UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark One)
[X] QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED: March 31, 2015
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from __________ to __________
Commission
File Number: ________________
SMACK
SPORTSWEAR, INC.
(Exact
name of registrant as specified in its charter)
Nevada |
|
26-1665960 |
(State
or other jurisdiction of
incorporation or organization) |
|
(I.R.S.
Employer
Identification No.) |
20316
Gramercy Place
Torrance,
CA 90501
(Address
of principal executive offices, Zip Code)
(310)
787-1222
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark 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 [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] |
Accelerated
filer [ ] |
Non-accelerated
filer [ ] |
Smaller
reporting company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[X]
The
number of shares of registrant’s common stock outstanding as of May 19, 2015 was 22,059,443. The registrant had no outstanding
preferred stock as of that date.
FORM
10-Q
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
MARCH
31, 2015
TABLE
OF CONTENTS
ITEM
I - FINANCIAL STATEMENTS
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
March 31, 2015 | | |
June 30, 2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | |
Cash | |
$ | 26,837 | | |
$ | 824 | |
Accounts receivable, net of allowance of $90,290 and $63,953 as of March 31, 2015 and June 30, 2014, respectively | |
| 19,828 | | |
| 31,078 | |
Inventories | |
| 19,585 | | |
| 25,072 | |
Prepaid expenses and other current assets | |
| 5,030 | | |
| - | |
| |
| | | |
| | |
TOTAL CURRENT ASSETS | |
| 71,280 | | |
| 56,974 | |
| |
| | | |
| | |
Other assets | |
| 8,000 | | |
| 8,000 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 79,280 | | |
$ | 64,974 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | |
Accounts payable and accrued expenses | |
$ | 229,264 | | |
$ | 240,128 | |
Payroll and sales taxes payable | |
| 273,398 | | |
| 270,664 | |
Amounts due to officers | |
| 221,700 | | |
| 123,200 | |
Notes payable - related parties | |
| 169,508 | | |
| 23,308 | |
| |
| | | |
| | |
TOTAL CURRENT LIABILITIES | |
| 893,870 | | |
| 657,300 | |
| |
| | | |
| | |
LONG-TERM LIABILITIES | |
| | | |
| | |
Notes payable - related parties | |
| 150,000 | | |
| 280,000 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 1,043,870 | | |
| 937,300 | |
| |
| | | |
| | |
SHAREHOLDERS’ DEFICIT | |
| | | |
| | |
Preferred stock, $0.001 par value; 5,000,000 shares authorized Series A
Voting Preferred stock, 2,000,000 shares authorized; No shares issued and outstanding | |
| - | | |
| - | |
Common stock, $0.003 par value; 70,000,000 shares authorized; 22,059,443 and
18,626,110 shares issued and outstanding | |
| 66,178 | | |
| 55,878 | |
Additional paid in capital | |
| 1,255,957 | | |
| 948,026 | |
Accumulated deficit | |
| (2,286,725 | ) | |
| (1,876,230 | ) |
| |
| | | |
| | |
TOTAL SHAREHOLDERS’ DEFICIT | |
| (964,590 | ) | |
| (872,326 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | |
$ | 79,280 | | |
$ | 64,974 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three Months Ended | | |
Nine Months Ended | |
| |
March 31, 2015 | | |
March 31, 2014 | | |
March 31, 2015 | | |
March 31, 2014 | |
| |
| | |
| | |
| | |
| |
Sales, related party | |
$ | 106,177 | | |
$ | 541,751 | | |
$ | 258,369 | | |
$ | 1,020,223 | |
Sales, other | |
| 72,703 | | |
| - | | |
| 272,732 | | |
| - | |
| |
| 178,880 | | |
| 541,751 | | |
| 531,101 | | |
| 1,020,223 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of Goods Sold | |
| 98,899 | | |
| 522,664 | | |
| 317,131 | | |
| 781,531 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Profit | |
| 79,981 | | |
| 19,087 | | |
| 213,970 | | |
| 238,692 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 128,444 | | |
| 326,128 | | |
| 601,982 | | |
| 789,889 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from Operations | |
| (48,463 | ) | |
| (307,041 | ) | |
| (388,012 | ) | |
| (551,197 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER EXPENSES | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| 7,398 | | |
| 6,070 | | |
| 22,483 | | |
| 119,366 | |
Loss on conversion of accounts payable | |
| - | | |
| - | | |
| - | | |
| 13,500 | |
Financing costs | |
| - | | |
| - | | |
| - | | |
| 22,642 | |
Loss on note conversion | |
| - | | |
| - | | |
| - | | |
| 66,667 | |
| |
| | | |
| | | |
| | | |
| | |
TOTAL OTHER EXPENSES | |
| 7,398 | | |
| 6,070 | | |
| 22,483 | | |
| 222,175 | |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS | |
$ | (55,861 | ) | |
$ | (313,111 | ) | |
$ | (410,495 | ) | |
$ | (773,372 | ) |
| |
| | | |
| | | |
| | | |
| | |
BASIC AND DILUTED LOSS PER SHARE | |
$ | (0.00 | ) | |
$ | (0.02 | ) | |
$ | (0.02 | ) | |
$ | (0.04 | ) |
| |
| | | |
| | | |
| | | |
| | |
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED | |
| 21,983,332 | | |
| 18,401,110 | | |
| 20,443,841 | | |
| 17,728,033 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
(Unaudited)
| |
| | |
| | |
| | |
| | |
Additional | | |
| | |
| |
| |
Preferred stock | | |
Common stock | | |
Paid-in | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
Balance at June 30, 2014 | |
| - | | |
$ | - | | |
| 18,626,110 | | |
$ | 55,878 | | |
$ | 948,026 | | |
$ | (1,876,230 | ) | |
$ | (872,326 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock issued for cash | |
| - | | |
| - | | |
