ITEM 1. DESCRIPTION OF BUSINESS.
This Report contains summaries of the material terms of various agreements executed in connection with the transactions described herein. The summaries of these agreements are subject to, and are qualified in their entirety by reference to, these agreements, all of which are incorporated herein by reference.
History and Organization
SMACK Sportswear (“SMACK or the Company”) 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 29 million of his personal shares to TSS in exchange for 100 percent of its outstanding stock. At the time of the agreement, Reshoot had 40 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 29 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 was 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 of the Company now 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 provider for 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 shareholders and employees. We expect that future revenue growth will result from our uncompromising discipline to drive the business through our people, processes, and products.
Our core business is the manufacturing and sale of 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 accelerate the growth of the sport at the youth and high school levels.
Change in Fiscal Year
SMACK closed the purchase of TSS on December 6, 2012. The purchase represented a substantial portion of the Company’s business at the time of acquisition. In connection with the closing of the transaction, the Company changed its fiscal year end to June 30 from December 31 to conform its fiscal year end to that of TSS.
Competition
The market for performance volleyball apparel, footwear and accessories is highly competitive and includes many new competitors as well as increased competition from established companies expanding their production and marketing of performance products. Many of the fabrics and technology used in manufacturing our products are not unique to us. Some of our competitors are large apparel and footwear companies with strong worldwide brand recognition and significantly greater resources than us, such as Mizuno, Asics, Nike and Adidas. We also compete with other manufacturers, including those specializing in volleyball and team apparel, as well as non-branded offerings targeting the market through the expansive decorator distribution channel.
Patents, trademarks, franchises, concessions, royalty agreements
SMACK currently has no pending or provisional patents, nor any trademark applications filed. The SMACK brand has been operated since 1994. We have developed our own proprietary technology and processes. We produce a portion of our finished apparel at our facilities in Torrance, California. We regard our technologies and processes as trade secrets. We recognize that trade secrets are difficult to protect. We intend to enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. These agreements also generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable.
Government Regulation
We are subject to federal, state and local laws and regulations affecting our business, including those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission and various environmental laws and regulations.
This means we may be required to make significant expenditures to comply with governmental laws and regulations, including labeling laws and privacy laws, compliance with which may require significant additional expense. Complying with existing or future laws or regulations may materially limit our business and increase our costs. Failure to comply with such laws may expose us to potential liability and have a material adverse effect on our results of operations.
Employees
The Company has no full time employees, but has seven independent contractors, at this time.
ITEM 1A
ITEM 1A - RISK FACTORS.
RISK FACTORS
Risks Related to SMACK Sportswear’s Business
SMACK HAS A LIMITED OPERATING HISTORY.
SMACK has a limited operating history. Prospective investors should be aware of the difficulties and risks encountered by such new enterprises, including, but are not limited to: competition, the absence of an operating history, the need for additional working capital, the possible inability to adapt to various economic changes inherent in a market economy expenses that are frequently incurred in the operation of a new business and the competitive environment in which SMACK will be operating. The likelihood of success of SMACK must be considered together with these issues.
IF SMACK'S BUSINESS PLAN IS NOT SUCCESSFUL, THERE IS SUBSTANTIAL DOUBT THAT SMACK MAY BE ABLE TO CONTINUE OPERATIONS AS A GOING CONCERN AND IF WE DISCONTINUE OPERATIONS, STOCKHOLDERS MAY LOSE THEIR ENTIRE INVESTMENT.
The accompanying 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. During the year ended June 30, 2014, the Company incurred a net loss of $1,246,488 and cash used in operating activities was $191,447, and as of that date, is delinquent in payments of $270,664 for payroll and sales taxes. As of June 30, 2014, the Company had a working capital deficit of $600,326 and a shareholders’ deficit of $872,326. These factors raise substantial doubt that the Company will be able to continue operations as a going concern, and SMACK’s independent auditors included an explanatory paragraph regarding this uncertainty in their report on the financial statements for the years ended June 30, 2014 and 2013.
The Company’s ability to continue as a going concern is dependent upon generating cash flow sufficient to fund operations and reducing operating expenses. SMACK’s business plan may not be successful in addressing these issues. If SMACK cannot continue as a going concern, its stockholders may lose their entire investment.
Failure to raise additional financing will cause us to go out of business. Further, we cannot guarantee that we will be successful in generating revenues and profit in the future. Failure to generate revenues and profit will cause us to suspend or cease operations. If this happens, you could lose all or part of your investment.
IT IS DIFFICULT TO EVALUATE THE LIKELIHOOD THAT SMACK WILL ACHIEVE OR MAINTAIN PROFITABILITY IN THE FUTURE.
SMACK’s ability to continue to operate as a going concern is dependent upon SMACK earning sufficient revenues or obtaining financing to continue its development and operational activities. It is important to note that even if the appropriate financing is received, there is no guarantee that SMACK will ever be able to operate profitably or derive any significant revenues from its operation.
We have a limited product LINE at the current time.
There can be no assurance that any of SMACK’s product concepts will be successfully developed, prove to be safe and efficacious, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or be successfully marketed.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market products we may develop, we may not be able to generate increased product revenue.
We do not currently have a well-defined organization for the sales, marketing and distribution of our apparel products. In order to market our products, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. In addition, we have no experience in developing, training or managing a sales force and will incur substantial additional expenses in doing so. The cost of establishing and maintaining a sales force may exceed its cost effectiveness. Furthermore, we will compete with many apparel companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.
We are subject to various laws and regulations where we operate our business.
We are subject to federal, state and local laws and regulations affecting our business, including those promulgated under the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the rules and regulations of the Consumer Products Safety Commission as well as environmental laws and regulations. This means we may be required to make significant expenditures to comply with governmental laws and regulations, including labeling laws and privacy laws, compliance with which may require significant additional expense. Complying with existing or future laws or regulations may materially limit our business and increase our costs. Failure to comply with such laws may expose us to potential liability and have a material adverse effect on our results of operations.
