UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934




For
the quarterly period ended March 31, 2009





OR





o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
File Number


000-51119





SKINS
INC.


(Exact
name of registrant as specified in its charter)





Nevada
              (State
      or other jurisdiction of
              incorporation
      or organization)
            
            20-4711789
              (I.R.S.
      Employer
              Identification
      No.)1
      Newark Street, Suite 25A
              Hoboken,
      New Jersey
              (Address
      of principal executive offices)
            
            07030
              (Zip
      Code)





(201)
377-5502


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


Yesx Noo




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  o No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” as defined in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer  o
            
            Accelerated
      filer  oNon-accelerated
      filer  o
            
            Smaller
      reporting companyx




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yeso Nox





Indicate the number of
shares outstanding of each of the issuer’s classes of common stock, as of the
latest practicable date.





Class
            
            Outstanding
      at  May 20, 2009Common
      stock, $0.001 par value
            
            78,533,561










SKINS
INC.


(A
DEVELOPMENT STAGE COMPANY)





FORM
10-Q





TABLE
OF CONTENTS




PagePART
      I - FINANCIAL INFORMATION
            
            3ITEM
      1.
            FINANCIAL
      STATEMENTS
            
            3Consolidated
      Balance Sheets as of March 31, 2009 (unaudited) and December 31, 2008
      (audited)
            
            4Consolidated
      Statements of Operations for the Three Months ended March 31, 2009 and
      2008 and the period from Inception (May 18, 2004) to March 31, 2009
      (unaudited)
            
            5Consolidated
      Statements of Stockholders' Equity (Deficiency) the period from
      Inception (May 18, 2004) to March 31, 2009 (unaudited)
            
            6Consolidated
      Statements of Cash Flows for the Three Months ended March 31, 2009 and
      2008, and the period from Inception (May 18, 2004) to March 31, 2009
      (unaudited)
            
            14Notes
      to Condensed Consolidated Interim Financial Statements
            
            16ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            
            39ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            
            44ITEM
      4.
            CONTROLS
      AND PROCEDURES
            
            44PART
      II - OTHER INFORMATION
            
            45ITEM
      1.
            LEGAL
      PROCEEDINGS
            
            45ITEM
      1A.
            RISK
      FACTORS
            
            45ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            47ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES
            
            48ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            48ITEM
      5.
            OTHER
      INFORMATION
            
            48ITEM
      6.
            EXHIBITS
            
            48SIGNATURES
            
            
            49




2





PART
I - FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS





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





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





The
results for the three ended March 31, 2009 are not necessarily indicative of the
results of operations for the full year. These financial statements and related
footnotes should be read in conjunction with the financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
period ended December 31, 2008 filed with the Securities and Exchange Commission
on April 10, 2009.




3





SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)





CONSOLIDATED
BALANCE SHEETS





March
      31,
              2009
            
            
            December
      31,
              2008(Unaudited)ASSETSCurrent
      assets:Cash
            
            $
            29,908
            
            
            $
            88Accounts
      receivable, less allowance for doubtful accounts of $10,388 at March 31,
      2009
            
            
            21,737
            
            
            
            -Inventory
      (Note 3)
            
            
            207,314
            
            
            
            -Prepaid
      expenses
            
            
            18,650
            
            
            
            56,355Total
      current assets
            
            
            277,609
            
            
            
            56,443Property
      and equipment, net (Note 5)
            
            
            81,420
            
            
            
            173,071Software
      costs, net (Note 6)
            
            
            -
            
            
            
            434Capitalized
      production molds, net (Note 7)
            
            
            30,530
            
            
            
            -Patent
      costs, net (Note 8)
            
            
            192,643
            
            
            
            195,357Other
      intangibles, net (Note 9)
            
            
            4,083
            
            
            
            4,198Deferred
      financing costs (Note 17)
            
            
            40,500
            
            
            
            -Total
      Assets
            
            $
            626,785
            
            
            $
            429,503LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued liabilities (Note 10)
            
            $
            1,664,256
            
            
            $
            1,497,434Convertible
      accounts payable (Note 11)
            
            
            242,314
            
            
            
            -Liability
      for derivative instruments (Notes 12 and 13)
            
            
            812,530
            
            
            
            -Convertible
      debenture-Tangiers (Notes 11 )
            
            
            65,000
            
            
            
            -Liquidated
      damages
            
            
            21,988
            
            
            
            21,988Total
      current liabilities
            
            
            2,806,088
            
            
            
            1,519,422Convertible
      debenture-JED (Note 11 )
            
            
            185,000Total
      Liabilities
            
            
            2,991,088
            
            
            
            1,519,422Commitments and
      contingencies (Note
15)Stockholders'
      Deficiency (Notes 1 and 17)Common  Stock,
      $.001 par value; 436,363,650 shares authorized; 71,123,992 and 68,608,471
      shares issued and outstanding at March 31, 2009 and  December
      31, 2008, respectively
            
            
            71,124
            
            
            
            68,608Additional
      paid in capital
            
            
            15,269,060
            
            
            
            14,484,778Deficit
      accumulated in the development stage
            
            
            (17,704,487
            )
            
            
            (15,643,305
            )Total
      stockholders' deficiency
            
            
            (2,364,303
            )
            
            
            (1,089,919
            )Total
      Liabilities and Stockholders' Deficiency
            
            $
            626,785
            
            
            $
            429,503




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


4




SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)





CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)




Three
      Months Ended
              March
      31,
            
            
            Period from
              Inception (May
              18, 2004) to
              March 31,2009
            
            
            2008
            
            
            2009Revenues
      (Note 3)
            
            $
            32,125
            
            
            $
            -
            
            
            $
            32,125Operating
      expenses:Cost
      of sales
            
            
            22,389
            
            
            
            -
            
            
            
            22,389Design
      and development
            
            
            70,861
            
            
            
            109,253
            
            
            
            3,263,966Selling,
      general and administrative
            
            
            1,081,858
            
            
            
            917,955
            
            
            
            12,512,533Total
      operating expenses
            
            
            1,175,108
            
            
            
            1,027,208
            
            
            
            15,798,888Operating
      loss
            
            
            (1,142,983)
            
            
            
            (1,027,208
            )
            
            
            (15,759,097
            )Unrealized
      (loss) on derivative instruments (Notes 12 and 13)
            
            
            (812,530)
            
            
            
            -
            
            
            
            (2,119,284
            )Liquidated
      damages
            
            
            -
            
            
            
            -
            
            
            
            (21,988
            )Interest
      income
            
            
            -
            
            
            
            -
            
            
            
            77,810Loss
      on extinguishment of debt (Note 16)
            
            
            (103,938)
            
            
            
            -
            
            
            
            (103,938
            )Loss
      on disposal of property and equipment
            
            
            -
            
            
            
            (1,993
            )
            
            
            (24,172
            )Amortization
      of discount on notes payable (Note 14)
            
            
            -
            
            
            
            (86,590
            )
            
            
            (104,003
            )Interest
      expense
            
            
            (1,731
            )
            
            
            (6,325
            )
            
            
            (18,007
            )Net
      loss
            
            $
            (2,061,182
            )
            
            $
            (1,122,116
            )
            
            $
            (18,080,345
            )Basic
      and diluted loss per share
            
            $
            (0.03
            )
            
            $
            (0.03
            )Weighted
      average number of common shares outstanding, basic and
    diluted
            
            
            69,361,544
            
            
            
            39,692,878





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


5


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
            
            
            
            
            
            
            
            145,180




6




Share
      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
            
            
            
            
            
            
            
            59,925




7




Warrants
      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
      14)
            
            
            
            
            
            
            
            
            
            
            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
      14)
            
            
            
            
            
            
            
            
            
            
            68,382
            
            
            
            
            
            
            
            68,382Discount
      on note payable for common stock to be issued- February 11, 2008 (Note
      14)
            
            
            
            
            
            
            
            
            
            
            15,294
            
            
            
            
            
            
            
            15,294Discount
      on note payable for common stock to be issued- February 14, 2008 (Note
      14)
            
            
            
            
            
            
            
            
            
            
            50,000
            
            
            
            
            
            
            
            50,000Discount
      on note payable for common stock to be issued- February 28, 2008 (Note
      14)
            
            
            
            
            
            
            
            
            
            
            8,478
            
            
            
            
            
            
            
            8,478Shares
      issued on March 14, 2008 for the common stock to be issued on the December
      21, 2007 note discount (Note 14)
            
            
            220,588
            
            
            
            221
            
            
            
            (221
            )
            
            
            
            
            
            
            -Shares
      issued on March 14, 2008 for the common stock to be issued on the January
      7, 2008 note (Note 14)
            
            
            220,588
            
            
            
            221
            
            
            
            (221
            )
            
            
            
            
            
            
            -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      11, 2008 note (Note 14)
            
            
            58,824
            
            
            
            59
            
            
            
            (59
            )
            
            
            
            
            
            
            -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      14, 2008 note (Note 14)
            
            
            185,185
            
            
            
            185
            
            
            
            (185
            )
            
            
            
            
            
            
            -Shares
      issued on March 14, 2008 for the common stock to be issued on the February
      28, 2008 note (Note 14)
            
            
            32,609
            
            
            
            32
            
            
            
            (32
            )
            
            
            
            
            
            
            -




8




Discount
      on note payable for common stock to be issued- March 17, 2008 (Note
      14)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            150,000
            
            
            
            
            
            
            