| 3,250,000 | | |
| 9,750 | | |
| 185,250 | | |
| - | | |
| 195,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fair value of common stock issued for services | |
| - | | |
| - | | |
| 308,333 | | |
| 925 | | |
| 37,306 | | |
| - | | |
| 38,231 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Fair value of common stock issued upon settlement with former officer | |
| - | | |
| - | | |
| 208,333 | | |
| 625 | | |
| 49,375 | | |
| - | | |
| 50,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cancellation of common stock issued to former officer | |
| - | | |
| - | | |
| (333,333 | ) | |
| (1,000 | ) | |
| 1,000 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Additional stock compensation costs | |
| - | | |
| - | | |
| - | | |
| - | | |
| 35,000 | | |
| | | |
| 35,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss for the nine months ended March 31, 2015 | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (410,495 | ) | |
| (410,495 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at March 31, 2015 | |
| - | | |
$ | - | | |
| 22,059,443 | | |
$ | 66,178 | | |
$ | 1,255,957 | | |
$ | (2,286,725 | ) | |
$ | (964,590 | ) |
The
accompanying notes are an integral part of these condensed consolidated financial statements
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
Nine months Ended | |
| |
March 31, 2015 | | |
March 31, 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (410,495 | ) | |
$ | (773,372 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | |
| | | |
| | |
Debt discount and beneficial conversion expense | |
| - | | |
| 116,071 | |
Loss on note conversion | |
| - | | |
| 66,667 | |
Loss on conversion of accounts payable | |
| - | | |
| 13,500 | |
Common stock issued for services to former officers | |
| - | | |
| 73,200 | |
Fair value of common stock issued for services | |
| 38,231 | | |
| 120,000 | |
Fair value of common stock issued upon settlement with former officer | |
| 50,000 | | |
| - | |
Additional stock compensation costs | |
| 35,000 | | |
| - | |
Provision for doubtful accounts | |
| 26,338 | | |
| 55,000 | |
Changes in Assets and Liabilities | |
| | | |
| | |
(Increase) Decrease in: | |
| | | |
| | |
Accounts receivable | |
| (15,088 | ) | |
| (91,905 | ) |
Inventories | |
| 5,487 | | |
| 209,203 | |
Prepaid expenses and other current assets | |
| (5,030 | ) | |
| - | |
Other assets | |
| - | | |
| 2,000 | |
Increase (Decrease) in: | |
| | | |
| | |
Accounts payable and accrued expenses | |
| (10,864 | ) | |
| 76,506 | |
Payroll and sales taxes payable | |
| 2,734 | | |
| 22,191 | |
Customer deposits | |
| - | | |
| (14,034 | ) |
Advances from officers | |
| 98,500 | | |
| (15,465 | ) |
| |
| | | |
| | |
NET CASH USED IN OPERATING ACTIVITIES | |
| (185,187 | ) | |
| (140,438 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from promissory notes payable – related party | |
| 20,000 | | |
| 281,600 | |
Repayment of notes payable – related party | |
| (3,800 | ) | |
| (136,743 | ) |
Proceeds from issuance of common stock | |
| 195,000 | | |
| - | |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 211,200 | | |
| 144,857 | |
| |
| | | |
| | |
NET INCREASE IN CASH | |
| 26,013 | | |
| 4,419 | |
| |
| | | |
| | |
CASH BEGINNING OF PERIOD | |
| 824 | | |
| 2,414 | |
| |
| | | |
| | |
CASH END OF PERIOD | |
$ | 26,837 | | |
$ | 6,833 | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |
| | | |
| | |
Interest paid | |
$ | - | | |
$ | 30,657 | |
Taxes paid | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS | |
| | | |
| | |
Common stock issued for conversion of note payable | |
$ | - | | |
$ | 200,000 | |
Beneficial conversion costs on issuance of convertible note payable | |
$ | - | | |
$ | 38,380 | |
Common stock issued for payable due to former officer | |
$ | - | | |
$ | 9,000 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
1. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Smack Sportswear, Inc. and Subsidiary (the
“Company”) have been prepared in accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
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, all normal recurring adjustments considered necessary for a
fair presentation have been included. Operating results for the nine months ended March 31, 2015 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2015. For further information refer to the
financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended June 30,
2014.
History
and Organization
SMACK
Sportswear, Inc. (“SMACK”) was originally incorporated in
Nevada in October 2007 as Reshoot Production Company (“Reshoot”), which was incorporated as a subsidiary of Reshoot
& Edit, a Nevada corporation. In September 2011, Reshoot entered into an Irrevocable Business Sales Agreement with Team Sports
Superstore, Inc. (“TSS”) to buy 100 percent of the outstanding shares of TSS (owned by one individual). On the same
date, the majority owner of Reshoot entered into a Stock Value Agreement in which he agreed to transfer approximately 9.7 million
of his personal shares to TSS in exchange for 100 percent of its outstanding stock. At the time of the agreement, Reshoot had
approximately 13.3 million shares outstanding. The sale of the shares to TSS represented approximately 72 percent of the outstanding
shares of Reshoot. In December 2011, Reshoot changed its corporate name from Reshoot Production Company to SMACK Sportswear. In
December 2012, SMACK closed the purchase of TSS (“TSS Closing”).
