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_______________________
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____________________
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Name of
Subscriber
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Agreement No.
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CONFIDENTIAL SUBSCRIPTION AGREEMENT
SKINNY NUTRITIONAL CORP.
Private Sale of
Securities
Consisting of up to 21,000 Shares of
Series A Convertible Preferred Stock
Aggregate Offering Amount:
$2,100,000
________________________
THIS SUBSCRIPTION AGREEMENT CONTAINS MATERIAL
NONPUBLIC INFORMATION CONCERNING SKINNY NUTRITIONAL CORP. AND IS
PREPARED SOLELY FOR THE USE OF THE OFFEREE NAMED
ABOVE. ANY USE OF THIS INFORMATION FOR ANY PURPOSE OTHER
THAN IN CONNECTION WITH THE CONSIDERATION OF AN INVESTMENT IN THE
SECURITIES OFFERED HEREBY MAY SUBJECT THE USER TO CRIMINAL AND
CIVIL LIABILITY.
THE
SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND IMMEDIATE DILUTION AND MAY BE PURCHASED ONLY BY
PERSONS WHO QUALIFY AS “ACCREDITED INVESTORS” UNDER
RULE 501 (a) OF REGULATION D UNDER THE SECURITIES
ACT.
THIS
DOCUMENT HAS NOT BEEN FILED WITH OR REVIEWED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER COMMISSION OR
REGULATORY AUTHORITY, AND HAS NOT BEEN FILED WITH OR REVIEWED BY
THE ATTORNEY GENERAL OF ANY STATES NOR HAS ANY SUCH COMMISSION,
AUTHORITY OR ATTORNEY GENERAL DETERMINED WHETHER IT IS ACCURATE OR
COMPLETE OR PASSED UPON OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SKINNY NUTRITIONAL
CORP.
3 Bala Plaza East, Suite
101
Bala Cynwyd, Pennsylvania
19004
Tel. (610) 784-2000
February 25, 2009
Amended as of April 8,
2009
CONFIDENTIAL SUBSCRIPTION
AGREEMENT
Items to be
delivered by all Investors:
a. One
(1) completed and executed Subscription Agreement, including the
Investor Questionnaire.
b.
Payment in the amount of subscription, by wire transfer of funds or
check. All checks should be made payable to “Becker &
Poliakoff, LLP escrow account for Skinny Nutritional Corp.”
in the total amount of the Securities subscribed for.
c. Wired
funds should be directed as follows:
ATTORNEY ESCROW ACCOUNT FOR
THE
SUBSCRIBER IS RESPONSIBLE FOR ALL WIRE TRANSFER FEES IMPOSED BY THE
SUBSCRIBER’S BANK.
ALL DOCUMENTS SHOULD BE RETURNED
TO:
Skinny Nutritional Corp.
c/o Becker & Poliakoff,
LLP
45 Broadway, 11
th Floor
New York, New York 10006
THE FOLLOWING EXHIBITS ARE
ANNEXED TO
AND FORM PART OF THIS
SUBSCRIPTION AGREEMENT:
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EXHIBIT B:
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CERTIFICATE
OF DESIGNATION, PREFERENCES, RIGHTS AND LIMITATIONS OF THE SERIES A
CONVERTIBLE PREFERRED STOCK
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SUBSCRIPTION
AGREEMENT
The undersigned (the “ Subscriber
” or the “ Purchaser ”) hereby subscribes
to purchase from Skinny Nutritional Corp., a Nevada corporation
(the “ Company ”), certain of the
Company’s securities, as described herein, for a total
purchase price of $2,100,000 (the “ Purchase Price
”). The Company is offering hereby (the “
Offering ”) a maximum of 21,000 shares of its Series A
Convertible Preferred Stock (the “ Series A Preferred
Shares ” or “ Series A Shares
”).
