UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2015
OR
| [ ] | TRANSITION REPORT PURSUANT TO PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from__________ to __________
XFit Brands, Inc.
(Exact Name of Registrant as Specified in Charter)
| Nevada | 000-55372 | 47-1858485 | ||
| (State or Other Jurisdiction of Incorporation) | (Commission File No.) | (I.R.S. Employer Identification No.) |
| 25731 Commercentre Drive, Lake Forest, CA 92630 | (949) 916-9680 | |||
| (Address of Principal Executive Offices) | (Registrant’s Telephone Number) |
(Former name and address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] | Non-accelerated filer [ ] | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of February 16, 2016 there were 4,098,500 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
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XFit Brands, Inc.
Condensed Consolidated Balance Sheets
| December 31, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 139,666 | $ | 51,016 | ||||
| Accounts receivable | 208,888 | 92,823 | ||||||
| Royalties receivable | 65,413 | 75,000 | ||||||
| Inventory | 253,452 | 169,292 | ||||||
| Prepaid expenses | 206,235 | 333,572 | ||||||
| Total Current Assets | 873,654 | 721,703 | ||||||
| Long Term Assets | ||||||||
| Property and equipment, net | 37,652 | 42,292 | ||||||
| Other assets | ||||||||
| Deposits | 27,480 | 27,480 | ||||||
| Intangible assets, net | 37,472 | 52,264 | ||||||
| TOTAL ASSETS | $ | 976,258 | $ | 843,739 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 604,104 | $ | 446,063 | ||||
| Related party payable | 95,620 | 95,620 | ||||||
| Accrued expenses and interest | 67,507 | 129,182 | ||||||
| Customer deposits | 210,100 | 158,467 | ||||||
| Line of credit | 34,197 | — | ||||||
| Total Current Liabilities | 1,011,528 | 829,332 | ||||||
| Note payable, net | 2,307,960 | 1,705,417 | ||||||
| Total Liabilities | 3,319,488 | 2,534,749 | ||||||
| Commitments and contingencies (Note 8) | — | — | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2015 and June 30, 2015 | — | — | ||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized, 4,098,500 and 4,073,500 shares issued and outstanding as of December 31, 2015 and June 30, 2015, respectively | 409 | 407 | ||||||
| Additional paid in capital | 4,444,505 | 4,319,074 | ||||||
| Accumulated deficit | (6,788,144 | ) | (6,010,491 | ) | ||||
| Total Stockholders’ Deficit | (2,343,230 | ) | (1,691,010 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 976,258 | $ | 843,739 | ||||
See accompanying notes to the condensed consolidated financial statements.
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XFit Brands, Inc.
Condensed Consolidated Statements of Operations
For the three and six month periods ended December 31, 2015 and 2014 (Unaudited)
| For the Three Months Ended December 31, | For the Six Months Ended December 31, | |||||||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales | $ | 659,262 | $ | 542,118 | $ | 1,132,518 | $ | 773,321 | ||||||||
| Royalties | 15,413 | 67,492 | 15,413 | 130,440 | ||||||||||||
| Net revenues | 674,675 | 609,610 | 1,147,931 | 903,761 | ||||||||||||
| Cost of revenues | 386,487 | 397,708 | 645,331 | 605,759 | ||||||||||||
| Gross Profit | 288,188 | 211,902 | 502,600 | 298,002 | ||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 402,575 | 563,271 | 847,505 | 877,355 | ||||||||||||
| Sales and marketing | 84,302 | 55,428 | 174,196 | 101,720 | ||||||||||||
| Total operating expenses | 486,877 | 618,699 | 1,021,701 | 979,075 | ||||||||||||
| (Loss) Income from operations | (198,689 | ) | (406,797 | ) | (519,101 | ) | (681,073 | ) | ||||||||
| Interest expense | (142,279 | ) | (94,304 | ) | (258,556 | ) | (171,912 | ) | ||||||||
| Other income | — | 12,758 | — | 14,757 | ||||||||||||
| Net (Loss) Income | $ | (340,968 | ) | $ | (488,343 | ) | $ | (777,657 | ) | $ | (838,228 | ) | ||||
| Loss per common share - basic and diluted | $ | (0.09 | ) | $ | (0.12 | ) | $ | (0.19 | ) | $ | (0.21 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 4,098,500 | 4,000,000 | 4,098,500 | 4,000,000 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements.
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XFit Brands, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six month periods ended December 31, 2015 and 2014
| Six Month Periods Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (777,657 | ) | $ | (838,228 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 29,942 | 4,200 | ||||||
| Amortization of debt issuance costs and loan discount | 91,905 | 69,020 | ||||||
| Stock based compensation | 75,000 | 232,314 | ||||||
| Value of options issued to employees | 433 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (116,065 | ) | (81,547 | ) | ||||
| Royalties receivable | 9,587 | 18,133 | ||||||
| Prepaid expenses | 127,337 | — | ||||||
| Inventory | (84,160 | ) | (125,127 | ) | ||||
| Accounts payable | 158,044 | 239,545 | ||||||
| Accrued expenses and interest | (1,036 | ) | 71,151 | |||||
| Customer deposits | 51,633 | 268,161 | ||||||
| Net cash used in operating activities | (435,037 | ) | (142,378 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of intangible assets | (8,999 | ) | (3,596 | ) | ||||
| Purchase of property and equipment | (1,511 | ) | (33,634 | ) | ||||
| Net cash used in investing activities | (10,510 | ) | (37,230 | ) | ||||
| Cash flows from financing activities | ||||||||
| Payoff of line of credit | (19,224 | ) | — | |||||
| Proceeds from line of credit | 53,421 | — | ||||||
| Proceeds from increase in PIMCO note payable | 500,000 | — | ||||||
| Net cash provided by financing activities | 534,197 | — | ||||||
| Net increase (decrease) in cash | 88,650 | (179,608 | ) | |||||
| Cash at beginning of period | 51,016 | 360,323 | ||||||
| Cash at end of period | $ | 139,666 | $ | 180,715 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 103,305 | $ | 65,233 | ||||
| Non-cash investing and financing activities: | ||||||||
| Value of common shares issued as a loan fee | $ | 50,000 | $ | — | ||||
| Distribution | $ | — | $ | 100,000 | ||||
| Issuance of common stock in exchange for LLC interests | $ | — | $ | 400 | ||||
See accompanying notes to the condensed consolidated financial statements.