The sports apparel industry is subject to pricing pressures that may cause us to reduce the future gross margins for our products.
Average prices in the sports apparel industry have been declining over the past several years, primarily as a result of the growth of the mass merchant channel of distribution, increased competition, consolidation in the retail industry and a promotional retail environment.
To be competitive, we will be required to adjust our prices in response to these industry-wide pricing pressures. Many of our competitors source their product requirements, from lesser-developed countries to achieve lower operating costs. Our competitors may possibly source from regions with lower costs than those of our sourcing partners and those competitors may apply such additional cost savings to further reduce prices.
Moreover, increased customer demands for markdown allowances, incentives and other forms of economic support reduce our gross margins and affect our profitability. Our financial performance may be negatively affected by these pricing pressures if we are forced to reduce our prices without being able to correspondingly reduce our costs for finished goods or if our costs for finished goods increase and we cannot increase our prices.
We may not be able to keep pace with constantly changing sports apparel fashion trends, and if we misjudge consumer preferences, the image of one or more of our brands may suffer and the demand for our products may decrease.
Our success will depend, in part, on management's ability to anticipate and respond effectively to rapidly changing fashion sport trends and consumer tastes and to translate market trends into appropriate, saleable product offerings. If we are unable successfully to anticipate, identify or react to changing styles or trends and misjudge the market for our products or any new product lines, our sales may be lower and we may be faced with a significant amount of unsold finished goods inventory. In response, we may be forced to increase our marketing promotions, to provide markdown allowances to our customers, or to liquidate excess merchandise, any of which could have a material adverse effect on our net sales and profitability. Our brand image may also suffer if customers believe that we are no longer able to offer innovative products, respond to the latest fashion trends or maintain the quality of our products.
Even if we are able to anticipate and respond effectively to changing fashion sport trends and consumer preferences, our competitors may quickly duplicate or imitate one or more aspects of our products, promotions, advertising, brand image and business processes, whether or not they are protected under applicable intellectual property law, which may materially reduce our sales and profitability.
The loss of one or more of our future suppliers of finished goods or raw materials may interrupt our supplies.
We purchase sport apparel from a limited number of third-party manufacturers. We do not have any material or long-term contracts with any of our suppliers. Furthermore, our finished goods suppliers also purchase the fabrics and accessories used in our products from a limited number of suppliers. The loss of one or more of these vendors could interrupt our supply chain and impact our ability to deliver products to our customers, which would have a material adverse effect on our net sales and profitability.
Increases in the price of raw materials used to manufacture our sports apparel could materially increase our costs and decrease our profitability.
The principal fabrics used in our business are made from cotton, synthetic fabrics and cotton-synthetic blends. The prices for these fabrics are dependent on the market price for the raw materials used to produce them, primarily cotton and chemical components of synthetic fabrics, and there can be no assurance that prices for these and other raw materials will not increase in the near future.
These raw materials are subject to price volatility caused by weather, supply conditions, power outages, government regulations, economic climate and other unpredictable factors. Fluctuations in crude oil or petroleum prices may also influence the prices of related items such as chemicals, dyestuffs, man-made fiber and foam. Any raw material price increase would increase our cost of sales and decrease our profitability unless we are able to pass higher prices on to our customers. In addition, if one or more of our competitors is able to reduce its production costs by taking advantage of any reductions in raw material prices or favorable sourcing agreements, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have a material and adverse effect on our business, results of operations and financial condition.
The worldwide sports apparel industry is heavily influenced by general economic conditions.
The worldwide sports apparel industry is highly cyclical and heavily dependent upon the overall level of consumer spending. Purchases of sports apparel and related goods tend to be highly correlated with changes in the disposable income of consumers. Consumer spending is dependent on a number of factors, including actual and perceived economic conditions affecting disposable consumer income (such as unemployment, wages and salaries), business conditions, interest rates, availability of credit and tax rates in the general economy and in the international, regional and local markets where our products are sold. As a result, any deterioration in general economic conditions, reductions in the level of consumer spending or increases in interest rates could adversely affect the future sales of our products.
A return to recessionary or inflationary conditions, whether in the United States or globally, additional terrorist attacks or similar events could have further adverse effects on consumer confidence and spending and, as a result, could have a material adverse effect on our financial condition and results of operations.
We may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls.
Because of the emerging nature of the apparel markets in which we compete, our historical financial data is of limited value in estimating future operating expenses. Our budgeted expense levels are based in part on our expectations concerning future revenues. However, our ability to generate any revenues is solely dependent on our ability to market and sell our apparel products. The size of any future revenues depends on the choices of individuals the Company intends to recruit to assist with the development and implementation of future sales and marketing programs, which are difficult to forecast accurately. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, a significant shortfall in demand for our products could have an immediate and material adverse effect on our business, results of operations, and financial condition. We may not be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business, operating results and financial condition.
Our operating results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as any indication of our future performance. Our quarterly and annual expenses are likely to increase substantially over the next several years. Our operating results in future quarters may fall below expectations. Any of these events could adversely impact our business prospects and make it more difficult to raise additional equity capital at an acceptable price per share. Each of the risk factors listed in this “Risk Factors” section may affect our operating results.
Our business and the sport apparel industry are constantly changing and evolving over time. Furthermore, we compete in an unpredictable industry and regulatory environment. Our ability to succeed depends on our ability to compete in this fluctuating market. As such, our actual operating results may differ substantially from our projections.
If we lose or fail to retain the services of key management personnel, we may not be able to execute our business strategy effectively.
Our future success depends in a large part upon the continued service of key members of our senior management team. All of our current executive officers are independent contractors and we do not maintain any key-person life insurance policies. The loss of any of our management or key personnel could materially harm our business.
We may not be able to find suitable employees, who can help us move our business forward.
