrant
                              (Vest 2008)Expected
      volatility
                            
                            
                            165.64
                            %Expected
      dividends
                            
                            
                            NoneExpected
      term (in years)
                            
                            
                            4Risk-free
      interest rate
                            
                            
                            1.71
                            %





2008 Option
Grants





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




On
November 19, 2008 the Company received a resignation from an employee effective
immediately.  As of the date of his resignation 50,000 options were
forfeited.





On March
26, 2008, the Company granted 50,000 options to an employee. The options vest on
an annual basis over three years, with the first one-third vesting on the one
year anniversary of the grant date and


have a
per share exercise price of $0.31. The options expire on March 26, 2013. The
stock options as of the date of the grant have a fair value of $13,175, which
shall be expensed as compensation in the Company’s consolidated statement of
operations ratably over a 36 month service period.





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





On June
10, 2008, in accordance with a May 27, 2008 revised agreement with TLD Asian
Pacific Ltd (“TLD”), the Company granted a designee of TLD 257,143 options with
an exercise price of $0.28 a share. The 257,143 options were calculated dividing
$72,000 by the closing price of the Company’s common stock on the date of grant
or $0.28 per share. The options have a term of five years from the date of grant
and have the following vesting schedule: 214,290 options vested upon grant,
21,427 options vest on July 10, 2008, and 21,426 options vest on August 10,
2008. During the year ended December 31, 2008 the Company recognized $72,000 of
expense relating to this grant.





The total
compensation expense related to the non-vested options on 2008 awards to
employees at December 31, 2008 is $6,620. For the years ended December 31, 2008
and 2007, the Company recorded compensation expense of $2,552 and $0,
respectively.





The fair
value of the options granted to employees on February 29, 2008, March 26, 2008,
and April 9, 2008 were calculated using the Black-Scholes option valuation model
with the following assumptions:




F-28


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)




February 29,
                          2008
                          Option Grants
                        
                        March 26,
                          2008
                          Option Grant
                        
                        April 9,
                          2008
                          Option GrantExpected
      volatility
                        
                        
                        115.51
                        %
                        125.74
                        %
                        130.89
                        %Expected
      dividends
                        
                        
                        None
                        
                        None
                        
                        NoneExpected
      term (in years)
                        
                        
                        4-5
                        
                        5
                        
                        4Risk-free
      interest rate
                        
                        
                        2.50
                        %
                        2.55
                        %
                        2.59
                        %




On April
2, 2008, the Board of Directors of the Company acted to reprice a total of
2,794,625 options that it had previously granted to certain employees, directors
and consultants of the Company. The options, all of which had been previously
issued pursuant to the Amended And Restated 2005 Incentive Plan (the “Plan”),
were repriced to be $0.40 per share, which is greater than the $0.33 closing
trading price of the





Company’s
common stock on the date of approval by the Board of Directors. The Board of
Directors resolved that an exercise of $0.40 per share would provide an
incentive to the recipients of the repriced options to continue to work in the
best interests of the Company. The other terms of the options, including the
vesting schedules, remained unchanged as a result of the repricing. Total
additional compensation expense on non-vested options relating to the April 2,
2008 repricing is approximately $26,000 which will be expensed ratably over the
7 to 29 months service periods that remain. Additional compensation expense on
vested and unvested options relating to the April 2, 2008 repricing is $73,422
and $6,458, respectively, is included in selling, general and administrative
expenses for the year ended December 31, 2008.





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





A summary
of option activity under the 2005 Plan as of December 31, 2008 and 2007 and
changes during the year then ended is presented below:




F-29


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
11: STOCK OPTIONS (continued)




Shares
                                                                  
                                                                  Weighted
                                                                    Average
                                                                    Exercise
                                                                    Price
                                                                  
                                                                  Weighted -
                                                                    Average
                                                                    Remaining
                                                                    Contractual
                                                                    Term
                                                                  
                                                                  Aggregate
                                                                    Intrinsic
                                                                    ValueOptionsOutstanding,
      January 1, 2007
                                                                  
                                                                  3,139,375
                                                                  
                                                                  $
                                                                  .91
                                                                  
                                                                  3.79Granted
                                                                  
                                                                  939,000
                                                                  
                                                                  
                                                                  1.28Cancelled
                                                                  
                                                                  (591,875
                                                                  )
                                                                  
                                                                  .99Outstanding,
      December 31, 2007
                                                                  
                                                                  3,486,500
                                                                  
                                                                  $
                                                                  1.00
                                                                  
                                                                  3.21
                                                                  
                                                                  $
                                                                  -




Granted
                                                                        
                                                                        532,143
                                                                        
                                                                        
                                                                        .35Cancelled
                                                                        
                                                                        (559,551)
                                                                        
                                                                        
                                                                        .39Outstanding,
      December 31, 2008
                                                                        
                                                                        3,459,092
                                                                        
                                                                        $
                                                                        .39
                                                                        
                                                                        
                                                                        2.36
                                                                        
                                                                        $Exercisable,
      December 31, 2008
                                                                        
                                                                        2,999,426
                                                                        
                                                                        $
                                                                        .39
                                                                        
                                                                        
                                                                        2.27
                                                                        
                                                                        $




A summary
of the status of the Company's non-vested shares as of December 31, 2008, and
changes during the year ended December 31, 2008, is presented
below:





Shares
                      
                      
                      Weighted-
                        Average
                        Grant-Date
                        Fair ValueNon-vested SharesNon-vested,
      January 1, 2008
                      
                      
                      1,461,225
                      
                      
                      $
                      .72Granted
                      
                      
                      532,143
                      
                      
                      
                      .35Cancelled
                      
                      
                      (559,551
                      )
                      
                      
                      .96Vested
                      
                      
                      (974,151
                      )
                      
                      
                      .55Non-vested,
      December 31, 2008
                      
                      
                      459,666
                      
                      
                      $
                      .51





NOTE
12: STOCKHOLDERS’ DEFICIENCY





On April
9, 2008, the Company sold a total of 13,403,225 units to 27 investors and raised
aggregate gross proceeds of approximately $2,680,645 in a private offering. Of
the gross proceeds of $2,680,645 raised in the offering,





(i)
            $1,935,000 represents cash
      received by the Company from
investors,




(ii)
            $705,000 represents an amount due
      under six secured promissory notes previously issued by the Company that
      was invested by five holders into this offering,
  and




(iii)
            $40,645 represents amounts owed
      by the Company to three non-employee board members and two advisory board
      members in lieu of payment for fees due to
  them.





In
addition, the Company issued 100,000 units to a financial consultant that
provided services in connection with the offering in lieu of a $20,000 payment
in cash for such services.




F-30


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
12: STOCKHOLDERS’ DEFICIENCY (continued)




The
offering was made pursuant to a U.S. investor subscription agreement and an
offshore subscription agreement, each dated April 9, 2008, Each unit was sold
for $0.20 and consists of one share of common stock of the Company and one share
purchase warrant, exercisable at an exercise price of $0.40 per share at any
time upon election of the holder during the 24 month period following the
offering. The Company agreed to register the shares of common stock and the
shares of common stock underlying the warrants on a registration statement that
must be filed with the Securities and Exchange Commission within the earlier of
21 days after the closing of the offering or 10 days after the Company filed its
Annual Report on Form 10-KSB. The Company filed the registration statement on
Form S-1 on April 24, 2008. The registration statement was declared effective on
August 7, 2008.





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





Upon
execution of the secured notes (Note 9), the holders received shares of common
stock in an amount that was equal to (x) half of the principal amount of the
notedivided by (y) the
closing trading price of the Company’s common stock on the date of the note. The
lowest trading price used to calculate the number so shares to be issued under
the secured notes was $0.22 per share. In consideration of the holders investing
the principal due into private placement in lieu of payment and waiving any and
all interest due, each holder that received shares upon the execution of the
note based on a trading price higher than $0.22 per share were issued additional
shares of common stock. These additional shares were equal to the number of
shares that would have been received if $0.22 were in the formula, minus the
number of shares actually received upon execution of the secured note. A total
of 316,298 additional shares were issued to these secured note holders. The
Company booked a fee expense equal to the fair value of the additional common
shares issuable at April 9, 2008 or approximately $187,000 in its consolidated
statement of operations for the  year
ended December 31, 2008. Our former Chief Financial Officer and Chairman of the
Board were each note holders that converted amounts of $15,000 and $100,000,
respectively, in the private placement on the same terms and conditions as the
rest of the investors.





On June
16, 2008 the Company appointed Michael Solomon as its new Chief Financial
Officer and executed an employment letter on July 9, 2008. Mr. Solomon will be
paid $175,000 base salary per year which will be increased to $200,000 per year
after the Company completes a financing transaction or series of financing
transactions cumulatively totaling in excess of $1 million. Mr. Solomon also was
granted 150,000 shares of the Company’s common stock to be issued upon his
appointment and will receive an additional 250,000 shares of common stock three
months from the commencement of his employment. The common shares issued were
originally subject to only certain legal restrictions. The total fair value of
the common stock on the date of grant is $92,000.  On October 30, 2008
the Company considered the shares granted to Mr. Solomon to be vested and,
accordingly, issued the 400,000 shares , subject only  to the
conditions stated below.  For the year ended December 31, 2008 the
Company recognized $92,000 of compensation expense which is included in selling,
general and administrative expenses.





On July
30, 2008, the Company and Mr. Solomon, entered into an amendment (the
“Amendment”) to the employment letter agreement dated July 9, 2008.