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XFit Brands, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
History of the Company
XFit Brands, Inc. (“XFit” or the “Company”) was incorporated on September 16, 2014 under the laws of the State of Nevada. The fiscal year of the Company is June 30. XFit’s principal business activity is the design, development, and worldwide marketing and selling of functional equipment, training gear, apparel and accessories for the impact sports market and fitness industry. Products are marketed and sold under the “Throwdown®” brand name to gyms, fitness facilities and directly to consumers via an internet website and through third party catalogues through a mix of independent distributors and licensees throughout the world.
These financial statements represent the condensed consolidated financial statements of XFit and its wholly owned operating subsidiaries Throwdown Industries Holdings, LLC (“Holdings”), Throwdown Holdings, LLC (“TDLLC”), and Throwdown Industries, Inc. (“TDINC”). On September 26, 2014, XFit entered into a Contribution and Exchange Agreement with TD Legacy, LLC (“TD Legacy”) and Holdings under which TD Legacy contributed all of its membership interest in Holdings to XFit in exchange for the issuance by XFit of 4,000,000 shares of common stock to TD Legacy. The result of this transaction was that Holdings became a wholly owned subsidiary of XFit.
Basis of presentation
The accompanying condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary to fairly state the Company’s financial position, results of operations, and cash flows as of and for the dates and periods presented. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes as of and for the years ended June 30, 2015 and 2014, which were filed with the Company’s annual report form 10K on September 28, 2015. The results of operations for the six months ended December 31, 2015 are not necessarily indicative of results that may be expected for the year ending June 30, 2016, or for any other interim period.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of XFit, Holdings and TDINC. All significant intercompany transactions and balances have been eliminated in consolidation.
The Company also consolidates any variable interest entities (“VIEs”), of which it is the primary beneficiary, as defined within Accounting Standards Codification (“ASC”) 810. The Company does not have any VIEs that are required to be consolidated as of December 31, 2015 or June 30, 2015.
Recent Accounting Pronouncements
The Company has implemented all new accounting standards and does not believe that there are any other new accounting pronouncements that have been issued that may have a material impact on the consolidated financial statements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs(“ASU-2015-03”). ASU 2015-03 requires companies to present debt issuance costs as a direct deduction from the carrying value of that debt liability. ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
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Income (Loss) per Share
The basic loss per share is calculated by dividing the Company’s net loss available to common shareholders by the weighted average number of common shares during the period. The diluted net loss per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted net loss per share is the same as basic net loss per share due to the lack of dilutive items. As of December 31, 2015 and June 30, 2015, the Company had 453,723 and 452,612, respectively, of potential shares exercisable that are attributable to the PIMCO warrant, which have been excluded as their effect is anti-dilutive.
Use of Estimates
Condensed consolidated financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable, the valuation of long-lived assets, and equity instruments issued for financing. Actual results could differ from those estimates.
Loan Discounts and Loan Fees
The Company amortizes loan discounts over the term of the loan using the effective interest method. Costs associated with obtaining financing are capitalized and amortized over the term of the related loans using the effective interest method. As of December 31, 2015 and June 30, 2015, the Company had total gross debt issuance costs of $199,632 and $149,632, respectively. Amortization of the debt issuance costs was $32,947 and $19,611 for the six month periods ended December 31, 2015 and 2014, respectively, which was recorded as a component of interest expense on the condensed consolidated statements of operations.
Subsequent Events
In accordance with ASC 855, the Company evaluated subsequent events through February 16, 2016, which was the date the consolidated financial statements were available for issue.
NOTE 2 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at:
| December 31, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Office furniture and equipment | $ | 48,193 | $ | 46,233 | ||||
| Warehouse equipment | 15,254 | 13,254 | ||||||
| Molds and dies | 4,200 | 6,650 | ||||||
| Total, cost | 67,647 | 66,137 | ||||||
| Accumulated Depreciation | (29,995 | ) | (23,845 | ) | ||||
| Property and equipment, net | $ | 37,652 | $ | 42,292 | ||||
Depreciation expense for the six month periods ended December 31, 2015 and 2014 was $6,151 and $4,200, respectively.
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NOTE 3 – INTANGIBLE ASSETS, NET
Intangible assets consisted of the following at:
| December 31, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Transformations exercise fitness program | $ | 62,500 | $ | 62,500 | ||||
| Trademark and patent | 7,811 | 4,396 | ||||||
| Computer software | 5,584 | — | ||||||
| Total, cost | 75,895 | 66,896 | ||||||
| Accumulated amortization | (38,423 | ) | (14,622 | ) | ||||
| Intangible assets, net | $ | 37,472 | $ | 52,264 | ||||
Amortization expense for the six months ended December 31, 2015 and 2014 was $23,791 and $270, respectively.