Article I
SALE OF
SECURITIES
1.1 Sale of
Securities; Offering Period
(a) Subject
to the terms and conditions hereof and on the basis of the
representations and warranties hereinafter set forth, the Company
hereby agrees to issue and sell to the Subscriber and the
Subscriber agrees to purchase from the Company, upon Closing, the
Series A Preferred Shares as described herein for the Purchase
Price as set forth on the signature page of this Subscription
Agreement executed by the Subscriber. The number of Series A
Preferred Shares purchased hereunder by a Subscriber shall be as
specified on the signature page of this Subscription Agreement
executed by the Subscriber. The Company may reject any subscription
in whole or in part. The securities being offered consist of a
total of up to 21,000 Series A Preferred Shares, par value $.001
per share. The Series A Preferred Shares are being offered at a
purchase price of $100.00 per share (the “ Purchase
Price ”) for a minimum subscription amount of $20,000
(200 Series A Preferred Shares), unless waived by the Company. This
Offering is only being made to “accredited investors”
(as defined in Rule 501 under the Securities Act of 1933, as
amended (the “ Securities Act ”)) in reliance
upon an exemption from registration under Section 4(2) of the
Securities Act and/or Regulation D promulgated thereunder, and on
similar exemptions under applicable state laws. The Series A
Preferred Shares may be purchased, in part or their entirety, by
officers and directors of the Company.
(b) The
Series A Preferred Shares are being offering during the offering
period commencing on the date set forth on the cover page of this
Subscription Agreement and terminating on the earlier of (a) 5:00
p.m. (New York time) on April 30, 2009 or (b) the date on which all
Series A Preferred Shares authorized for sale have been sold (the
“ Offering Period ”).
1.2 High
Risk Investment. This investment is speculative and should only
be made by investors who can afford the risk of loss of their
entire investment. The proceeds from the sale of the Series A
Preferred Shares will be used to fund short term capital needs to
enable the Company to maintain operations until additional funding
is received. The Company may sell additional securities after the
completion of this transaction to further fund its operations.
Unless the Company is successful in completing these additional
funding transactions, or is able to generate sufficient revenue
from operations, the Company may be forced to significantly curtail
its operations and the Subscribers will lose their entire
investment.
1.3
Selling Agent
Compensation. The Company intends to engage registered
broker-dealers to serve as selling agents (the “ Selling
Agents ”) for the sale of the Series A Preferred Shares
and pay commissions and other compensation to the Selling Agents
who procure purchasers of the Series A Preferred Shares. We will
pay and issue to each Selling Agent a warrant (the “ Agent
Warrants ”) to purchase such number of Shares as equals
10% of the total number of Shares actually sold in the Offering to
Subscribers procured by each Selling Agent. Agent Warrants shall be
exercisable at the per share price of $0.07 for a period of five
years from the date of issuance.
Summary of Offering and Terms of
Preferred Stock
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The Company is
offering a maximum of 21,000 Series A Preferred Shares solely to
accredited investors on a best efforts basis. Each Series A
Preferred Share has a stated value of $100.00 per share. The Series
A Preferred Shares and shares of Common Stock issuable upon
conversion of the Series A Preferred Shares (the “
Conversion Shares ”) are hereafter collectively
referred to as the “ Securities .”
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The minimum
subscription amount for the Series A Preferred Shares is $20,000,
although we may accept subscriptions in lesser amounts at our sole
discretion.
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Terms of
Preferred Stock:
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Upon the
effective date (the “ Effective Date ”) of the
acceptance by the Secretary of State of the State of Nevada of an
amendment to the Company’s Articles of Incorporation to
increase the number of authorized shares of the Company’s
Common Stock in an amount sufficient to permit the conversion of
all of the outstanding Series A Preferred Shares into Conversion
Shares (the “ Amendment ”), then all of the
outstanding Series A Preferred Shares shall, immediately upon the
occurrence of the aforesaid Effective Date, automatically be
converted into shares of the Company’s Common Stock (the
“ Mandatory Conversion ”).
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The conversion
rate of the Series A Preferred Shares initially will be $0.06 per
share, with customary adjustments for stock splits, stock dividends
and similar events (the “ Conversion Rate ”).
Upon conversion of the maximum number of Series A Preferred Shares
authorized for issuance in this Offering, the Company would issue
an aggregate of 35,000,000 shares of Common Stock.