In order to implement the aggressive business plan of the Company, management recognizes that additional clerical staff will be required. Our officers can manage the office functions and bookkeeping services until the Company can generate enough revenues to hire additional staff.
No assurances can be given that the Company will be able to find suitable employees that can support the above needs of the Company or that these employees can be hired on terms favorable to the Company.
We rely on trained personnel and, if we are unable to retain or motivate key personnel or hire additional qualified personnel, we may not be able to grow effectively.
Our performance is largely dependent on the talents and efforts of trained individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate, and retain trained personnel for all areas of our organization. Competition in the apparel industry for qualified employees is intense, especially on the West Coast and it is likely that certain of our competitors will directly target certain of our employees in the future. Our continued ability to compete effectively depends on our ability to retain and motivate those employees.
We may also need to hire additional qualified personnel with expertise in the apparel industry, government regulation, manufacturing and sales and marketing. We compete for qualified individuals with numerous companies and other emerging entrepreneurial companies. Competition for such individuals, particularly in California is intense, and may not be able to successfully recruit or retain such personnel. Attracting and retaining qualified personnel will be critical to our success.
We may not successfully manage any growth that we may experience.
Our success will depend upon the expansion of our operations and the effective management of any such growth, which will place a significant strain on our management and on our administrative, operational, and financial resources. To manage any such growth, we must expand our facilities, augment our operational, financial and management systems, and hire and train additional qualified personnel. If we are unable to manage our growth effectively, our business would be harmed.
If we engage in any acquisition, we will incur a variety of costs and may never realize the anticipated benefits of the acquisition.
We may attempt to acquire technologies, services or products or in-license technologies that we believe are a strategic fit with our business. We have limited experience in identifying acquisition targets, and successfully completing and integrating any acquired businesses, technologies, services or products into our current infrastructure. The process of integrating any acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may divert significant management attention from our ongoing business operations. As a result, we will incur a variety of costs in connection with an acquisition and may never realize its anticipated benefits.
Risks Related to Intellectual Property
Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information and may not adequately protect our intellectual property.
Because we operate in the highly competitive sports apparel field, we need to protect our proprietary technology and processes. However, trade secrets are difficult to protect. We intend to enter into confidentiality and intellectual property assignment agreements with our corporate partners, employees, consultants, and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us during the course of the party’s relationship with us. These agreements also generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. The failure to obtain or maintain trade secret protection could adversely affect our competitive position.
Risks Related to Our Stock
We may, in the future, issue additional common shares, which would reduce investors' percent of ownership and may dilute our share value.
The future issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
Our common shares are subject to the “Penny Stock” Rules of the SEC, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person's account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person; and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our Common shares and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because we do not intend to pay any cash dividends on our common stock, our stockholders will not be able to recEIve a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them. There is no assurance that stockholders will be able to sell shares when desired.
IN THE FUTURE, SMACK WILL INCUR INCREMENTAL COSTS AS A RESULT OF OPERATING AS A PUBLIC COMPANY, AND MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME TO COMPLIANCE INITIATIVES.
As SMACK is a fully reporting company with the SEC, it will incur additional legal, accounting and other expenses. Moreover, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC, have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
Our office is located at 20316 Gramercy Place, Torrance CA 90501. In July 2013, we entered into a two year lease to rent approximately 4,000 square feet. Management feels the facility is adequate for our operational and administrative needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.	
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the Financial Industry Regulatory Authority’s OTC Bulletin Board under the symbol “SMAK”. The following quotations obtained from Yahoo! Finance reflect the highs and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The high and low bid prices of our common stock for the previous two fiscal years are as follows:
Transfer Agent
Our transfer agent for our common stock is Empire Stock Transfer, Inc. They are located at 1859 Whitney Mesa Drive, Henderson NV 89014. Tel: 702 818-5898 Fax: 702 974-1444.
Holders of Common Stock
As of October 17, 2013, we have 662 registered shareholders holding 58,378,330 shares of our common stock.
Dividends
We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Our directors will determine if and when dividends should be declared and paid in the future based on our financial position at the relevant time. All shares of our common stock are entitled to an equal share of any dividends declared and paid.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
In October 2014, the Company sold 2,500,000 shares of its common stock, par value $0.001, at $0.02 per share. Total gross proceeds were $50,000.
Please refer to our previous filings on our Quarterly Reports on Form 10-Q, or on our Current Reports on Form 8-K for information regarding all of our sales of our equity securities during the fiscal year ended June 30, 2014.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
As a smaller reporting company, we are not required to provide the information required by this Item.
ITEM 7.
ITEM 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk Factors” and elsewhere in this report.
The following discussion and analysis of the Company’s financial condition and results of operations is based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.
Plan of Operation
It is unclear whether the Company will be able to generate any significant profit during the coming year. Management believes that general and administrative costs and well as building its infrastructure will most likely exceed any anticipated revenues for the coming year.
The Company's current need for capital may change dramatically if it can generate significant additional revenues from its operations. Currently the Company requires additional funds and is seeking loans or equity placements to cover such cash needs. There are no assurances additional capital will be available to the Company on acceptable terms.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are summarized in Note 2 of our financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
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. 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.
Stock-Based Compensation
The Company periodically issues common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock payments to employees by measuring the cost of services received in exchange for equity on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock grants to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
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 and common stock issued for services, among others. Actual results could differ from these estimates.
Results of Operations for the year ended June 30, 2014 compared to the year ended June 30, 2013
Revenue and Cost of Goods Sold
Revenue for the years ended June 30, 2014 and 2013 was $1,084,206 and $947,223, respectively. The increase of $136,983 was primarily due to additional market penetration in both female high school and club teams during fiscal 2014.