NOTE 4 – NOTE PAYABLE
The note payable is comprised of the following at:
| December 31, 2015 | June 30, 2015 | |||||||
| (Unaudited) | ||||||||
| Note payable | $ | 2,620,098 | $ | 2,085,128 | ||||
| Add: accrued interest added to note principal | 25,670 | — | ||||||
| Less: unamortized loan discount | (218,113 | ) | (277,070 | ) | ||||
| Less: unamortized debt issuance costs | (119,695 | ) | (102,641 | ) | ||||
| Total note payable, net | $ | 2,307,960 | $ | 1,705,417 | ||||
On June 10, 2014, the Company entered into a Note Purchase Agreement with Pacific Investment Management Company (“PIMCO”) that authorized the issuance of up to $2,500,000. On June 12, 2014, the Company entered into a Senior Secured Note (“Note”) whereby the Company drew $1,500,000. The note bears interest at 14% and an effective interest rate of 21%. This Note is collateralized by all of the assets of the Company.
On February 6, 2015, the Company drew down an additional $500,000 of funds on the PIMCO Note Payable. Following the February 6, 2015 draw, the principal balance payable (including accrued interest added to the principal amount) on the PIMCO note was $2,044,300, and the Company had an additional $500,000 available to draw on this loan facility. The full principal balance outstanding related to this note is due in June 2017.
The Note includes various covenants, including but not limited to, having annual audited financial statements within 90 days of the end of the fiscal year. At December 31, 2015, the Company is in compliance with all covenants.
In connection with the Note, the Company granted warrants to acquire up to 10% of the Company’s capital stock based on an aggregate enterprise fair market value of $15.0 million. The Company valued the warrants using the Black-Scholes option pricing model with the following variables: annual dividend yield of 0%; expected life of 10 years; risk free rate of return of 2.92%; and expected volatility of 0%. The Company estimated the value of the warrants to be $377,480, which is recorded as a loan discount and is being amortized under the effective interest method to interest expense over the term of the loan.
On September 30, 2015, in consideration of the draw-down of the remaining $500,000 available on the PIMCO Note Payable, the Company issued 10,000 shares of its common stock at a fair value of $50,000 as determined by the Company’s board of directors. This amount was recorded as a loan fee to be amortized over the remaining term of the PIMCO Note Payable.
On October 20, 2015, the Company drew the remaining $500,000 available under its delayed draw note facility with PIMCO to increase the principal amount under this note (including the accrued interest added to the principal amount) to $2,620,098. A replacement note was issued on this date to reflect the note increase.
During the six month periods ended December 31, 2015 and 2014, the Company amortized $91,905 and $69,020, respectively, of the loan fees and discount which is recorded as a component of interest expense on the consolidated statements of operations.
NOTE 5 – BANK LINE OF CREDIT
On July 24, 2015,the Company entered into an unsecured line of credit with Wells Fargo Bank for up to $35,000. The line of credit bears interest at prime plus 4% and is personally guaranteed by the Company’s chief executive officer. As of September 30, 2015, the balance payable on the line of credit was $19,224, which amount was repaid on October 23, 2015. After October 23, 2015, the Company borrowed an additional $34,197 from this line of credit and has an unpaid balance on the line of credit of $34,197 as of December 31, 2015.
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NOTE 6 – RELATED PARTY TRANSACTIONS
Related Party Payable
As of December 31, 2015 and June 30, 2015, the Company has $95,620 of salaries and bonuses payable to four of its officers and membership interest holders. These bonuses were to cover income taxes relating to bonuses issued during 2009.
NOTE 7 – STOCKHOLDERS’ DEFICIT
On July 1, 2015, the Company issued 15,000 shares of its common stock valued at $75,000 to an employee as a signing bonus.
On July 15, 2015, the board of directors approved the issuance of 63,500 stock options to employees to be utilized on a performance and retention basis.
On September 30, 2015, the Company issued 10,000 shares of its common stock valued by the Company’s board of directors at $50,000 to PIMCO as a loan fee in consideration of the additional $500,000 draw-down on the PIMCO Note Payable that was funded on October 20, 2015. (See Note 4—Note Payable).
On November 17, 2015, the Company issued options to purchase 43,000 shares of stock to six employees for services rendered. (See Note 8—Commitments and Contingencies—Stock Incentive Plan)
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Lease Commitments
In June 2015, the Company entered into a lease agreement for approximately 25,788 square feet of warehouse and office space under a 38 month operating lease that commenced on October 1, 2015 and expires on October 31, 2018. The lease has monthly payments starting at $8,252 for the period October 1, 2015 through February 28, 2016. Thereafter with monthly payments ranging $16,504 to $17,509 over the term of the lease. The Company previously leased office and warehouse facilities under a lease which expired on November 30, 2015 pursuant to which it paid $4,865 per month which included operating expenses, insurance and property taxes
In June 2015, the Company entered into a sublease of a portion of the premises for the period October 1, 2015 through August 31, 2016, at a monthly rental rate of $5,000.
Rent expense for the six month periods ended December 31, 2015 and 2014, were $67,937 and $29,383, respectively.
Litigation
From time-to-time, the Company is subject to various litigation and other claims in the normal course of business. The Company establishes liabilities in connection with legal actions that management deems to be probable and estimable. No amounts have been accrued in the condensed consolidated financial statements with respect to any matters.
Stock Incentive Plan
On October 21, 2014, the Board of Directors and the Company’s sole stockholder adopted the 2014 Stock Incentive Plan. The purpose of the 2014 Stock Incentive Plan is to advance the best interests of the Company by providing those persons who have a substantial responsibility for management and growth of the Company with additional incentive and by increasing their proprietary interest in the success of the Company, thereby encouraging them to maintain their relationships with the Company. Further, the availability and offering of stock options and common stock under the plan supports and increases the Company’s ability to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability which the Company depends. The total number of shares available for the grant of either stock options or compensation stock under the plan is 600,000 shares of common stock, subject to adjustment. The Board of Directors administers the plan and has full power to grant stock options.
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At December 31, 2015, the Company had not issued any shares under the plan and had granted options to purchase 43,000 shares under the plan.