            150,000Proceeds
      received on March 28, 2008 for issuance of common stock in relation to the
      April 9, 2008 private placement (Note 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            100,000
            
            
            
            
            
            
            
            100,000Compensation
      expense on repriced stock options April 2, 2008
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            200,000
            
            
            
            
            
            
            
            200,000




9




Exchange
      of $705,000 of secured promissory notes, net of unamortized discount of
      $186,413 and accrued interest of $6,114 for private placement units on
      April 9, 2008 (Note 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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
      17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            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 17)
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            
            
            
            
            
            10,000Issuance
      of shares on April 18, 2008 in relation to March 17, 2008 promissory note
      (Note 17)
            
            
            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
      17)
            
            
            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 17)
            
            
            3,525,000
            
            
            
            3,525
            
            
            
            (3,525
            )
            
            
            
            
            
            
            -




10




Shares
      issued on May 28, 2008 for Fee Expense in relation to additional shares on
      exchange of promissory notes (Note 17)
            
            
            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
      17)
            
            
            203,225
            
            
            
            203
            
            
            
            (203
            )
            
            
            
            
            
            
            -Shares
      issued on May 28, 2008 to consultant in relation to the April 9, 2008
      private placement (Note 17)
            
            
            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
            
            
            
            
            
            
            
            
            
            
            125,000
            
            
            
            
            
            
            
            125,000Proceeds
      received on September 5, 2008 for the issuance of common stock in relation
      to the September 2008 private placement
            
            
            
            
            
            
            
            
            
            
            50,000
            
            
            
            
            
            
            
            50,000Proceeds
      received on September 10, 2008 for the issuance of common stock in
      relation to the September 2008 private placement
            
            
            
            
            
            
            
            
            
            
            20,000
            
            
            
            
            
            
            
            20,000Proceeds
      received on September 18, 2008 for the issuance of common stock in
      relation to the September 2008 private placement
            
            
            
            
            
            
            
            
            
            
            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 1)
            
            
            (72,689
            )
            
            
            (73
            )
            
            
            73
            
            
            
            
            
            
            
            -Shares
      issued on October 30, 2008 to the Company’s Chief Financial Officer
      pursuant to employment letter
            
            
            400,000
            
            
            
            400
            
            
            
            91,600
            
            
            
            
            
            
            
            92,000




11




Shares
      issued on October 30, 2008 to the Consultant pursuant to July 30, 2008
      letter agreement
            
            
            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
            
            
            
            
            
            
            
            
            
            
            150,000
            
            
            
            
            
            
            
            150,000Shares
      issued on November 18, 2008 to consultants in lieu of payment for
      services
            
            
            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
            
            
            
            
            
            
            
            
            
            
            80,000
            
            
            
            
            
            
            
            80,000Proceeds
      received on November 26, 2008 for the issuance of common stock in relation
      to the September 2008 private placement
            
            
            
            
            
            
            
            
            
            
            10,000
            
            
            
            
            
            
            
            10,000Shares
      issued on December 19, 2008 related to private placement cash proceeds
      received in September and November 2008
            
            
            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
            
            
            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
            )Proceeds
      received on January 16, 2009 for the issuanceof
      common stock in relation to the January 2009 privateplacement
      (Note 17)
            
            
            
            
            
            
            
            
            
            
            70,000
            
            
            
            
            
            
            
            70,000




12




Proceeds
      received on January 29, 2009 for the issuanceOf
      common stock in relation to the January 2009 private placement (Note
      17)
            
            
            
            
            
            
            
            
            
            
            7,875
            
            
            
            
            
            
            
            7,875Shares
      issued on February 18, 2009 related to private placement cash proceeds
      received in January 2009 (Note 17)
            
            
            1,557,500
            
            
            
            1,558
            
            
            
            (1,558)
            
            
            
            
            
            
            
            -Shares
      issued on March 27, 2009 in relation to the JED conversion
      of  accounts payable (Note 11)
            
            
            350,878
            
            
            
            351
            
            
            
            19,649
            
            
            
            
            
            
            
            20,000Shares
      issued on March 30, 2009 to a consultant pursuant to a March 2, 2009
      agreement (Note 17)
            
            
            57,143
            
            
            
            57
            
            
            
            5,943
            
            
            
            
            
            
            
            6,000Shares
      issued on March 31, 2009 to a consultant -pursuant to a February 19, 2009
      agreement (Note 17 )
            
            
            250,000
            
            
            
            250
            
            
            
            33,500
            
            
            
            
            
            
            
            33,750Shares
      issued on March 31, 2009 to a consultant—an affiliate
      of Tangiers—for legal
      services (Note 17)
            
            
            300,000
            
            
            
            300
            
            
            
            40,200
            
            
            
            
            
            
            
            40,500Share-based
      compensation for the three months endedMarch
      31, 2009 (Note 16)
            
            
            
            
            
            
            
            
            
            
            307,610
            
            
            
            
            
            
            
            307,610Stock
      options granted in lieu of payment for board fees and salary (Note
      16)
            
            
            
            
            
            
            
            
            
            
            301,063
            
            
            
            
            
            
            
            301,0635Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,061,182
            )
            
            
            (2,061,182
            )Balances
      at March 31, 2009 (unaudited)
            
            
            71,123,992
            
            
            $
            71,124
            
            
            $
            15,269,060
            
            
            $
            (17,704,487
            )
            
            $
            (2,364,303
            )




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


13


SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)




Three
      Months Ended
              March
      31,
            
            
            Period from
              Inception
              (May 18, 2004) to
              March
      31,2009
            
            
            2008
            
            
            2009Cash
      flows used in operating activities:Net
      loss
            
            $
            (2,061,182
            )
            
            $
            (1,122,116
            )
            
            $
            (18,080,345
            )Adjustments
      to reconcile net loss from operations to net cash used in operating
      activities:Depreciation
            
            
            91,651
            
            
            
            1,675
            
            
            
            311,642Amortization
            
            
            13,440
            
            
            
            7,512
            
            
            
            69,103Issuance
      of common stock for services
            
            
            39,750
            
            
            
            18,150
            
            
            
            539,152Share
      based compensation expense
            
            
            307,610
            
            
            
            74,454
            
            
            
            2,232,476Loss
      on extinguishment of debt
            
            
            103,938
            
            
            
            -
            
            
            
            103,938Allowance
      for doubtful accounts
            
            
            10,388
            
            
            
            -
            
            
            
            10,388Loss
      on write down of molds
            
            
            -
            
            
            
            -
            
            
            
            243,156Loss
      on disposal of property and equipment
            
            
            -
            
            
            
            1,993
            
            
            
            24,172Amortization
      on discount of note payable
            
            
            -
            
            
            
            86,590
            
            
            
            104,003Unrealized
      loss on derivative instruments
            
            
            812,530
            
            
            
            -
            
            
            
            2,119,284Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (32,125)
            
            
            
            -
            
            
            
            (32,125
            )Inventory
            
            
            (207,314)
            
            
            
            (245,678)
            
            
            
            (207,314
            )Prepaid
      expenses
            
            
            37,705
            
            
            
            107,883
            
            
            
            4,721Accounts
      payable, convertible payable, and accrued liabilities
            
            
            626,261
            
            
            
            386,474
            
            
            
            2,185,355Liquidated
      Damages
            
            
            -
            
            
            
            -
            
            
            
            21,988Net
      cash used in operating activities
            
            
            (257,348
            )
            
            
            (683,063
            )
            
            
            (10,350,406
            )Cash
      flows used in investing activities:Purchases
      of molds
            
            
            (40,707
            )
            
            
            (73,100
            )
            
            
            (283,863
            )Software
      costs
            
            
            -
            
            
            
            -
            
            
            
            (31,551
            )Purchase
      of property and equipment
            
            
            -
            
            
            
            (96,065
            )
            
            
            (415,256
            )Patent
      Costs
            
            
            -
            
            
            
            (9,545
            )
            
            
            (211,061
            )Other
      intangibles
            
            
            -
            
            
            
            -
            
            
            
            (4,589
            )Cash
      used in investing activities
            
            
            (40,707
            )
            
            
            (178,710
            )
            
            
            (946,320
            )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)
            
            
            77,875
            
            
            
            310,000
            
            
            
            8,017,541Proceeds
      from issuance of convertible debentures
            
            
            250,000
            
            
            
            -
            
            
            
            250,000Proceeds
      from notes payable
            
            
            -
            
            
            
            555,000
            
            
            
            855,000Repurchase
      of options  (Note 16)
            
            
            -
            
            
            
            -
            
            
            
            (30,445
            )Net
      cash provided by financing activities
            
            
            327,875
            
            
            
            865,000
            
            
            
            11,326,634Net
      increase in cash and cash equivalents
            
            
            29,820
            
            
            
            3,227
            
            
            
            29,908Cash
      and cash equivalents at beginning of period
            
            
            88
            
            
            
            6,186
            
            
            
            -Cash
      and cash equivalents at end of period
            
            $
            29,908
            
            
            $
            9,413
            
            
            $
            29,908




14


Supplemental
      Disclosure of Cash Flow InformationCash
      paid during this year for:Interest
            
            $
            -
            
            
            $
            -
            
            
            $
            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
            
            
            –
            
            
            
            -
            
            
            
            524,701Discounts
      on notes payable for common stock to be issued December 31, 2007, January
      7, February 11, February 24, February 28, March 17, 2008 (Note
      14)
            
            
            –
            
            
            
            233,063
            
            
            
            290,416617,592
      shares of common stock issued to non-employee and Advisory Board members
      for payment of fees due
            
            
            –
            
            
            
            –
            
            
            
            61,363Issuance
      of Common Stock to a consultant on November 18, 2008 for services to be
      provided over a three month term
            
            
            –
            
            
            –
            
            
            
            60,000Issuance
      of Common Stock on October 30, 2008 for a payable to
      a  consultant
            
            
            –
            
            
            –
            
            
            
            10,000Issuance
      of Common Stock to Consultants on March 3, 2006 for services to be
      provided for aTwo
      year term
            
            
            –
            
            
            –
            
            
            
            127,030Conversion
      of accounts payable into 350,878 shares of common stock
            
            
            20,000
            
            
            –
            
            
            
            20,000Issuance
      of  11,918,182 stock options on February 5, 2009  to
      board members, company officers, employees, and a consultant in payment of
      accrued board fees, salaries, and consulting fees
            
            
            197,125
            
            
            –
            
            
            
            197,125Issuance
      of Common Stock to a consultant on March 31, 2009 for legal services (Note
      17)
            
            
            40,500
            
            
            –
            
            
            
            40,500Assignment
      and Assumption of accounts payable on March 27, 2009
            
            $
            262,314
            
            
            $
            –
            
            
            $
            262,314




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


15




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.




