Almost Never Films Inc. - Quarter Report: 2014 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:  December 31, 2014

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: ________________

SMACK SPORTSWEAR, INC.

(Exact name of registrant as specified in its charter)

20316 Gramercy Place

Torrance, CA 90501

 (Address of principal executive offices, Zip Code)

(310) 787-1222

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x       No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

The number of shares of registrant’s common stock outstanding as of February 17, 2014 was 65,803,330. The registrant had no outstanding preferred stock as of that date.

FORM 10-Q

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

DECEMBER 31, 2014

TABLE OF CONTENTS

ITEM I - FINANCIAL STATEMENTS

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

The accompanying unaudited condensed consolidated financial statements of Smack Sportswear, Inc. and Subsidiary (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.  Operating results for the six months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015.  For further information refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 30, 2014.

History and Organization

SMACK Sportswear, Inc. (“SMACK”) was originally incorporated in Nevada in October 2007 as Reshoot Production Company (“Reshoot”), which was incorporated as a subsidiary of Reshoot & Edit, a Nevada corporation. In September 2011, Reshoot entered into an Irrevocable Business Sales Agreement with Team Sports Superstore, Inc. (“TSS”) to buy 100 percent of the outstanding shares of TSS (owned by one individual). On the same date, the majority owner of Reshoot entered into a Stock Value Agreement in which he agreed to transfer 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 is deemed to be the acquiring company for accounting purposes and the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States (“GAAP”).  These consolidated financial statements reflect the historical results of TSS prior to the merger and that of the combined company following the Merger, and do not include the historical financial results of Reshoot prior to the completion of the merger.

Overview of Business

SMACK is a Southern California based manufacturer of performance and lifestyle based indoor and sand volleyball apparel and accessories. The Smack brand was founded in 1994 on the sands of Manhattan Beach, California. Throughout our history, Smack has worked with some of the leading professional beach players, as well as a select group of elite indoor junior volleyball clubs. Our products have been featured in Volleyball Magazine, DiG Magazine, Coaching Volleyball magazine, and featured in ABC’s hit show “The Bachelor”. Smack has also served as the official apparel of the AVP, USA Beach Volleyball, and NVL.

Our core business is performance and lifestyle volleyball Smack branded products. Volleyball continues to experience a sustained growth rate across all age groups, with high school participation rates increasing for 24 consecutive years. Sand volleyball has maintained a steady growth rate across both core and casual participants, and represents the fastest growing sport at the NCAA level, which will serve as an accelerant the growth of the sport at the youth and high school levels.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the six months ended December 31, 2014, the Company incurred a net loss of $354,634 and cash used in operating activities was $116,045, and as of that date, is delinquent in payments of $272,216 for payroll and sales taxes.  As of December 31, 2014, the Company had a working capital deficiency and a shareholders’ deficit of $629,191 and $921,191, respectively, and as of that date, $75,727 of the Company’s accounts payable was greater than 90 days past due. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditor, in their report on our audited financial statements for the year ended June 30, 2014, expressed substantial doubt about our ability to continue as a going concern.

The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. During the six months ended December 31, 2014, the Company has obtained $20,000 from its debt holders and $195,000 from the initiation of a Private Placement Memorandum (PPM). Management anticipates the Company will raise additional funding from the PPM. Management believes this funding will continue from its current investors and the Company will also obtain funding from new investors. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stock holders, in case of equity financing.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Team Sports Superstore. 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. Management assesses the business environment, the customer's financial condition, historical collection experience, accounts receivable aging and customer disputes to whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sales, the company does not recognize revenue until collection occurs. Title to the Company’s products is transferred to the customer once the product is shipped from the Company’s warehouse. Products are not shipped until there is a purchase agreement signed by the customer with a specified payment arrangement.  The Company’s sales are primarily customized, made to order apparel, where after a deposit is made there are no refunds after the customer has committed to the sale through a signed contract. Therefore, the company has not recorded an allowance for returned products.

Loss per Share Calculations

Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The Company’s diluted loss per share is the same as the basic loss per share for the three and six months ended December 31, 2014 and 2013, as the inclusion of any potential shares would have had an anti-dilutive effect due to the Company generating a loss.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

Concentration of sales and accounts receivable

For the six months ended December 31, 2014, the Company sold $198,360 of its products to a company owned by the Company’s former Chief Executive Officer (CEO) and a current member of the Board of Directors (see Note 4). This amount represented 56% of the Company’s sales during six months ended December 31, 2014. There were no other customers with sales representing more than 10% of the Company’s total sales during this period. At December, 31, 2014, there was one customer with an accounts receivable balance that represented 51% of the Company’s total accounts receivable.