Cost of sales for the years ended June 30, 2014 and 2013, was $984,648 and $615,406, respectively. Gross profit for the years ended June 30, 2014 and 2013 was $99,558 and $331,817, respectively. The gross profit decrease of $232,259 for the year ended June 30, 2014 was significantly lower than in 2013 due to the write down of fabric and prior year inventory items during the third and fourth quarters of fiscal 2014, which amounted to approximately $331,000. The total write down of fabric was approximately $115,000 and the total amount of finished products was approximately $216,000. If not for these write downs, the gross profit percentage in 2014 would have been reasonably comparable to 2013.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased by $353,939 to $1,117,443 for the year ended June 30, 2014, compared to $763,504 for the year ended June 30, 2013. The increase in SG&A expenses was due primarily to an increase in stock issued for services to officers and former officers of $303,700, bad debt expense of $71,512 and facility costs of $58,360, offset by a decrease in other SG&A expenses.
Other Income and Expenses
Other income and expense increased by $164,337 to $228,603 for the year ended June 30, 2014, compared to $64,266 for the year ended June 30, 2013. Interest expense was $125,794 for the year ended June 30, 2014 compared to $64,266 for the year ended June 30, 2013, an increase of $61,528. The interest expense in 2014 and 2013 related to the amortization of the debt discount on the convertible note payable (see Note 4), while the 2014 balance also included accrued interest on the two promissory notes (see Note 4). During the year ended June 30, 2014, the Company also incurred other expenses of $13,500 relating to the loss on conversion of accounts payable to common stock, financing costs of $22,642 and a loss of $66,667 on the conversion of debt to common stock. None of these expenses were incurred during the year ended June 30, 2013.
Net Loss
Our net loss increased by $750,535 to $1,246,488 for the year ended June 30, 2014, compared to a net loss of $495,953 for the year ended June 30, 2013. The increase in net loss was due to the increase in operating expenses of $353,939 and other expenses of $164,337, combined with a decrease in gross profit of $232,260. As noted above, the decrease in gross profit was due to the write down of fabric and prior year inventory items during fiscal 2014, which amounted to approximately $331,000.
Liquidity and Capital Resources
Comparison of years ended June 30, 2014 and 2013
As of June 30, 2014, we had $824 in cash, negative working capital of $600,326 and an accumulated deficit of $872,326.
As of June 30, 2013, we had $2,414 in cash, negative working capital of $267,085 and an accumulated deficit of $257,085.
Cash flows used in operating activities
During the year ended June 30, 2014, the Company used cash flows in operating activities of $191,447 compared to $315,632 used in the year ended June 30, 2013. The reasons for the decrease in cash used in operating activities in the amount of $124,185 was due mainly to the decrease in purchases of inventories and the increase in accounts payable and accrued expenses.
Cash flows provided by financing activities
Cash flows from financing activities for the years ended June 30, 2014 and 2013 provided net cash of $189,857 and $306,613, respectively, primarily relating to the proceeds from notes payable.
Going Concern
The accompanying consolidated condensed 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 consolidated condensed financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the year ended June 30, 2014, the Company incurred a net loss of $1,246,488 and cash used in operating activities was $191,448, and as of that date, is delinquent in payments of $270,664 for payroll and sales taxes. As of June 30, 2014, the Company had a working capital deficiency of $600,326 and a shareholders’ deficit of $872,326. These factors, among others, raise substantial doubt about the Company’s 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. The Company has obtained funds from its debt holders in the year ended June 30, 2014 and has obtained additional funding in the amount of $50,000 from the initiation of a Private Placement Memorandum (PPM) subsequent to June 30, 2014. The Company feels it will raise additional funding from the PPM. Management believes this funding will continue from its current investors and also will 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.
New Accounting Standards
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 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 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.
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.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Smack Sportswear
We have audited the accompanying consolidated balance sheet of Smack Sportswear, Inc. and Subsidiary (the “Company”) as of June 30, 2014 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2014 and the consolidated results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a shareholders’ deficiency and has experienced recurring operating losses and negative operating cash flows since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that might result from the outcome of this uncertainty.
/s/ Weinberg and Company, P.A
Los Angeles, California
October 17, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Smack Sportswear
We have audited the accompanying balance sheet of Smack Sportswear as of June 30, 2013, and the related statements of income, stockholders’ equity (deficit), and cash flows for the year then ended. Smack Sportswear’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Smack Sportswear as of June 30, 2013, and the related statements of income, stockholders’ equity (deficit), and cash flows for the year ended June 30, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has revenue that is insufficient to cover its expenses, has negative working capital at June 30, 2013, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Seale and Beers, CPAs
Seale and Beers, CPAs
Las Vegas, Nevada
October 15, 2013
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
The accompanying notes are an integral part of these consolidated financial statements.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 1. ORGANIZATION, OPERATIONS AND BASIS OF ACCOUNTING
History and Organization
SMACK Sportswear (“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 29 million of his personal shares to TSS in exchange for 100 percent of its outstanding stock. At the time of the agreement, Reshoot had 40 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 29 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 was 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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 1. ORGANIZATION, OPERATIONS AND BASIS OF ACCOUNTING (Continued)
Going Concern
The accompanying 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 consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the year ended June 30, 2014, the Company incurred a net loss of $1,246,488 and cash used in operating activities was $191,448, and as of that date, is delinquent in payments of $270,664 for payroll and sales taxes. As of June 30, 2014, the Company had a working capital deficiency of $600,326 and a shareholders’ deficit of $872,326. These factors, among others, raise substantial doubt about the Company’s 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. The Company has obtained funds from its debt holders in the year ended June 30, 2014 and has obtained additional funding in the amount of $50,000 from the initiation of a Private Placement Memorandum (PPM) subsequent to June 30, 2014 (see Note 10). The Company believes it will raise additional funding from the PPM. Management believes this funding will continue from its current investors and also will 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Basis of Consolidation
The 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.
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. 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.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
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 years ended June 30, 2014 and 2013, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.