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Voting Rights:
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The holders of Series A Preferred Shares shall
have the right to vote, together with holders of Common Stock and
not as a separate class, on all matters submitted to a vote of the
holders of Common Stock on an as converted basis. In addition, as
long as any Series A Preferred Shares are outstanding, the Company
shall not, without first obtaining the written approval of the
holders of at least a majority of the then outstanding Series A
Preferred Shares: (i) alter, change, modify or amend the terms of
the Series A Preferred Shares or any other capital stock of the
Company so as to affect adversely any of the rights of the holders
of Series A Preferred Shares; (ii) create or provide for the
creation of any new class or series of capital stock having a
preference over or ranking pari passu with the Series A
Preferred Shares as to payment of dividends, redemption or
distribution of assets upon a liquidation, dissolution or winding
up of the Company; (iii) issue any senior or pari passu securities;
(iv) agree to any provision in any agreement that would impose any
restriction on the Company’s ability to honor the exercise of
any rights of the holders of the Series A Preferred Stock or (v)
purchase, redeem or otherwise acquire for value, or declare, pay or
make any provision for any dividend or distribution with respect to
junior securities or pari passu securities.
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The Series A
Preferred Shares shall not be entitled to dividends unless the
Company declares dividends in cash or other property to holders of
outstanding junior or pari passu securities, in which event, each
outstanding Series A Preferred Share shall be entitled, prior to
the payment of any dividend on junior or pari passu securities, to
receive dividends in respect of the number of Conversion Shares
issuable to each holder of Series A Preferred Shares.
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However, in the
event that the Effective Date of the Mandatory Conversion does not
occur on or before October 1, 2009 (such date may be referred to as
the “ Event Date ”), holders
of Series A Preferred Shares will be entitled to
receive, when and as declared by the Board, but only out of funds
of the Company legally available for payment, dividends in cash at
an annual rate of 8% per Series A Preferred Share, payable
semi-annually and commencing on November 1, 2009 and thereafter on
May 1 and November 1of each year until such date as the Series A
Preferred Shares are converted into Common Stock or redeemed. All
dividends paid with respect to shares of the Series A Preferred
Stock shall be paid pro rata to the Holders entitled thereto
in an amount equivalent in value to the dividend payable in respect
of one share of Common Stock multiplied by the number of Conversion
Shares into which each Series A Preferred Share is convertible
based on the Conversion Rate in effect on the payment date for such
dividend.
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Upon the
liquidation, dissolution or winding-up of the Company, holders of
Series A Preferred Shares are entitled to receive a liquidation
distribution equivalent to the stated value of each Series A
Preferred Share, plus accumulated and unpaid dividends, if any,
before any distribution to holders of the Common Stock or any
capital stock ranking junior to the Series A Preferred
Shares.
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In the event
that the Effective Date for the Mandatory Conversion does not occur
on or prior to the Event Date, the Company shall thereafter have
the option to redeem some or all of the outstanding shares of
Series A Preferred Stock at the Redemption Price (the “
Redemption ”). The “ Redemption Price
” shall be equal to the sum of (x) the stated value of the
Series A Preferred Shares being redeemed plus (y) the unpaid
dividends, if any, with respect to the Series A Preferred Shares
being redeemed.
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The Series A
Preferred Shares will rank senior to the Common Stock and any other
class or series of the Company’s capital stock either
specifically ranking by its terms junior to the Series A Preferred
Shares or not specifically ranking by its terms senior to or on
parity with the Series A Preferred Shares, with respect to the
payment of dividends and upon liquidation, dissolution or
winding-up of the Company.
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See the Form of
Certificate of Designation, Preferences and Rights for the Series A
Convertible Preferred Stock, attached hereto as Exhibit B
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The Conversion
Shares will only be issued if the Secretary of State of Nevada
accepts for filing the amendment to the Company’s Articles of
Incorporation to increase the number of authorized shares of the
Company’s Common Stock in an amount sufficient to permit the
conversion of all of the outstanding Series A Preferred Shares into
Conversion Shares (the “ Amendment ”). The
Company’s ability to file the Amendment is subject to the
approval of its stockholders, of which there can be no guarantee.
The Company intends to convene a meeting of its stockholders
following the closing of the Offering for the purpose of, among
other things, approving the Amendment. If the Company’s
stockholders do not approve the Amendment, then the holders of
Series A Preferred Shares will not be able to convert such shares
into Conversion Shares and may be required to hold their Series A
Preferred Shares for an indefinite period of time.
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Piggyback
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Subscribers
shall be entitled to the piggyback registration rights applicable
to the Conversion Shares issuable upon the Mandatory Conversion, as
described in Section 5.1 of this Agreement.