On November 17, 2015, the Company granted 43,000 aggregate stock options to six employees. The value of the shares granted was determined to be $17,742 utilizing the Black-Scholes valuation model based on stock value of $5.00 at the date of issuance, a 5 year life of the options, a discount rate of 1.73%, and a zero percent stock volatility rate. For the six months ended December 31, 2015, the value of the stock options was $433 and was recorded as stock based compensation expense on the statement of operations.
Equity Purchase Agreement
On December 17, 2014, the Company entered into an Equity Purchase Agreementwith Kodiak Capital LLC. The Equity Purchase Agreement provides the Company with financing whereby the Company can issue and sell to Kodiak, from time to time, shares of common stock (the“Put Shares”) up to an aggregate purchase price of $5.0 million (the “Maximum Commitment Amount”) during the commitment period. The commitment period is defined as the period beginning on the trading day immediately following the effectiveness of the registration statement and ending December 31, 2016. In addition, in no event shall Kodiak be entitled to purchase that number of Put Shares which when added to the sum of the number of shares of common stock already beneficially owned by Kodiak would exceed 9.99% of the number of shares of common stock outstanding on the applicable closing date.
The Equity Purchase Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $5.0 million of the Company’s common stock, (ii) on December 31, 2016 or (iii) upon written notice from the Company to Kodiak.
Registration Rights Agreement
On December 17, 2014, the Company entered into a registration rights agreement with Kodiak Capital, LLC under which the Company is obligated to register the shares to be acquired by Kodiak pursuant to that certain Equity Purchase Agreement dated December 17, 2014, under which Kodiak agreed to purchase up to $5 million of XFit common stock, subject to certain conditions.
Asset Purchase Agreement
On February 26, 2015, the Company entered into an Asset Purchase Agreement to acquire the exclusive rights, title, and interest in the Transformations exercise and fitness program. The purchase price was $62,500 which comprised of a $7,500 cash payment and eleven thousand (11,000) shares of the Company’s common stock that was valued at $55,000. The agreement also has a performance based earn out for a period of eighteen (18) months that is based on fifty percent (50%) of all programming services gross revenues derived from the Transformations program, up to a maximum earn out of $187,500. The earn out is payable in tranches and none of the tranches were met as of December 31, 2015.
Vendor Credit Agreements
On June 18 2015, the Company entered into a Stock Purchase Agreement with Ever Blooming Industrial Limited, whereby the Company issued 20,000 shares of its common stock at $5.00 per share. The purchase price is in the form of a manufacturing credit totaling $100,000 to use for future inventory purchases (the “Vendor Credit”). The Company can use all or part of the Vendor Credit over the next 12 months until the Vendor Credit is exhausted. As of December 31, 2015 and June 30, 2015, the Company had none and $100,000, respectively, of Vendor Credit included in prepaid expenses on the condensed consolidated balance sheets.
On June 26 2015, the Company entered into a Stock Purchase Agreement with Yayu General Machinery Co., LTD, whereby the Company issued 40,000 shares of its common stock at $5.00 per share. The purchase price is in the form of a manufacturing credit of $200,000 to use for future inventory purchases (the “Vendor Credit”). The Company can use all or part of the Vendor Credit over the next 12 months until the Vendor Credit is exhausted. As of Deceember 31, 2015 and June 30, 2015, the Company had $191,549 and $200,000, respectively, of Vendor Credit included in prepaid expenses in the condensed consolidated balance sheets.
NOTE 9 – SUBSEQUENT EVENTS
None
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING INFORMATION
The following information should be read in conjunction with XFit Brands, Inc. and its subsidiaries (“we”, “us”, “our”, or the “Company”) condensed consolidated unaudited financial statements and the notes thereto contained elsewhere in this report. Information in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-Q that does not consist of historical facts, are “forward-looking statements.” Statements accompanied or qualified by, or containing words such as “may,” “will,” “should,” “believes,” “expects,” “intends,” “plans,” “projects,” “estimates,” “predicts,” “potential,” “outlook,” “forecast,” “anticipates,” “presume,” and “assume” constitute forward-looking statements, and as such, are not a guarantee of future performance.
Forward-looking statements are subject to risks and uncertainties, certain of which are beyond our control. Actual results could differ materially from those anticipated as a result of the factors described in the “Risk Factors” and detailed in our other Securities and Exchange Commission filings. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; and advances in technology that can reduce the demand for the Company’s products. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.
Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this report or incorporated by reference might not transpire. Factors that cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described elsewhere in this report and in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended June, 30, 2015.
The Company disclaims any obligation to update the forward-looking statements in this report.
Overview
XFit Brands, Inc. was incorporated in September 2014 under the laws of the State of Nevada. As used herein, the terms “we,” “us,” “XFIT,” and the “Company” refer to XFit Brands, Inc. and its predecessors, subsidiaries, and affiliates, collectively, unless the context indicates otherwise. Our fiscal year end is June 30. Our principal office address is 25731 Commercentre Drive, Lake Forest, CA 92630. Our telephone number is (949) 916-9680. As of February 16, 2016 we had 8 employees.
Our principal business activity is the design, development, and worldwide marketing and selling of functional equipment, training gear, apparel, and accessories for the impact sports market and fitness industry. Our products are marketed and sold under our Throwdown®, XFit Brands®, and Transformations™ brand names to gyms, fitness facilities, and directly to consumers via our internet website and through third party catalogues (which we refer to as our “Direct to Consumer” operations) through a mix of independent distributors and licensees throughout the world. All of our products are manufactured by independent contractors. Our equipment and apparel products are produced both in the United States and abroad.
We are an “emerging growth company” within the meaning of the federal securities laws. For as long as we are an emerging growth company, we will not be required to comply with the requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and the exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an emerging growth company.