Stock-Based Compensation
The Company periodically issues common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock payments to employees by measuring the cost of services received in exchange for equity on the grant date fair value of the awards, with the cost recognized as compensation expense in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock grants to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs included within selling, general and administrative expenses were approximately $31,530 and $60,036 for the years ended June 30, 2014 and 2013, respectively.
Use of Estimates
The preparation of the consolidated 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 and common stock issued for services, among others. Actual results could differ from these estimates.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible. Bad debt expenses were $71,512 for the year ended June 30, 2014. There were no bad debt expenses for the year ended June 30, 2013. The allowance for doubtful accounts was $63,953 and $9,400 as of June 30, 2014 and 2013, respectively.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company provides inventory write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. The write-down is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales.
At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. During the year ended June 30, 2014, the Company recorded a charge of approximately $331,000 relating to the mark down of inventories to net realizable value at June 30, 2014. The mark downs related to inventories that management felt had become obsolete or in excess of future estimated sales of those products over the next year, particularly fabric and prior year products.
Shipping and handling costs
The Company’s shipping and handling costs are reported as selling, general and administrative expenses in the consolidated Statements of Operations. These costs primarily relate to outbound freight. The Company classifies amounts billed to customers for shipping fees as revenues.
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Customer Deposits
In many of its customer agreements, the Company requires its customers pay a 50 percent deposit upon signing the agreement. At June 30, 2013, there was $14,034 in outstanding customer deposits. There were no customer deposits at June 30, 2014.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
Fair Value of Financial Instruments
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.
In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
As of June 30, 2014, the balances reported for cash, accounts receivable, 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
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.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
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 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.
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.
NOTE 3. INVENTORIES
Inventories consisted of the following at June 30, 2014 and 2013:
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 4. NOTES PAYABLE AND OTHER DEBT TO RELATED PARTIES
Notes payable and other debt to related parties consist of the following as of June 30, 2014 and 2013:
a. As of June 30, 2013, the Company had a loan payable due to a 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 June 30, 2014, the balance of the loan was $19,508.
b. As of June 30, 2013, the Company had received advances from the former CFO in the amount of $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 calls for the Company to make five $3,800 payments beginning in March 2014 and ending in July 2014. If the Company is late in making any of its required payments, the note becomes in default and the Company is required to pay interest at the rate of 10 percent on any outstanding balances until the note is fully repaid. At June 30, 2014, the outstanding balance of the short-term note was $3,800. The short-term note is unsecured.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 4. NOTES PAYABLE AND OTHER DEBT TO RELATED PARTIES (Continued)
c. In 2012, the Company entered into a $250,000 promissory note payable to Bill Kotlar, a shareholder. The note was payable in full at maturity on June 30, 2014 and accrued interest at a rate of 10 percent per annum payable quarterly commencing on September 30, 2012. The note was convertible into common stock of the Company at any time until the note was paid in full at a conversion rate equal to 75 percent of the average market price of the common stock 30 days immediately prior to the conversion date. On October 19, 2012, the note was amended to increase the revolving credit limit from $250,000 to $300,000. Concurrently, the note holder forgave all accrued and future interest in exchange for the right to convert the note into common stock of the Company at a conversion price of $0.06 per share. As the conversion price of the note is less than the market price of the Company’s common stock at the date of issuance, the Company determined that the note contained a beneficial conversion feature of $141,940. The note’s beneficial conversion feature was recorded as a debt discount which was amortized over the life of the note. As of June 30, 2013, $279,943 was outstanding on the note and the amount of the unamortized note discount was $77,691.
During the year ended June 30, 2014, an aggregate amount of $200,000 of the note was converted into 13,333,330 shares of the Company’s common stock. The fair value of the shares at the date of conversion was $266,667 (based on a trading price of $0.02 per share). This resulted in a loss on conversion of $66.667. In February 2014, the remaining outstanding balance of $79,943 was paid off and all remaining unamortized note discount was recorded as interest expense.
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, of which $80,000 was advanced at closing. During the year ended June 30, 2014, the Company borrowed an additional $50,000 on the note. As of June 30, 2014, the outstanding balance of the note was $130,000. The outstanding principal amount and all accrued and unpaid interest is due by December 2016.
e. 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. During the year ended June 30, 2014, the Company borrowed $150,000 on the note which was outstanding as of June 30, 2014. The outstanding principal amount and all accrued and unpaid interest is due by January 2016.
NOTE 5. OTHER NOTE
Effective July 2013, the Company entered into a convertible note payable agreement in the principal amount of $53,000. The note had an interest rate of 8 percent and was due on March 19, 2014. Per the agreement, if the note was not repaid by March 19, 2014, the note would convert into shares of the Company’s common stock at a conversion rate of 58 percent of the market price of the average of the three lowest closing prices of the common stock for the ten trading days prior to the date of conversion. As the conversion price of the note was less than the market price of the Company’s common stock at the date of issuance, the Company determined that the note contained a beneficial conversion feature of $ $38,380. The note’s beneficial conversion feature was considered as debt discount and was being amortized over the life of the note. In February 2014, the note was paid off and all remaining unamortized note discount was recorded as interest expense.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 6. RELATED PARTY TRANSACTIONS
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 ending on the close of business 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 the time such shares are available to be issued by the Company). The conversion price shall be the lower of $0.02 or the same conversion price as the current note holders (see Note 4). In the event that the former CEO is not able to exercise the above accrued salary conversation rights by December 31, 2015, 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 $3000 per month commencing on March 1, 2015 and continuing on a monthly basis thereafter until repayment is completed.
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 officer 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. The Company also owed $2,200 to another officer for personal loans to the Company. As of June 30, 2013, the Company owed the former officer $80,063. These amounts are reflected as Advances from Officers on the accompanying consolidated Balance Sheets.
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.
Also during the year, the former CEO agreed to issue certain shares of common stock to the Company’s President and Director for services (see Note 7).