F-31


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
12: STOCKHOLDERS’ DEFICIENCY (continued)




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





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





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





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





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





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





On July
30, 2008 (“date of grant”), the Company entered into a finder’s agreement with
Alicia Johnson pursuant to which the Company agreed to issue 200,000 shares of
common stock to Ms. Johnson in exchange for locating and placing Michael Solomon
with the Company as its new Chief Financial Officer. Pursuant to the agreement,
if during a six month probation period, starting on June 16, 2008, the Company
terminates the employment of Mr. Solomon for cause or Mr. Solomon voluntarily
terminates employment for any reason, Ms. Johnson agreed to use best efforts to
locate the Company a suitable replacement candidate during the remaining portion
of the six month period. Ms. Johnson agreed that the 200,000 shares to be issued
to her can only be transferred or sold after the expiration of the six-month
probation. In addition, if Ms. Johnson fails to present a suitable replacement
candidate for the Company, if such requirement should arise, the 200,000 shares
issued to her would be returned to the Company and cancelled. The Company will
use the provisions of FAS 123(R) and EITF 96-18,Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services to account for the finders fee expense
associated with the common stock grant. The Company will measure the
compensation associated with this grant based on the fair value of the common
stock issued. There is no measurement date to calculate the fair value of the
common stock at the date of grant because the performance commitment had not yet
occurred (there are no sufficiently large disincentives for non-performance) and
the performance by the Ms. Johnson was not complete. Pursuant to FAS 5,Accounting for
Contingencies, the Company concluded that it is probable that a loss
contingency related to the agreement with Ms. Johnson had occurred. As such, the
Company has accrued on the date of grant a finders fee expense of $44,000 which
equal to the fair value of the 200,000 common shares granted. On October 30,
2008 the Company considered the performance of Ms. Johnson complete and,
accordingly, issued  200,000 shares to her. For the year ended
December 31, 2008 the Company recognized an expense of $44,000 which is included
in Selling, general, and administrative expenses.




F-32


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE
12: STOCKHOLDERS’ DEFICIENCY (continued)




On
October 31, 2008 the Company entered into a one year Consulting Agreement for,
among other things, strategic planning and marketing services. For its services
the Company shall pay to the consultant a total of 1,400,000 shares of
unrestricted Company common stock as follows: 900,000 shares upon execution of
the agreement, 250,000 shares 30 days after execution of the agreement, and
250,000 shares 60 days after the execution of the agreement. Pursuant to this
agreement the Company issued 900,000 shares of its common stock on November 17,
2008.  The Company has recorded an accrual of $24,000 for the
remaining 500,000 shares of common stock have not yet been
issued.   On November 5, 2008 the Company entered into a three
month Consulting Agreement for corporate planning services for a fee of
1,000,000 shares of Company common stock. Pursuant to this agreement the Company
issued these shares on November 17, 2008.





Pursuant
to a private placement offering the Company sold 4,900,000 private placement
units for $245,000 in September 2008.  On November 7, 2008 and
November 19, 2008 the Company sold 3,000,000 and 1,800,000
private placement units for $150,000 and $90,000, respectively.  Each
Unit was sold for $0.05 and consists of one share of the Company Common stock
and one purchase Warrant representing one and one-half shares of Company Common
Stock, exercisable at an exercise price of $0.05 per Warrant. The Warrants
expire 30 months from the date of issuance.




In
addition, the Company, in lieu of cash, paid November 2008 private placement
units to Steve Reimer, former Board member, and to William Priakos and Mark
Itzkowitz, former Advisory Board members.  In lieu of $10,718 of
accrued Board fees, consulting fees, and expenses Mr. Reimer received 214,367
shares of common stock and 214,367 purchase warrants exercisable for 321,551
shares of common stock.  In lieu of accrued Advisory board fees of
$5,000 each Mr. Priakos and Mr. Itzkowitz each received 100,000 shares of common
stock and 100,000 purchase warrants exercisable for 150,000 shares of common
stock.





NOTE
13. INCOME TAXES





The
components of the Company’s deferred tax assets as of December 31, 2008 and 2007
are as follows:





Fixed
      assets and start up costs
                
                $
                3,417,000
                
                
                
                2,270,000Stock
      compensation
                
                
                180,000
                
                
                
                342,000Net
      operating losses
                
                
                1,369,000
                
                
                
                689,000Less:
      valuation allowance
                
                
                (4,966,000
                )
                
                
                (3,301,000
                )Net
      deferred tax asset
                
                $
                —
                
                
                $
                —




In
assessing the realization of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. As a result of uncertainty of achieving sufficient taxable
income in the future, the Company has recorded a full valuation allowance
against its deferred tax asset of $4,966,000 as of December 31, 2008 and
$3,301,000 as of December 31, 2007 (an increase of approximately
$1,665,000  and $873,000 from the year ended December 31, 2007
and 2006, respectively).




F-33


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


NOTE
13. INCOME TAXES (continued)




At
December 31, 2008, the Company has accumulated net operating losses totaling
approximately $3,424,000 that may be used to reduce future tax liabilities. Such
net operating losses expire through 2028 and may be limited as the annual amount
available for use under Internal Revenue Code Section 382.




A
reconciliation of the benefit from income taxes based on the Federal statutory
rate to the Company’s effective rate for the years ended December 31, 2008 and
2007 is as follows:





2008
                        %
                      
                      2007
                        %Federal
      income tax benefit at statutory rate
                      
                      
                      (34.0
                      )
                      (34.0
                      )State
      income tax benefit, net of federal income tax
                      
                      
                      (6.0
                      )
                      (6.0
                      )-
                      
                      --
                      
                      -Change
      in valuation allowance
                      
                      
                      40.0
                      
                      40.0Total
      benefit from taxes
                      
                      
                      -
                      
                      -





NOTE 14: SUBSEQUENT
EVENTS





January
2009 Private Placement





On
January 16, 2009 and January 20, 2009 the Company sold 600,000 and 200,000
private placement units, respectively, for $40,000.   Also during
January 2009 the Company sold 757,500 private placement units to Michael J.
Rosenthal, the Company Chairman, for $37,875. Each unit was sold for $0.05 and
consisted of one share of Company Common stock and one purchase Warrant
representing one and one-half shares of Company Common Stock, exercisable at an
exercise price of $0.05 per share. The Warrants expire 30 months from the date
of issuance.





$2
million Securities Purchase Agreement and $85,000 Convertible
Debenture





On March
23, 2009 the Company signed with Tangiers Investors, LP, a limited partnership
(“Tangiers”) a Securities Purchase Agreement (“SPA”) and a Registration Rights
Agreement. (“Registration Rights Agreement”).   In addition, the
Company sold a one-year 7% Convertible Debenture to Tangiers for
$85,000.





Under
terms of the SPA Tangiers will purchase from the Company up to $2
million  of Common Stock during an 18 month commitment period
(“Commitment Period”) commencing with a registration statement, filed by the
Company being declared effective by the Securities and Exchange Commission.
Under the Registration Rights Agreement the registration statement must remain
effective during the Commitment Period, and must include all shares anticipated
being sold to Tangiers.  Any sales of Common Stock to Tangiers will be
made at the Company’s sole discretion. Any funding under the SPA will be used
for general corporate purposes.




F-34


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE 14: SUBSEQUENT EVENTS
(continued)




The
Company may sell to Tangiers shares of Common Stock every 10 Trading Days
(“Trading Days”),as defined. The purchase price of the Common Stock shall be 90%
of the Market Price which is defined as the lowest daily volume weighted average
price of the Common Stock during the five consecutive Trading Days after the
Company gives Notice (“Notice”) to Tangiers of its intent to sell Common Shares
under the SPA.  The maximum total dollar amount sold to Tangiers will
equal be equal to the average daily trading volume in dollar amount during the
ten Trading Days preceding the notice of sale by the Company to Tangiers but in
no case shall be more than $250,000.  In addition the total number of
shares of Common Stock purchased by Tangiers during the Commitment Period shall
not exceed 9.9% of the then outstanding Common Stock of the
Company.  For at least ten days after any Notice is given to Tangiers
the Company may not sell or issue Common Stock, Preferred Stock, purchase
warrants, or stock options except on terms or exceptions  described in
the SPA.  Further, the Company will not, without prior written consent
of Tangiers and which shall not be unreasonably withheld, enter into any other
equity line of credit financing agreement.





Upon
execution of the SPA the Company will pay a $100,000 Commitment Fee (“Commitment
Fee”) to Tangiers payable in shares of Common Stock which shall be determined by
dividing the Commitment Fee by the lowest volume weighted average price of the
Company’s Common Stock during the ten business days immediately following the
execution of the SPA (March 23, 2009).  The shares to be issued as
payment of the Commitment Fee have no registration rights.





In
addition, Tangiers purchased from the Company a 7% Convertible Debenture
(“Tangiers Debenture”) for $85,000 cash.  The Tangiers Debenture
matures on March 23, 2011 (“Maturity Date”) and accrues interest, which is
payable on the Maturity date in cash or with shares of Common Stock, at the
Company’s sole discretion.  The Tangiers Debenture may not be prepaid
without the written consent of Tangiers.   The Tangiers Debenture
may be converted, in whole or in part, at any time at the sole discretion of
Tangiers, at the Conversion Price (“Conversion Price”), which shall be equal to
75% of the average of the three lowest volume weighted average trading prices of
the Company’s Common Stock during the five Trading Days prior to
conversion.  However, if the average of the three lowest volume
weighted average trading prices is below $0.01 the Company can elect to prepay
at a premium of 125% the portion of the Tangier Debenture which was subject to
the conversion election.  The Conversion Price shall be subject to
adjustment as defined in the SPA and the conversion privileges shall not be
effective if a conversion shall cause Tangiers to own more than 9.9% of the then
outstanding Common Stock of the Company.





In the
case of an Event of Default, as defined, or a Fundamental Corporate Change, as
defined, the Maturity Date shall be accelerated and the principal amount due
shall be increased by 150%.  In the event of late payment of principal
or interest the Conversion Price shall be subject to adjustment, as
defined.





On March
19, 2009, prior to closing the Tangiers SPA, the Company entered into a
consulting agreement with an affiliate of Tangiers in which the consultant will
receive 300,000 shares of common stock, registered on Form S-8 (Note 11), for
the purposes of providing legal services for the preparation of the registration
statement to be filed by the Company pursuant to the terms of the
SPA.