Results of Operations
For the next twelve months, our current operating plan is focused on the development and sale of training and competition cages, training and protective gear for the Mixed Martial Arts (“MMA”), fitness, training, and exercise industry.
Our long term growth strategy includes expanding our presence in the fitness, training, and exercise community; leveraging our MMA core credibility and heritage; developing strategic alliances; and acquiring other companies in the fitness, training, and exercise industry to leverage our asset base, manufacturing infrastructure, market presence, and experienced personnel.
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As is discussed further in the Liquidity and Capital Resources section below, we have limited funds to support our operations. Our continuation as a going concern subsequent to the year ended June 30, 2015 is dependent on our ability to obtain additional financing to fund the continued operation of our business model for a long enough period to achieve profitable operations. Based on our current business plan, we currently estimate we will need up to an additional $643,000 of financing to execute our business plan over the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern.
Three months ended December 31, 2015 Compared to the Three Months Ended December 31, 2014
Our revenue, operating expenses, and net income (loss) from operations for the three month period ended December 31, 2015 as compared to the three month period ended December 31, 2014 are set forth below.
| Three Months Ended December 31: | ||||||||||||||||
| 2015 | 2014 | Change | % Change Increase (Decrease) | |||||||||||||
| REVENUES | ||||||||||||||||
| Product sales | $ | 659,262 | $ | 542,118 | $ | 117,144 | 21.6 | % | ||||||||
| Royalties | 15,413 | 67,492 | (52,079 | ) | (77.2 | )% | ||||||||||
| Net revenues | 674,675 | 609,610 | 65,065 | 10.7 | % | |||||||||||
| COST OF REVENUES | 386,487 | 397,708 | (11,221 | ) | (2.8 | )% | ||||||||||
| Gross profit | 288,188 | 211,902 | 76,286 | 36.0 | % | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| General and administrative | 402,575 | 563,271 | (160,696 | ) | (28.5 | )% | ||||||||||
| Sales and marketing | 84,302 | 55,428 | 28,874 | 52.1 | % | |||||||||||
| Total operating expenses | 486,877 | 618,699 | (131,822 | ) | (21.3 | )% | ||||||||||
| (Loss) income from operations | (198,689 | ) | (406,797 | ) | 208,108 | 51.2 | % | |||||||||
| Interest expense | (142,279 | ) | (94,304 | ) | (47,975 | ) | 50.9 | % | ||||||||
| Other income | — | 12,758 | 12,758 | 100.0 | % | |||||||||||
| Net loss | $ | (340,968 | ) | $ | (488,343 | ) | $ | 147,375 | 30.2 | % | ||||||
Revenues.Revenues consist of product sales and royalties. Total revenues for the three months ended December 31, 2015 were $674,675, an increase of $65,065, or 10.7%, from $609,610 of total revenues for the three months ended December 31, 2014. Product sales increased $117,144, or 21.6%, to $659,262 for the three months ended December 31, 2015 from $542,118 for the three months ended December 31, 2014. The increase in product sales is attributable to increased selling efforts and momentum during the three months ended December 31, 2015. Royalties from international distributors were $15,413 and $67,492 for the three months ended December 31, 2015 and 2014, respectively. The decrease in royalties is attributable to a lack of royalties from our Brazilian partner due to the current economic climate in Brazil.
Cost of Revenues. Total cost of revenues for the three months ended December 31, 2015 were $386,487, a decrease of $11,221, or 2.8%, from $397,708 for the three months ended December 31, 2014. Cost of product sales during the three months ended December 31, 2015 were 58.6% as compared to 73.4% during the three months ended December 31, 2014. The decrease in cost of revenues is attributable to the decrease in product sales costs as a percentage of revenues form 73.4% during the three months ended December 31, 2014 as compared to 58.6% during the three months ended December 31, 2015.
Gross Profit. Gross profit increased $76,286 to $288,188 for the three months ended December 31, 2015, from a gross profit of $211,902 for the three months ended December 31, 2014. The increase in gross profit reflects the decrease in product cost of sales, and the $15,413 in royalties during the three months ended December 31, 2014. During the three months ended December 31, 2014, we realized a 26.6% gross profit on our product sales as compared to a 41.4% gross profit on product sales during the three months ended December 31, 2015.
| 12 |
General and Administrative Expenses. General and administrative expenses decreased by $160,696, or 28.5%, to $402,575 for the three months ended December 31, 2015 from $563,271 for the three months ended December 31, 2014. General and administrative expenses for the three months ended December 31, 2015 are comprised of salaries and wages of $40,436, office expenses of $614, insurance of $27,776, rent of $34,883, professional fees of $72,853, travel of $12,138, stock-based compensation of $75,433, SEC financial reporting expenses of $60,380, and other of $78,061. General and administrative expenses for the three months ended December 31, 2014 are comprised of salaries and wages of $93,336, professional fees of $50,244, office expenses of $5,055, insurance of $10,302, rent of $14,789, SEC registration expenses, (including accounting, legal, audit and filing fees) of $141,998, a decrease in capital commitment fee of $197,314, travel of $549, and other of $49,684. The decrease in general and administrative expenses during the three months ended December 31, 2015 is comprised of a decrease in salaries and wages of $52,900, increase in professional fees of $22,609, a decrease in office expenses of $4,441, an increases in insurance expense of $17,474 an increase of $20,094 of rent expense, an increase in travel of $11,589, an increase in stock based compensation of $75,433, a decrease in IPO expenses of $141,998 decrease in capital commitment fee of $197,314, and a net $28,377 increase in other general and administrative expenses. The overall decrease in general and administrative expenses is attributable to decreased expenses for SEC registration fees, increased expenses for stock based compensation, net of a decrease in capital commitment fees and decrease in other general and administrative expenses.