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In order to
subscribe for the Series A Preferred Shares, each prospective
subscriber must complete, execute and deliver to the Company a
signature page evidencing such prospective subscriber’s
execution of this Subscription Agreement along with a completed
confidential Purchaser Questionnaire.
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Neither the
Series A Preferred Shares offered hereby nor the Conversion Shares
underlying the Series A Preferred Shares are registered under the
Securities Act or under the securities laws of the United States or
of any state or other jurisdiction. As a result, neither the Series
A Preferred Shares nor the Conversion Shares may be transferred
without registration under the Securities Act, or, if applicable,
the securities laws of any state or other jurisdiction, unless in
the opinion of counsel to the Company, such registration is not
then required because of the availability of an exemption from
registration.
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An investment
in the Company is highly speculative, and each investor bears the
risk of losing his, her or its entire investment. All Purchasers
must complete and execute a Subscription Agreement and a
confidential Purchaser Questionnaire. Purchasers must set forth
representations in such documents that he, she or it is purchasing
the Series A Preferred Shares for investment purposes only and
without a view toward distribution. The Series A Preferred Shares
are suitable investments only for sophisticated investors for whom
an investment in the Series A Preferred Shares does not constitute
a complete investment program and who fully understand, are willing
to assume, and who have the financial resources necessary to
withstand, the risks involved in investing in the Series A
Preferred Shares and who can bear the potential loss of their
entire investment. The Series A Preferred Shares are being offered
and sold only to persons who qualify as “accredited
investors,” as defined under Regulation D of the Securities
Act.
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1.4 Escrow;
No Minimum Offering Amount . The Subscriber acknowledges and
agrees that all subscription amounts will be deposited in a
non-interest bearing account established on behalf of the Company,
but that there is no minimum Offering amount necessary to conduct a
closing for the funds to be released to the Company. Accordingly,
funds may be released to the Company and closings held, from time
to time, as determined by the Company at any time during the
Offering Period. During the Offering period, subscription funds
will be placed into the escrow account and closings will be held
from time to time up to the sale of the maximum amount of
Securities described in this Subscription Agreement or the
expiration of the Offering Period. The final Closing shall be
either the date of which this Offering is fully subscribed or the
last date during the Offering Period on which the Company accepts a
subscription, whichever is latest. Each closing of the transactions
contemplated hereunder (the “ Closing ”) shall
be deemed to occur at the offices of Becker & Poliakoff, LLP,
45 Broadway, 11 th Floor, New York, New York 10006, or at such
other place as shall be mutually agreeable to the parties, at 11:00
a.m., New York Time, on such other date as be mutually agreeable to
the parties.
1.5 Closing
Matters . At each Closing the following actions shall be
taken:
(a) each
Subscriber shall deliver its Purchase Price in immediately
available United States funds to the escrow account established for
the Offering; and
(b) the
Company shall deliver certificates representing the Series A
Preferred Shares subscribed for to each Subscriber; and
(c) each
of the Company and the Subscriber shall deliver to the other signed
copies of this Agreement and the Subscriber shall deliver to the
Company a completed and executed Purchaser
Questionnaire.
1.6 Use of
Proceeds. The Company intends to use the proceeds
derived from this Offering to satisfy its working capital
requirements and general corporate purposes. Management reserves
the right to utilize the net proceeds of the Offering in a manner
in the best interests of the Company. The amount of the net
proceeds that will be invested in particular areas of the
Company’s business will depend upon future economic
conditions and business opportunities. To the extent that the
Company continues to incur losses from operations, such losses will
be funded from its general funds, including the net proceeds of
this Offering.
1.7 Certain
Reports Filed Under the Securities Exchange Act of
1934.