On
February 5, 2009 the Company signed a consulting agreement where the Company
which requires that the Company pay certain fees to the consultant based upon
funding obtain by the Company though any contacts introduced by the
consultant.  Tangiers was introduced to the Company by the
consultant.


The
Company will pay fees on funds actually received by the company equaling 8% of
the first $1million dollars, 6.50% of the next $1million dollars, 4.5% of the
next $2 million dollars, and 4% of any funding received by the Company in excess
of $4 million.  For the Tangiers Debenture the consultant received
$6,800 as a fee which was directly deducted from the $85,000
proceeds.





The
Tangiers transactions closed on April 1, 2009.





F-35


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE 14: SUBSEQUENT EVENTS
(continued)




March
2009 Convertible Debentures Totaling $370,000





On March
19, 2009 and March 25, 2009 the Company sold two 8% Convertible Debentures (“the
Debentures”) to JED Management Corp. (“JED”) for $185,000 each.





Principal
and accrued interest on the Debentures matures on as follows: $76,000 on March
19, 2011, $109,000 on March 25, 2011 for the first of the Debentures, and
$185,000 on March 25, 2011on the second of the Debentures.  The
Company may prepay, at its sole discretion, any portion of the principal for
125% of the amount being prepaid plus any portion of the accrued
interest.   JED, at its sole discretion, may convert the
principal plus accrued interest into shares of Common Stock at a price of (60%)
of the lowest closing bid price, determined on the then current trading market
for the Company’s Common Stock, for 10 trading days prior to
conversion.  In addition, one of the Debenture’s, in lieu of
conversion may be exchanged, including all principal and interest, for non-trade
debt of $275,000.





For a
period of six months from March 19, 2009 and March 25, 2009, respectively, JED
shall be entitled to “piggyback” registration rights on registration statements
being filed by the Company except if the registration statements are being filed
for the purposes of “Pipe” transactions.





In the
case of an Event of Default, as defined, the payment of principal and accrued
interest shall be immediately due and payable if JED so elects.





On March
27, 2009 JED exchanged the second of the debentures for $275,000
of payables of the Company pursuant to Assignment and Assumption Agreements
(“A-A Agreements”) between JED and two of the Company’s
vendors.  Pursuant to the A-A Agreements JED purchased from the
vendors, at a discount, payables owed to the vendors provided that the
Company agrees to convert to common stock the payables, now owned by JED, at 60%
of the lowest closing bid price for 10 days prior to the conversion
date.   All conversions of the payables into common
stock are made at the sole discretion of JED.  From March 27,
2009-April 9, 2009 JED converted $30,000 of payables into 559,211 shares of
common stock.





Consulting
Agreements





On
February 19, 2009 the Company entered into a one-year agreement with a
consultant for investor relations consulting services.   The
terms of this agreement provide for a fee to be paid to the consultant in the
amount of 1,000,000 shares of common stock, and 1,000,000 stock options. The
common stock is to be paid in four equal monthly installments of 250,000
shares commencing March 1, 2009 and the stock options vest in equal
installments over the same period.  The stock options have an exercise
price of $0.35 and expire March 1, 2012.  In addition the Company will
reimburse the consultant for all pre-approved expenses not to exceed
$6,000.




F-36


Skins
Inc. and Subsidiary
 (A
Development Stage Company)
 Notes
to Consolidated Financial Statements
 
 NOTE 14: SUBSEQUENT EVENTS
(continued)




On March
2, 2009 the Company entered into a seven-month services agreement with a public
relations consultant.  Pursuant to terms of the agreement the Company
will pay the consultant a $7,500 monthly fee which is payable of which $2,500 is
payable in cash and $5,000 is payable in shares of common stock for
April-September 2009.  For the month of March 2009 the monthly fee
will be $1,500 in cash and $6,000 payable in shares of common
stock.  The agreement expires on September 30, 2009.  The
agreement also provides for the reimbursement to the consultant for
out-of-pocket expenses.





February
2009 Stock Option Grants





On
February 5, 2009 the Company Board of Directors approved the issuance of
13,418,182 stock options to Board
members, Company officers, employees, and
consultants.    All stock options were issued at an exercise
price of  $0.055 which was the fair market value of the Common Stock
on the date of grant (February 5, 2009) and expire 24 months from the date of
grant.   Of the total 1,000,000 stock options were issued to two
Source Agent consultants which vest within one year depending on the completion
of certain deliverables and the achievement of certain product quality
standards, and 827,273 fully vested stock options were granted to a design
consultant of which 500,000 stock options represented compensation
and  327,273 stock options represented payment lieu of $9,000 accrued
consultant fees.   The Company issued 11,590,909 fully vested
stock options to Board members, Company officers, and employees of which
4,750,000 stock options represented compensation, 3,363,636 stock options
represented payment in lieu of $92,500 of accrued Board member fees through
December 31, 2008, and 3,477,273 stock options represented payment in lieu of
$95,625 of accrued salaries through January 31, 2009.




On
February 5, 2009 the stock option grants made to Board Members and Company
Officers were as follows:





Michael
J. Rosenthal, Company Chairman, was granted 2,727,273 stock options in lieu of
$75,000 accrued Board fees through December 31, 2008 plus 500,000 stock options
as compensation.





Mark
Klein, Board member and Chief Executive Officer, was granted 363,636 stock
options in lieu of $10,000 of accrued Board fees through December 31, 2008,
1,136,363 stock options in lieu of $31,250 of accrued salary through January 31,
2009 plus 2,000,000 stock options as  compensation for issuing a
personal guarantee on the Ashford Loan Agreement (Note 10).





Frank
Zambrelli, Board Member, was granted 272,727 Stock Options in lieu of $7,500 of
accrued Board fees through December 31, 2008 plus 500,000 stock options as
compensation.





Michael
Solomon, Chief Financial Officer, was granted 795,454 stock options in lieu of
$21,875 accrued salary through January 31, 2009  plus 750,000 stock
options as compensation.





Two
employees were granted a total of 1,545,456 stock options in lieu of $42,500
accrued salary through January 31, 2009 plus a total of 1,000,000 stock options
as compensation.





On the
Date of Grant the stock options granted to officers, employees and board
members of the Company had a fair market value of $521,564, of which $324,439
will be recognized as an expense on the date of grant and $197,125 will reduce
accounts payable and accrued expenses.  The 1,000,000 stock options
granted to consultants will be accounted for using the provisions of FAS 123(R)
and EITF 96-18,Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services to account for the
compensation expense associated with these grants.




The fair
value of the stock options was determined by the Black-Scholes option valuation
model with the following assumptions:





February 5,
                          2009Expected
      volatility
                        
                        
                        166.81
                        %Expected
      dividends
                        
                        
                        NoneExpected
      term (in years)
                        
                        
                        2.0Risk-free
      interest rate
                        
                        
                        0.98
                        %




F-37





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





As
reported on Current Report 8-K dated January 6, 2009 Skins Inc. (“the Company”)
appointed MHM Mahoney Cohen CPAs as the Company’s new auditor as approved by the
Audit Committee of the Board of Directors on January 2, 2009. The Company was
notified that the shareholders of Mahoney Cohen & Company, CPA, P.C. (“MC”),
became shareholders of Mayer Hoffman McCann P.C. pursuant to an asset purchase
agreement.  The New York practice of Mayer Hoffman McCann P.C. now
operates under the name MHM Mahoney Cohen CPAs.





During
the Company’s two most recent fiscal years ended December 31, 2007 and 2006 and
through the date of this Current Report on Form 8-K, the Company did not consult
with MHM Mahoney Cohen CPAs regarding any of the matters or reportable events
set forth in Item 304 (a)(2) (i) and (ii) of Regulation S-K.





The audit
reports of MC on the consolidated financial statements of the Company as of, and
for the years ended, December 31, 2007 and 2006 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles.The audit report of MC
on the consolidated financial statements of the Company as of, and for the year
ended, December 31, 2007included an emphasis
paragraph relating to an uncertainty as to the Company’s ability to continue as
a going concern.





In
connection with the audits of the Company’s consolidated financial statements
for each of the fiscal years ended December 31, 2007 and 2006 and through the
date of this Current Report on Form 8-K, there were (i) no disagreements between
the Company and MC on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of MC, would have caused MC
to make reference to the subject matter of the disagreement in their reports on
the Company’s financial statements for such years or for any reporting period
since the Company’s last fiscal year end and (ii) no reportable events within
the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K.




34




The
Company has provided MC a copy of the disclosures in the Form 8-K and has
requested that MC furnish it with a letter addressed to the Securities and
Exchange Commission stating whether or not MC agrees with the Company’s
statements in this Item 4.01.  A copy of the letter dated January 7,
2009, once furnished by MC in response to that request, was filed by an
amendment as Exhibit 16.1 to the Current Report on Form 8-K/A filed on January
12, 2009.





ITEM
9A. CONTROLS AND PROCEDURES




Disclosure
Controls and Procedures





The Company's
management evaluated, with the participation of its Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the
design/operation of its disclosure controls and procedures (as defined in Rules
13a-15(c) and 15d-15(c) under the Securities Exchange Act of 1934, as amended
(“Exchange Act”)) as of December 31, 2008.





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





Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our principal executive officer and our principal financial
officer. Based on that evaluation, management concluded that our financial
disclosure controls and procedures were not effective related to the preparation
of the 10-K filing as of December 31, 2008.





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





Management’s
Annual Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
set of processes designed by, or under the supervision of, a company’s principal
executive and principal financial officers, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:




35




·
              pertain to the maintenance of
      records that in reasonable detail accurately and fairly reflect our
      transactions and dispositions of our
  assets;
  ·
              provide reasonable assurance that
      our transactions are recorded as necessary to permit preparation of our
      financial statements in accordance with generally accepted accounting
      principals, and that receipts and expenditures of the Company are being
      made only in accordance with authorizations of our management and
      directors; and
  ·
              provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of our assets that could have a material effect on the
      financial statement.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  It should be noted that any system
of internal control, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system will
be met.  Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an assessment of the
effectiveness of our internal control over financial reporting based on criteria
established in “Internal Control-Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), as of December
31, 2008.