Development
Stage




The
Company is in the development stage. Since its formation the Company has not
realized any significant 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 March 31, 2009
will not agree with the total loss from May 18, 2004 (inception date) to March
31, 2009 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 March 31, 2009, the Company has no
significant established source of revenues, a working capital deficit of
approximately $2,528,479, and has accumulated losses of $18,080,345 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.




16




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
1: DESCRIPTION OF BUSINESS (continued)




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.





NOTE 2: CONDENSED PRESENTATION





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





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





The
results for the nine months ended March 31, 2009 are not necessarily indicative
of the results of operations for the full year. These financial statements
should be read in conjunction with the summary of accounting policies and the
notes to condensed consolidated interim financial statements for the year ended
December 31, 2008 included in our annual report on Form 10-K.




NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Allowance for Uncollectible
Accounts




The
allowance for uncollectible accounts receivable is an estimate of losses that
might be realized as a result of customers’ inability to
pay.   Management estimates this allowance based a review of
customer status.  Adjustments to these estimates may be required if
the financial condition of the customers change.




Inventories




Inventory
is valued at the lower of cost or market using the first-in, first-out (“FIFO”)
method or methods that approximate the FIFO method.   Inventory
costs include costs of finished goods from third party manufacturers, inbound
freight, duties, and sourcing agent fees.  Costs of warehousing and
distribution are expensed as incurred and are included in selling, general and
administrative expenses.


17




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





Revenue
Recognition





Revenue
is recognized when products have been shipped, persuasive evidence of an
arrangement exists, the customer takes legal title, the sales price is fixed or
determinable, and collectability of the related receivable is reasonably
assured.  Estimated allowances for returns and discounts are recorded
as a reduction of gross revenue during the same period as the related revenue is
recorded.  These estimates are based on factors that include, but not
limited to, analysis of credit memorandum activity and management’s current
expectations.  The ultimate amount realized from the sale of products
could differ from management estimates.




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
except for disclosures found in Note 13. 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.   FSP FAS 157-2 is effective for the
financial statements included in the Company’s quarterly report for the three
months ended March 31, 2009 and application of FSA FAS 157-2 had no impact on
the Company’s consolidated financial statements.




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 quarterly report for the three
months ended March 31, 2009 and application of FSP FAS 157-3 had no impact on
the Company’s consolidated financial statements.





In April
2009 the FASB issued FASB Staff Position (FSP) FAS 157-4, “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”. This
FSP: (1) affirms that the objective of fair value when the market for an asset
is not active is the price that would be received to sell the asset in an
orderly transaction, (2) clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for
an asset when the market for that asset is not active, and (3) eliminates the
proposed presumption that all transactions are distressed (not orderly) unless
proven otherwise. The FSP instead (1) requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence, (2)
includes an example that provides additional explanation on estimating fair
value when the market activity for an asset has declined significantly, (3)
requires an entity to disclose a change in valuation technique (and the related
inputs) resulting from the application of the FSP and to quantify its effects,
if practicable, and (4) applies to all fair value measurements when
appropriate.  FSP FAS 157-4 must be applied prospectively and
retrospective application is not permitted. FSP FAS 157-4 is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity early adopting FSP
FAS 157-4 must also early adopt FSP FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, as discussed
below.





In April
2009 the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments”. This FSP: (1) changes existing guidance
for determining whether an impairment is other than temporary to debt
securities, (2) replaces the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired security until
recovery with a requirement that management assert: (a) it does not have the
intent to sell the security; and (b) it is more likely than not it will not have
to sell the security before recovery of its cost basis, (3) incorporates
examples of factors from existing literature that should be considered in
determining whether a debt security is other-than-temporarily impaired, (4)
requires that an entity recognize noncredit losses on held-to-maturity debt
securities in other comprehensive income and amortize that amount over the
remaining life of the security in a prospective manner by offsetting the
recorded value of the asset unless the security is subsequently sold or there
are additional credit losses, (5) requires an entity to present the total
other-than-temporary impairment in the statement of earnings with an offset for
the amount recognized in other comprehensive income, and (6) when adopting FSP
FAS 115-2 and FAS 124-2, an entity is required to record a cumulative-effect
adjustment as of the beginning of the period of adoption to reclassify the
noncredit component of a previously recognized other-temporary impairment from
retained earnings to accumulated other comprehensive income if the entity does
not intend to sell the security and it
is not more likely than not that the entity will be required to sell the
security before recovery.FSP FAS 115-2 and FAS 124-2 are
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. FSP 157-4, FSP 115-2
and FAS 124-2 will not have a material impact on the Company’s consolidated
financial statements upon adoption.




18




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)





In April
2009 the FASB issued FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair
Value of Financial Instruments”.  This FSP amends FASB Statement No.
107, Disclosures about Fair Value of Financial Instruments, to require an entity
to provide disclosures about fair value of financial instruments in interim
financial information. This FSP also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods. Under this FSP, a publicly traded
company shall include disclosures about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. In addition, an entity shall disclose in the body or in the
accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods the fair
value of all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by Statement 107.





FSP 107-1
and APB 28-1 are effective for interim periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. However, an
entity may early adopt these interim fair value disclosure requirements only if
it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS
124-2.   The Company is currently evaluating the impact adoption
of FSP 107-1 and APB 28-1may have on the 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 has adopted the accounting and
reporting standards of SFAS 160 in its March 31, 2009 consolidated financial
statements.  SFAS 160 had no impact on the Company’s 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 14 1(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.





In April
2009 the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, “Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies”. This FSP amends the guidance in SFAS 141 (R). This FSP is
effective for assets or liabilities arising from contingencies in 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.





SFAS
141(R) and FSP FAS 141(R)-1 are effective for the financial statements included
in the Company’s quarterly report for the three months ended March 31, 2009, and
application of SFAS 141(R) and FSP FAS 141(R)-1  had no impact on the
Company’s consolidated financial statements.





In March
2008 FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS
161”).  SFAS 161 requires enhanced disclosures about an entity’s
derivative and hedging activities. Entities will be required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedge items are accounted for under SFAS
133 and its related interpretations; and (c) how derivative instruments and
related hedge items affect an entity’s financial position, financial performance
and cash flows. The Company has adopted the disclosure provisions of SFAS 161 as
described in Note 12.





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.  FSP APB-14-1 is effective
for the Financial Statements included in the Company’s quarterly report for the
three months ended March 31, 2009 and application of FSP APB 14-1 had no impact
on the Company’s consolidated financial statements.





19




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
3: 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.  FSP EITF
03-6-1 is effective for the financial statements included in the Company’s
quarterly report for the three months ended March 31, 2009, and application of
FSP EITF 03-6-1 had no impact on the Company’s consolidated financial
statements.




NOTE
4:  NET LOSS PER COMMON SHARE




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 three months ended March
31, 2009 and 2008 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.




Three
      Months Ended March 31,2009
            
            
            2008Numerator:Net
      loss - basic and diluted
            
            $
            (2,061,182
            )
            
            $
            (1,122,116
            )Denominator:Weighted
      average shares – basic
            
            
            69,361,544
            
            
            
            39,692,878Effect
      of dilutive stock options and warrants
            
            
            -
            
            
            
            -Denominator
      for diluted earnings per share
            
            
            69,361,544
            
            
            
            39,692,878Loss
      per shareBasic
            
            $
            (0.03
            )
            
            $
            (0.03
            )Diluted
            
            $
            (0.03
            )
            
            $
            (0.03
            )





At March
31, 2009 and 2008 the Company stock options outstanding totaled 17,702,274 and
3,366,500, respectively. In addition, at March 31, 2009 and 2008, the Company’s
warrants outstanding represented 35,161,026 and 4,714,714 common shares,
respectively. Inclusion of the Company’s options and warrants in diluted loss
per share for the three months ended March 31, 2009 and 2008 have an
anti-dilutive effect because the Company incurred a loss from
operations.