Use of Estimates

The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, inventory valuations, convertible notes, fair value of common stock issued upon settlement of accounts payable and fair value of common stock issued for services, among others. Actual results could differ from these estimates.

Inventories

Inventories are stated at the lower of cost or market. Cost is computed on a first-in, first-out basis. The Company’s inventories consist of finished goods as of December 31, 2014 and June 30, 2014.

Fair Value of Financial Instruments

The Fair Value of Financial Instruments requires disclosure of fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2014, the balances reported for cash, accounts receivable, inventory, accounts payable and accrued expenses approximate their fair value because of their short maturities. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). This guidance amends the requirements for reporting for discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company’s operations and financial results should be presented as discontinued operations. This guidance is effective for annual periods beginning after December 15, 2014. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.   The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required.  The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.  The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

Notes payable and other debt to related parties consist of the following as of December 31, 2014 and June 30, 2014:

For the six months ended December 31, 2014, the Company incurred $15,085 of interest expense relating to the unsecured promissory notes totaling to $300,000. The total amount of accrued interest payable relating to those notes at December 31, 2014 was $24,808.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

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 any time from the effective date. The conversion price shall be the lower of $0.02 or the same conversion price as the current note holders (see Note 3). In the event that the former CEO is not able to exercise the above accrued salary conversation rights by December 31, 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.

In exchange for the mutual release agreement, the Company is required to pay the former CEO $3,000 a month commencing on the effective date and ending on February 28, 2015.

Any and all obligations not paid by the Company per the agreement (and exclusive of the accrued salary obligation), as well as loans by the former CEO to the Company, which total $21,000 as of the Effective Date, shall be repaid by the Company by January 31, 2015 or earlier based on the occurrence of certain events.

As of June 30, 2014, the Company determined it owed $121,000 to the former officer under the mutual release agreement.

During the six months ended December 31, 2014, the Company accrued an additional $39,000 and paid $17,300 under the former CEO’s mutual release agreement. As of December 31, 2014, a total of $142,700 was owed under the agreement and is included in Advances from Former Officers on the accompanying December 31, 2014 condensed consolidated Balance Sheet.

Concurrently to the mutual release agreement, the former officer entered into an independent sales agent/team dealer agreement (dealer agreement) with the Company to sell the Company’s products. In accordance with the dealer agreement, the former CEO is required to prepay in full all sales orders with the Company prior to delivery of the goods. During the six months ended December 31, 2014, the Company sold $198,690 to the former CEO’s new company. As of December 31, 2014, the Company’s advances from former CEO related to pending sales orders with the Company amounted to $24,135 and is included in Advances from Officers on the accompanying December 31, 2014 condensed consolidated Balance Sheet.

The Company also owed $2,200 to another officer for personal loans to the Company. During the six months ended December 31, 2014, the Company fully paid the balance owed to the officer.

SMACK SPORTSWEAR, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE SIX MONTHS ENDED DECEMBER 31, 2014 AND 2013

On July 21, 2014, the Company entered into a service agreement with Mr. Christopher Jenks to serve as a member of the Board of Directors for one year. As compensation, Mr. Jenks will receive up to 750,000 shares of its common stock valued at $15,000. The stock vests 200,000 shares on December 1, 2014; 200,000 shares on March 1, 2015; and 350,000 shares on August 15, 2015. Mr. Jenks was subsequently appointed as the Company’s Chief Executive Officer. During the six months ended December 31, 2014, 200,000 shares valued at $6,269 vested and were issued to Mr. Jenks for his services. As of December 31, 2014, $8,731 of the award remains unvested and will be amortized over the remaining vesting period.

During the six month ended December 31, 2014, the Company issued 350,000 shares of its common stock to its Chief Financial Officer under the terms of his service agreement valued at$19,500.

During the six months ended December 31, 2014, the Company sold 9,750,000 shares of its common stock at the price of $0.02 per share through its private placement memorandum. Gross proceeds from the issuance were $195,000. In connection with the financing, 2,500,000 shares were sold to the Company’s Chief Executive Officer (CEO) for cash at $0.02 per share. The market value of the stock at issuance was $0.03 per share. The difference in price of $25,000 between the market value of the stock and the cash value was recorded as additional compensation to the CEO during the six months ended December 31, 2014.