Sales and Marketing Expense. Sales and marketing expense increased $28,874, or 52.1%, to $84,302 for the three months ended December 31, 2015 from $55,428 for the three months ended December 31, 2014. This increase in sales and marketing expenses is commensurate with a net 10.7% increase in our product sales during the three months ended December 31, 2015 and the added salary cost of a sales manager.
Interest Expense. Interest expense increased by $47,975 to $142,279 for the three months ended December 31, 2015 from $94,304 for the three months ended December 31, 2014. The increase is largely due to the increased interest expense on the increased balance of the delayed draw note with the PIMCO Fund during the three months ended December 31, 2015 and the amortization of loan discounts and loan fees.
Other Income.During the three months ended December 31, 2014, we realized $12,758 of other income while during the three months ended December 31, 2015 we realized zero of other income.
Net Loss.Net loss decreased by $147,375 or 30.2% to a net loss of $340,968 for the three months ended December 31, 2015 from a net loss of $488,343 for the three months ended December 31, 2014. This increase in our net loss is attributable to the increased revenues and decreased expenses, as explained herein.
Six months ended December 31, 2015 Compared to the Six Months Ended December 31, 2014
Our revenue, operating expenses, and net (loss) income from operations for the six month period ended December 31, 2015 as compared to the six month period ended December 31, 2014 are set forth below.
| Six Months Ended December 31: | ||||||||||||||||
| 2015 | 2014 | Change | % Change Increase (Decrease) | |||||||||||||
| REVENUES | ||||||||||||||||
| Product sales | $ | 1,132,518 | $ | 773,321 | $ | 359,197 | 46.4 | % | ||||||||
| Royalties | 15,413 | 130,440 | (115,027 | ) | (88.2 | )% | ||||||||||
| NET REVENUES | 1,147,931 | 903,761 | 244,170 | 27.0 | % | |||||||||||
| COST OF REVENUES | 645,331 | 605,759 | 39,572 | 6.5 | % | |||||||||||
| Gross profit | 502,600 | 298,002 | 204,598 | 68.7 | % | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| General and administrative | 847,505 | 877,355 | (29,850 | ) | (3.42 | )% | ||||||||||
| Sales and marketing | 174,196 | 101,720 | 72,476 | 71.3 | % | |||||||||||
| Total operating expenses | 1,021,701 | 979,075 | 42,626 | 4.4 | % | |||||||||||
| (Loss) income from operations | (519,101 | ) | (681,073 | ) | 161,972 | 23.8 | % | |||||||||
| Interest expense | (258,556 | ) | (171,912 | ) | (86,644 | ) | (50.4 | )% | ||||||||
| Other income | — | $ | 14,757 | (14,757 | ) | (100.0 | )% | |||||||||
| Net (loss) income | $ | (777,657 | ) | $ | (838,228 | ) | $ | 60,571 | 7.2 | % | ||||||
| 13 |
Revenues.Total revenues for the six months ended December 31, 2015 were $1,147,931, an increase of $244,170, or 27.0%, from $903,761 of total revenues for the six months ended December 31, 2014. Product sales increased $359,197, or 46.4%, to $1,132,518 for the six months ended December 31, 2015 from $773,321 for the six months ended December 31, 2014. The increase in product sales is attributable to the active sales and marketing program launched during 2015. Royalties from international distributors were $15,413, a decrease by $115,027 for the six months ended December 31, 2015, as compared to $130,440 of royalties for the six months ended December 31, 2014. The decrease in royalties is attributable to the economic downturn in Brazil which severely impeded our Brazilian partner to sell product and pay royalties.
Cost of Revenues. Total cost of revenues for the six months ended December 31, 2015 were $645,331, an increase of $39,572, or 6.5%, from $605,759 for the six months ended December 31, 2014. Cost of product sales during the six months ended December 31, 2015 were 57.0% as compared to 78.3% during the six months ended December 31, 2014. The increase in costs of revenues is attributable to the increased product and the improved product cost of sales percentages during the six months ended December 31, 2015.
Gross Profit. Gross profit increased $204,598 to $502,600 for the six months ended December 31, 2015, from a gross profit of $298,002 for the six months ended December 31, 2014. The increase in gross profit reflects the increase in product sales and the improved gross profit margin on product sales during the six months ended December 31, 2015. During the six months ended December 31, 2015, we realized a 43.0% gross profit on our product sales as compared to a 21.7% gross profit realized on product sales during the six months ended December 31, 2014.
General and Administrative Expenses. General and administrative expenses decreased by $29,850, or 3.7%, to $847,505 for the six months ended December 31, 2015 from $877,355 for the six months ended December 31, 2014.General and administrative expenses for the six months ended December 31, 2015 are comprised of salaries and wages of $219,014, professional fees of $151,866, office expenses of $1,752, insurance of $47,451, rent of $67,937, SEC financial reporting expenses, (including accounting, legal, audit and edgar/XBRL filing service fees) of $163,218, travel of $23,704, stock based compensation of $75,433, and other of $97,130. General and administrative expenses for the six months ended December 31, 2014 are comprised of salaries and wages of $146,072, professional fees of $101,536, expenses associated with our initial public offering of $291,824, insurance of $21,268, rent of $29,383, office expenses of $8,718, capital commitment fee of $197,314, travel of $29,445, and other of $51,795. The decrease in general and administrative expenses during the six months ended December 31, 2015 is comprised of an increase in salaries and wages of $72,942, a decrease in SEC financial reporting expenses of $291,824, an increase in expenses associated with our initial public offering of $163,218, a decrease in office expenses of $6,966, an increase in professional fees of $50,330 a decrease in capital commitment fee of $197,314, an increase of $26,183 in insurance expense, an increase of $38,554 in rent expense, a decrease in travel of $5,741, an increase in stock based compensation of $75,433, and a net $45,335 increase in other general and administrative expenses. The overall decrease in general and administrative expenses is attributable to decreased expenses for professional fees relating to the audit, accounting, legal fees capital commitment fees associated with the initial public offering of our securities, offset by an increase in stock based compensation.