At
the TSS Closing, (i) TSS was merged with and into SMACK; (ii) TSS became SMACK’s wholly-owned subsidiary; (iii) all of TSS’s
shares outstanding prior to the TSS Merger were exchanged for comparable securities of SMACK; and (iv) 72 percent of SMACK’s
fully-diluted shares were owned by TSS’s former shareholder. At the TSS Closing, SMACK issued a total of approximately 9.7
million shares of its common stock to TSS’s former shareholder, in exchange for the 40 million shares of TSS’s common
stock outstanding prior to the TSS Merger. Upon the effectiveness of the TSS Merger, 11 million shares of SMACK’s common
stock were maintained by its existing stockholders.
Since
the former holder of TSS’s common stock owned, after the Merger, approximately 72% of SMACK’s shares of common stock,
and as a result of certain other factors, including that the former Chief Executive Officer (CEO) of TSS was the CEO of SMACK,
TSS is deemed to be the acquiring company for accounting purposes and the Merger was accounted for as a reverse merger and a recapitalization
in accordance with generally accepted accounting principles in the United States (“GAAP”). These consolidated financial
statements reflect the historical results of TSS prior to the merger and that of the combined company following the Merger, and
do not include the historical financial results of Reshoot prior to the completion of the merger.
Overview
of Business
SMACK
is a Southern California based manufacturer of performance and lifestyle based indoor and sand volleyball apparel and accessories.
The Smack brand was founded in 1994 on the sands of Manhattan Beach, California. Throughout our history, Smack has worked with
some of the leading professional beach players, as well as a select group of elite indoor junior volleyball clubs. Our products
have been featured in Volleyball Magazine, DiG Magazine, Coaching Volleyball magazine, and featured in ABC’s hit show “The
Bachelor”. Smack has also served as the official apparel of the AVP, USA Beach Volleyball, and NVL.
Our
core business is performance and lifestyle volleyball Smack branded products. Volleyball continues to experience a sustained growth
rate across all age groups, with high school participation rates increasing for 24 consecutive years. Sand volleyball has maintained
a steady growth rate across both core and casual participants, and represents the fastest growing sport at the NCAA level, which
will serve as an accelerant the growth of the sport at the youth and high school levels.
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
1. BASIS
OF PRESENTATION (Continued)
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying
condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue
as a going concern. During the nine months ended March 31, 2015, the Company incurred a net loss of $410,495 and cash used in
operating activities was $185,187, and as of that date, is delinquent in payments of $273,398 for payroll and sales taxes. As
of March 31, 2015, the Company had a working capital deficiency and a shareholders’ deficit of $822,590 and $964,590, respectively,
and as of that date, $75,727 of the Company’s accounts payable was greater than 90 days past due. These factors, among others,
raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditor, in their report
on our audited financial statements for the year ended June 30, 2014, expressed substantial doubt about our ability to continue
as a going concern.
The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon,
among other things, additional cash infusion. During the nine months ended March 31, 2015, the Company has obtained $20,000 from
its debt holders and $195,000 from the initiation of a Private Placement Memorandum (PPM). Management anticipates the Company
will raise additional funding in the future. Management believes this funding will continue from its current investors and the
Company will also obtain funding from new investors. Management believes the existing shareholders, the prospective new investors
and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will
allow the development of its core business operations. No assurance can be given that any future financing will be available or,
if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional
financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for
our stock holders, in case of equity financing.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICES
Basis
of Consolidation
The condensed
consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Team Sports Superstore.
All significant intercompany transactions and balances have been eliminated in consolidation.
Stock
Split
On February
14, 2015, the Company’s shareholders authorized its Board of Directors to effectuate a reverse stock split of the Company’s
issued and outstanding shares of common stock at a ratio of 1-for-3 (the “Reverse Stock Split”), which was ultimately
declared effective by the Board of Directors as of the close of business on April 14, 2015. As a result of the Reverse Stock Split,
every three issued and outstanding shares of the Company’s common stock was changed and converted into one share of common
stock. All share related information presented in these financial statements and accompanying footnotes has been retroactively
adjusted to reflect the reduced number of shares resulting from this action.
Revenue
Recognition
The
Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable
is reasonably assured. Management assesses the business environment, the customer’s financial condition, historical collection
experience, accounts receivable aging and customer disputes to whether collectibility is reasonably assured. If collectibility
is not considered reasonably assured at the time of sales, the company does not recognize revenue until collection occurs. Title
to the Company’s products is transferred to the customer once the product is shipped from the Company’s warehouse.
Products are not shipped until there is a purchase agreement signed by the customer with a specified payment arrangement. The
Company’s sales are primarily customized, made to order apparel, where after a deposit is made there are no refunds after
the customer has committed to the sale through a signed contract. Therefore, the company has not recorded an allowance for returned
products.
Loss
per Share Calculations
Basic
earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares
available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per
share for the three and nine months ended March 31, 2015 and 2014, as the inclusion of any potential shares would have had an
anti-dilutive effect due to the Company generating a loss.
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Concentration
of sales and accounts receivable
For
the three and nine months ended March 31, 2015, the Company sold $72,703 and $272,732 of its products to a company owned by the
Company’s former Chief Executive Officer (CEO) and a current member of the Board of Directors (see Note 4). This amount
represented 41% and 51%, respectively, of the Company’s sales during those periods. There were no other customers with sales
representing more than 10% of the Company’s total sales during this period. At March, 31, 2015, there were two customers
with an accounts receivable balance that represented 74% of the Company’s total accounts receivable.
Use of
Estimates
The
preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.
Significant estimates are used in valuing our allowances for doubtful accounts, inventory valuations, convertible notes, fair
value of common stock issued upon settlement of accounts payable and fair value of common stock issued for services, among others.
Actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Fair Value of Financial Instruments requires disclosure of fair value information, whether or not recognized in the balance sheet,
where it is practicable to estimate that value. As of March 31, 2015, the balances reported for cash, accounts receivable, inventory,
accounts payable and accrued expenses approximate their fair value because of their short maturities. Debt balances are stated
at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its
debt agreements are commensurate with lender risk profiles for similar companies.
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Recently
Issued Accounting Pronouncements
In
April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). This guidance amends
the requirements for reporting for discontinued operations and requires additional disclosures about discontinued operations.
Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company’s
operations and financial results should be presented as discontinued operations. This guidance is effective for annual periods
beginning after December 15, 2014. The Company does not expect the adoption of this guidance to have a material impact on the
Company’s consolidated financial statements.
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue
from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under
current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted.
Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on
our ongoing financial reporting.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s
ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide
certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.
The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted.
In
November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in
a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not
change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial
instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded
derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities
that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for
public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
3. NOTES
PAYABLE AND OTHER DEBT TO RELATED PARTIES
Notes payable
and other debt to related parties consist of the following as of March 31, 2015 and June 30, 2014:
| |
March 31, 2015 | | |
June 30, 2014 | |
| |
(Unaudited) | | |
| |
| |
| | |
| |
Loan payable – related party (a) | |
$ | 19,508 | | |
$ | 19,508 | |
Note payable (b) | |
| - | | |
| 3,800 | |
Unsecured promissory note (c) | |
| 150,000 | | |
| 130,000 | |
Unsecured promissory note (d) | |
| 150,000 | | |
| 150,000 | |
| |
| | | |
| | |
TOTAL | |
| 319,508 | | |
| 303,308 | |
| |
| | | |
| | |
Less: Current portion | |
| (169,508 | ) | |
| (23,308 | ) |
| |
| | | |
| | |
LONG-TERM PORTION | |
$ | 150,000 | | |
$ | 280,000 | |
a. |
As of June 30, 2014, the Company had
a loan payable to family member of the former CEO in the amount of $19,508. The loan is unsecured, non-interest bearing and
due upon demand. As of March 31, 2015, the balance of the loan remained at $19,508. |
|
|
b. |
As of June 30, 2013, the Company had
advances from an individual which amounted to $14,000. In February 2014, the advance amount, plus one time interest of $5,000,
was converted into a short-term note payable. The note called for the Company to make five $3,800 payments beginning in March
2014 and ending in July 2014. At June 30, 2014, the outstanding balance of the short-term note was $3,800. During the nine
months ended March 31, 2015, the note was fully repaid and no amounts were outstanding at March 31, 2015. |
|
|
c. |
In February 2014, the Company entered
into an unsecured promissory note agreement with a shareholder. The agreement allows for the Company to borrow up to $150,000
at an interest rate of 10 percent per year, of which $80,000 was advanced at closing. A balance of $130,000 was owed under
the agreement as of June 30, 2014. During the nine months ended March 31, 2015, the Company borrowed an additional $20,000
on the note. As of March 31, 2015, the outstanding balance of the note was $150,000. The outstanding principal amount and
all accrued and unpaid interest is due by December 2016. |
|
|
d. |
In February 2014, the Company entered
into an unsecured promissory note agreement with a shareholder. The agreement allows for the Company to borrow up to $150,000
at an interest rate of 10 percent per year. The outstanding balance under the agreement at March 31, 2015 and June 30, 2014
was $150,000, respectively. The outstanding principal amount and all accrued and unpaid interest is due by January 2016 |
For
the nine months ended March 31, 2015, the Company incurred $22,483 of interest expense relating to the unsecured promissory notes
totaling to $300,000. The total amount of accrued interest payable relating to those notes at March 31, 2015 was $32,205.
SMACK
SPORTSWEAR, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR
THE NINE MONTHS ENDED MARCH 31, 2015 AND 2014
4. RELATED
PARTY TRANSACTIONS
Release
Agreement with Former CEO
In
September 2014 (the Effective Date), the Company entered into a mutual release agreement with its former CEO under which the CEO
agreed to resign his position and the Company agreed to pay the former officer $3,000 per month commencing as of the Effective
Date and ended on February 28, 2015. The Parties agreed that the Company’s accrued and unpaid salary obligation owed to
the former officer as of the Effective Date was $130,000 and is net of any and all other offsetting obligations owed by the former
officer to the Company. Fifty percent of the accrued salary ($65,000) will be converted into the Company’s common stock
at any time from the effective date. The conversion price shall be the lower of $0.06 or the same conversion price as the current
note holders (see Note 3). In the event that the former CEO is not able to exercise the above accrued salary conversation rights
by December 31, 2014, the amount of any such accrued salary obligation will be paid in cash in full by no later than January 15,
2016.
The
remaining fifty percent of the accrued salary obligation ($65,000) will be paid by the Company through cash payment(s) to be made
at the earlier of (i) the date of the Company’s closing of the next round of financing (debt or equity) of at least $400,000,
in which case the entire then-remaining unpaid portion of $65,000 shall be repaid, or (ii) in the event that the financing does
not occur by February 28, 2015 and to the extent that the financing has not occurred subsequent to that date, through payments
of $3,000 per month commencing on March 1, 2015 and continuing on a monthly basis thereafter until repayment is completed.
In
exchange for the mutual release agreement, the Company is required to pay the former CEO $3,000 a month commencing on the effective
date and ending on February 28, 2015.
Any
and all obligations not paid by the Company per the agreement (and exclusive of the accrued salary obligation), as well as loans
by the former CEO to the Company, which total $21,000 as of the Effective Date, shall be repaid by the Company by January 31,
2015 or earlier based on the occurrence of certain events.
As
of June 30, 2014, the Company determined it owed $121,000 to the former officer under the mutual release agreement.