NOTE 7. CAPITAL STOCK
In December 2012, the Company entered into an employment agreement with an officer with a term of three years. Under the agreement, the officer was entitled to receive up to 3,000,000 shares of the Company’s common stock, subject to vesting at rate of 500,000 shares on a semi-annual basis, commencing June 30, 2013. The officer resigned in March 2014. During the year ended June 30, 2014, the Company issued 1,000,000 shares of common stock to the former officer valued at $160,000. The remaining 2,000,000 shares of common stock were forfeited upon resignation of the Officer. The Company also accrued a total of $18,000 as part of the former officer’s termination agreement, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet as of June 30, 2014.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 7. CAPITAL STOCK (Continued)
During the year ended June 30, 2014, the Company issued 120,000 shares of common stock valued at $73,200 to its legal counsel for services provided to the Company.
During the year ended June 30, 2014, the Company issued 800,000 shares of common stock to a former officer for services valued at $40,000. The shares issued were valued at the trading price at the date of the agreement.
During the year ended June 30, 2014, the Company issued 450,000 shares to a former officer valued at $22,500 upon conversion of $9,000 accounts payable owed to the officer. The shares issued were valued at the trading price at the conversion date. As a result, the Company recorded a loss on conversion of accounts payable of $13,500 which has been included in the accompanying consolidated statement of operations for the year ended June 30, 2014.
During the year ended June 30, 2014, the Company issued 13,333,330 shares of common stock, with market value of $266,667 (or at $0.02 per share), for the settlement of convertible notes payable in the aggregate principal amount of $200,000. As a result, the Company recorded a loss of $66,667 which has been reflected on the accompanying consolidated statement of operations for the year ended June 30, 2014.
In February 2014, the Company entered into an agreement with its President and 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 500,000 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 has accounted for as additional compensation expense and as additional paid in capital contributed by the former CEO in the accompanying financial statements for the year ended June 30, 2014. The President may also earn up to an additional 3,250,000 shares of common stock upon reaching certain revenue milestones by June 2015 and an additional 1,250,000 shares upon reaching certain net income milestones in the future. These shares will also be contributed by the former CEO.
In April 2014, the Company entered into an agreement with its Chief Financial Officer under which the officer could earn up to 500,000 shares of the Company’s common stock upon reaching certain milestones, specific to the completion of the Company’s quarterly SEC filings. The officer can also earn 50,000 shares per quarter upon reaching certain milestones, also specific to the timely filing of the Company’s quarterly SEC filings. During the year ended June 30, 2014, the officer met the milestones and earned a total of 175,000 shares, which were valued at $10,500 and are included in the accompanying consolidated statement of operations for the year ended June 30, 2014.
Preferred Stock
The Company has two series of preferred stock. The Series A Voting preferred stock consists of 2,000,000 authorized shares, par value $0.001. The holders of the Series A Voting preferred stock are not entitled to receive any dividends and do not have any liquidation rights. The holders of Series A Voting preferred stock shall be entitled to (a) notice of any meeting of the shareholders of the Company; and (b) have the power to vote each share at any shareholder meeting, where each share of Series A Voting preferred stock carries the weight of 20 votes for each share of common stock.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 7. CAPITAL STOCK (Continued)
On December 4, 2012, the Company agreed to issue 1,000,000 shares of its unregistered Series A Voting preferred stock to the Company’s former CEO in exchange for the transfer of 2,500,000 restricted common shares from his personal holdings to the Company’s Employee Stock Option Plan. At June 30, 2013, the shares were held in treasury. On June 30, 2014, the agreement was rescinded and as a result, the Company had no preferred shares and treasury shares outstanding as of June 30, 2014.
After the shares were rescinded, at June 30, 2014, the Company had 4,000,000 undesignated authorized preferred shares of which there are no shares issued or outstanding. The designation of these shares has yet to be determined by the Board of Directors.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases its office and warehouse space in Torrance, California under a non-cancelable operating lease that will expire on June 30, 2015. The Company has the option to extend the lease to June 30, 2017. The minimum lease payment is $4,209 per month.
Rent expense, which is classified in selling, general and administrative expenses, was $50,508 for the years ended June 30, 2014 and 2013.
Future minimum lease payments at June 30, 2014 under the Company’s non-cancelable operating lease for the year ending June 30, 2015 is $50,508.
Legal Matters
The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. Reserves are established for specific liabilities in connection with legal actions when they can be deemed probable and estimable. These matters are not expected to have a material adverse effect upon the Company’s financial condition.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 9. INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using the currently enacted tax rates applied to taxable income in the periods in which the deferred tax assets and liabilities are expected to be settled or realized.
Total income taxes differ from expected income taxes (computed by applying the U.S. federal corporate tax rate of 34%) for the years ended June 30, 2014 and 2013 as follows:
The Company’s effective tax rate differs from the statutory rate primarily as a result of the full valuation allowance on the Company’s deferred taxes as of June 30, 2014 and 2013.
The Company’s net deferred taxes include the following significant components as of June 30, 2014 and 2013:
The Company’s deferred tax assets and liabilities represent the tax effects of taxable temporary differences between book and tax reporting. The temporary differences arise from unused net operating loss carryforwards. The Company recorded a full valuation allowance against its net deferred tax assets at June 30, 2014 and 2013. Based upon management’s assessment of all available evidence, the Company has concluded that it is more likely than not that the net deferred tax assets will not be realized.
As of June 30, 2014, the Company has U.S. federal and state income tax net operating loss carryforwards of approximately $1.8 million that may be applied against future taxable income and that begin to expire in the year 2032.
The Company files tax returns in the United States and California. Management has evaluated its tax positions and believes that there are no adjustments or disclosures of possible additional tax liabilities for the year ended June 30, 2014. The amount that may ultimately have to be recognized, in the event that the Company’s tax returns are examined by a taxing authority, may differ from management’s estimate.