20




SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
5: PROPERTY AND EQUIPMENT




Property
and equipment consist of the following:




March
      31,
              2009
            
            
            December
      31,
              2008Sewing
      equipment
            
            $
            1,882
            
            
            $
            1,882Computer
      equipment
            
            
            18,624
            
            
            
            18,623Store
      displays
            
            
            360,343
            
            
            
            360,343380,848
            
            
            
            380,848Less
      accumulated depreciation
            
            
            299,428
            
            
            
            207,777$
            81,420
            
            
            $
            173,071




Depreciation
expense related to property and equipment was $91,651 and $1,675 for the three
months ended March 31, 2009 and 2008, respectively.





NOTE
6: SOFTWARE COSTS




Software
costs, net consist of the following:




March 31,
              2009
            
            
            December 31,
              2008Website
      design costs
            
            $
            31,551
            
            
            $
            31,551Less
      accumulated amortization
            
            
            31,551
            
            
            
            31,117$
            -
            
            
            $
            434





Amortization
expense related to software costs was $434 and $5,258 for the three months ended
March 31, 2009 and 2008, respectively.





NOTE
7: CAPITALIZED PRODUCTION MOLDS




During
the three months ended March 31, 2009, and 2008, respectively, the Company
purchased $40,707 and $73,100, 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.  The Company’s capitalized production
molds are $30,530 and $0 at March 31, 2009 and December 31, 2008,
respectively.   For the three months ended March 31, 2009
amortization expense related to the production molds was $10,177.  For
the three months ended March 31, 2008 no amortization of production molds is
included in the consolidated statement of operations as they were not placed in
service.





21




SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
8: 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:





March
      31,
              2009
            
            
            December 31,
              2008Patent
      costs
            
            $
            219,512
            
            
            $
            219,512Less
      accumulated amortization
            
            
            26,869
            
            
            
            24,155$
            192,643
            
            
            $
            195,357





Amortization
expense related to patents was $2,714 and $2,219 for the three months ended
March 31, 2009 and 2008, respectively. The estimated aggregate amortization
expense for the next five years is estimated to be approximately $10,900 for
each year.




NOTE
9: OTHER INTANGIBLES




The
Company’s capitalized internet brand name was $4,589  at March 31,
2009 and December 31, 2008,  and is being amortized using the straight
line method over an estimated useful life of 10 years. Accumulated amortization
at March 31, 2009 and December 31, 2008 is $506 and $391, respectively.
Amortization expense related to other intangibles was $115 and $379 for the
three months ended March 31, 2009 and 2008, respectively




NOTE
10: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES




Accounts payable and accrued liabilities consist of the
following:





March 31,
              2009
            
            
            December 31,
              2008Trade
      payables
            
            $
            833,183
            
            
            $
            828,078Professional
      fees
            
            
            454,939
            
            
            
            320,084Commissions
      payable
            
            
            30,000
            
            
            
            30,000Board
      Fees and Director Fees
            
            
            7,500
            
            
            
            92,500Payroll
      and payroll taxes payable
            
            
            332,283
            
            
            
            212,965Other
      accrued liabilities
            
            
            6,351
            
            
            
            13,807$
            1,664,256
            
            
            $
            1,497,434





22





SKINS
INC. AND SUBSIDIARY


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
11: CONVERTIBLE DEBENTURES AND CONVERTIBLE PAYABLES




$85,000
Convertible Debenture




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




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.  During March 2009 the Company received $58,200 in proceeds
from the sale of the debenture after deduction of $6,800 of fees payable to a
consultant.  On April 1, 2009 the Company received the remaining
$20,000 of the proceeds.





JED
Convertible Debentures





On March
19, 2009 and March 25, 2009 the Company issued 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 upto $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.





For the
three months ended March 31, 2009 the Company recognized $343 of interest
expense on the convertible debentures.





The
Convertible Debentures mature as follows:





2010
            
            $
            65,0002011
            
            
            185,000$
            250,000





23




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
11: CONVERTIBLE DEBENTURES AND CONVERTIBLE PAYABLES (continued)





JED
Convertible Accounts Payable





On March
27, 2009 JED exchanged, in settlement of second of the
debentures,  $262,314 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
(“JED Convertible Payables”), at 60% of the lowest closing bid price for 10 days
prior to the conversion date.   All conversions of the
Convertible Payables into common stock are made at the sole discretion
of JED.  The Convertible Payables do not carry an interest
charge.





The
exchange of was accounted for pursuant to EITF No. 96-19 “Debtors Accounting for
a Modification or Exchange of Debt Instruments” (“EITF 96-19”). Under terms
of  EITF 96-19 if the debt instruments being exchanged are
substantially different, as defined, then the new debt instrument should be
recorded at fair value and that amount is used to determine the debt
extinguishment gain or loss to be recognized.  The Company has
determined that the instruments exchanged were substantially different but the
fair values of the new instrument equaled the debt instrument modified,
therefore no gain or loss extinguishment was recognized (Note
13).





On March
27, 2009-March 31, 2009 JED converted $20,000 of trade payables due under the
A-A Agreements into 350,878 shares of common stock.





NOTE
12: EMBEDDED DERIVATIVES





Statement
of Financial  Accounting  Standards  (SFAS) No.
133,  "Accounting  for
Derivative  Instruments  and Hedging  Activities,"
as amended and EITF Issue No.
00-19,   "Accounting  for  Derivative  Financial  Instruments  Indexed  to,  and
Potentially  Settled in, a Company's Own Stock,"  require
all  derivatives to be recorded  on the
balance  sheet at fair  value.  The conversion
features on the convertible debentures disclosed in Note 11 are variable and
contain embedded derivatives. The embedded derivatives are separately valued and
accounted for on the balance sheet with changes in fair value recognized during
the period of change as a separate component of other
income/expense.  The pricing model used for determining the fair value
of embedded derivatives is the Black- Scholes Pricing
Model.  Valuations derived from this model are subject to ongoing
internal and external verification and review.  The model uses
market-sourced inputs such as interest rates and stock price volatilities.
Selection of these inputs involves management's judgment and may impact net
income.








The fair
value and balance sheet location of derivative instruments are as
follows:


FairLocation
              
              ValueEmbedded
      derivative instruments
              
              Liability
      for derivative instruments
              
              $
              812,530


The
amount of unrealized losses and statement of operations location of derivative
instruments are as follows:


UnrealizedLocation
                
                LossesEmbedded
      derivative instruments
                
                Unrealized
      losses on derivative instruments
                
                $
                812,530


24




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements








NOTE
13: FAIR VALUE MEASUREMENTS





As
discussed in Note 3, “Recently Adopted and Issued Accounting Pronouncements”,
the Company adopted FAS 157 effective January 1, 2008.





SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  SFAS 157 applies
to reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard amends
numerous accounting pronouncements but does not require any new fair value
measurements of reported balances. SFAS 157 emphasizes that fair value, among
other things, is based on exit price versus entry price, should include
assumptions about risk such as nonperformance risk in liability fair values, and
is a market-based measurement, not an entity-specific measurement. When
considering the assumptions that market participants would use in pricing the
asset or liability, SFAS 157 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy). The fair value hierarchy
prioritizes inputs used to measure fair value into three broad
levels.


Level
      1 inputs
              Level
      1 inputs utilize quoted prices (unadjusted) in active markets for
      identical assets or liabilities that the Company has the ability to
      access.Level
      2 inputs
              Level
      2 inputs are inputs other than quoted prices included in Level 1 that are
      observable for the asset or liability, either directly or
      indirectly.  Level 2 inputs may include quoted prices for
      similar assets and liabilities in active markets, as well as inputs that
      are observable for the asset or liability (other than quoted prices), such
      as interest rates, foreign exchange rates, and yield curves that are
      observable at commonly quoted intervals.Level
      3 inputs
              Level
      3 inputs are unobservable inputs for the asset or liability, which is
      typically based on an entity’s own assumptions, as there is little, if
      any, related market activity.




In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.





Embedded
Derivative Liability





The
conversion features on the convertible debentures disclosed in Note 11 are
variable and contain embedded derivatives. The embedded derivatives are
separately valued and accounted for at fair value using the Black Scholes
Pricing Model.  The Black Scholes Pricing valuation model considers
various assumptions, including the current market price for the Company’s common
stock, current conversion price on the debt, risk free interest rate, volatility
on the Company’s common stock and remaining maturity date of the convertible
debt, as well as other relevant economic measures (Level 2 of fair value
hierarchy).





Modification
of Debt Instrument





The
Company modified $262,314 of its trade accounts payable by adding a conversion
feature to a holder who purchased the trade accounts payable from its existing
vendors (through the exchange and settlement of the March 25, 2009 convertible
debenture-Note 11). Under the terms of EITF 96-19, a debt instrument should be
recorded at fair value and a debt extinguishment gain or loss to be recognized
if the debt instrument has been exchanged or modified and those changes are
substantially different, as defined.  The Company has determined that
adding the conversion feature to the $262,214 of trade accounts payable has
rendered the debt substantially different.  Based on a discounted cash
flow approach the Company concluded that the fair value of the debt approximated
its carrying value and therefore no debt extinguishment gain or loss was
recorded (Level 2 of fair value hierarchy).





25




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
13: FAIR VALUE MEASUREMENTS





The
following items are measured at fair value on a recurring basis subject to
disclosure requirements of SFAS 157 at March 31, 2009.