During
the nine months ended March 31, 2015, the Company accrued an additional $45,000 and paid $17,300 under the former CEO’s
mutual release agreement. As of March 31, 2015, a total of $148,700 was owed under the agreement and is reflected as Amounts Due
to Officers on the accompanying March 31, 2015 condensed consolidated Balance Sheet.
Concurrently
to the mutual release agreement, the former officer entered into an independent sales agent/team dealer agreement with the Company
to sell the Company’s products. During the three and nine months ended March 31, 2015, the Company sold $72,703 and $272,232
to the former CEO’s new company. The independent sales agent/team dealer agreement was terminated in April 2015.
Other
Advances
As
of June 30, 2014, the Company owed $2,200 to an officer for personal loans to the Company. During the nine months ended March
31, 2015, the Company fully paid the balance owed to the officer for the personal loans. As of March 31, 2015, the Company owes
the officer $73,000 relating to unpaid compensation and this amount is reflected as Amounts Due to Officers on the accompanying
March 31, 2015 condensed consolidated Balance Sheet.
5. CAPITAL
STOCK
On
July 21, 2014, the Company entered into a service agreement with Mr. Christopher Jenks to serve as a member of the Board of Directors
for one year. As compensation, Mr. Jenks will receive up to 250,000 shares of its common stock valued at $15,000. The stock vests
66,667 shares on December 1, 2014; 66,667 shares on March 1, 2015; and 116,666 shares on August 15, 2015. Mr. Jenks was subsequently
appointed as the Company’s Chief Executive Officer (CEO) until February 13, 2015, when he resigned. During the nine months
ended March 31, 2015, 133,334 shares valued at $9,731 vested and were issued to Mr. Jenks for his services. As of March 31, 2015,
$5,269 of the award remains unvested and will be amortized over the remaining vesting period as long as Mr. Jenks remains a Director
of the Company.
During the
nine months ended March 31, 2015, the Company issued 175,000 shares of its common stock to its Chief Financial Officer (CFO) under
the terms of his service agreement valued at $28,500. On February 16, 2015, the CFO was also appointed as the interim CEO of the
Company.
During
the nine months ended March 31, 2015, the Company sold 3,250,000 shares of its common stock at the price of $0.06 per share through
a private placement memorandum. Gross proceeds from the issuance were $195,000. In connection with the financing, 833,333 shares
were sold to the Company’s former Chief Executive Officer (CEO) for cash at $0.06 per share. The market value of the stock
at issuance was $0.09 per share. The difference in price of $25,000 between the market value of the stock and the cash value was
recorded as additional compensation to the CEO during the nine months ended March 31, 2015.
On
December 29, 2014, the Company entered into a settlement and mutual release agreement (the “Agreement”) with its former
CFO to settle the claims filed by the former CFO. Under the agreement, among others, the Company issued a total of 208,333 shares
common stock valued at $50,000. The Agreement also required the former CFO to return for cancellation the 333,333 shares of common
stock previously issued to former CFO. Accordingly, the Company recorded an adjustment to reduce its common stock outstanding
as of March 31, 2015.
In
February 2014, the Company entered into an agreement with its former President and former Director under which the Company agreed
to pay him a monthly salary of $7,500. As part of the agreement, the Company’s former CEO agreed to issue the President
166,667 shares of common stock from his personal holdings upon signing of the agreement. The fair value of those shares at the
date of grant was $20,000 which the Company accounted for as additional compensation expense and as additional paid in capital
contributed by the former CEO in the financial statements for the year ended June 30, 2014. The former CEO also agreed to issue
the President an additional 166,667 shares of common stock when corporate mission statement and standard operating procedures
are developed and implemented within 180 days from February 2014. The President developed and implemented the mission statements
and standard operating procedures timely. As a result, the former CEO issued 166,667 shares to the President from his personal
holdings. The fair value of those shares at grant date was $10,000 which the Company accounted for as additional compensation
expense and as additional paid in capital contributed by the former CEO in the accompanying condensed interim financial statements
for the nine months ended March 31, 2015.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond
our control, which may include statements about our:
|
● |
business
strategy; |
|
|
|
|
● |
financial
strategy; |
|
|
|
|
● |
future
operating results; and |
|
|
|
|
● |
plans,
objectives, expectations and intentions contained in this report that are not historical. |
All
statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future
operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management
are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,”
“intend,” “estimate,” “expect,” “project” and similar expressions are intended
to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking
statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements.
Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we
make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. These
statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
as well as in this report generally. Actual events or results may differ materially from those discussed in forward-looking statements
as a result of various factors. In light of these risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this filing will in fact occur.
Organizational
History
SMACK
Sportswear, Inc. (“SMACK”) was originally incorporated in
Nevada in October 2007 as Reshoot Production Company (“Reshoot”), which was incorporated as a subsidiary of Reshoot
& Edit, a Nevada corporation. In September 2011, Reshoot entered into an Irrevocable Business Sales Agreement with Team Sports
Superstore, Inc. (“TSS”) to buy 100 percent of the outstanding shares of TSS (owned by one individual). On the same
date, the majority owner of Reshoot entered into a Stock Value Agreement in which he agreed to transfer approximately 9.7 million
of his personal shares to TSS in exchange for 100 percent of its outstanding stock. At the time of the agreement, Reshoot had
approximately 13.3 million shares outstanding. The sale of the shares to TSS represented approximately 72 percent of the outstanding
shares of Reshoot. In December 2011, Reshoot changed its corporate name from Reshoot Production Company to SMACK Sportswear. In
December 2012, SMACK closed the purchase of TSS (“TSS Closing”).