SMACK SPORTSWEAR, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014 AND 2013
NOTE 9. INCOME TAXES (Continued)
At June 30, 2014, the Company has no material unrecognized tax positions. For the years ended June 30, 2014 and 2013, the Company did not recognize any interest or penalties for uncertain tax positions. There are also no accrued interest and penalties at June 30, 2014 and 2013. The Company is currently not under examination by the United States Internal Revenue service or any other state, city or local jurisdiction. As such, the Company is subject to the standard statutes of limitations by the relevant tax authorities for federal and state purposes. The Company’s federal and state income tax returns are subject to examination by taxing authorities for the years 2009 through 2014.
NOTE 10. SUBSEQUENT EVENTS
In July 2014, the Company was advanced an additional $20,000 under one if its promissory notes payable agreements (see Note 4, item d).
In September 2014, the Company entered into a mutual release agreement with its CEO (see Note 6).
In October 2014, the Company sold 2,500,000 shares of its common stock at the price of $0.02 per share through its private placement memorandum. Gross proceeds from the issuance were $50,000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Effective March 20, 2014, Seale and Beers, CPAs (“SB”) resigned as certifying independent accountant of Smack Sportwear. SB had been engaged by the Registrant effective August 7, 2009.
The report of SB on the financial statements of the Registrant for the fiscal year ended June 30, 2013 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such report included an explanatory paragraph with respect to the Registrant’s ability, in light of its lack of revenues and history of losses, to continue as a going concern.
During the Registrant’s two most recent fiscal years ended June 30, 2014 and the subsequent interim periods, there were no disagreements between the Registrant and SB on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of SB would have caused them to make reference to this subject matter of the disagreements in connection with their report, nor were there any "reportable events" as such term as described in Item 304(a)(1)(v) of Regulation S-K.
Contemporaneous with the resignation of SB, the Registrant engaged Weinberg & Company P.A. (“WC”) as the Registrant’s independent registered public accountant. The engagement was approved by the Board of Directors (the “Board”) of the Registrant. Prior to March 20, 2014, the Registrant did not consult with WC regarding (1) the application of accounting principles to a specified transaction, (2) the type of audit opinion that might be rendered on the Registrant’s financial statements, (3) written or oral advice provided that would be an important factor considered by the Registrant in reaching a decision as to an accounting, auditing or financial reporting issue, or (4) any matter that was the subject of a disagreement between the Registrant and its predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the SEC, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
Management, with the participation of the 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 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 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 June 30, 2014. 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 June 30, 2014.
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 annual report on Form 10-K, 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 year ended June 30, 2014. 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 Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This amended quarterly report does not include an attestation report of the Corporation's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Corporation's registered public accounting firm pursuant to temporary rules of the SEC that permit the Corporation to provide only the management's report in this quarterly report.
Changes in internal controls over financial reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B
Item 9B - OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors
As of October 17, 2014, we have three directors. The name, age and appointment details are as follows:
Executive Officers
As of October 17, 2014, we have one Executive Officer. His name, age and appointment details are as follows:
Significant Employee
As of October 17, 2014, we have a Significant Employee whose name, age and date of employment are set out below:
Business Experience
The following is a brief account of the education and business experience for at least the past five years of our directors and our executive officer, indicating each person’s business experience, principal occupation during the period, and the name and principal business of the organization by which they were employed.
Doug Samuelson, Interim Chief Executive Officer and Chief Financial Officer
Doug Samuelson has his CPA license in California and has over 10 years of experience working for public accounting firms and over 10 years of experience as a CFO, Director and Controller of both private and publicly traded companies. Most recently, Doug was the CFO for two years at Medacta USA, an orthopedic distributor located in Camarillo, California. Before that, he had his own consulting practice, working as a contract CFO and assisting public companies with their Sarbanes-Oxley (SOX) compliance. From 2005 to 2010, he worked for JH Cohn LLP in their audit and consulting groups in Woodland Hills, California, primarily working with publicly traded companies with their SOX compliance, but also providing technical accounting and financial reporting guidance to those companies. He also managed audits for privately held companies. From 2002 to 2005, he worked for the RAND Corporation in Los Angeles, California, as a Director of Accounting. From 1998 to 2002, he worked for Spirent Communications as their Director of Accounting in Calabasas, California. From 1992 to 1998, he worked for Arthur Andersen LLP in their audit practice in Los Angeles, California.
Doug has his Bachelor of Science degree in Accounting from the University of Utah and his Master of Science degree in Computer Science from the California State University, Northridge.
William Sigler, Director
Mr. Sigler’s management of the business (since 1994), coupled with his entrepreneurial experience and passion for the sport, makes him the ideal leader to drive this endeavor. His relationships in the sport will be key to aligning strategic partners. He coached club volleyball from 2002-2009, coached some of the top players on the beach, and has been running amateur volleyball classes and leagues since 1996. He is a member of Vistage, the Los Angeles Venture Association, and has been on the board of 6 other companies. Mr. Sigler also established a non-profit called Southern California Foundation for Children in 2001, which has raised over $300,000 for underprivileged kids. He has also been an appointed member of the Hermosa Beach Parks and Rec Commission since 2002.
Mr. Sigler was hired by Stuart Pharmaceuticals (now Astra Zeneca). At that time is was a division of ICI Americas (based in Delaware). One of the largest companies in the world, Mr. Sigler was recruited in his senior year of college to participate in ICI’s Corporate Program, which included 25 of their top college hires across all divisions. The program was designed to train future management. Mr. Sigler first worked in the MIS department supporting sales and marketing senior management with PC Support, and systems development. He then was moved to marketing, where Mr. Sigler was the company’s youngest Assistant Product Manager, where he helped launch an innovative new anesthetic called Propofol, as well as prenatal vitamins. He was then transferred into sales in Raleigh, NC.