Assets
and Liabilities Measured at Fair Value on a Recurring Basis


March
      31,
              
              
              Fair
      Value Measurements Using2009
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Liabilities:Embedded
      Derivative Liability
              
              $
              812,530
              
              
              $
              -
              
              
              $
              812,530
              
              
              $
              -





The
Company has consistently applied valuation techniques in all periods presented
and believes it has obtained the most accurate information available for the
types of derivative contracts it holds.





NOTE
14: NOTES PAYABLE





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




A total
discount of $290,416 was taken on the Notes for the fair value of the shares of
common stock issuable upon each note's issuance date.  The Company
amortized the discount using the effective interest rate method over the term of
the Notes.




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




Amortization
of discounts was $0 and $86,590 for the three months ended March 31, 2009 and
2008, 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 17).




NOTE
15: 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.





26




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
15: COMMITMENTS AND CONTINGENCIES (continued)





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 March
31, 2009.




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 March 31, 2009 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 three
months ended March 31, 2009 the Company recorded insurance expense of $3,225
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.  At March
31, 2009 the amount due to LJP totaled $18,398 and is included in Accounts
Payable and Accrued Expenses.





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.  27




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
15: 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 are no amounts due under this agreement for the
three months ended March 31, 2009.





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.





On
February 5, 2009 the Company signed a consulting agreement 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 $65,000 proceeds (Note
11).





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.




28





Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
15: COMMITMENTS AND CONTINGENCIES (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 was
$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.




NOTE
16: 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 (Note 1) 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.




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.




29




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
16:STOCK
OPTIONS (continued)


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 three months ended March 31, 2009 and 2008,
the Company recorded no compensation expense  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 March 31, 2009 and 2008, the Company recorded compensation
      expense of $0 and $12,720,
respectively.




·
            The
      remaining 421,875 options were granted to a non-employee for services that
      had already been provided. The Company used the provisions of EITF-00-19
      to account for these options. At the grant date and at December 31, 2005,
      the Company treated the option grant as 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.




2006 Option
Grants




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




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




For the
three months ended March 31, 2007, the Company recorded a total compensation
expense of $67,190 related to the Former Vice President's June 19, 2006 option
grant. Total compensation was made up of the $9,135 service period expense 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 March
31, 2009 is $3,819.  For the three months ended March 31, 2009 and
2008 the Company recorded compensation expense of $7,614 and $2,417,
respectively related to the two grants above.




30




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
16: STOCK OPTIONS (continued)




On May 9,
2006 the Company granted 300,000 options to a consultant at a per share exercise
price of $1.06. The options vest quarterly beginning three months from the date
of the agreement and expire 30 days after the related investor relations
agreement is terminated. The Company used the provisions of FAS 123(R) and EITF
96-18 to account for the compensation expense associated with this grant. The
Company measured the compensation associated with this grant based on the fair
value of the equity instrument. There is no measurement date to calculate the
fair value of this grant at the date of grant because the performance commitment
had not yet occurred and the performance by the consultant was not complete. The
Company calculated the expense at each reporting period based on the fair value
of the options that vested during the reporting period. For the three months
ended March 31, 2009 and 2008, the Company recorded compensation expense of $0
and $35, 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 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 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 three months ended March 31,
2009 and 2008 no options under this grant vested and so no expense had been
recorded.




2007 Option
Grants





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




On April
13, 2007 the Company granted 500,000 options to its then  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 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 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.  The option expired on April 8, 2009
unexercised.




On July
3, 2007, the Company granted 200,000 options to its then 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.




31




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
16: 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 March 31, 2009 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 forAcquiring, or in Conjunction with
Selling, Goods or Servicesto 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
three months ended March 31, 2009 and 2008,  no options under this
granted vested and so no expense had been recorded.




The total
compensation expense related to the non-vested options on 2008 awards to
employees for the three months ended   March 31, 2009 is
$78,857.  For the three months ended March 31, 2009 and 2008 the
Company recorded compensation expense of $14,142 and $56,577,
respectively.





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.  The employee terminated before vesting occurred so no
expense was recorded related to these options.




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.  The employee terminated before vesting occurred so no
expense was recorded related to these options.




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 Company will use the provisions of FAS
123(R) and EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees forAcquiring, or in Conjunction with
Selling, Goods or Servicesto 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. The options
have a term of five years from the date of grant and have the following vesting
schedule: 214,290 options vested upon grant, 21,427 options vest on July 10,
2008, and 21,426 options vest on August 10, 2008. During the three months ended
March 31, 2009 and 2008 under this grant no option had vested and therefore no
expense had been recorded.




32




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
16: STOCK OPTIONS (continued)




The total
compensation expense related to the non-vested options on 2008 awards to
employees for the three months ended March 31, 2009 is $5,855. For the three
months ended March 31, 2009 and 2008, the Company recorded compensation expense
of $765 and $469, respectively.




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




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




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.   Additional compensation expense on unvested options
relating to the April 2, 2008 repricing is $1,542 and is included in selling,
general and administrative expenses for the three months ended March 31,
2009.




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.





2009 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.





The
issuance of stock options to the Company’s board members, officers and employees
in lieu of their accrued board fees and salary resulted in the loss on
extinguishment of debt of $103,938.  The loss was determined by the
Company’s exchange of accounts payable and accrued liabilities with a carrying
value of $197,125 for stock options with a fair value of $301,063.





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 15).




33




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
16: STOCK OPTIONS (continued)





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, board members,
and one consultant, had a fair market value of $521,903, of which $220,839 was
recognized as an expense on the date of grant and $301,063 was exchanged for
$197,125 of accounts payable and accrued expenses.  The 1,000,000
stock options granted to the source agent consultants was 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 upon which the Company recorded compensation
expense of $41,833 for the three months ended March 31, 2009.





Consulting
Agreement:





On
February 19, 2009, commencing on March 1, 2009, the Company entered into a
one-year agreement, with a consultant for investor relations consulting
services. The consulting fee is 1 million shares of common stock (Note 12) and 1
million stock options.   The stock options vest in four equal
monthly installments of 250,000 with the an initial vesting date of March 1,
2009.  The stock options have an exercise price of $0.35 and expire
March 1, 2012.  The stock option granted to a consultant was accounted
for using the provisions of FAS 123R 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 which amounted to $20,875 for the three
months ended March 31, 2009.





The fair
value of the 2009 stock options was determined by the Black-Scholes option
valuation model with the following assumptions:





February 5,
              2009
            
            
            March
      1,
              2009
            
            
            March
      1,
              2009Expected
      volatility
            
            
            166.81
            %
            
            
            168.67
            %
            
            
            192.74
            %Expected
      dividends
            
            None
            
            
            None
            
            
            NoneExpected
      term (in years)
            
            
            2.0
            
            
            
            3.0
            
            
            
            2.0Risk-free
      interest rate
            
            
            0.98
            %
            
            
            1.28
            %
            
            
            . 81
            %




34




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
16: STOCK OPTIONS (continued)




A summary
of option activity under the 2005 Plan as of March 31, 2009 and changes during
the three months then ended is presented below:


Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Weighted -
                Average
                Remaining
                Contractual
                Term
              
              
              Aggregate
                Intrinsic
                ValueOptionsOutstanding,
      January 1, 2009
              
              
              3,459,092
              
              
              $
              0.39
              
              
              
              2.36Granted
              
              
              14,418,182
              
              
              
              0.08Cancelled
              
              
              (175,000
              )
              
              
              0.51Outstanding,
      March 31, 2009
              
              
              17,702,274
              
              
              $
              0.12
              
              
              
              4.35
              
              
              $
              -Exercisable,
      March 31, 2009
              
              
              16,073,165
              
              
              $
              0.12
              
              
              
              4.36
              
              
              $






A summary
of the status of the Company's non-vested shares as of March 31, 2009, and
changes during thethree months ended March 31, 2009, is presented
below:




Shares
            
            
            Weighted-
              Average
              Grant-Date
              Fair ValueNon-vested SharesNon-vested,
      January 1, 2009
            
            
            459,666
            
            
            $
            0.51Granted
            
            
            14,418,182
            
            
            
            0.06Cancelled
            
            
            (175,000
            )
            
            
            0.51Vested
            
            
            (13,073,739
            )
            
            
            0.06Non-vested,
      March 31, 2009
            
            
            1,629,109
            
            
            $
            0.19





NOTE
17: STOCKHOLDERS’ DEFICIENCY





2008





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




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




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




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




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




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




35




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
17: STOCKHOLDERS’ DEFICIENCY (continued)




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 10), the holders received shares of common
stock in an amount that was equal to (x) half of the principal amount of the
note divided
by(y) the closing trading price of the Company’s common stock on the
date of the note. The lowest trading price used to calculate the number so
shares to be issued under the secured notes was $0.22 per share. In
consideration of the holders investing the principal due into private placement
in lieu of  payment and waiving any and all interest due, each holder
that received shares upon the execution of the note based on a trading price
higher than $0.22 per share were issued additional shares of common stock. These
additional shares were equal to the number of shares that would have been
received if $0.22 were in the formula, minus the number of shares actually
received upon execution of the secured note. A total of 316,298 additional
shares were issued to these secured note holders. The Company booked a fee
expense equal to the fair value of the additional common shares issuable at
April 9, 2008 or approximately $187,000 in its consolidated statement of
operations for the 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
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.




2009




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




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 (Note
11).




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 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.  On April 21, 2009 the Company issued
1,111,111 shares of common stock in payment of the Commitment
Fee.