On December 29, 2014, the Company entered into a settlement and mutual release agreement (the “Agreement”) with its former CFO to settle the claims filed by the former CFO. Under the agreement, among others, the Company issued a total of 625,000 shares common stock valued at $50,000. The Agreement also required the former CFO to return for cancellation the 1,000,000 shares of common stock previously issued to former CFO. Accordingly, the Company recorded an adjustment to reduce its common stock outstanding as of December 31, 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 accounted for as additional compensation expense and as additional paid in capital contributed by the former CEO in the financial statements for the year ended June 30, 2014. The former CEO also agreed to issue the President an additional 500,000 shares of common stock when corporate mission statement and standard operating procedures are developed and implemented within 180 days from February 2014. The President developed and implemented the mission statements and standard operating procedures timely. As a result, the former CEO issued 500,000 shares to the President from his personal holdings. The fair value of those shares at grant date was $10,000 which the Company accounted for as additional compensation expense and as additional paid in capital contributed by the former CEO in the accompanying condensed interim financial statements for the six months ended December 31, 2014.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Form 10-Q contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

All statements, other than statements of historical fact included in this report, regarding our strategy, intellectual property, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved.  These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations,” as well as in this report generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

Organizational History

SMACK Sportswear, Inc. (“SMACK”) was originally incorporated in Nevada in October 2007 as Reshoot Production Company (“Reshoot”), which was incorporated as a subsidiary of Reshoot & Edit, a Nevada corporation. In September 2011, Reshoot entered into an Irrevocable Business Sales Agreement with Team Sports Superstore, Inc. (“TSS”) to buy 100 percent of the outstanding shares of TSS (owned by one individual). On the same date, the majority owner of Reshoot entered into a Stock Value Agreement in which he agreed to transfer 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 is deemed to be the acquiring company for accounting purposes and the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States (“GAAP”).  These consolidated financial statements reflect the historical results of TSS prior to the merger and that of the combined company following the Merger, and do not include the historical financial results of Reshoot prior to the completion of the merger.

Overview of Business

SMACK is a Southern California based manufacturer of performance and lifestyle based indoor and sand volleyball apparel and accessories. The Smack brand was founded in 1994 on the sands of Manhattan Beach. Throughout our history, Smack has worked with some of the leading professional beach players, as well as a select group of elite indoor junior volleyball clubs. Our products have been featured in Volleyball Magazine, DiG Magazine, Coaching Volleyball magazine, and featured in ABC’s hit show “The Bachelor”. Smack has also served as the official apparel of the AVP, USA Beach Volleyball, and NVL.

Our primary corporate objective is increasing revenue and strengthening our financial performance, while serving the best interests of our employees and shareholders. Revenue increases will be the result of an uncompromising discipline to drive the business through people, processes, and products.

Our core business is performance and lifestyle volleyball Smack branded products. Volleyball continues to experience a sustained growth rate across all age groups, with high school participation rates increasing for 24 consecutive years. Sand volleyball has maintained a steady growth rate across both core and casual participants, and represents the fastest growing sport at the NCAA level, which will serve as an accelerant the growth of the sport at the youth and high school levels.

Critical Accounting Policies

The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition. 

Revenue Recognition

The Company recognizes revenue upon shipment of the Company’s products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.  Management assesses the business environment, the customer's financial condition, historical collection experience, accounts receivable aging and customer disputes to whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sales, the company does not recognize revenue until collection occurs. Title to the Company’s products is transferred to the customer once the product is shipped from the Company’s warehouse. Products are not shipped until there is a purchase agreement signed by the customer with a specified payment arrangement.  The Company’s sales are primarily customized, made to order apparel, where after a deposit is made there are no refunds after the customer has committed to the sale through a signed contract. Therefore, the company has not recorded an allowance for returned products.

Use of Estimates

The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, inventory valuations, convertible notes, fair value of common stock issued upon settlement of accounts payable and fair value of common stock issued for services, among others. Actual results could differ from these estimates.

Fair Value of Financial Instruments

The Fair Value of Financial Instruments requires disclosure of fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2014, the balances reported for cash, accounts receivable, inventory, accounts payable and accrued expenses approximate their fair value because of their short maturities. Debt balances are stated at historical amounts less principal payments, which approximate fair market value. The Company believes interest rates in its debt agreements are commensurate with lender risk profiles for similar companies.