At
the TSS Closing, (i) TSS was merged with and into SMACK; (ii) TSS became SMACK’s wholly-owned subsidiary; (iii) all of TSS’s
shares outstanding prior to the TSS Merger were exchanged for comparable securities of SMACK; and (iv) 72 percent of SMACK’s
fully-diluted shares were owned by TSS’s former shareholder. At the TSS Closing, SMACK issued a total of approximately 9.7
million shares of its common stock to TSS’s former shareholder, in exchange for the 40 million shares of TSS’s common
stock outstanding prior to the TSS Merger. Upon the effectiveness of the TSS Merger, 11 million shares of SMACK’s common
stock were maintained by its existing stockholders.
Since
the former holder of TSS’s common stock owned, after the Merger, approximately 72% of SMACK’s shares of common stock,
and as a result of certain other factors, including that the former Chief Executive Officer (CEO) of TSS was the CEO of SMACK,
TSS is deemed to be the acquiring company for accounting purposes and the Merger was accounted for as a reverse merger and a recapitalization
in accordance with generally accepted accounting principles in the United States (“GAAP”). These consolidated financial
statements reflect the historical results of TSS prior to the merger and that of the combined company following the Merger, and
do not include the historical financial results of Reshoot prior to the completion of the merger.
Overview
of Business
SMACK
is a Southern California based manufacturer of performance and lifestyle based indoor and sand volleyball apparel and accessories.
The Smack brand was founded in 1994 on the sands of Manhattan Beach. Throughout our history, Smack has worked with some of the
leading professional beach players, as well as a select group of elite indoor junior volleyball clubs. Our products have been
featured in Volleyball Magazine, DiG Magazine, Coaching Volleyball magazine, and featured in ABC’s hit show “The Bachelor”.
Smack has also served as the official apparel of the AVP, USA Beach Volleyball, and NVL.
Our
primary corporate objective is increasing revenue and strengthening our financial performance, while serving the best interests
of our employees and shareholders. Revenue increases will be the result of an uncompromising discipline to drive the business
through people, processes, and products.
Our
core business is performance and lifestyle volleyball Smack branded products. Volleyball continues to experience a sustained growth
rate across all age groups, with high school participation rates increasing for 24 consecutive years. Sand volleyball has maintained
a steady growth rate across both core and casual participants, and represents the fastest growing sport at the NCAA level, which
will serve as an accelerant the growth of the sport at the youth and high school levels.
Critical
Accounting Policies
The
Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require
application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies
require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed
to be critical within the SEC definition.
Revenue
Recognition
The
Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable
is reasonably assured. Management assesses the business environment, the customer’s financial condition, historical collection
experience, accounts receivable aging and customer disputes to whether collectibility is reasonably assured. If collectibility
is not considered reasonably assured at the time of sales, the company does not recognize revenue until collection occurs. Title
to the Company’s products is transferred to the customer once the product is shipped from the Company’s warehouse.
Products are not shipped until there is a purchase agreement signed by the customer with a specified payment arrangement. The
Company’s sales are primarily customized, made to order apparel, where after a deposit is made there are no refunds after
the customer has committed to the sale through a signed contract. Therefore, the company has not recorded an allowance for returned
products.
Use
of Estimates
The
preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period.
Significant estimates are used in valuing our allowances for doubtful accounts, inventory valuations, convertible notes, fair
value of common stock issued upon settlement of accounts payable and fair value of common stock issued for services, among others.
Actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Fair Value of Financial Instruments requires disclosure of fair value information, whether or not recognized in the balance sheet,
where it is practicable to estimate that value. As of March 31, 2015, the balances reported for cash, accounts receivable, inventory,
accounts payable and accrued expenses approximate their fair value because of their short maturities. Debt balances are stated
at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its
debt agreements are commensurate with lender risk profiles for similar companies.
Recently
Issued Accounting Pronouncements
Management
reviewed accounting pronouncements issued during the nine months ended March 31, 2015, and the following pronouncements were adopted
during the period.
In
April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic
205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations
and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic
shift in operations or that have a major effect on the Company’s operations and financial results should be presented as
discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014.
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue
from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under
current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted.
Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on
our ongoing financial reporting.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s
ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide
certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.
The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted.
In
November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in
a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not
change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial
instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded
derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities
that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for
public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption is permitted.
Other
accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or
future consolidated financial statements.
Results
of Operations
Results
of Operations for the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Revenue
and Cost of Goods Sold
Revenue
for the three months ended March 31, 2015 and 2014 was $178,880 and $541,751, respectively. The decrease of $362,871 was primarily
due to less market penetration in both female high school and club teams during the third quarter of fiscal year ending June 30,
2015 as compared to prior fiscal year of the same period.
Cost
of sales for the three months ended March 31, 2015 and 2014, was $98,899 and $522,664, respectively. Gross profit for the three
months ended March 31, 2015 and 2014 was $79,981 and $19,087, respectively. The gross profit increase of $60,894 for the three
months ended March 31, 2015 was primarily due to the write down of the Company’s inventories of approximately $190,000 during
the three months ended March 31, 2014. The increase in gross profit would have been higher, except it was offset by the decrease
in revenue during the three months ended March 31, 2015, combined with the lower margins during that quarter associated with sales
to the company owned by the Company’s former CEO (see Note 4).
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the three months ended March 31, 2015 and 2014 was $128,444 and
$326,128, respectively. The decrease in SG&A expenses of $197,684 was due primarily to the decrease in stock compensation
costs of $154,734, the decrease in bad debt expense of approximately $55,000, offset by an increase in other SG&A expenses.