36




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements





NOTE
17: STOCKHOLDERS’ DEFICIENCY (continued)




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.  Accordingly, the Company issued the 300,000 to the consultant on
March 20, 2009 which was valued at $40,500 and is recorded in Deferred Financing
Costs.  The Company will charge the Deferred Financing Costs against
Additional paid-in capital on a pro-rata basis as shares are sold to Tangiers,
based upon the ratio of the proceeds received compared to the estimate of total
proceeds to be received over the life of the SPA.




The
Tangiers transactions closed on April 1, 2009.




On May 6,
2009 pursuant to terms of the SPA the Company filed a Form S-1 Registration
Statement with the Securities and Exchange Commission.  The
Registration Statement has not yet been declared effective.




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, commencing March 1, 2009, 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 (Note 16). 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. As of March 31, 2009
management estimates that the agreement with the consultant is substantially
complete and therefore has recognized an expense of $33,750 for the 250,000
shares issued on March 31, 2009.




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.  On  March 30,
2009 the Company issued 57,143 shares of common stock to the consultant in
payment of the $6,000.  The agreement expires on September 30, 2009.
The agreement also provides for the reimbursement to the consultant for
out-of-pocket expenses.




NOTE
18: SUBSEQUENT EVENTS





On April
24, 2009 the Company executed an Amendment (the “Amendment”) to
the  8% 185,000 Debenture issued to JED on March 19,
2009.   The Amendment provide that JED, at its sole discretion,
may convert the principal plus accrued interest into shares of Common Stock at a
price of (35%) 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.   Before the Amendment the conversion rate was
60%.





The
Amendment also added to the Debentures that if the Company does not request the
issuance of shares underlying the Debentures after receipt of a Notice of
Conversion within 4 business days following the period allowed for any
objection, Mark Klein, the Company’s Chief Executive Officer, shall, in his
personal capacity, be responsible for any differential in the value of the
converted shares underlying the Debentures between the value of the closing
price on the date the shares should have been delivered and the date the shares
are delivered.





On April
22, 2009 the Company issued two 8% Convertible Debentures (“the April 2009
Debentures”) to JED for $70,000 and $104,250, respectively.





Principal
and accrued interest on the Debentures matures on April 22, 2011. 
 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 (35%)
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 April 2009 Debenture’s, in lieu
of conversion may be exchanged, including all principal and interest, for
payables of $104,250.   On April 22, 2009 JED elected to settle a
debenture by exchanging it for $104,250 of payables.





37




Skins
Inc. and Subsidiary


(A
Development Stage Company)


Notes
to Consolidated Financial Statements




NOTE
18: SUBSEQUENT EVENTS (continued)





For a
period of six months from April 22, 2009, 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.





The
closing date of both the Amendments and the April 2009 Debentures was April 27,
2009.





From
April 1, 2009-May 13, 2009 JED converted $110,000 of trade payables due
under the A-A Agreements into 5,914,408 shares of common stock.




38


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION





Unless
otherwise noted, references in this Form 10-Q to “Skins”, “we”, “us”, “our”, and
the “Company” means Skins, Inc., a Nevada corporation.   Our
principal place of business is located at 1 Newark Street, Suite 25A, Hoboken,
New Jersey 07030.  Our telephone number is (201) 377-5502.





Management’s
Discussion and Analysis contains various “forward looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
regarding future events or the future financial performance of the Company that
involve risks and uncertainties. Certain statements included in this Form 10-Q,
including, without limitation, statements related to anticipated cash flow
sources and uses, and words including but not limited to “anticipates”,
“believes”, “plans”, “expects”, “future” and similar statements or expressions,
identify forward looking statements. Any forward-looking statements herein are
subject to certain risks and uncertainties in the Company’s business, including
but not limited to, reliance on key customers and competition in its markets,
market demand, product performance, technological developments, maintenance of
relationships with key suppliers, difficulties of hiring or retaining key
personnel and any changes in current accounting rules, all of which may be
beyond the control of the Company. The Company adopted at management’s
discretion, the most conservative recognition of revenue based on the most
astringent guidelines of the SEC in terms of recognition of revenue. Management
will elect additional changes to revenue recognition to comply with the most
conservative SEC recognition on a forward going accrual basis as the model is
replicated with other similar markets (i.e. SBDC). The Company’s actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth
therein.





The
following discussion of our financial condition and plan of operation should be
read in conjunction with our financial statements and the related notes, and the
other financial information included in this report. This Management's
Discussion and Analysis or Plan of Operation describes the matters we consider
to be important to understanding our history, technology, current position,
financial condition and future plans. Factors and risks that could affect our
results and achievements and cause them to materially differ from those
contained in the forward-looking statements include those identified in the
section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2008, as well as other factors that we are currently
unable to identify or quantify, but that may exist in the future. Our fiscal
year begins on January 1 and ends on December 31.





The following discussion includes
forward looking statements and uncertainties, including plans, objectives,
goals, strategies, financial projections as well as known and unknown
uncertainties. The actual results of our future performance may differ
materially from the results anticipated in these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievement. 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.




OVERVIEW




Our
Company




We are a
development stage company. We have not yet realized any significant 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.




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.




39





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.




In late
March 2009 we took delivery of the Spring/Summer 2009 season inventory from a
third-party manufacturer located in Brazil..  In addition in late
March 2009 we began shipments of the Spring/Summer 2009 to select
retailers.  For the three months ended March 31, 2009, we recognized
revenue of approximately $32,000.





We
are currently soliciting orders on the Brazilian made Fall/Winter 2009
Collection (“F/W 2009”).




Sourcing




On
November 24, 2008, we entered into a Buying Agency Agreement with LJP
International, LLC. Pursuant to the agreement,  LJP International, LLC
will serve as the 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 International, LLC 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.




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.





RECENT
EVENTS





Stock
Option Issuances





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





January
2009 Private Placement





On
January 16, 2009 and January 20, 2009, we sold 600,000 and 200,000 private
placement units, respectively, for $40,000.   During January
2009, we sold 757,500 private placement units to Michael J. Rosenthal, our
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 our 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 we entered into a Securities Purchase Agreement with Tangiers (the
“SPA”). Pursuant to the SPA, we may, at its discretion, periodically sell to
Tangiers shares of its common stock for a total purchase price of up to
$2,000,000. For each share of common stock purchased under the SPA, Tangiers
will pay the us 90% of the lowest volume weighted average price of our common
stock as quoted by Bloomberg, LP on the Over-the-Counter Bulletin Board or other
principal market on which the our common stock is traded for the five days
immediately following the notice date. The price paid by Tangiers for our common
stock shall be determined as of the date of each individual request for an
advance under the SPA. Tangiers’ obligation to purchase shares of our common
stock under the SPA is subject to certain conditions, including our obtaining an
effective registration statement for shares of our common stock sold under the
SPA and is limited to $250,000 per ten consecutive trading days after the
advance notice is provided to Tangiers. The SPA shall terminate and Tangiers
shall have no further obligation to make advances under the SPA at the earlier
of the passing of 18 months after the date that the Securities and Exchange
Commission declares our registration statement effective or we receive advances
from Tangiers equal to the $2,000,000. Upon the execution of the SPA, Tangiers
received a one-time commitment fee equal to $100,000 of the our common stock
divided by the lowest volume weighted average price of our common stock during
the 10 business days immediately following the date of the Securities Purchase
Agreement, as quoted by Bloomberg, LP.





In
relation with the SPA, we issued Tangiers a convertible debenture in the amount
of $85,000 on March 23, 2009 (the “Debenture”). The Debenture has a term of one
year and was fully funded on April 1, 2009. Payment of interest on the Debenture
can be made in cash or, at our option, in shares of our common stock valued at
the then applicable conversion price. Interest on the Debenture will accrue as
of March 23, 2009 and will not be payable until the maturity date of March 23,
2010. The Debenture also has a conversion price equal to 75% of the average of
the three lowest volume weighted average trading prices of our 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, we may elect
to prepay at a premium of 125% the portion of the Debenture which was subject to
the conversion election. The conversion price shall be subject to adjustment as
defined in the Securities Purchase Agreement and a conversion shall not be
affected if a conversion shall cause Tangiers to own more than 9.9% of the then
outstanding common stock of the Company.   The Company received
$65,000 of proceeds of the debenture prior to March 31, 2009.




40





The above
transactions closed on April 1, 2009.




On May 6,
2009 pursuant to terms of the Securities Purchase Agreement
the Company filed a Registration Statement  on Form S-1 with the
Securities and Exchange Commission.  The Registration Statement has
not yet been declared effective.





b.  JED
Management Corp. Convertible Debentures





On March
19, 2009 and March 25, 2009 we sold two, two-year, 8% Convertible Debentures
(“the Debentures”) to JED Management Corp. (“JED”) for $185,000
each.  On April 22, 2009 we issued two 8% Convertible Debentures (“the
April 2009 Debentures”) to JED for $70,000 and $104,250,
respectively.  Principal and accrued interest is payable on the
maturity date of the Debentures. We 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.  On March 27, 2009 and April 22, 2009 JED
exchanged in settlement of a Debenture, in lieu of conversion, trade payables of
$262,314 and $104,250, respectively.  On April 24, 2009 we executed an
Amendment (the “Amendment”) to the remaining  8% 185,000 Debentures
issued to JED on March 19, 2009. The Amendment provided, among other things,
that JED, at its sole discretion, may convert the principal plus accrued
interest into shares of Common Stock at a price of (35%) of the lowest closing
bid price, determined on the then current trading market for our Common Stock,
for 10 trading days prior to conversion.   Before the Amendments
the conversion rate was 60%.