 Recently Issued Accounting Pronouncements

Management reviewed accounting pronouncements issued during the six months ended December 31, 2014, and the following pronouncements were adopted during the period.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360). ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

In November 2014, the FASB issued Accounting Standards Update No. 2014-16 (ASU 2014-16), Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.   The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required.  The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.  The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.

Other accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Results of Operations

Results of Operations for the three months ended December 31, 2014 compared to the three months ended December 31, 2013.

Revenue and Cost of Goods Sold

Revenue for the three months ended December 31, 2014 and 2013 was $298,187 and $418,284, respectively. The decrease of $120,097 was primarily due to less market penetration in both female high school and club teams during the second quarter of fiscal year ending June 30, 2015 as compared to prior fiscal year of the same period.

Cost of sales for the three months ended December 31, 2014 and 2013, was $190,869 and $198,094, respectively. Gross profit for the three months ended December 31, 2014 was $107,318 and the gross profit for the three months ended December 31, 2013 was $220,190. The gross profit decrease of $112,872 for the three months ended December 31, 2014 was primarily due to the decrease in revenue, combined with the lower margins associated with the related party sales to the company owned by the Company’s former CEO (see Note 4).

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended December 31, 2014 and 2013 was $311,163 and $162,639, respectively. The increase in SG&A expenses of $148,524 was due primarily to the increase in labor costs of $129,329 and bad debt expense of $26,895, offset by a decrease in other SG&A expenses. The increase in labor costs primarily related to an increase in sales commissions, stock compensation costs and an increase in personnel costs. The increase in professional expenses primarily related to legal costs.

Other Income and Expenses

Other expenses consist of interest expenses, fair value of beneficial conversion costs and loss on conversion of debt. Interest expense for the three months ended December 31, 2014 was $7,562. There was no interest expense for the three months ended December 31, 2013. The interest expense incurred during the three months ended December 31, 2014 was related to the Company’s notes payable. During the three months ended December 31, 2013, the Company recorded $137,667 relating to debt discount on convertible notes payable and $150,000 relating to a loss on conversion of debt. There were no other expenses of this type during the three months ended December 31, 2014.

Net Loss

Our net loss for the three months ended December 31, 2014 and 2013 was $211,407 and $230,116, respectively. The decrease in net loss of $18,709 was due to a decrease in other expenses of $280,107, offset by the increase in SG&A expenses of $148,524 and decrease in gross profit of $112,872.

Results of Operations for the six months ended December 31, 2014 compared to the six months ended December 31, 2013.

Revenue and Cost of Goods Sold

Revenue for the six months ended December 31, 2014 and 2013 was $352,221 and $478,472, respectively. The decrease of $126,251 was primarily due to less market penetration in both female high school and club teams during the first six months of fiscal year ending June 30, 2015 as compared to prior fiscal year of the same period.

Cost of sales for the six months ended December 31, 2014 and 2013, was $218,232 and $258,868, respectively. Gross profit for the six months ended December 31, 2014 was $133,989 and the gross profit for the six months ended December 31, 2013 was $219,604. The gross profit decrease of $85,615 for the six months ended December 31, 2014 was primarily due to the decrease in revenue, combined with the lower margins associated with sales to the company owned by the Company’s former CEO (see Note 4).

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the six months ended December 31, 2014 and 2013 was $473,538 and $246,199, respectively. The increase in SG&A expenses of $227,339 was due primarily to the increase in bad debt expense of $26,895, increase in labor costs of $164,048, increase in professional fees of $27,458, plus an increase in other SG&A expenses. The increase in labor costs primarily related to an increase in sales commissions, an increase in personnel costs and an increase in stock compensation costs. The increase in professional expenses primarily related to legal costs.

Other Income and Expenses

Other expenses consist of interest expenses, fair value of beneficial conversion costs and loss on conversion of debt. Interest expense for the six months ended December 31, 2014 was $15,085. There was no interest expense for the six months ended December 31, 2013. The interest expense incurred during the six months ended December 31, 2014 was related to the Company’s notes payable. During the six months ended December 31, 2013, the Company recorded $160,299 relating to debt discount on convertible notes payable and $150,000 relating to a loss on a conversion of debt. There were no other expenses of this type during the six months ended December 31, 2014.