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 annual or interim financial statements will not be prevented or
detected.  In connection with the assessment described above,
management identified the following control deficiency that represents material
weaknesses at December 31, 2008:




·
              Due to the limited number of
      Company personnel, a lack of segregation of duties
      exists.   An essential part of internal control is for
      certain procedures to be properly segregated and the results of their
      performance be adequately reviewed.  This is normally
      accomplished by assigning duties so that no one person handles a
      transaction from beginning to end and incompatible duties between
      functions are not handled by the same
  person.




As a
result of this material weakness described above, management has concluded that,
as of December 31, 2008, our internal control over financial reporting was not
effective based on the criteria in “Internal Control-Integrated Framework”
issued by COSO.   We intend to initiate measures to remediate and
refine our internal controls to address this identified material weakness as the
Company grows and we obtain a stronger cash position that would justify
additional expenditures.




Changes
in internal control over financial reporting




Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15(f)
or 15d-15(f) under the SEC Act of 1934 we believe that there were no changes in
our internal control over financial reporting that occurred during our last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





36




Auditor
Attestation





This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to rules of the Securities and Exchange
Commission that permit the company to provide only management’s report in this
annual report.





ITEM
9B. OTHER INFORMATION





None.




ITEM
10. EXECUTIVES, DIRECTORS, KEY EMPLOYEES AND CORPORATE GOVERNANCE





The
following individuals constitute our board of directors and executive management
as of the date of this prospectus:





Name
              
              Age
              
              PositionMark
      Klein
              
              34
              
              Chief
      Executive Officer, President and DirectorMichael
      S. Solomon
              
              48
              
              Chief Financial
      OfficerMichael
      J. Rosenthal
              
              65
              
              Chairman of
      the BoardFrank
      Zambrelli
              
              42
              
              Director





Mark
Klein. Mr. Klein
has served as the President and Chief Executive Officer of the Company since
February 2006. He began working on the business concept behind the predecessor
of Skins Footwear Inc. in 2002 and was appointed President and Chief Executive
Officer of Skins Footwear Inc. on May 18, 2004. From 2001 to 2002, Mr. Klein
served as the Sales Director on ICQ Mobile, the mobile instant messaging
division of AOL Time Warner, where he set sales and marketing strategies for
ICQ's Value Added Service (VAS) wireless operations and handled technical and
marketing deployments and workshops with operators. From 1999 to 2000, he acted
as a senior marketing and sales executive for both Comverse Network Systems and
Oraios.com, where he directed, created and implemented sales and marketing
initiatives. Mr. Klein launched his executive career from 1997 through 1999 as
the Sales Director of Convertbond.com, where he managed the business development
and sales strategy for the online financial portal.




37




Michael S.
Solomon.Mr. Solomon has served as our Chief Financial Officer since June
2008. Prior to joining our company, Mr. Solomon served as a Senior Vice
President and Controller of Nexxar Group, Inc., a venture capital backed global
money transmitter company, from September 2006 to April 2008. At Nexxar Group,
Mr. Solomon was responsible for all external and internal financial reporting.
From January 2006 to September 2006, Mr. Solomon served as the Chief Financial
Officer of Startrak Systems LLC, a privately-held company focused on delivering
wireless monitoring solutions to the refrigerated transportation industry, where
he was responsible for creating a finance and accounting infrastructure
necessary for the eventual sale of Startrak to a publicly held company. During
2005, Mr. Solomon served as an accounting consultant to the Worldwide
Consolidations and Accounting Group of SonyBMG Music Entertainment. From 2003 to
2005, he served as the Chief Financial Officer of Shareholder International
Corporation, a start-up company focusing on investor communications in Asia.
From 1994-2003 Mr. Solomon was the Senior Vice President and Chief Financial
Officer of Georgeson Shareholder Communications, Inc. and from 1991 to 2004, Mr.
Solomon was the Vice President of Finance and Controller for Graff Pay-Per-View,
Inc. From 1984-1991, Mr. Solomon worked in the middle-market group of Deloitte
& Touche and from 1982 to 1984 Mr. Solomon was a staff accountant at
Weinick, Sanders & Co., a regional accounting firm specializing in the
apparel industry. Mr. Solomon is a Certified Public Accountant. He earned a
Masters of Business Administration in Finance from Pace University in 1992 and
in 1982 he earned a Bachelors of Science in Accounting from Fairleigh Dickinson
University. Mr. Solomon is a member of the American Institute of Certified
Public Accountants and the New York State Society of Certified Public
Accountants.




Michael J.
Rosenthal. Mr.
Rosenthal was appointed Chairman of the Board of Directors of Skins Footwear
Inc. in October 2005. As of February 2006 Mr. Rosenthal was appointed Chairman
of Bill Blass NY. He also served as CEO through November 2007. Since 1986, Mr.
Rosenthal has served as Chairman and President of M.J. Rosenthal and Associates,
Inc., an investment and consulting company. From 1984 to 1986, Mr. Rosenthal was
a partner and managing director of Wesray Capital Corporation, an equity
investment firm. From 1976 to 1984, Mr. Rosenthal served as a partner and a
Managing Director of the Mergers and Acquisitions Department of Donaldson,
Lufkin & Jenrette, Inc. an investment banking firm. During 2002 and 2003,
Mr. Rosenthal served as Chief Restructuring Officer for Foster Wheeler Ltd. Mr.
Rosenthal also serves as a director of MAXXAM, Inc., The Pacific Lumber Company,
Nobel Learning Communities, Inc. and as a director and Treasurer of the
Horticultural Society of New York. Over the last several years, Mr. Rosenthal
has also served as Chairman, a director and/or Chief Executive Officer of a
number of companies including American Vision Centers, Inc.; Northwestern Steel
& Wire Company; Star Corrugated Box Co., Inc. Vector Distributors, Inc;
Western Auto Supply Company; and Wilson Sporting Goods Company. Mr. Rosenthal
was an honors graduate from the New York University Law School and Columbia
University Graduate School of Business.





Frank
Zambrelli. Mr.
Zambrelli was appointed to the Board of Directors of Skins Inc. in January 2007.
Mr. Zambrelli is a founder of Banfi Zambrelli, a leading fashion footwear design
firm. As a Skins strategic business partner, Banfi Zambrelli has helped lead the
direction of the Skins brand. Before founding Banfi Zambrelli in 2003 along with
Silvano Banfi, Mr. Zambrelli has worked for a renowned group of companies
including, Chanel, Cole-Haan and Coach.





Family
Relationships





There are
no family relationships among any of the officers and directors.





Advisory
Board





The
Company does not currently have an Advisory Board.




38




Director
Independence





As the
Company is quoted on the OTC Bulletin Board and not one of the national
securities exchanges, it is not subject to any director independence
requirements.





The
Board of Directors and Committees





We have
an Audit Committee. Currently, our Audit Committee is comprised solely of
Michael Rosenthal, who is the Chairman of our Board of Directors. Our Audit
Committee recommends the selection and appointment of our independent registered
public accounting firm to the Board of Directors and reviews the proposed scope,
content and results of the audit performed by the accountants and any reports
and recommendations made by them, after which these are presented to the entire
Board for approval. Mr. Rosenthal qualifies as an audit committee financial
expert under SEC Rules. Mr. Rosenthal does not meet the definition of
“independent” as defined in Rule 4200(a)(15) of the Marketplace Rules of the
NASDAQ Stock Market, Inc. The Audit Committee currently does not have a formal
charter, however the committee expects to adopt a charter in the near
future.





We have a
Compensation Committee. The current member of our compensation committee
is Frank Zambrelli. Mr. Zambrelli does not meet the definition of an
“independent director” as defined in Rule 4200(a)(15) of the Marketplace Rules
of the NASDAQ Stock Market, Inc. This committee has two primary
responsibilities: (1) to review and advise the Board of Directors with respect
to senior executive compensation, and (2) to monitor our management resources,
structure, development and selection process as well as the performance of key
executives. The Compensation Committee currently does not have a formal charter,
however the committee expects to adopt a charter in the near
future.





Code
of Business Conduct and Ethics




Our board
of directors has adopted a code of ethics, which applies to all our directors,
officers and employees. Our code of ethics is intended to comply with the
requirements of Item 406 of Regulation S-K. Our code of ethics is posted on our
Internet website at www.skinsfootwear.com
and attached hereto as Exhibit 14.1.   We will provide our code
of ethics in print without charge to any stockholder who makes a written request
to: Chief Financial Officer, Skins Inc., 1 Newark Street, Suite 25A, Hoboken,
NJ  07030. Any waivers of the application and any amendments to our
code of ethics must be made by our board of directors. Any waivers of, and any
amendments to, our code of ethics will be disclosed promptly on our Internet
website, www.skinsfootwear.com.




ITEM
11. EXECUTIVE COMPENSATION





Summary
Compensation Tables





The
following table sets forth information concerning the compensation for the
fiscal year ended December 31, 2008 and 2007 of the principal executive officer,
principal financial officer, in addition to, as applicable, our three most
highly compensated officers whose annual compensation exceeded $100,000, and up
to two additional individuals for whom disclosure would have been required but
for the fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year (the “Named Executive
Officers”).