From
March 27, 2009-May 13, 2009 JED converted $130,000 of the trade debt payables
into 6,265,286 shares of common stock.





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 our stock price, our Board of
Directors believed that such options no longer would properly incentivize our
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.




Results
of Operations and Financial Condition




Three
Months Ended March 31, 2009 Compared with Three Months Ended March 31,
2008




For the
three months ended March 31, 2009 and 2008 we recognized revenue of
approximately $32,000 and $0, respectively.  In late March 2009 we
began shipping our Brazilian made Spring/Summer 2009 collection to a select
group of retailers.




Cost of
sales was $22,389 and $0 for the three months ended March 31, 2009 and 2008,
respectively.  The increase was attributed to the sale of inventory to
customers in late March 2009.





Design
and development expenses were $70,861 and $109,253 for the three months ended
March 31, 2009 and 2008, respectively. The decrease of $38,392 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 three months ended March
31, 2009 and 2008 were $1,081,858 and $917,955 respectively.
The  increase in SG&A expenses of $163,903 are primarily
attributable to increases in share based compensation of approximately $233,000,
resulting from the issuance of stock options to board members, Company officers,
employees, and consultants,  an increase in consulting expenses of
approximately 177,000 related to the fund raising efforts, an increase of
approximately $96,000 of depreciation expense, and an increase of approximately
10,000 in estimated bad debt expense,  which was offset by a decrease
in advertising and marketing expenses of approximately $156,000,  a
decrease in salaries, board and advisor member fees and compensation of
approximately $143,000,  a decrease in rent expense of approximately
$23,000,  a decrease in travel and entertainment of approximately
$23,000, and a decrease in professional and other expenses of approximately
$7,000.




Our net
loss for the three months ended March 31, 2009 was $2,061,182 or $0.03 per share
as compared to a net loss of $1,122,116 or $0.03 per share for the three months
ended March 31, 2008.




41




Liquidity
and Capital Resources




As of
March 31, 2009, we had no significant established source of revenues and had
accumulated losses of $18,080,345 since inception. Our ability to continue as a
going concern is dependent upon achieving sustainable 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 March
31, 2009, we had $29,908 in cash. We earned approximately $32,000 in 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 and convertible debentures.




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




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




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




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




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




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




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




In
addition, we 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 our common stock and
one common stock 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 we 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 our common stock and one common stock purchase Warrant representing one
and one-half shares of our 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 we 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 our common stock and one common stock purchase Warrant
representing one and one-half shares of our 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 we 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 Loan Agreement is collateralized by a first priority security
interest in all our assets, as defined. In addition all borrowings under
the terms of the Loan Agreement are personally guaranteed by Mark
Klein, the Company’s Chief Executive Officer. To date we have not made any
borrowings under the Loan Agreement.




In lieu
of cash, we 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 our common stock and 100,000 purchase warrants exercisable for 150,000
shares of our common stock.




42








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





On
February 5, 2009 our 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.





On March
19, 2009 and March 25, 2009 we sold two, two-year, 8% Convertible Debentures
(“the Debentures”) to JED Management Corp. (“JED”) for $185,000
each.  On April 22, 2009 we issued two 8% Convertible Debentures (“the
April 2009 Debentures”) to JED for $70,000 and $104,250,
respectively.  Principal and accrued interest is payable on the
maturity date of the Debentures. We may prepay, at our sole discretion, any
portion of the principal for 125% of the amount being prepaid plus any portion
of the accrued interest.  On March 27, 2009 and April 22, 2009 JED
exchanged in settlement of a Debenture, in lieu of conversion, trade payables of
$262,314 and $104,250, respectively.  On April 24, 2009 we executed an
Amendment (the “Amendment”) to the remaining  8% 185,000 Debentures
issued to JED on March 19, 2009. The Amendment provided, among other things,
that JED, at its sole discretion, may convert the principal plus accrued
interest into shares of our common stock at a price of (35%) of the lowest
closing bid price, determined on the then current trading market for our common
stock, for 10 trading days prior to conversion.   Before the
Amendments the conversion rate was set at 60%.




The
Amendment also added a provision to the Debentures that if the Company
does not request the issuance of shares underlying the Debentures after receipt
of a Notice of Conversion within 4 business days following the period allowed
for any objection, Mark Klein, the Company’s Chief Executive Officer, shall, in
his personal capacity, be responsible for any differential in the value of the
converted shares underlying the Debentures between the value of the closing
price on the date the shares should have been delivered and the date the shares
are delivered.


From
March 27, 2009-May 13, 2009 JED converted $130,000 of the trade debt payables
into 6,265,286 shares of our common stock.




On April
22, 2009 the Company issued two 8% Convertible Debentures (“the April 2009
Debentures”) to JED for $70,000 and $104,250, respectively. Principal
and accrued interest on the Debentures matures on April 22, 2011. We may
prepay, at our 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 our common stock at a price of
(35%) of the lowest closing bid price, determined on the then current trading
market for the our common stock, for 10 trading days prior to
conversion.  In addition, one of the April 2009 Debenture’s, in lieu
of conversion may be exchanged, including all principal and interest, for
payables of $104,250.   On April 22, 2009 JED elected to settle a
debenture by exchanging it for $104,250 of payables.




On March
23, 2009 we 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 us up to $2 million of our
common stock during an 18 month commitment period (“Commitment Period”)
commencing with a registration statement, filed by us 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 of common stock 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.




On May 6,
2009 pursuant to terms of the SPA we filed a Form S-1 Registration
Statement with the Securities and Exchange Commission.  The
Registration Statement has not yet been declared effective.




Net cash
used in operating activities for the three months ended March 31, 2009 was
$257,348 as compared to net cash used of $683,063 in the same period in 2008.
The decrease in net cash used was primarily attributable to a decrease in net
loss from operations during the three months ended March 31, 2009 as compared to
the same period in 2008, which was primarily attributable to a decrease in
operating expenditures compared to the three months ended March 31, 2008.
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 three months ended March 31, 2009 was $40,707,
as compared to $178,710 during the same period in 2008. The decrease in net cash
used was primarily attributable to a decrease in our purchase of molds, store
displays and property and equipment.




Net cash
provided by financing activities for the three months ended March 31, 2009 was
$327,875, as compared to $865,000 for the same period in 2008. The decrease was
primarily attributable to the Company receiving $555,000 from the issuance of
secured promissory notes to various lenders in 2008, and the raising of $310,000
as part of the April 9, 2008 private placement as compared to the sale of
$250,000 of convertible debentures in March 2009 and the $77,875 private
placement of common stock and warrants in January 2009.




43




At March
31, 2009, we had 17,702,274 stock options and 29,395,092 common stock purchase
warrants outstanding. The outstanding stock options have a weighted average
exercise price of $0.12 per share as adjusted for the April 2, 2008 option
repricing. The outstanding warrants have a weighted average exercise price of
$0.35 per share. Accordingly, at March 31, 2009, the outstanding options and
warrants represented a total of 47,027,366 shares issuable for a maximum of
$12,259,663 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.




If we are
unable to obtain additional financing, enter into a merger or acquisition, or
generate sustainable revenue we may not have sufficient cash to continue
operations for beyond July 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 July 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.




Off
Balance Sheet Arrangements




We do not
have any off-balance sheet arrangements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable to smaller reporting companies.




ITEM
4. CONTROLS AND PROCEDURES




Evaluation of Disclosure
Controls and Procedures.





Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last
day of the fiscal period covered by this report, March 31, 2009. The term
disclosure controls and procedures means our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our principal executive
and principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.





Our
principal executive officer and our principal financial officer, are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Management is required to base its assessment of the effectiveness of our
internal control over financial reporting on a suitable, recognized control
framework, such as the framework developed by the Committee of Sponsoring
Organizations (COSO). The COSO framework, published in Internal Control-Integrated
Framework, is known as the COSO Report. Our principal executive officer
and our principal financial officer, have has chosen the COSO framework on which
to base its assessment. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of March 31, 2009.





It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable and not absolute assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of certain events. Because of
these and other inherent limitations of control systems, there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.





44


PART
II-OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS





We are
not currently a party to any material legal proceedings.





ITEM
1A. RISK FACTORS





Other
than as set forth below, there have been no material changes from the risk
factors disclosed in the “Risk Factors” section of our 2008 Form 10-K, as filed
with the Securities and Exchange Commission on April 10, 2009.





If
we are unable to obtain additional financing, or enter into a merger or
acquisition, or generate significant revenue we may not have sufficient cash to
continue operations beyond July 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 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
footnotes contain substantial doubt about our ability to continue as a going
concern.
 
 Note One
of our footnotes to the unaudited financial statements for the quarter ended
March 31, 2009, contains explanatory language that substantial doubt exists
about our ability to continue as a going concern. The report states that we
depend upon achieving production and sale of goods, our ability to obtain the
necessary financing to meet its obligations and pay our liabilities arising from
normal business operations when they come due and upon profitable
operations.  If we are unable to obtain sufficient financing in the
near term or achieve profitability, then we would, in all likelihood, experience
severe liquidity problem, the result of which will adversely affect the value of
our common shares.


We
may not be able to access sufficient funds under the Tangiers Securities
Purchase Agreement when needed.




