Skinny Nutritional Corp.(fka SKNYQ)

[Lawson Digest]

Looking at the 13D just filed, a few things jump out:

"At the third closing (the “Third Closing”), the Notes sold at the First and Second Closings will convert into additional Equity Units, and, in addition, Trim will purchase $5,000,000 of additional Equity Units such that, after the Third Closing, Trim will own $9,000,000 of Senior Preferred and 65% of the Third Closing Fully Diluted Common Stock."

Trim Capital, LLC, a company that holds shares managed by Dachsund, LLC, a company that manages investments for a Marc Cummins (who is the principal for both companies), will be owning the shares, as will Dachsund and Cummins, but

"Marc Cummins is the sole member of Dachshund, and Dachshund is the sole managing member of Trim. Therefore, Mr. Cummins will have voting and investment control over the shares of Common Stock to be held by Trim, and may be deemed to have beneficial ownership of such shares."

If Cummins is all private equity as the 13D states, then he's positioning himself to make a lot of money off of this. Please note that the multiple entities owned and controlled by one very rich person is not a new concept, so there's technically nothing really fishy here about this.

"The Notes bear interest at a rate of 15% per annum and are secured by a first priority lien on all of the Company’s assets, other than the inventory and receivables of the Company for which Trim’s lien is subordinated to the lien held by the Company’s senior lender. The Initial Note is due and payable on the earlier of June 28, 2013."

The noteS (plural) will bear a 15% interest rate. The initial note of $1M + interest ($150,000) will be due on June 28th of next year.

"Effective as of the First Closing, the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Cummins pursuant to which he will receive a monthly consulting fee of $10,000 during a term commencing on June 28, 2012 and continuing in effect until the Notes are paid in full or converted into Equity Units (unless earlier terminated in accordance with their terms)."

For a company that isn't generating enough revenue to keep up with debts, they sure are quick to enter into additional financing and paying a $120k/yr consulting fee to Cummins.

"It is anticipated that Mr. Cummins will be elected as a member of the Board as a nominee of the holders of the Senior Preferred in connection with the Third Closing."

Doesn't sound too bad now, but unless they have a master strategy to get out of debt, adding on additional debt is going to be useless.

"Michael Salaman, the Company’s CEO and a director, is a minority investor in Trim Capital."

Well then.

"The Senior Preferred will carry a cash dividend of 15% of the original issue price per annum,

which will be cumulative, shall compound semi-annually and shall be payable on the earliest of (i) the closing of a qualified public offering, (ii) a liquidation event, (iii) the redemption of the Senior Preferred, or (iv) semi-annually to the extent that funds are legally available therefor. No dividends may be paid on the Common Stock or any series of preferred stock ranking junior to or pari passu with the Senior Preferred unless all accrued but unpaid dividends on the Senior Preferred have been paid in full."

So in addition to the 15% interest on the notes, the $9M in equity financing has a 15% div yield on top of it, paid out "semi-annually to the extent that funds are legally available therefor" (read: semi-annually as long as the company isn't about to declare bankruptcy).

But in accounting class I remember that an investment which states 15% nominal rate and compounding 2 times per year results in an effective rate of 15.562%.

This puts an additional annual liability of $1,400,580 in preferred dividends. And if you're an optimist and think that the first few dividends wont have to get paid out, then please understand the last line from above: "No dividends may be paid on the Common Stock or any series of preferred stock ranking junior to or pari passu with the Senior Preferred unless all accrued but unpaid dividends on the Senior Preferred have been paid in full."

So already we're up to the following:

$15,000,000 in new financing, with an obligation of

New liabilities
$1,400,580 per year, dividends on preferred shares
$1,150,000 once, due on June 28th, 2013
$450,000* per year, interest on second ("Remaining") note
$120,000 per year, consulting fee to Marc Cummins

This totals our new PER ANNUM additional liabilities to:

$1,970,580

Additionally, the securities were sold by Bryant Park Capital for the sum of $400,000, $50,000 of which the CEO is using to pay himself back for a loan he gave to SKNY.

See: this SEC filing.

Also, I just looked at the financial statements again, and see an accumulated deficit of (47,064,577). This is separate from Stockholder's equity (which is negative, so technically it's stockholders' deficit), which is normally reported as shareholder equity i.e. the value of the company's stock.

I was wrong with my initial comments about the company's debt and you were correct. Thank you for pointing that out.