39
 
  2008
SUMMARY COMPENSATION TABLE
  Name
      and Principal Position
                        Year
                        Salary ($)
                        Bonus ($)
                        Stock
                          Awards
                          ($)
                        Option
                          Awards
                          ($)
                        Non-Equity
                          Incentive
      Plan
                          Compensation
                          ($)
                        Change
      in
                          Pension
                          Value
      and
                          Nonqualified
                          Deferred
                          Compensation
                          Earnings
                          ($)
                        All
      Other
                          Compensation
                          ($)
                        Total
                          ($)Mark
      Klein
                          President
      and Chief Executive Officer2008
                        260,000(2)
                        -
                        -
                        -
                        -
                        -
                        -
                        260,0002007
                        208,000(2)
                        -
                        -
                        -
                        -
                        -
                        5,376(1)
                        213,376Michael
      Solomon (5)
                          Chief
      Financial Officer2008
                        131,250
                        -
                        92,000(6)
                        -
                        -
                        -
                        -
                        232,2502007
                        -
                        -
                        -
                        -
                        -
                        -
                        -
                        -Deborah
      A. Gargiulo (3)
                          Former
      Chief Financial Officer2008
                        108,704
                        -
                        -
                        -
                        -
                        -
                        -
                        108,7042007
                        92,100
                        -
                        -
                        30,567
                        -
                        -
                        1,000(1)
                        123,667Antonio
      Pavan (4)
                          Former
      Chief Operating Officer2008
                        57,654
                        -
                        -
                        -
                        -
                        -
                        -
                        57,6542007
                        178,225
                        -
                        -
                        91,255
                        -
                        -
                        7,551
                        277,031CDEF
   (1)
                Relates
      to automobile and medical personal
benefits.
 (2)
                Includes
      $10,000 for fees earned for services as a director of the
      Company.
 (3)
                Ms.
      Gargiulo became our Chief Financial Officer in July 2007 and resigned in
      May 2008.
 (4)
                Mr.
      Pavan became our Chief Operating Officer in April 2007 and resigned this
      position on March 27, 2008.
 (5)
                Mr.
      Solomon became our Chief Financial Officer on June 16,
    2008.
 (6)
                Value
      of 400,000 shares of Common Stock
granted
  40
 
 2008
GRANTS OF PLAN-BASED AWARDS TABLE
  Name
                                        Grant
                                          Date
                                        Approval
                                          Date
                                        Number
      of
                                          Non-Equity
                                          Incentive Plan
                                          Units
      Granted
                                          (#)
                                        Estimated
      Future Payouts Under
                                          Non-Equity Incentive Plan Awards
                                        Estimated Future Payouts Under
                                          Equity
      Incentive Plan Awards
                                        All Other
                                          Stock Awards:
                                          Number
      of
                                          Shares
      of
                                          Stock
      or
                                          Units
                                          (#)
                                        All
      Other
                                          Option Awards:
                                          Number
      of
                                          Securities
                                          Underlying
                                          Options
                                          (#)
                                        Exercise or
                                          Base
      Price
                                          of
      Option
                                          Awards
                                          ($ / Sh)
                                        Closing
                                          Price on
                                          Grant
                                          Date
                                          ($ / Sh)Threshold
                                          ($)
                                        Target
                                          ($)
                                        Maximum
                                          ($)
                                        Threshold
                                          (#)
                                        Target
                                          (#)
                                        Maximum
                                          (#)-
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -Mark
      Klein
                                          President
      and Chief Executive Officer
                                        
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -Michael
      Solomon (1)
                                          Chief
      Financial Officer
                                        
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -Deborah
      A. Gargiulo (2)
                                          Former
      Chief Financial Officer
                                        
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        --
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -Antonio
      Pavan (3)
                                          Former
      Chief Operating Officer
                                        
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
                                        -
 
 
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  41
  2008
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
  Option
      Awards
                                      Stock
      AwardsNumber
      of
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options
                                        (#)
                                      Number
      of
                                        Securities
                                        Underlying
                                        Unexercised
                                        Options
                                        (#)
                                      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
                                        ($)Name
                                      Exercisable
                                      Unexercisable-
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -Mark
      Klein
                                        President
      and Chief Executive Officer
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -Michael
      Solomon (1)
                                        Chief
      Financial Officer
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -Deborah
      A. Gargiulo (2)
                                        Former
      Chief Financial Officer
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      --
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -Antonio
      Pavan (3)
                                        Former
      Chief Operating Officer
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
                                      -
  
 
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  42
  2008
OPTION EXERCISES AND STOCK VESTED TABLE
  Name
                        Option
      Awards
                        Stock
      AwardsNumber of Shares
                          Acquired on Exercise
                          (#)
                        Value Realized
                          on
      Exercise
                          ($)
                        Number of Shares
                          Acquired on Vesting
                          (#)
                        Value Realized
                          on
      Vesting
                          ($)-
                        -
                        -
                        -Mark
      Klein
                          President
      and Chief Executive Officer
                        -
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        -Michael
      Solomon (1)
                          Chief
      Financial Officer
                        -
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        -Deborah
      A. Gargiulo (2)
                          Former
      Chief Financial Officer
                        -
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        --
                        -
                        -
                        -Antonio
      Pavan (3)
                          Former
      Chief Operating Officer
                        -
                        -
                        -
  
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  43
 
 2008
PENSION BENEFITS TABLE
  Name
                      Plan Name
                      Number of Years
                        Credited
      Service
                        (#)
                      Present Value
                        of Accumulated
                        Benefit
                        ($)
                      Payments During Last
                        Fiscal
      Year
                        ($)-
                      -
                      -
                      -Mark
      Klein
                        President
      and Chief Executive Officer
                      -
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      -Michael
      Solomon (1)
                        Chief
      Financial Officer
                      -
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      -Deborah
      A. Gargiulo (2)
                        Former
      Chief Financial Officer
                      -
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      --
                      -
                      -
                      -Antonio
      Pavan (3)
                        Former
      Chief Operating Officer
                      -
                      -
                      -
                      -
  _________________
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  44
 
 2008
NONQUALIFIED DEFERRED COMPENSATION TABLE
  Name
                      Executive Contributions
                        in
      Last Fiscal Year
                        ($)
                      Registrant
                        Contributions in Last
                        Fiscal
      Year
                        ($)
                      Aggregate Earnings
                        in
      Last Fiscal Year
                        ($)
                      Aggregate
                        Withdrawals /
                        Distributions
                        ($)
                      Aggregate Balance at
                        Last
      Fiscal Year-End
                        ($)-
                      -
                      -
                      -
                      -Mark
      Klein
                        President
      and Chief Executive Officer
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -Michael
      Solomon (1)
                        Chief
      Financial Officer
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -Deborah
      A. Gargiulo (2)
                        Former
      Chief Financial Officer
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -Antonio
      Pavan (3)
                        Former
      Chief Operating Officer
                      -
                      -
                      -
                      -
                      -
  _________________
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  45
 
 2008 DIRECTOR
COMPENSATION TABLE
  Name
                      Fees Earned or
                        Paid in Cash
                        ($)
                      Stock Awards
                        ($)
                      Option Awards
                        ($)
                      Non-Equity
                        Incentive
      Plan
                        Compensation
                        ($)
                      Change
                        in
      Pension
                        Value
      and
                        Nonqualified
                        Deferred
                        Compensation
                        Earnings
                        ($)
                      All
      Other
                        Compensation
                        ($)
                      Total
                        ($)Michael
      J. Rosenthal
                      100,000
                      -
                      -
                      -
                      -
                      -
                      100,000Steve
      Reimer (1)(2)
                      12,500
                      -
                      21,977
                      -
                      -
                      -
                      38,227Frank
      Zambrelli
                      10,000
                      -
                      65,232
                      -
                      -
                      -
                      75,232(1)
      Represents $5,000 of Director Fees and $7,500 in connection with
      consulting services.
                        
                        (2)
      Resigned on July 31, 2008.
  46
  2008
ALL OTHER COMPENSATION TABLE
  Name
                      Year
                      Perquisites
                        and
      Other
                        Personal
                        Benefits
                        ($)
                      Tax
                        Reimbursements
                        ($)
                      Insurance
                        Premiums
                        ($)
                      Company
                        Contributions
                        to Retirement and
                        401(k)
      Plans
                        ($)
                      Severance
                        Payments /
                        Accruals
                        ($)
                      Change
                        in Control
                        Payments /
                        Accruals
                        ($)
                      Total ($)-
                      -
                      -
                      -
                      -
                      -
                      -
                      -Mark
      Klein
                        President
      and Chief Executive Officer
                      2007
                        2008
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      -Michael
      Solomon (1)
                        Chief
      Financial Officer
                      2007
                        2008
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      -Deborah
      A. Gargiulo (2)
                        Former
      Chief Financial Officer
                      2007
                        2008-
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -
                      -2007
                        2008
                      --
                      --
                      --
                      --
                      --
                      --
                      --Antonio
      Pavan (3)
                        Former
      Chief Operating Officer
                      
                      -
                      -
                      -
                      -
                      -
                      -
                      -
  
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  47
 
 2008
PERQUISITES TABLE
  Name
                      Year
                      Personal Use of
                        Company
                        Car/Parking
                      Financial Planning/
                        Legal
      Fees
                      Club Dues
                      Executive Relocation
                      Total Perquisites and
                        Other Personal Benefits-
                      -
                      -
                      -
                      -
                      -Mark
      Klein
                        President
      and Chief Executive Officer
                      2007
                        2008
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -Michael
      Solomon (1)
                        Chief
      Financial Officer
                      2007
                        2008
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -Deborah
      A. Gargiulo (2)
                        Former
      Chief Financial Officer
                      2007
                        2008
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -2007
                        2008
                      -
                      -
                      -
                      -
                      -Antonio
      Pavan (3)
                        Former
      Chief Operating Officer
                      
                      -
                      -
                      -
                      -
                      -
  
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.
  48
 
 2008
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL TABLE
  Before Change in
                        Control
                      After Change in
                        ControlName
                      Benefit
                      Termination
                        w/o Cause
      or for
                        Good
      Reason
                      Termination
                        w/o Cause
      or
                        for Good Reason
                      Voluntary
                        Termination
                      Death
                      Disability
                      Change in
                        Control-
                      -
                      -
                      -
                      -
                      -
                      -Mark
      Klein
                        President
      and Chief Executive Officer
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -Michael
      Solomon (1)
                        Chief
      Financial Officer
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -Deborah
      A. Gargiulo (2)
                        Former
      Chief Financial Officer
                      -
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      --
                      -
                      -
                      -
                      -
                      -
                      -Antonio
      Pavan (3)
                        Former
      Chief Operating Officer
                      -
                      -
                      -
                      -
                      -
                      -
                      -
 (1) Mr.
Solomon became our Chief Financial Officer on June 16, 2008.
 (2)  Ms.
Gargiulo became our Chief Financial Officer in July 2007 and resigned in May
2008.
 (3)  Mr.
Pavan became our Chief Operating Officer in April 2007 and resigned this
position on March 27, 2008.