Sales and Marketing Expense. Sales and marketing expense increased $72,476, or 71.3%, to $174,196 for the six months ended December 31, 2015 from $101,720 for the six months ended December 31, 2014. This increase in sales and marketing expenses is attributable to increased sales and marketing personnel that were employed during the six months ended December 31, 2015 and increased sales commissions due to a 46.4% increase in sales.
Interest Expense. Interest expense increased by $86,644 to $258,556 for the six months ended December 31, 2015 from $171,912 for the six months ended December 31, 2014. The increase is largely due to the increased interest expense on the delayed draw note with the PIMCO Fund during the six months ended December 31, 2015 and the amortization of $92,905 of loan fees and discounts during the six months ended December 31, 2015.
Other Income.During the six months ended December 31, 2014, we realized $14,757 of other income while during the six months ended December 31, 2015 we did not realize comparable other income.
Net Loss.Net loss decreased by $60,571 or 7.2% to a net loss of $777,657 for the six months ended December 31, 2015 from net loss of $838,228 for the six months ended December 31, 2014. This increase in our net loss is attributable to the increased revenues and increased expenses, as explained herein.
| 14 |
Liquidity and Capital Resources
Our condensed consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As presented in the condensed consolidated financial statements, we incurred a net loss of $777,657 during the six months ended December 31, 2015, and losses are expected to continue in the near term. The accumulated deficit since inception is $6,788,144 at December 31, 2015. We have been funding our operations through private loans and the sale of equity interests in private placement transactions. See our discussion of our Credit Facility with PIMCO and our Equity Purchase Agreement with Kodiak Capital below. Our cash resources are insufficient to meet our planned business objectives without additional financing. The accompanying condensed 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 classification of liabilities that may result from the possible inability of our company to continue as a going concern.
Management anticipates that significant additional expenditures will be necessary to further develop our product lines and licensing relationships to expand product sales and royalty revenues before significant positive operating cash flows can be achieved. Our ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2015, we had $139,666 of cash on hand. We anticipate that our existing cash and cash equivalents, together with our cash from operating activities will not be sufficient to fund operations and expected growth through at least the next twelve months. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. 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 us. Even if we are 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.
Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) executing contracts with international licensees; and (c) controlling overhead and expenses. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to us on satisfactory terms and conditions, if at all.
In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view it as a likely occurrence.
The success of our ability to continue as a going concern is dependent upon obtaining new customers for our products and new licensees to generate royalty revenues, and maintaining a break even or profitable level of operations. We have incurred operating losses since inception, and this is likely to continue in the near future. We believe that we are able to fund our immediate operations, working capital requirements, and debt service requirements with existing working capital, cash flows generated from operations, and if available, under our equity purchase agreement with Kodiak.
Our financial requirements will be dependent upon the financial support through credit facilities and additional sales of our equity securities. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital.
The downturn in the United States stock 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. Further, 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 shares of common stock or the debt securities may cause us to be subject to restrictive covenants. If additional financing is not available or is not available on acceptable terms, we may have to curtail our operations.
| 15 |
Cash, total current assets, total assets, total current liabilities and total liabilities as of September 30, 2015 and June 30, 2015, were as follows:
| December 31, 2015 | June 30, 2015 | |||||||
| Cash | $ | 139,666 | $ | 51,016 | ||||
| Total current assets | $ | 873,654 | $ | 721,703 | ||||
| Total assets | $ | 976,258 | $ | 843,739 | ||||
| Total current liabilities | $ | 1,011,528 | $ | 829,332 | ||||
| Total liabilities | $ | 3,319,488 | $ | 2,534,749 | ||||
At December 31, 2015, we had a working capital deficit of $137,874 compared to a working capital deficit of $107,629 at June 30, 2015. Current liabilities increased to $1,011,528 at December 31, 2015 from $829,332 at June 30, 2015, primarily as a result of increases in accounts payable, customer deposits, and the bank line of credit.
Our operating activities used net cash of $435,037 for the six months ended December 31, 2015 compared to net cash used in operations of $142,378 for the six months ended December 31, 2014. The net cash used in operations for the six months ended December 31, 2015, reflects a net loss of $777,657, decreased by $197,280 in non-cash charges and by $145,340 net increase in the working capital accounts. The net cash used in operations for the six months ended December 31, 2014 reflects a net loss of $838,228, decreased by $305,534 in non-cash charges and by $390,316 net increase in the working capital accounts.
Our net cash used in investing activities was $10,510 for the six months ended December 31, 2015, comprised of $8,999 of intangible asset acquisitions and $1,511 of equipment acquisitions. Our cash used in investing activities for the six months ended December 31, 2014, was $37,230 that included $33,634 in purchases of equipment and $3,596 of intangible asset acquisition costs.
Our net cash provided by financing activities for the six months ended December 31, 2015 was $534,197, which consisted of $500,000 in cash proceeds from our October 2015 draw-down on the PIMCO Note Payable, $53,421 in proceeds from the Well Fargo Bank line of credit, offset by payment of $19,224 on the Wells Fargo Bank line of credit. We did not have any cash proceeds related to financing activities in the six months ended December 31, 2014.