(a)
Restatement of Financial Statements for the year ended December
31, 2007 . On March 31, 2009, the Company filed with
the U.S. Securities and Exchange Commission (the “ SEC
”) a Current Report on Form 8-K (the “ Form 8-K
”) and subsequently filed with the SEC on April 1, 2009 an
amendment to its Annual Report on Form 10-KSB for the year ended
December 31, 2007 (the “ 2007 Amendment ”). The
Form 8-K and the Amendment were filed in order for the Company to
restate its consolidated financial statements and related financial
information for the year ended December 31, 2007 in order to
correct an error in the Company’s accounting and disclosures
for its convertible debentures and options and warrants. The
Amendment (and Form 8-K) restates (i) the Company’s
consolidated balance sheets at December 31, 2007 and
December 31, 2006, and (ii) the Company’s
consolidated statements of operations and cash flows for the year
ended December 31, 2007, and the notes related thereto. The
significant effects of the restatement are as follows: (a) to debit
debt conversion expense in an amount of $3,371,964 and to credit
additional paid in capital by $3,371,964 related to the
Company’s accounting for the beneficial conversion feature of
convertible debentures that were amended to reduce the conversion
rate; (b) to credit to its profit and loss statement in the amount
of $69,525 in order to properly reflect on its financial statements
the stock compensation expense that the Company incurred in fiscal
2007 in accordance with SFAS 123R; and (c) reflect a
reclassification of the Company’s expense incurred in
connection with its private placement of securities in 2007 to
credit “general and administrative” expense on the
Company’s statement of operations by an amount of $435,749
and debit to additional paid in capital of an equivalent amount.
Due to these adjustments, the Company’s net loss for 2007 was
impacted by $3,371,964 and increased to $5,698,643.
(b)
Annual Report on Form 10-K for the year ended December 31,
2008 . On April 7, 2009, the Company filed its Annual Report on
Form 10-K for the year ended December 31, 2008 (the “ 2008
Annual Report ”) with the SEC.
(c)
Acknowledgement and Confirmation . The undersigned hereby
agrees and acknowledges that it has been advised that the Company
has filed with the SEC the 2007 Amendment, the Form 8-K and the
2008 Annual Report (collectively, the “ SEC Reports
”) and that it has either obtained or has access to (through
the public website of the SEC or otherwise) the SEC Reports. The
SEC Reports comprise an integral part of this Agreement and each
Subscriber is urged to read each such report in its entirety. The
undersigned further agrees that the SEC Reports are incorporated
herein by reference, that it has taken the opportunity to review
such reports in their entirety and that is has considered all
factors that it deems material in deciding on the advisability of
investing in the Company’s securities.
1.8 Subscriber
Information
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(a)
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Name(s)
of
SUBSCRIBER(s): _____________________
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___________________________________
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___________________________________
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(b)
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Principal
Amount of Securities
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Subscribed
for:
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$__________
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Accredited
Investor Status
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The Subscriber acknowledges and agrees that the
offering and sale of the Securities are intended to be exempt from
registration under the Securities Act, by virtue of Section 4(2)
thereof and/or Regulation D promulgated thereunder. In
accordance therewith and in furtherance thereof, the Subscriber
represents and warrants to and agrees with the Company as follows
[Please check statements applicable to the Subscriber]:
The Subscriber is an Accredited Investor because
the Subscriber is (check appropriate item):
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a bank as
defined in Section 3(a)(2) of the Securities Act;
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a savings and
loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act;
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a broker or
dealer registered pursuant to Section 15 of the Securities Exchange
Act of 1934 as amended (the “ Exchange Act
”);
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an insurance
company as defined in Section 2(13) of the Securities
Act;
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an investment
company registered under the Investment Company Act of 1940, as
amended or a business development company as defined in Section
2(a)(48) of such act;
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a Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958;
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an employee
benefit plan within the meaning of Title I of the Employee
Retirement Income Security Act of 1974, as amended, if the
investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser,
or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
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a private
business development company as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940, as amended;
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an organization
described in Section 501(c)(3) of the Internal Revenue Code, a
corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of
$5,000,000;
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a natural
person whose individual net worth or joint net worth with that
person's spouse, at the time of his purchase exceeds
$l,000,000;
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a natural
person who had an individual income in excess of $200,000 in each
of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the
current year;
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a trust, with
total assets in excess of $5,000,000, not formed for the specific
purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule
506(b)(2)(ii) of the Exchange Act; or
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an entity in
which all of the equity owners are accredited
investors. (If this alternative is checked, the
Subscriber must identify each equity owner and provide statements
signed by each demonstrating how each qualifies as an accredited
investor.)
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a plan
established and maintained by a state, its political subdivisions,
or any agency or instrumentality thereof, for the benefit of its
employees, if such plan has total assets in excess of
$5,000,000
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a director or
officer of the Company.