Other
Income and Expenses
Other
expenses consist of interest expense. Interest expense for the three months ended March 31, 2015 and 2014 was $7,398 and $6,070,
respectively. The increase in interest expense of $1,328 during the three months ended March 31, 2015 related to the lower balance
in the Company’s notes payable during the three months ended March 31 2014.
Net
Loss
Our
net loss for the three months ended March 31, 2015 and 2014 was $55,861 and $313,111, respectively. The decrease in net loss of
$257,250 was due to an increase in gross profit of $60,894, the decrease in SG&A expenses of $197,684, offset by the increase
in other expenses of $1,328.
Results
of Operations for the nine months ended March 31, 2015 compared to the nine months ended March 31, 2014.
Revenue
and Cost of Goods Sold
Revenue
for the nine months ended March 31, 2015 and 2014 was $531,101 and $1,020,223, respectively. The decrease of $489,122 was primarily
due to less market penetration in both female high school and club teams during the first nine months of fiscal year ending June
30, 2015, as compared to prior fiscal year of the same period.
Cost
of sales for the nine months ended March 31, 2015 and 2014, was $317,131 and $781,531, respectively. Gross profit for the nine
months ended March 31, 2015 and 2014 was $213,970 and $238,692. The gross profit decrease of $24,722 for the nine months ended
March 31, 2015 was primarily due to the decrease in revenue, combined with the lower margins associated with sales to the company
owned by the Company’s former CEO (see Note 4), offset by inventory write-downs of $190,000 during the nine months ended
March 31, 2014.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the nine months ended March 31, 2015 and 2014 was $601,982 and
$789,889, respectively. The decrease in SG&A expenses of $187,907 was due primarily to the decrease in stock compensation
costs of $142,264, the decrease in bad debt expenses of $28,662 and the decrease in professional fees of $36,000, offset by an
increase in legal fees of $27,275 and other SG&A expenses. The professional fee expenses in 2014 related to investment banking
costs.
Other
Income and Expenses
Other
expenses consist of interest expenses, financing costs and loss on conversion of accounts payable and debt. Total other expenses
for the nine months ended March 31, 2015 and 2014 was $22,483 and $222,175, respectively. The decrease in other expenses of $199,692
was due primarily to increased interest expense and other non-cash transactions. Interest expense for the nine months ended March
31, 2015 and 2014 was $22,483 and $119,366, respectively. The interest expense incurred during the nine months ended March 31,
2015 was related to the Company’s notes payable. The interest expense incurred during the nine months ended March 31, 2014
was related almost entirely to the amortization of debt discount recorded from the beneficial conversion features in the convertible
notes payable. During the nine months ended March 31, 2014, the Company also recorded $13,500 relating to the loss on conversion
of accounts payable, $66,667 relating to the loss on the conversion of debt and $22,642 of financing costs. There were no other
expenses of this type during the nine months ended March 31, 2015.
Net
Loss
Our
net loss for the nine months ended March 31, 2015 and 2014 was $410,495 and $773,372, respectively. The decrease in net loss of
$362,877 was due to the decrease in SG&A expenses of $187,907 and a decrease in other expenses of $199,692, offset by a decrease
in gross profit of $24,722.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital expenditures.
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying
condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue
as a going concern. During the nine months ended March 31, 2015, the Company incurred a net loss of $410,495 and cash used in
operating activities was $185,187, and as of that date, is delinquent in payments of $273,398 for payroll and sales taxes. As
of March 31, 2015, the Company had a working capital deficiency of $822,590 and a shareholders’ deficit of $964,590, and
as of that date, $75,727 of the Company’s accounts payable was greater than 90 days past due. These factors, among others,
raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditor, in their report
on our audited financial statements for the year ended June 30, 2014, expressed substantial doubt about our ability to continue
as a going concern.
The
ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon,
among other things, additional cash infusion. During the nine months ended March 31, 2015, the Company has obtained $20,000 from
its debt holders and $195,000 from the initiation of a Private Placement Memorandum (PPM). Management anticipates the Company
will raise additional funding in the future. Management believes this funding will continue from its current investors and the
Company will also obtain funding from new investors. Management believes the existing shareholders, the prospective new investors
and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will
allow the development of its core business operations. No assurance can be given that any future financing will be available or,
if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional
financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for
our stock holders, in case of equity financing.
As
of March 31, 2015 and June 30, 2014, we had cash of $26,837 and $824, respectively, and working capital deficit of $822,590 and
$600,327, respectively. The increase in working capital deficit was primarily due to the decrease in accounts receivable and inventories
and the increase in accounts payable and accrued expenses, advances from officers and notes payable to related parties, offset
by the increase in cash and prepaid expenses.
During
the first nine months of fiscal 2015, we raised an aggregate of $195,000 through our PPM. The opinion of our independent registered
public accounting firm on our audited financial statements as of and for the year ended June 30, 2014 contains an explanatory
paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern
is dependent upon raising capital from financing transactions and future revenue.
Net
cash used in operating activities was $185,187 for the nine months ended March 31, 2015, compared to $140,438 for the nine months
ended March 31, 2014. The increase of $44,749 in cash used in operating activities was primarily due to the decrease in non-cash
expenses. The net loss for the nine months ended March 31, 2015 includes non-cash expenses for bad debt expense, common stock
issued for services and common stock issued to a former officer, and the net loss for the nine months ended March 31, 2014 includes
non-cash expenses for the amortization of debt discount, common stock issued for services and a loss on the conversion of accounts
payable and debt.
There
were no cash flows used in investing activities for the nine months ended March 31, 2015 and March 31, 2014.