He then moved to California in 1992, where he became a Neonatal specialist for a regional medical equipment company. Mr. Sigler taught himself to play volleyball at age 23, and rose to the highest amateur rank (AAA) by age 32 (and was ranked in the top 100 players in California). Mr. Sigler’s passion for the sport led him to starting Smack Sportswear, an apparel company devoted to So Cal inspired volleyball apparel. The company was established in Manhattan Beach, CA in 1994. During the 90’s Mr. Sigler was able to build a brand that was sold in Sports Chalet, as well as specialty stores nationwide. In 2001, Mr. Sigler focused attention on the indoor volleyball apparel market, which allowed for higher profits thru a B2C model, as well as the ease at which one could gain volume orders.
Mr. Sigler graduated with a BS degree from University of Delaware with honors in both Economics and Management Information Systems in 1988, with a 3.4 GPA.
Tom Mercer, Director
Tom Mercer has over 20 years of sales and marketing experience in the team sports apparel and footwear industry. He spent his first 13 plus years with Adidas, where he quickly elevated from sales representative to regional sales manager, before moving to the North America headquarters and serving as US Marketing Manager for Football and Baseball, Director of Team Sports, and Sr. Strategic Account Planning Manager - Foot Locker, Inc. Most recently before joining Smack, Tom spent the last 6 years as Vice President of Sales & Marketing for High Five Sportswear in Seattle, WA. Tom is married with 4 children and resides in the Seattle area.
Christopher Jenks, Director
Christopher Jenks is currently the Chief Marketing Officer for Epic Sports Products, Inc., a global baseball training product manufacturing and marketing company. With over 25 years in the sporting goods industry, Chris has marketing and operating experience with several world class brands including adidas, Sports Specialties (a division of Nike), Body Glove, and YKK. From 2003 to 2009, Chris was COO of BG Partners, Body Glove’s US softgoods (apparel, footwear, bags, related accessories) licensing arm. Prior to Body Glove, Chris was Director of Brand Marketing at adidas America, responsible for all consumer communications. He was also the Director of Marketing for agron, Inc., the US licensee of adidas accessories. Chris serves on the Board of Directors of Epic Sports Products, Inc. and the Fremont County Humane Society. Previously, he held roles of Development Chair and Marketing Chair for the UCLA Anderson Alumni Executive Board. He earned his MBA from UCLA Anderson in 1994 and received his undergraduate degree from the University of Notre Dame in 1989, graduating cum laude.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
4. being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table summarizes the compensation of our executive officers, directors and President during the fiscal years ended June 30, 2014 and 2013. No other officers or directors received annual compensation in excess of $100,000 during the fiscal year.
(1) William Sigler was appointed as our Chief Executive Officer, and a director in April 2012. Mr Sigler receives a base salary of $10,000 per month, but has waived receiving $20,000 during FY 2014 and $30,000 during FY 2013.
(2) Doug Samuelson was appointed as our Chief Financial Officer (CFO) in April 2014. During FY 2014, Mr. Samuelson only worked part-time. Mr. Samuelson is entitled to 175,000 shares of common stock due June 30, 2014 as part of his employment agreement.
(3) Tom Mercer was appointed President and Director in February 2014. He earns a salary of $7,500 per month and is entitled 500,000 shares of common stock as part of his employment agreement.
(4)
Charles A. Lesser was appointed as our CFO in December 2012. During FY 2013, Mr. Lesser only worked part-time while the Company sought to re-define its business objectives. Mr. Lesser was entitled to 500,000 shares of common stock due June 30, 2013 and 500,000 shares due December 31, 2013 as part of his employment agreement. Mr. Lesser resigned his position in the third quarter of FY 2014.
(5) Ramon Valdez was CFO and subsequently Chief Information Officer for the Company. Mr. Valdez resigned his position during FY 2014. Mr. Valdez received 800,000 shares during FY 2014.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following tables set forth certain information concerning the number of shares of our common stock known by us to be owned beneficially as of October 14, 2014: (i) each person (including any group) that owns more than 5% of any class of the voting securities of our company; (ii) each director and officer of our company; and (iii) directors and officers as a group. Unless otherwise indicated, the stockholders listed possess sole voting and investment power with respect to the shares shown.
Security ownership of Management
(1) Based upon 58,378,330 issued and outstanding shares of common stock as of October 17, 2014.
(2)	William Sigler holds 21,643,500 shares of common stock.
(3) Doug Samuelson is due 175,000 shares as of June 30, 2014 per his Employment Agreement (not yet issued).
(4) Tom Mercer is due 500,000 shares as of June 30, 2014 per his Employment Agreement (not yet issued and is due from former officer).
(5) Chris Jenks is due 2,500,000 shares from his $50,000 investment in October 2014. He also had purchased 400,000 shares prior to June 30, 2014.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
During our last fiscal year and except as disclosed below, none of the following persons has had any direct or indirect material interest in any transaction worth more than $120,000 to which our company was or is a party, or in any proposed transaction to which our company proposes to be a party:
(a)	any director or officer of our company;
(b)	any proposed director of officer of our company;
(c)	any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our common stock; or,
(d)	any member of the immediate family of any of the foregoing persons (including a spouse, parents, children, siblings, and in-laws).
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The following table sets forth the fees billed to the Company for professional services rendered by the Company's independent registered public accounting firm, for the years ended June 30, 2014 and June 30, 2013:
Audit Fees. Consist of fees billed for professional services rendered for the audits of our financial statements and reviews of our interim consolidated financial statements included in quarterly reports.
Tax Fees. Weinberg & Company, CPAs and Seale and Beers, CPAs did not provide us with professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
Item. 15. EXHIBITS
* Filed herewith.
** This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Tom Mercer
Director
October 17, 2014
Tom Mercer
/s/ Bill Sigler
Director
October 17, 2014
Bill Sigler
/s/ Chris Jenks
Director
October 17, 2014
Chris Jenks