Employment
Agreements





Mark
Klein





On
September 28, 2007, we executed an Amended and Restated Employment Agreement
(the “Klein Agreement”) with our President and Chief Executive Officer, Mark
Klein, which superseded, amended and restated the prior employment agreement
entered into when Mr. Klein was initially appointed Chief Executive Officer and
President on March 20, 2006. Pursuant to the terms of the Klein Agreement, the
Company will continue to employ Mr. Klein for a period of three years with
successive one-year automatic renewals unless either party provides 180-days
advance notice of intent not to renew the Company will pay Mr. Klein an annual
base salary of $250,000 with a bonus of up to 50% of the base salary at the
discretion of the Board of Directors. Mr. Klein is also eligible to receive paid
vacation and other benefits made available by the Company to its executives,
including a Company-owned or leased automobile.





If
Mr. Klein’s employment is terminated with cause, as defined in the Klein
Agreement, Mr. Klein will receive that portion of any unpaid base salary
that has been earned through the termination date and any accrued but unpaid
vacation pay as well as any expense reimbursements due and owing to him. If
Mr. Klein is terminated without cause, resigns with good reason or is
terminated upon a change of control, he will receive, in addition to his accrued
base salary, bonus compensation, vested deferred compensation, any benefits
under any plans of the Company in which he is a participant to the full extent
of his rights under such plan, and accrued vacation benefits prorated through
the termination date, 12 months of his base salary along with health benefits,
to be paid out proportionally, on the Company's usual paydays, over a 12 month
period.  Mr. Klein has agreed not to compete with the Company during his
employment or in the 12 months that severance payments are made.





49




Michael
S. Solomon





On June
16, 2008, we appointed Michael Solomon as its Chief Financial Officer, and on
July 8, 2008, we entered into an employment letter agreement pursuant to which
we agreed to pay Mr. Solomon a base salary of $175,000 per year. In addition,
Mr. Solomon’s base salary will be increased to $200,000 per year after we
complete a financing transaction in excess of $1 million. We also agreed to
issue Mr. Solomon 150,000 shares of restricted common stock in connection with
his appointment and we agreed to issue an additional 250,000 shares of common
stock three months from the commencement of his employment. The employment offer
agreement indicates that either we or Mr. Solomon may terminate employment at
any time and for any reason, with or without cause.





Dennis
Walker





On
February 9, 2008, we entered into an employment agreement with Dennis Walker in
connection with the employment of Mr. Walker as our Senior Vice President of
Sales. Pursuant to the terms of the agreement, we will employ Mr. Walker for a
period of three years with successive one-year automatic renewals unless either
party provides 180-days’ advance notice of intent not to renew. We will pay Mr.
Walker an annual base salary of $200,000 with a bonus of up to 40% of the base
salary at the discretion of the Board of Directors. If Mr. Walker’s employment
is terminated for cause, Mr. Walker will receive that portion of any unpaid base
salary that has been earned through the termination date and any accrued but
unpaid vacation pay as well as any expense reimbursements due and owing to him.
In addition to the foregoing payments, in the event Mr. Walker is terminated
without cause or he resigns with good reason, he will be entitled to severance
pay in an amount equal to (i) ten months of his base pay if the termination of
his employment occurs during the first year of employment under the agreement,
(ii) eleven months of his base pay if termination of his employment occurs
during the second year of employment under the agreement, or (iii) twelve months
of his base pay if the termination occurs during the third year of employment
under the agreement. The severance pay would be paid in accordance with our
usual paydays during the applicable severance period.





Deborah
Gargiulo





On
October 29, 2007, we executed an Executive Employment Agreement (the “Gargiulo
Agreement”) in connection with the employment of Ms. Gargiulo as our Chief
Financial Officer. Pursuant to the terms of the Gargiulo Agreement, the Company
will employ Ms. Gargiulo for a period of three years with successive one-year
automatic renewals unless either party provides 180-days’ advance notice of
intent not to renew. The Company will pay Ms. Gargiulo an annual base salary of
$200,000 with a bonus of up to 40% of the base salary at the discretion of the
Board of Directors or its Compensation Committee. Ms. Gargiulo is also eligible
to receive paid vacation and other benefits made available by the Company to its
executives, including a monthly automobile allowance. The Company had also
previously granted to Ms. Gargiulo 200,000 options exercisable at fair market
value on the date of grant under the Company’s 2005 Incentive Plan. In May 2008,
Ms. Gargiulo resigned from her positions with the Company and the employment
agreement was terminated.




50





Skins
Amended and Restated 2005 Incentive Plan





In
connection with the Share Exchange Transaction in March 2006, we assumed the
Skins 2005 Incentive Plan as the stock option plan of Skins Inc. Immediately
after the closing of the Share Exchange Transaction, we assumed share purchase
options granted under the 2005 Incentive Plan to purchase an aggregate of
2,109,375 shares at an exercise price of $0.80 per share. At the Company’s 2007
Annual Meeting of Stockholders held on September 28, 2007, the Company’s
stockholders approved an amendment to the Company’s 2005 Incentive Plan to
increase the maximum number of shares of common stock that may be issued under
such plan by 1,625,000 shares to a total of 5,000,000 shares.  The
Amended and Restated 2005 Incentive Plan (the “Plan”) Plan provides for the
granting of stock options, stock appreciation rights, restricted shares, and
other stock-based awards for employees, directors and consultants.  In
October 2008 the Company increased the maximum number of shares of common stock
that may be issued under the Plan to 13,000,000 and registered all such shares
on Form S-8 effective in November 2008.  As of December 31, 2008, we
had 3,509,092 options outstanding with an average exercise price of
$0.40.





Repricing
of Options





On April
2, 2008, the board of directors of the Company acted to reprice a total of
2,794,625 options that it had previously granted to certain employees, directors
and consultants of the Company. The options, all of which had been previously
issued pursuant to the Plan, were repriced to be $0.40 per share, which is
greater than the $0.33 closing trading price of the Company’s common stock on
the date of approval by the board of directors. The board of directors resolved
that an exercise of $0.40 per share would provide an incentive to the recipients
of the repriced options to continue to work in the best interests of the
Company. The other terms of the options, including the vesting schedules,
remained unchanged as a result of the repricing.





The
repriced options had originally been issued with $.80 to $1.37 per share option
exercise prices, which prices reflected the then current market prices of the
Company’s stock on the dates of original grant. As a result of the recent sharp
reduction in the Company’s stock price, the board of directors believed that
such options no longer would properly incentivize the Company’s employees,
officers and consultants who held such options to work in the best interests of
the Company and its stockholders. Moreover, the board of directors believed that
if these options were repriced, that such options would provide better
incentives to such employees, officers and directors.





The
persons receiving the repriced options include executive officers, directors,
and advisory directors of the Company that had received stock options granted
between March 2006 to November 2007, including:




·
              Deborah Gargiulo, our former
      Chief Financial Officer and Corporate Secretary, holds options to purchase
      200,000 shares of the Company’s common stock at an exercise price of $1.29
      per share. All of these options were repriced to $0.40 per share. Ms.
      Gargiulo resigned in May 2008. Upon her resignation, all options have
      forfeited.


·
              Antonio Pavan, former Chief
      Operating Officer, holds options that includes options to purchase 250,000
      shares of the Company’s common stock at an exercise price of $1.25 per
      share. All of these options were repriced to $0.40 per
      share.


·
              Steve Reimer, a former director,
      holds options to purchase 421,875 shares of the Company’s common stock at
      an exercise prices of $0.80 per share. All of these options were repriced
      to $0.40 per share.


·
              Frank Zambrelli, a director,
      holds options to purchase 150,000 shares of the Company’s common stock at
      an exercise price of $1.37 per share that were issued to him as a
      director. All of these options were repriced to $0.40 per share. Mr.
      Zambrelli is the beneficial holder of 25,000 options, exercisable at $1.15
      per share, that were granted for consulting service, and such options are
      not subject to the repricing.  51


·
            Each of Mark Itzkowitz and Bill
      Priakos, advisory board members, holds options to purchase 421,875 shares
      of the Company’s common stock at an exercise price of $0.80 per share. All
      of these options were repriced to $0.40 per
  share.




We have
an established policy to provide compensation to members of our Board of
Directors for their services in that capacity. Directors are compensated in
amounts as indicated above and are eligible for option grants for their
services. In addition, Directors are reimbursed for reasonable out-of-pocket
expenses incurred in connection with attendance at Board meetings. Messrs.
Priakos and Itzkowitz, who sit on our advisory board, receive $2,500 per
quarter. In addition, each director was permitted to participate in the option
repricing that we conducted in April 2008, as follows:




·
              Frank
      Zambrelli, a director, holds options to purchase 150,000 shares of the
      Company’s common stock at an exercise price of $1.37 per share that were
      issued to him as a director. All of these options were repriced to $0.40
      per share. Mr. Zambrelli is the beneficial holder of 25,000 options,
      exercisable at $1.15 per share, that were granted for consulting service,
      and such options are not subject to the
  repricing.
 
 ·
              Each of Mark Itzkowitz and Bill
      Priakos, former advisory board members, holds options to purchase 421,875
      shares of the Company’s common stock at an exercise price of $0.80 per
      share. All of these options were repriced to $0.40 per
      share.


52





Compensation
Committee Interlocks and Insider Participation




During
the last fiscal year, we did not have a standing compensation committee. The
Board of Directors, as a whole, was responsible for the functions customarily
performed by the compensation committee.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
      AND RELATED STOCKHOLDER MATTERS





Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.