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The Subscriber has completed the signature page
to this Subscription Agreement and the Questionnaire annexed at
Exhibit A to this Subscription Agreement.
Investing in
our Securities involves risks and our operating results and
financial condition have varied in the past and may in the future
vary significantly depending on a number of factors. You should
consider the following risk factors in evaluating whether to invest
in our Securities. However, the risks described below are not the
only risks facing the Company. In addition to these risk factors
and other risks described elsewhere in this Agreement, you should
carefully consider the risk factors described in our SEC Reports,
each of which has been filed with the Securities and Exchange
Commission and which are all incorporated by reference in this
Agreement. These risks could have a material adverse effect on our
business, results of operations, financial condition or liquidity
and cause our actual operating results to materially differ from
those contained in forward-looking statements made in this
Agreement, in our SEC Reports and elsewhere by management. Before
making an investment decision, you should carefully consider these
risks as well as other information contained or incorporated by
reference in this Agreement. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial
also may materially adversely affect our business, financial
condition and/or operating results.
General Risks Related to the
Company’s Business
The
Company has a history of operating losses. If it continues to incur
operating losses, it eventually may have insufficient working
capital to maintain operations.
As of December 31,
2008, the Company had an accumulated deficit of $22,229,657, of
which $14,234,212 is directly related to the development of Skinny
Nutritional products. For the years ended December 31, 2008
and December 31, 2007, the Company incurred losses from operations
of $6,232,123 and $5,698,643, respectively. If the Company is not
able to begin to earn an operating profit at some point in the
future, it will eventually have insufficient working capital to
maintain its operations as it presently intends to conduct
them.
The
Company recently restated its financial statements for the fiscal
year ended December 31, 2007.
In its Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2007 (the “ 2007 Form
10-KSB ”), the Company reported an accumulated deficit of
$13,127,636. Further, the Company had also reported in its 2007
Form 10-KSB that for the years ended December 31, 2007 and
2006, it incurred losses from operations of $2,828,745 and
$2,303,446 respectively. Following its reassessment of its
accounting of the beneficial conversion feature of its then
outstanding convertible debentures and its valuation of outstanding
stock options and warrants, the Company filed an amendment to the
2007 Form 10-KSB on April 1, 2009 to restate (i) the
Company’s consolidated balance sheets at December 31,
2007 and December 31, 2006, and (ii) the Company’s
consolidated statements of operations and cash flows for the year
ended December 31, 2007, and the notes related thereto. The
significant effects of the restatement are as follows: (a) to debit
debt conversion expense in an amount of $3,371,964 and to credit
additional paid in capital by $3,371,964 related to the
Company’s accounting for the beneficial conversion feature of
convertible debentures that were amended to reduce the conversion
rate; (b) to credit to its profit and loss statement in the amount
of $69,525 in order to properly reflect on its financial statements
the stock compensation expense that the Company incurred in fiscal
2007 in accordance with SFAS 123R; and (c) reflect a
reclassification of the Company’s expense incurred in
connection with its private placement of securities in 2007 to
credit “general and administrative” expense on the
Company’s statement of operations by an amount of $435,749
and debit to additional paid in capital of an equivalent amount.
Due to these adjustments, the Company’s net loss for 2007 was
impacted by $3,371,964 and increased to $5,698,643.
The
Company has been reliant on capital raised from private placements
of its securities to fund operations and its independent auditors
have included a “going concern” opinion in their report
included in the Company’s Annual Report.
The Company has been substantially reliant on
capital raised from private placements of our securities to fund
our operations. During the 2008 fiscal year, the Company raised
approximately $5,000,000 from the sale of securities to accredited
investors in private transactions pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, as amended. Our
independent auditors have included a “going concern”
explanatory paragraph in their report to our financial statements
for the year ended December 31, 2008, citing recurring losses from
operations. Our capital needs in the future will depend upon
factors such as market acceptance of our products and any other new
products we launch, the success of our independent distributors and
our production, marketing and sales costs. None of these factors
can be predicted with certainty. The Company must satisfy its
future cash needs by further developing a market for its products,
selling additional securities in private placements or by
negotiating for an extension of credit from third party
lenders.