Net Loss

Our net loss for the six months ended December 31, 2014 and 2013 was $354,634 and $336,894, respectively. The increase in net loss of $17,740 was due to the increase in SG&A expenses of $227,339, a decrease in gross profit of $85,615, offset by a decrease in other expenses of $295,214.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business.  The accompanying condensed consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. During the six months ended December 31, 2014, the Company incurred a net loss of $354,634 and cash used in operating activities was $116,045, and as of that date, is delinquent in payments of $272,216 for payroll and sales taxes.  As of December 31, 2014, the Company had a working capital deficiency of $629,191 and a shareholders’ deficit of $921,191, and as of that date, $75,727 of the Company’s accounts payable was greater than 90 days past due. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Our independent auditor, in their report on our audited financial statements for the year ended June 30, 2014, expressed substantial doubt about our ability to continue as a going concern.

The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusion. During the six months ended December 31, 2014, the Company has obtained $20,000 from its debt holders and $195,000 from the initiation of a Private Placement Memorandum (PPM). Management anticipates the Company will raise additional funding from the PPM. Management believes this funding will continue from its current investors and the Company will also obtain funding from new investors. Management believes the existing shareholders, the prospective new investors and future sales will provide the additional cash needed to meet the Company’s obligations as they become due, and will allow the development of its core business operations. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stock holders, in case of equity financing.

As of December 31, 2014 and June 30, 2013, we had cash of $95,979 and $824, respectively and working capital deficit of $629,191 and $600,327, respectively.  The increase in working capital deficit was primarily due to the decrease in accounts receivable and the increase in accounts payable and accrued expenses and advances from officers, offset by the increase in cash and supplier advances.

During the first six months of fiscal 2015, we raised an aggregate of $195,000 through our PPM.  The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended June 30, 2014 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions and future revenue.

Net cash used in operating activities was $116,045 for the six months ended December 31, 2014, compared to $55,414 for the six months ended December 31, 2013. The increase of $60,631 in cash used in operating activities was primarily due to the decrease in cash provided by accounts payable and accrued expenses. The net loss for the six months ended December 31, 2014 includes non-cash expenses for bad debt expense, common stock issued for services and common stock issued to a former officer, and the net loss for the six months ended December 31, 2013 includes non-cash expenses for the amortization of debt discount and a loss on the conversion of debt.  

There were no cash flows used in investing activities for the six months ended December 31, 2014 and December 31, 2013.

Net cash flows provided by financing activities was $211,200 for the six months ended December 31, 2014, as compared to $53,000 for the six months ended December 31, 2013.  The increase in cash provided by financing activities of $158,200 was due to the increase in proceeds received from our promissory notes payable of $20,000 and proceeds from our PPM of $195,000, offset by a decrease in short-term loans of $53,000.  To date, we have principally financed our operations through the sale of our common stock and the issuance of debt.

We do not have any material commitments for capital expenditures during the next twelve months.  Although our proceeds from the issuance of debt and our offering of shares of common stock together with revenue from operations are currently sufficient to fund our operating expenses, we will need to raise additional funds in the future so that we can expand our operations. Therefore, our future operations are dependent on our ability to secure additional financing.  Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms.  However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our marketing and development plans and possibly cease our operations.

We have estimated our current average burn, and believe that we have assets to ensure that we can function without liquidation over the next twelve months, due to our ability to raise money from our investor base and future expected revenue.  Based on the aforesaid, we believe we have the ability to continue our operations for the foreseeable future and will be able to realize assets and discharge liabilities in the normal course of operations.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Management, with the participation of the 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:

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 December 31, 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 December 31, 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 quarterly report on Form 10-Q, management concluded that we had material weaknesses in our control environment and financial reporting process consisting of the following:

1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and

2) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the quarter ended December 31, 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 Controls

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1.  Legal Proceedings.

The Company is, from time to time, involved in legal proceedings, regulatory actions, claims and litigation arising in the ordinary course of business. These matters are not expected to have a material adverse effect upon the Company’s financial condition.

Item 1A. Risk Factors.  

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceed

In October 2014, the Company sold 2,800,000 shares of its common stock, par value $0.001, at $0.02 per share. Total gross proceeds were $56,000. In November 2014, the Company sold 3,000,000 shares of its common stock, par value, $0.001, at $0.02 per share. Total gross proceeds were $60,000. In December 2014, the Company sold 3,000,000 shares of its common stock, par value, $0.001, at $0.02 per share. Total gross proceeds were $60,000.

The shares were issued in transactions that were exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering. The Company relied on the representations made in the various subscription agreements, stock purchase agreements or other agreements signed by the stockholders. No commissions were paid and no underwriter or placement agent was involved in this transactions.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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