The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on 71,373,992 issued and outstanding shares
of common stock as of April 1, 2009, by:




·
              Each person known to be the
      beneficial owner of 5% or more of the outstanding common stock of our
      company;
 
 ·
              Each executive
      officer;
 
 ·
              Each director;
      and
 
 ·
              All of the executive officers and
      directors as a group.





Unless
otherwise indicated, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder’s name, subject to community property laws, where applicable.
Unless otherwise indicated, the address of each stockholder listed in the table
is c/o Skins Inc. 1 Newark Street, Suite 25A, Newark,
NJ  07030.


53





Name and Address of
                                        Beneficial Owner
                                      
                                      Title
                                      
                                      Beneficially
                                        Owned
                                      
                                      
                                      Percent of Class
                                        Beneficially OwnedDirectors
      and Executive OfficersMark
      Klein
                                      
                                      President
      and Chief Executive Officer
                                      
                                      
                                      13,137,995
                                      (1)
                                      
                                      
                                      18.7
                                      %Michael
      J. Rosenthal
                                      
                                      Chairman
      of the Board
                                      
                                      
                                      7,446,312
                                      (2)
                                      
                                      
                                      10.6
                                      %Frank
      Zambrelli
                                      
                                      Director
                                      
                                      
                                      889,394
                                      (3)
                                      
                                      
                                      1.2
                                      %Michael
      Solomon
                                      
                                      Chief
      Financial Officer
                                      
                                      
                                      1,945,454
                                      (4)
                                      
                                      
                                      2.8
                                      %Officers
      and Directors as a Group (total of 6 persons)
                                      
                                      
                                      
                                      
                                      25,881,248
                                      (5)
                                      
                                      
                                      36.8
                                      %5%
      or more StockholdersGeoffrey
      Dubey(5)
                                      
                                      
                                      
                                      
                                      5,591,766
                                      (6)
                                      
                                      
                                      8.0
                                      %Joshua
      Hermelin(5)
                                      
                                      
                                      
                                      
                                      15,014,537
                                      (6)
                                      
                                      
                                      21.4
                                      %




*
Indicates less than 1%.




(1)
              Includes
      3,499,999 stock options immediately
exercisable.
 
 (2)
              Includes 1,323,225 warrants
      exercisable for 1,701,975 shares underlying warrants, and 3.227,273 stock
      options, all of which are currently
  exercisable.
 
 (3)
              Includes 25,000 shares underlying
      warrants, and  839,394 stock options that are currently
      exercisable.
 
 (4)
              Includes 400,000 shares issued
      pursuant to terms included in the July 2008 employment letter agreement,
      and 1,545,454 stock options that are currently
      exercisable.
 
 (5)
              Includes 1,348,225 warrants
      currently exercisable for 1,726,975 shares underlying those warrants and
      11,682,576 shares underlying options which are currently
      exercisable.
 
 (6)
              Mr. Dubey’s shares include
      2,150,000 warrants exercisable for 2,850,000 shares underlying the
      warrants all of which are currently exercisable. Mr. Hermelin’s shares
      include 4,950,000 warrants exercisable for 6,950,000 shares underlying
      warrants all of which are currently exercisable. Messrs. Dubey and
      Hermelin are consultants to the Company and utilize the Company's address
      for Company matters.




DESCRIPTION
OF SECURITIES




General




Our
authorized capital stock consists of 436,363,650 shares of common stock, par
value $ .001.


54




Common
Stock




The
shares of our common stock presently outstanding, and any shares of our common
stock issues upon exercise of stock options and/or warrants, will be fully paid
and non-assessable. Each holder of common stock is entitled to one vote for each
share owned on all matters voted upon by shareholders, and a majority vote is
required for all actions to be taken by shareholders. In the event we liquidate,
dissolve or wind-up our operations, the holders of the common stock are entitled
to share equally and ratably in our assets, if any, remaining after the payment
of all our debts and liabilities and the liquidation preference of any shares of
preferred stock that may then be outstanding. The common stock has no preemptive
rights, no cumulative voting rights, and no redemption, sinking fund, or
conversion provisions. Since the holders of common stock do not have cumulative
voting rights, holders of more than 50% of the outstanding shares can elect all
of our Directors, and the holders of the remaining shares by themselves cannot
elect any Directors. Holders of common stock are entitled to receive dividends,
if and when declared by the Board of Directors, out of funds legally available
for such purpose, subject to the dividend and liquidation rights of any
preferred stock that may then be outstanding.




Voting
Rights





Each
holder of Common Stock is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders.





Dividends





Holders of Common Stock are entitled to
receive ratably those dividends, if any, as may be declared from time to time by
the Company’s board of directors out of legally available funds. The Company and
its predecessors have not declared any dividends in the past. Further, the
Company does not presently contemplate that there will be any future payment of
any dividends on Common Stock.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE





Skins Footwear
Inc.




Skins
Footwear Inc. is our wholly-owned subsidiary. We have interlocking executive and
director positions with Skins Footwear Inc.





Secured
Promissory Notes





Rosenthal
Note





On
February 14, 2008, we issued a secured promissory note (the “Rosenthal Note”) to
our Chairman of the Board of Directors, Michael Rosenthal (“Chairman”), in the
principal amount of $100,000. Of the $100,000, $25,000 was used to pay certain
amounts due and payable to Mr. Rosenthal, including Board member fees. Pursuant
to the Rosenthal Note, it was to bear interest at the rate of 5% per annum
compounded annually and was secured by the grant of a security interest by the
Company in all of its intellectual property rights, patents, copyrights,
trademarks which the Company now has or acquires and all proceeds and products
thereof. The Company agreed to repay the Rosenthal Note upon the Company’s
completion of a financing, and in no event later than six months from the
Rosenthal Note’s date of issuance. Pursuant to the Rosenthal Note, and in
consideration of entering into the Rosenthal Note, our Chairman received 185,185
shares of the Company’s common stock. Based on the closing trading price of our
common stock on the OTC Bulletin Board as of the date of the Rosenthal Note, the
shares had a fair market value of $50,000. In addition, our Chairman received
piggy-back registration rights with respect to the shares.


55





Gargiulo
Note





On
February 28, 2008, we issued a secured promissory note (the “Gargiulo Note”) to
our Chief Financial Officer (“CFO”) at the time, Deborah Gargiulo, in the
principal amount of $15,000. Ms. Gargiulo resigned from her positions with the
Company in May 2008. Pursuant to the Gargiulo Note, it was to bear interest at
the rate of 5% per annum compounded annually and was secured by the grant of a
security interest by the Company in all of its intellectual property rights,
patents, copyrights, trademarks which the Company now has or acquires and all
proceeds and products thereof. The Company agreed to repay the Gargiulo
Note upon the Company’s completion of a financing, and in no event later than
six months from the Gargiulo Note’s date of issuance. Pursuant to the Gargiulo
Note, and in consideration of entering into the Gargiulo Note, our CFO received
32,609 shares of the Company’s common stock. Based on the closing trading price
of our common stock on the OTC Bulletin Board as of the date of the Gargiulo
Note, the shares had a fair market value of $8,478. In addition, our CFO
received piggy-back registration rights with respect to the shares.





Investment
of the Notes into the April 2008 Private Placement





In April
2008, we conducted a private placement, and in an effort to preserve cash for
Company operations, we agreed to convert the $115,000 in principal debt owed
under the Rosenthal Note and Gargiulo Note. The offering consisted of the sale
of units at a sales price of $0.20 per unit, each of which consisted of (i) one
share of common stock of the Company and (ii) one share purchase warrant,
exercisable at an exercise price of $0.40 per share at any time upon election of
the holder during the 24 month period following the offering. The Rosenthal Note
and Gargiulo Note were converted into the offering, and as a result, Mr.
Rosenthal and Ms. Gargiulo received 500,000 and 75,000 units, respectively.
Other secured promissory note holders also converted outstanding amounts due
under the notes into the private offering. Each of the secured note holders,
including Mr. Rosenthal and Ms. Gargiulo, agreed to waive payment of any and all
interest due under the note, which was cancelled upon conversion into the
private offering. Based on the closing trading price of our common stock on the
date of the closing of the private placement, the shares contained in the units
issued to Mr. Rosenthal and Ms. Gargiulo had a fair market value of $295,000 and
$44,250, respectively. Based on the discount of the exercise price of the
warrants contained in the units compared the closing trading price of our common
stock as of the date of the closing of the private placement, and assuming the
warrants were exercised in full on the closing date of the private placement,
the warrants issued to Mr. Rosenthal and Ms. Gargiulo had a fair market value of
$95,000 and $14,250, respectively.




From
December 2007 through March 2008, we issued several secured promissory notes in
the aggregate principal amount of $705,000. Upon execution of the secured notes,
the holders, including Mr. Rosenthal and Ms. Gargiulo, received shares of common
stock in an amount that was equal to (x) half of the principal amount of the
note divided by (y) the
closing trading price of the Company’s common stock on the date that the parties
agreed to enter into the note. This was equal to 185,185 and 32,609 shares for
Mr. Rosenthal and Ms. Gargiulo, respectively, as discussed above. The lowest
trading price used to calculate the number of shares to be issued under the
secured notes was $0.22 per share. In consideration of the holders investing the
principal due into private placement in lieu of payment and waiving any and all
interest due, as discussed above, each holder that received shares upon the
execution of the note based on a trading price higher than $0.22 per share,
including Mr. Rosenthal and Ms. Gargiulo, was issued additional shares of common
stock. These additional shares were equal to the number of shares that would
have been received if $0.22 were in the formula, minus the number of shares
actually received upon execution of the secured note. A total of 316,298
additional shares were issued to these secured note holders, and Mr. Rosenthal
and Ms. Gargiulo received 42,088 and 1,482 shares of common stock, respectively.
Based on the closing trading price of our common stock on the OTC Bulletin Board
on the date the additional shares were issued to Mr. Rosenthal and Ms. Gargiulo,
the shares had a fair market value of $24,832 and $874,
respectively.