If the Company is unable to achieve sufficient
levels of sales, it will need substantial additional debt or equity
financing in the future for which it currently has no commitments
or arrangement. No assurances can be given that any additional
financing, if required, will be available or, even if it is
available that it will be on acceptable terms. If the Company
raises additional funds by selling common stock or convertible
securities, the ownership of our existing shareholders will be
diluted. If additional funds are raised though the issuance of
equity or debt securities, such additional securities may have
powers, designations, preferences or rights senior to our currently
outstanding securities. Any inability to obtain required financing
on sufficiently favorable terms could have a material adverse
effect on our business, results of operations and financial
condition. If the Company is unsuccessful in raising additional
capital and increasing revenues from operations, it will need to
reduce costs and operations substantially. Further, if expenditures
required to achieve plans are greater than projected or if revenues
are less than, or are generated more slowly than, projected, the
Company will need to raise a greater amount of funds than currently
expected.
Risks Related to this
Offering
The
Securities offered hereby are “restricted securities”
and may not be transferred or resold absent registration or an
exemption therefrom.
The Securities offered hereby will be issued
pursuant to an exemption from registration under the Securities Act
and therefore have not been and will not be registered under that
act or any applicable state securities laws. Consequently, the
Securities may be sold, transferred, or otherwise disposed of by
the Purchasers hereunder only if, among other things, the Series A
Preferred Shares or the Conversion Shares are registered or, in the
opinion of counsel acceptable to us, registration is not required
under the Securities Act or any applicable state securities
laws.
Purchasers of our Series A Preferred Shares must
be aware of the long-term nature of their investment and be able to
bear the economic risks of their investment for an indefinite
period of time. No trading market exists for the Series A Preferred
Shares and neither the Series A Preferred Shares nor the Conversion
Shares have been registered under the Securities Act or the
securities or “blue sky” laws of any state. The right
of any Subscriber to sell, transfer, pledge or otherwise dispose of
the Securities offered herein will be limited by the Securities Act
and state securities laws and the regulations promulgated
thereunder. Accordingly, under the Securities Act, the Securities
offered herein may not be resold unless a registration statement is
filed and becomes effective or an exemption from registration is
available. The Company is not under any affirmative obligation to
file a registration statement covering the Securities and there can
be no assurance that any registration statement the Company may
file covering such securities will be effective. Further, there can
be no assurance that a liquid market for our Common Stock will be
sustained. Rule 144 promulgated under the Securities Act requires,
among other conditions, a holding period prior to the resale of
securities acquired in a non-public offering without having to
satisfy the registration requirements of the Securities Act. There
can be no assurance that we will fulfill in the future any
reporting requirements under the Exchange Act, or disseminate to
the public any current financial or other information concerning
the Company, as required by Rule 144 as one of the conditions of
its availability.
There is
no public market for the Series A Preferred
Shares.
There is no public market for the
Company’s Series A Preferred Stock and one will not develop
as a result of this Offering. Although the Company’s Common
Stock is traded on the Over-the-Counter Bulletin Board, due to the
risks of investing in a restricted security, all investors must
therefore bear the economic risk of their investment in the Series
A Preferred Stock for an indefinite period of
time. Accordingly, prospective investors must have
adequate means of providing for their current needs and personal
contingencies. Investors should be aware of the high risks involved
in an investment in the Company.
The
conversion of the Series A Preferred Shares into Conversion Shares
is subject to the approval of the Company’s stockholders and
there can be no guarantee the stockholder approval will be
obtained.
Pursuant to the terms of this Agreement, the
Company is offering its Series A Preferred Shares, for which there
is no trading market. The Conversion Shares which the Company may
issue upon the conversion of the Series A Preferred Shares, will
only be issued upon the occurrence of the mandatory conversion
event as described in the Certificate of Designations, Rights and
Limitations of the Series A Convertible Preferred Stock, which has
been annexed as Exhibit B to this Agreement (the “
Certificate of Designations ”). As described in the
Certificate of Designations, the Company will issue the Conversion
Shares upon the date that the Secretary of State of Nevada accepts
for filing an amendment to the Company’s Articles of
Incorporation to increase the number of authorized shares of the
Company’s Common Stock in an amount sufficient to permit the
conversion of all of the outstanding Series A Preferred Shares into
Conversion Shares (the “ Amendment ”). The
Company’s ability to file the Amendment is subject to the
approval of the Company’s stockholders, of which there
can
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