The
commitment amount of the Securities Purchase Agreement is $2,000,000. Our share
price is currently trading above $0.05 per share.  We will need to
register  44,444,444 shares of our common stock in order to obtain the
full $2,000,000 available to us under the Securities Purchase Agreement. The
total amount of 44,444,444 shares of our common stock will be issued to Tangiers
in order to obtain the funds available to us under the Securities Purchase
Agreement.  Our ability to raise funds under the Securities Purchase
Agreement is also limited by a number of factors, including the fact that the
maximum advance amount is capped at $250,000 as well as the fact that we are not
permitted to submit any request for an advance within 10 trading days of a
prior request. Also the Company may only draw an amount equal to the average
daily trading volume in dollar amount during the 10 trading days preceding the
advance date. As such, although sufficient funds are made available to the
Company under the Securities Purchase Agreement, such funds may not be readily
available when needed by the Company. At a  stock price of $0.05
per share, we will need to register 44,444,444 shares of our common stock in
order to obtain the full $2,000,000 available to us under the Securities
Purchase Agreement. We are only registering 22,222,978 shares of our common
stock under the registration statement.  If our stock price remains at
or below $0.05 we will be required to file another registration statement if we
intend to obtain the full amount of funds available to us under the Securities
Purchase Agreement. At a stock price of $0.05, if we issue to Tangiers all
22,222,978 shares of our common stock registered under this registration
statement we will be able to receive approximately $1,111,149 in gross
proceeds.




We
may be limited in the amount we can raise under the Tangiers Securities Purchase
Agreement because of concerns about selling more shares into the market than the
market can absorb without a significant price adjustment.




The
Company intends to exert its best efforts to avoid a significant downward
pressure on the price of its common stock by refraining from placing more shares
into the market than the market can absorb. This potential adverse impact on the
stock price may limit our willingness to use the Securities Purchase Agreement.
Until there is a greater trading volume, it seems unlikely that we will be able
to access the maximum amount we can draw without an adverse impact on the stock
price




We
will not be able to use the Tangiers Securities Purchase Agreement if the shares
to be issued in connection with an advance would result in Tangiers owning more
than 9.9% of our outstanding common stock.




Under the
terms of the Securities Purchase Agreement, we may not request advances if the
shares to be issued in connection with such advances would result in Tangiers
and its affiliates owning more than 9.9% of our outstanding common stock. We are
permitted under the terms of the Securities Purchase Agreement to make limited
draws on the Securities Purchase Agreement so long as Tangiers beneficial
ownership of our common stock remains lower than 9.9%. A possibility exists that
Tangiers and its affiliates may own more than 9.9% of our outstanding common
stock (whether through open market purchases, retention of shares issued under
the Securities Purchase Agreement, or otherwise) at a time when we would
otherwise plan to obtain an advance under the Securities Purchase
Agreement.  As such, by operation of the provisions of the Securities
Purchase Agreement, the Company may be prohibited from procuring additional
funding when necessary due to these provisions discussed above.





Our
Common Stock Is Subject To Penny Stock Regulation





Our
shares are subject to the provisions of Section 15(g) and Rule 15g-9 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
The Commission generally defines penny stock to be any equity security that has
a market price less than $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be penny stock unless
that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation on
the NASDAQ Stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
registrant's net tangible assets; or exempted from the definition by the
Commission. Since our shares are deemed to be "penny stock", trading in the
shares will be subject to additional sales practice requirements on
broker/dealers who sell penny stock to persons other than established customers
and accredited investors.





45




FINRASales Practice
Requirements May Also Limit A Stockholder's Ability To Buy And Sell Our
Stock.




In
addition to the “penny stock” rules described above, the Financial Industry
Regulatory Authority (FINRA) has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which
may limit your ability to buy and sell our stock and have an adverse effect on
the market for our shares.





Nevada  Law
And Our Articles Of Incorporation Protect Our Directors From Certain Types Of
Lawsuits, Which Could Make It Difficult For Us To Recover Damages From Them In
The Event Of A Lawsuit.




Nevada
law provides that our directors will not be liable to our company or to our
stockholders for monetary damages for all but certain types of conduct as
directors. Our Articles of Incorporation require us to indemnify our directors
and officers against all damages incurred in connection with our business to the
fullest extent provided or allowed by law. The exculpation provisions may have
the effect of preventing stockholders from recovering damages against our
directors caused by their negligence, poor judgment or other circumstances. The
indemnification provisions may require our company to use our assets to defend
our directors and officers against claims, including claims arising out of their
negligence, poor judgment, or other circumstances.




Because We Are Quoted On The OTCBB
Instead Of An Exchange Or National Quotation System, Our Investors May Have A
Tougher Time Selling Their Stock Or Experience Negative Volatility On The Market
Price Of Our Stock.




Our
common stock is traded on the OTCBB. The OTCBB is often highly
illiquid.  There is a greater chance of volatility for securities that
trade on the OTCBB as compared to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including the lack of readily
available price quotations, the absence of consistent administrative supervision
of bid and ask quotations, lower trading volume, and market conditions.
Investors in our common stock may experience high fluctuations in the market
price and volume of the trading market for our securities. These fluctuations,
when they occur, have a negative effect on the market price for our securities.
Accordingly, our stockholders may not be able to realize a fair price from their
shares when they determine to sell them or may have to hold them for a
substantial period of time until the market for our common stock
improves.




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.




It may be
time consuming, difficult and costly for us to develop and implement the
additional internal controls, processes and reporting procedures required by the
Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal
auditing and other finance staff in order to develop and implement appropriate
additional internal controls, processes and reporting procedures. If we are
unable to comply with these requirements of the Sarbanes-Oxley Act, we may not
be able to obtain the independent accountant certifications that the
Sarbanes-Oxley Act requires of publicly traded companies.




If we
fail to comply in a timely manner with the requirements of Section 404 of
the Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.




Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations,
beginning with our annual report on Form 10-K for our fiscal period
ending December 31, 2009, we will be required to prepare assessments
regarding internal controls over financial reporting and furnish a report
by our management on our internal control over financial reporting. We have
begun the process of documenting and testing our internal control procedures in
order to satisfy these requirements, which is likely to result in increased
general and administrative expenses and may shift management time and attention
from revenue-generating activities to compliance activities. While our
management is expending significant resources in an effort to complete this
important project, there can be no assurance that we will be able to achieve our
objective on a timely basis. There also can be no assurance that our auditors
will be able to issue an unqualified opinion on management’s assessment of the
effectiveness of our internal control over financial reporting. Failure to
achieve and maintain an effective internal control environment or complete our
Section 404 certifications could have a material adverse effect on our
stock price.




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.




46




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.




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, Limited




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.




ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




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





On
February 5, 2009, our Board of Directors approved the issuance of 13,418,182
stock options to Board of Director members, our 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.





On March
19, 2009 and March 25, 2009 we sold two 8% Convertible Debentures (“the
Debentures”), which were amended on April 24, 2009, 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.  We 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 (35%) of the lowest
closing bid price, determined on the then current trading market for our common
stock, for 10 trading days prior to conversion. On March 27, 2009 JED
exchanged, in settlement of the second of the debentures, for $262,314
of our payables of pursuant to Assignment and Assumption Agreements (“A-A
Agreements”) between JED and two of our vendors.  Pursuant to the A-A
Agreements JED purchased from the vendors, at a discount, payables owed to
the vendors provided that we agree to convert to common stock the payables, now
owned by JED, at 35% 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.




47





On April
22, 2009 we issued two 8% Convertible Debentures (“the April 2009 Debentures”)
to JED for $70,000 and $104,250, respectively.





Principal
and accrued interest on the Debentures matures on April 22, 2011.   We
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 (35%)
of the lowest closing bid price, determined on the then current trading market
for our common stock, for 10 trading days prior to conversion.  In
addition, one of the April 2009 Debenture’s, in lieu of conversion may be
exchanged, including all principal and interest, for debt of
$104,250.  On April 22, 2009 JED elected to exchange a Debenture for
$104,250 of debt.




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




The offer
and sale of such shares of our securities above were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based on the following: (a) the investors confirmed to us
that they were “accredited investors,” as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no
public offering or general solicitation with respect to the offering;
(c) the investors were provided with certain disclosure materials and all
other information requested with respect to our company; (d) the investors
acknowledged that all securities being purchased were “restricted securities”
for purposes of the Securities Act, and agreed to transfer such securities only
in a transaction registered under the Securities Act or exempt from registration
under the Securities Act; and (e) a legend was placed on the certificates
representing each such security stating that it was restricted and could only be
transferred if subsequent registered under the Securities Act or transferred in
a transaction exempt from registration under the Securities Act, including but
not limited to any exemption available under Rule 144 promulgated under the
Securities Act.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES




There
were no defaults upon senior securities during the period covered by this
report.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No
matters have been submitted to a vote of security holders during the period
covered by this report.




ITEM
5. OTHER INFORMATION




There is
no information with respect to which information is not otherwise called for by
this form.




ITEM
6. EXHIBITS




31.1
            Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act31.2
            Certification
      of Principal Financial and Accounting Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act32.1
            Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act




32.2
            Certification
      of Principal Financial and Accounting Officer Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





48




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)May
      20, 2009
              By:
              /s/ Mark KleinMark KleinChief Executive Officer, President and Director(Principal Executive Officer)




May  20, 2009
              By:
              /s/ Michael SolomonMichael SolomonChief Financial Officer(Principal Financial and Accounting Officer)





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