56





We
believe that our arrangements with Mr. Rosenthal and Ms. Gargiulo are at fair
market value and are on terms comparable to those that would have been reached
in arm's-length negotiations had the parties been unaffiliated at the time of
the negotiations.





April
2008 Private Placement





In April
2008, we conducted a private placement, and in an effort to preserve cash for
Company operations, we agreed to convert a total of $40,645 owed by the Company
to three non-employee board members and two advisory board members in lieu of
payment for fees due to them. Our three non-employee directors, Mr. Rosenthal,
Steve Reimer, and Frank Zambrelli were owed $13,145, $12,500, and $5,000,
respectively, and in lieu of payment of such amounts received 65,725, 62,500,
25,000 units, which consisted of (i) one share of common stock of the Company
and (ii) one share purchase warrant, exercisable at an exercise price of $0.40
per share at any time upon election of the holder during the 24 month period
following the offering. Mr. Reimer resigned on July 31, 2008. Based on the
closing trading price of our common stock on the date of the closing of the
private placement, the shares contained in the units issued to Messrs.
Rosenthal, Reimer, and Zambrelli had a fair market value of $38,778, $36,875 and
$14,750, respectively. Based on the discount of the exercise price of the
warrants contained in the units compared the closing trading price of our common
stock as of the date of the closing of the private placement, and assuming the
warrants were exercised in full on the closing date of the private placement,
the warrants issued to Messrs. Rosenthal, Reimer, and Zambrelli had a fair
market value of $12,488, $11,875 and $4,750, respectively.





Our two
advisory board members, Mark Itzkowitz and Bill Priakos, were each owed $5,000,
and in lieu of payment of such amount received 25,000 units. Based on the
closing trading price of our common stock on the date of the closing of the
private placement, the shares contained in the units issued to each of Messrs.
Itzkowitz and Priakos had a fair market value of $14,750. Based on the discount
of the exercise price of the warrants contained in the units compared the
closing trading price of our common stock as of the date of the closing of the
private placement, and assuming the warrants were exercised in full on the
closing date of the private placement, the warrants issued to each of Messrs.
Itzkowitz and Priakos had a fair market value of $4,750.





We
believe that our arrangements with Messrs. Rosenthal, Reimer, Zambrelli,
Itzkowitz, and Priakos are at fair market value and are on terms comparable to
those that would have been reached in arm's-length negotiations had the parties
been unaffiliated at the time of the negotiations.





November
2008 Private Placement





Pursuant
to a private placement conducted in November 2008 the Company paid, in lieu of
cash, private placement units to Steve Reimer, former Board member, and to
William Priakos and Mark Itzkowitz, former Advisory Board
members.  Each private placement unit consisted of one share of common
stock and one purchase warrant exercisable at $0.05 or one and one-half shares
of common stock exercisable for 30 months from the date of
issuance.    In lieu of $10,718 of accrued Board fees,
consulting fees, and expenses Mr. Reimer received 214,367 shares of common stock
and 214,367 purchase warrants exercisable for 321,551 shares of common
stock.  In lieu of accrued Advisory board fees of $5,000 Mr. Priakos
and Mr. Itzkowitz each received 100,000 shares of common stock and 100,000
purchase warrants exercisable for 150,000 shares of common stock.





In
addition Mr. Priakos participated in the November 2008 private placement
offering.  For a cash investment of $10,000 Mr. Priakos received
200,000 shares of common stock and 200,000 purchase warrants exercisable for
300,000 shares of common stock.


57





Consulting
Arrangements





We had
consulting relationships with Steve Reimer, a former director, and
Frank Zambrelli, a current director. Pursuant to our arrangement with Mr.
Reimer, through BTM Consulting, Inc., services provided to our company were in
relation to sales and marketing of our product. We paid Mr. Reimer a quarterly
fee of $3,750 for these consulting services.  The agreement with Mr.
Reimer expired on April 1, 2008 and Mr. Reimer resigned from the Board of
Directors effective July 31, 2008.  Mr. Zambrelli, through Design
Quadrant, provided consulting services to our company to assist in the design
and merchandising of our product. We paid Design Quadrant a monthly fee of
$10,000. Our arrangement with Mr. Zambrelli is on a month-to-month basis. In
2007, we received $120,000 in services from Design Quadrant. Of this amount, we
paid $80,000 in 2007 and the remaining $40,000 in 2008. We believe that our
arrangements with Messrs. Reimer and Zambrelli are at fair market value and are
on terms comparable to those that would have been reached in arm's-length
negotiations had the parties been unaffiliated at the time of the
negotiations.




On
November 28, 2007, the Company executed a Buying Agency and Sourcing Agreement
with Atsco Footwear, LLC. Pursuant to the Agreement, Atsco will serve as the
Company’s non-exclusive buying and sourcing agent and will be responsible for
sourcing, commercialization and product line review. The Company will pay Atsco
a commission of 7% of the first $5 million and 5% for the amounts above the
first $5 million at the FOB country of origin price for merchandise sourced by
Atsco and shipped to the Company. The Agreement had an initial term of one year,
from November 15, 2007 through November 15, 2008, and each party has the option
to extend the initial term of the Agreement for an additional year upon
providing written notice to the other party no less than thirty days prior to
the expiration of the initial term. This agreement was terminated in
2008.   Mark Itzkowitz, President of Atsco, was an advisory
member of the Board of Directors of the Company until October 31,
2008.





Consulting
Agreements





On April
3, 2006, we entered into consulting agreements with two shareholders, Geoffrey
Dubey and Joshua Hermelin, pursuant to which we agreed to issue 50,000 and
72,000 shares of our common shares to Geoffrey Dubey and Joshua Hermelin
respectively for an aggregate of 122,000 shares in exchange for consulting
services to be provided by the two shareholders over a two year term. The total
consulting services were valued at $145,180 based upon the closing price of our
common stock of $1.19 per share on the date of the agreement. The consulting
services include advising and counseling us with respect to technical, financial
and marketing issues, recruitment of qualified personnel and specific technical
issues, growth and business plans, and strategic planning. Messrs. Dubey and
Hermelin beneficially own approximately 8.9% and 9.8%, respectively, of our
outstanding securities. We believe that our arrangements with Messrs. Dubey and
Hermelin are at fair market value and are on terms comparable to those that
would have been reached in arm's-length negotiations had the parties been
unaffiliated at the time of the negotiations.





Director
Independence





As the
Company is quoted on the OTC Bulletin Board and not one of the national
securities exchanges, it is not subject to any director independence
requirements.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





During
the fiscal years ended December 31, 2007 and December 31, 2008, we retained
Mahoney Cohen & Company, CPA, P.C. to provide services as follows (see Item
9):





Fees for the Year EndedService
                                          
                                          December
                                            31, 2008
                                          
                                          
                                          December
                                            31, 2007Audit
      fees(1)
                                          
                                          $
                                          98,504
                                          
                                          
                                          $
                                          98,723Audit-related
      fees(2)
                                          
                                          
                                          30,922
                                          
                                          
                                          
                                          9,431Tax
      fees(3)
                                          
                                          
                                          3,967
                                          
                                          
                                          
                                          10,000All
      other fees(4)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Total
                                          
                                          $
                                          133,393
                                          
                                          
                                          $
                                          168,154


58





(1) The
aggregate fees billed for fiscal 2008 and 2007 professional services rendered by
the principal accountant for the audit of the Company’s annual financial
statements and review of financial statements included in the Company’s Forms
10-KSB, 10-QSB or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements were
$98,504.


(2) Fees
billed by the principal accountant relating to filing of the Company's
Registration Statements were $30,922 and $9,431 for fiscal 2008 and fiscal 2007,
respectively.





(3) There
were approximately $3,967 and $10,000 in tax return preparation fees for fiscal
2008 and fiscal 2007 paid to our principal accountants.





(4) No
fees were billed for each of fiscal 2007 and fiscal 2006 for products and
services provided by the principal accountant.





Pre-Approval
Policy





The
Company’s audit committee pre-approves all services provided by MHM Mahoney
Cohen CPAs(The New York Practice of Mayer Hoffman McCann P.C.) (see Item 9).
Prior to the engagement of MHM Mahoney Cohen CPAs for any non-audit or non-audit
related services, the Board of Directors must conclude that such services are
compatible with the independence of MHM Mahoney Cohen CPAs as our
auditors.




Based on
the review and discussions referred to above, the Board approved the inclusion
of the audited consolidated financial statements be included in the Company’s
Annual Report on Form 10-K for its 2008 fiscal year for filing with the
SEC.




PART
IV





ITEM
15.  EXHIBITS AND REPORTS.





3.1
                
                Articles
      of Incorporation (1)3.1
                
                Bylaws
      of the Corporation (1)14.1
                
                Code
      of Ethics (2)21
                
                Subsidiaries
      (2)31.1
                
                Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act. (2)31.2
                
                Certification
      of Principal Financial and Accounting Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act. (2)32.1
                
                Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act.  (2)32.2
                
                Certification
      of Chief Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act.  (2)


__________________________________________________





(1).
Incorporated by reference to same exhibit filed with the Company's Form SB-2
Registration Statement on August 24, 2004.


(2)  Filed
herein.


59


SIGNATURES





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





SKINS
      INC.
                (Registrant)April
      10, 2009
              By:
              /s/ Mark KleinMark
      KleinChief
      Executive Officer, President and Director
                (Principal
      Executive Officer)





April
      10, 2009
              By:
              /s/ Michael SolomonMichael
      SolomonChief
      Financial Officer
                (Principal
      Financial and Accounting
Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





SIGNATURE
                        
                        TITLE
                        
                        DATE/s/ Mark Klein
                        
                        Chief
      Executive Officer, President and Director
                        
                        April
      10, 2009Mark
      Klein
                        
                        (Principal
      Executive Officer)/s/ Michael J. Rosenthal
                        
                        Chairman
      of the Board
                        
                        April
      10, 2009Michael
      J. Rosenthal/s/ Frank Zambrelli
                        
                        Director
                        
                        April
      10, 2009Frank
      Zambrelli


60