Net
cash flows provided by financing activities was $211,200 for the nine months ended March 31, 2015, as compared to $144,857 for
the nine months ended March 31, 2014. The increase in cash provided by financing activities of $66,343 was due to the proceeds
received from our issuance of common stock and the reduction of payments on the promissory notes payable, offset by a decrease
in proceeds from the promissory notes payable. To date, we have principally financed our operations through the sale of our common
stock and the issuance of debt.
We
do not have any material commitments for capital expenditures during the next twelve months. Although our proceeds from the issuance
of debt and our offering of shares of common stock together with revenue from operations are currently sufficient to fund our
operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our
future operations are dependent on our ability to secure additional financing. Financing transactions may include the issuance
of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common
stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance
of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs
and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to
seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common
stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans
and possibly cease our operations.
We
have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over
the next twelve months, due to our ability to raise money from our investor base and future expected revenue. Based on the aforesaid,
we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge
liabilities in the normal course of operations.
Off-Balance
Sheet Arrangements
We
do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial
condition, revenues, and results of operations, liquidity or capital expenditures.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.
Item
4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required
to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods
required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Management,
with the participation of the interim Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the interim
Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective.
Our disclosure controls and procedures were not effective because of the “material weaknesses” described below under
“Management’s report on internal control over financial reporting,” which are in the process of being remediated
as described below under “Management Plan to Remediate Material Weaknesses.”
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision
of, our interim Chief Executive Officer and Chief Financial Officer and affected by our Board of Directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures
that:
|
● |
pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
our assets; |
|
|
|
|
● |
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management
and our Board of Directors; and |
|
|
|
|
● |
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on our financial statements. |
Because
of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute,
assurance that the objectives of the control system are met and may not prevent or detect misstatements. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override.
Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process,
and it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Further, over time control
may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial reporting as of March 31, 2015. In making its assessment,
management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Based on its assessment, management has concluded that we had certain control
deficiencies described below that constituted material weaknesses in our internal controls over financial reporting. As a result,
our internal control over financial reporting was not effective as of March 31, 2015.
A
“material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual
or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
As a result of management’s review of the investigation issues and results, and other internal reviews and evaluations that
were completed after the end of quarter related to the preparation of management’s report on internal controls over financial
reporting required for this quarterly report on Form 10-Q, management concluded that we had material weaknesses in our control
environment and financial reporting process consisting of the following:
1)
lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors
on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls
and procedures; and
2)
insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application
of US GAAP and SEC disclosure requirements.
We
do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition
and results of operations for the quarter ended March 31, 2015. However, management believes that the lack of a functioning audit
committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment
and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements
in future periods.
Management
Plan to Remediate Material Weaknesses
Management
is pursuing the implementation of corrective measures to address the material weaknesses described below. In an effort to remediate
the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate,
the following series of measures:
We
plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting
in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal
controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available
to us. And we plan to prepare written policies and procedures for accounting and financial reporting with respect to the requirements
and application of US GAAP and SEC disclosure requirements.
We
believe the remediation measures described above will remediate the material weaknesses we have identified and strengthen our
internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue
to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve
our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or
determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
Changes
in Internal Controls
There
have been no changes in our internal control over financial reporting during the most recent fiscal quarter ended March 31, 2015
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II
Item
1. Legal Proceedings.
The
Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary
course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.
Item
1A. Risk Factors.
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceed
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information.
None.
Item
6. Exhibits.
Exhibit
Number |
|
Description
of Exhibit |
|
|
|
31.1 |
|
Certification
by Interim Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
31.2 |
|
Certification
by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|
|
|
32.1 |
|
Certification
by Interim Chief Executive Officer and Chief Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange
Act and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
|
|
|
101.INS |
|
XBRL
Instance Document.* |
|
|
|
101.SCH |
|
XBRL
Taxonomy Extension Schema.* |
|
|
|
101.CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase.* |
|
|
|
101.DEF |
|
XBRL
Taxonomy Extension Definition Linkbase.* |
|
|
|
101.LAB |
|
XBRL
Taxonomy Extension Label Linkbase.* |
|
|
|
101.PRE |
|
XBRL
Extension Presentation Linkbase.* |
* |
Attached
as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Balance Sheets, (ii)
the Statement of Operations, (iii) the Statement of Shareholders’ Equity, (iv) the Statement of Cash Flow, and (v) Notes
to Financial Statements. |
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
SMACK SPORTSWEAR, INC. AND SUBSIDIARY |
|
|
|
|
By: |
/s/
Douglas Samuelson |
|
|
Douglas
Samuelson |
|
|
Interim
Chief Executive Officer and Chief Financial Officer |
|
|
May
19, 2015 |
EXHIBIT
31.1
CERTIFICATION
I,
Douglas Samuelson, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of SMACK SPORTSWEAR, INC. AND SUBSIDIARY, for the quarter ended March 31, 2015;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant is made known to us by others, particularly during the period in
which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
May
19, 2015
|
/s/
Douglas Samuelson |
|
Douglas
Samuelson |
|
Interim Chief Executive
Officer |
EXHIBIT
31.2
CERTIFICATION
I,
Douglas Samuelson, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of SMACK SPORTSWEAR, INC. AND SUBSIDIARY, for the quarter ended March 31, 2015;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant is made known to us by others, particularly during the period in
which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
May
19, 2015
|
/s/ Douglas
Samuelson |
|
Douglas Samuelson
|
|
Chief Financial
Officer |
|
|
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of SMACK SPORTSWEAR, INC. AND SUBSIDIARY (the “Company”) on Form 10-Q for the
quarter ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, Douglas Samuelson, Interim Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
A
signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request.
May
19, 2015 |
/s/
Douglas Samuelson |
|
Douglas
Samuelson |
|
Interim Chief Executive
Officer and Chief Financial Officer |
|
|
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