Credit Facility
On June 10, 2014, we entered into a Note Purchase Agreement (“Agreement”) with PIMCO Funds: Private Account Portfolio Series: PIMCO High Yield Portfolio, a separate investment portfolio of PIMCO Funds, a Massachusetts business trust (“PIMCO”) that authorized the issuance of up to $2,500,000. On June 12, 2014, we entered into a Senior Secured Note (“Note”) whereby we drew $1,500,000. The note bears interest at 14% and matures on June 12, 2017. Interest is payable monthly in arrears, provided that if no event of default has occurred, Obligor can elect to pay cash interest on each payment date at 9%, with the additional unpaid interest due on such dates added to the principal balance, The note bears an effective interest rate of 21%. This Note is collateralized by all of our assets. The Note includes various covenants, including but not limited to, having annual audited financial statements within 90 days of the end of the fiscal year.
On February 6, 2015, we drew an additional $500,000 under this facility to increase the principal amount payable (including the accrued interest added to the principal amount) under this note to $2,044,300 and on October 20, 2015, we drew the remaining $500,000 available under this facility to increase the amount payable under this note (with accrued interest) to $2,620,098. We issued 10,000 shares of our common stock to PIMCO as a loan fee in consideration of the October 2015 draw down. A replacement note was issued on each draw down date to reflect the note increase.
Equity Purchase Agreement with Kodiak Capital LLC
On December 17, 2014, we entered into an Equity Purchase Agreement (“Equity Purchase Agreement”) with Kodiak Capital LLC. The Equity Purchase Agreement provides us with a financing (the “Financing”) whereby the registrant can issue and sell to Kodiak, from time to time, shares of our common stock (the “Put Shares” ) up to an aggregate purchase price of $5.0 million (the “Maximum Commitment Amount”) during the Commitment Period (as defined below). Under the terms of the Equity Purchase Agreement, we have the right to deliver from time to time a Put Notice to Kodiak stating the dollar amount of Put Shares (up to $500,000 under any individual Put Notice) that we intend to sell to Kodiak with the price per share based on the following formula: seventy-five percent (75%) of the lowest closing bid price of our common stock during the period beginning on the date of the Put Notice and ending five (5) days thereafter. Under the Equity Purchase Agreement, we may not deliver the Put Notice until after the resale of the Put Shares has been registered pursuant to a registration statement filed with the Securities and Exchange Commission. Additionally, provided that the Equity Purchase Agreement does not terminate earlier, during the period beginning on the trading day immediately following the effectiveness of the registration statement and ending December 31, 2016, we may deliver the Put Notice or Notices (up to the Maximum Commitment Amount) to Kodiak (the “Commitment Period”). In addition, in no event shall Kodiak be entitled to purchase that number of Put Shares which when added to the sum of the number of shares of common stock already beneficially owned by Kodiak would exceed 9.99% of the number of shares of common stock outstanding on the applicable closing date.
| 16 |
The Equity Purchase Agreement also provides that we are not entitled to deliver a Put Notice, and Kodiak shall not be obligated to purchase any Put Shares, unless each of the following conditions are satisfied: (i) a registration statement has been declared effective and remains effective for the resale of the Put Shares until the closing with respect to the subject Put Notice; (ii) at all times during the period beginning on the date of the Put Notice and ending on the date of the related closing, our common stock has been listed on the Principal Market as defined in the Equity Purchase Agreement (which includes, among others, the Over-the-Counter Bulletin Board and the OTC Market Group’s OTC Link quotation system) and shall not have been suspended from trading thereon; (iii) we have complied with its obligations and is otherwise not in breach of or in default under the Equity Purchase Agreement, the Registration Rights Agreement or any other agreement executed in connection therewith; (iv) no injunction has been issued and remains in force, and no action has been commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the Put Shares; and (v) the issuance of the Put Shares will not violate any shareholder approval requirements of the market or exchange on which our common stock are principally listed.
The Equity Purchase Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $5.0 million of our common stock, (ii) on December 31, 2016 or (iii) upon written notice from us to Kodiak.
The proceeds from the agreement with Kodiak would primarily be used for working capital and general corporate purposes. However, Kodiak is not required to provide funding until certain conditions are met, as described above. There can be no assurance that we will meet the conditions under which Kodiak will be required to provide the equity capital.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of our last fiscal quarter ended December 31, 2015, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon those evaluations, management concluded that our disclosure controls and procedures were effective as of December 31, 2015, to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Going forward from this filing, the Company intends to improve its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
During the quarter covered by this Report, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| 17 |
From time to time, the Company may become a party to litigation or other legal proceedings that it considers to be a part of the ordinary course of its business. The Company is not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on its business, prospects, financial condition or results of operations. The Company may become involved in other material legal proceedings in the future.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item. Please refer to “Risk Factors” contained in our Annual Report on Form 10-K for the year ended June 30, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| 1. | See our Current Report on Form 8-K dated October 20, 2015 and filed on October 21, 2015. |
| 2. | On November 17, 2015, we issued options to purchase 43,000 shares of our common stock to six (6) employees in consideration of services rendered at an exercise price of $5.00 per share. The issuances were exempt under Section 4(a)(2) of the Securities Act of 1933, as amended. |
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
On December 26, 2015, we terminated our previously announced $2 million common stock offering. We did not sell any shares of common stock under this offering. We also terminated our engagement agreement with Carrolton Capital Partners, LLC dba Offerboard Securities, the placement agent for such terminated offering, on this date.
| 18 |
Item 6. Exhibits
EXHIBIT INDEX
| Exhibit No. | Description | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to U.S.C. Section 1350 As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema Linkbase Document | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Labels Linkbase Document | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| 19 |
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 of the undersigned thereunto duly authorized
| XFIT BRANDS, INC | ||
| (Registrant) | ||
| Date: February 16, 2016 | By: | /s/ David E. Vautrin |
| David E. Vautrin | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| Date: February 16, 2016 | By: | /s/ Robert J. Miranda |
| Robert J. Miranda | ||
| Chief Financial Officer (Principal Accounting Officer) | ||
| 20 |
